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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998
REGISTRATION NO. 333-41947
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GROUP MAINTENANCE AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TEXAS 1711 76-0535259
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
RANDOLPH W. BRYANT
SENIOR VICE PRESIDENT, GENERAL COUNSEL
8 GREENWAY PLAZA, SUITE 1500 AND SECRETARY
HOUSTON, TEXAS 77046 8 GREENWAY PLAZA, SUITE 1500
(713) 860-0100 HOUSTON, TEXAS 77046
(ADDRESS, INCLUDING ZIP CODE, AND (713) 860-0100
TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S PRINCIPAL AND TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
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Copies to:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
711 LOUISIANA STREET, SUITE 2900
HOUSTON, TEXAS 77002-2781
(713) 223-2900
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION DATED APRIL 30, 1998
7,000,000 SHARES
[LOGO OF GROUP MAINTENANCE APPEARS HERE]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
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Group Maintenance America Corp., a Texas corporation (collectively with its
subsidiaries, the "Company"), may offer and issue from time to time up to
7,000,000 shares of common stock, par value $0.001 per share ("Common Stock"),
covered by this Prospectus in connection with business combination transactions
(each, an "Acquisition") involving its acquisition, directly or indirectly, of
businesses, securities or assets of companies doing business in the Company's
industry. The price and other terms at which the Common Stock will be offered
shall be determined by negotiations between the Company and the companies to be
directly or indirectly acquired. The Company does not expect to pay any
underwriting discounts or commissions, but it may pay finder's fees from time
to time with respect to specific acquisitions. Any person receiving such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). The Company will pay all expenses of
this Offering.
As of March 31, 1998, 23,297,410 shares of the Common Stock were issued and
outstanding. The Common Stock is traded on the New York Stock Exchange under
the symbol "MAK." On April 29, 1998, the last reported sales price of the
Common Stock on the New York Stock Exchange was $15 13/16 per share.
Persons receiving shares of the Common Stock offered hereby may be
contractually required to hold some portions of those shares for periods of up
to two years. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares by
affiliates of the businesses the Company acquires for a period of one year from
the date of acquisition of the shares of Common Stock (or such shorter period
as the Securities and Exchange Commission may prescribe).
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
April , 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary........................................................ 3
Risk Factors.............................................................. 4
Price Range of Common Stock............................................... 9
Capitalization............................................................ 10
Dividend Policy........................................................... 10
Selected Historical and Pro Forma Financial Data.......................... 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 30
Management................................................................ 38
Related Party Transactions................................................ 49
Security Ownership of Certain Beneficial Owners and Management............ 50
Description of Capital Stock.............................................. 51
Description of Credit Agreement........................................... 53
Shares Eligible for Future Sale........................................... 55
Plan of Distribution...................................................... 57
Experts................................................................... 57
Available Information..................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUB-
SEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the related notes thereto, appearing elsewhere
in this Prospectus. Unless the context otherwise requires, (i) the "Company"
refers to Group Maintenance America Corp. ("GroupMAC") and its subsidiaries, as
well as to the business and operations of their predecessors and (ii) all
information in this Prospectus relating to the number of shares of Common Stock
and per share amounts reflects the 1-for-2.5 reverse stock split effected prior
to the date of the closing of the initial public offering of the Company's
Common Stock (the "IPO") hereinafter referred to. References to fiscal year
financial information of the Company refer to the fiscal year ended February 28
or 29 of the relevant year or the respective fiscal year ends of the individual
GroupMAC subsidiaries, and references to pro forma financial information of the
Company or combined financial information of any group of its operating units
refer to a year ending December 31 of the relevant year. Upon completion of the
IPO on November 13, 1997, the Company's fiscal year was changed to the calendar
year.
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services to residential and commercial customers. Since inception, the Company
has acquired 36 platform companies and has executed definitive agreements to
acquire two additional platform companies having $509.3 million in combined
1997 revenues. The Company believes it is one of the largest diversified
providers of HVAC, plumbing and electrical services in the United States.
The Company offers a comprehensive range of services to residential and
commercial customers in both the new installation and the maintenance, repair
and replacement segments of the HVAC, plumbing and electrical service
industries. The Company's services include installing and maintaining,
repairing and replacing central air conditioning systems, furnaces, heat pumps
and plumbing and electrical systems.
The Company is a Texas corporation with its principal executive offices
located at 8 Greenway Plaza, Suite 1500, Houston, Texas 77046, and its
telephone number is (713) 860-0100.
RISK FACTORS
An investment in the shares of Common Stock involves significant risks that a
potential investor should consider carefully. See "Risk Factors" beginning on
page 4 for certain information that should be considered by prospective
investors of the Common Stock offered hereby.
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors in the Common Stock offered hereby should consider carefully the
following factors before deciding to invest in the Common Stock.
DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF OPERATING SYSTEMS AND POLICIES
As a rapidly growing provider of HVAC, plumbing and electrical services, the
Company is faced with the development, implementation and integration of
Company-wide policies and systems related to its operations. The Company plans
to implement and integrate certain information and operating systems and
procedures for its subsidiaries including, but not limited to, accounting
systems, employment and human resources policies, uniform purchasing programs
and certain centralized marketing programs. Its subsidiaries may need to
modify certain systems and policies they have utilized historically to
implement the Company's systems and policies. As a result of the Company's
decentralized operating strategy, there can be no assurance that the Company's
operating systems and policies will be successfully implemented at the
subsidiary level or that the Company will be successful in monitoring the
performance of the subsidiaries. Furthermore, much of the Company's management
group has been assembled only recently, and a significant number of the
Company's management group has not worked in the HVAC, plumbing and electrical
service industries prior to joining the Company. There can be no assurance
that the management group will be able to manage the combined entity or to
implement effectively the Company's operating strategy, internal growth
strategy and acquisition program. The Company may experience delays,
complications and expenses in implementing, integrating and operating such
systems and in managing its businesses, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring residential and
commercial contracting businesses that install or maintain, repair and replace
HVAC, plumbing, electrical and other systems and equipment in existing homes
and commercial buildings and in homes and commercial buildings under
construction in its existing and new markets. The Company's acquisition
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company's business, financial condition and results of
operations. These risks include the possibility of the adverse effect on
existing operations of the Company from the diversion of management attention
and resources to acquisitions, the possible loss of acquired customer bases
and key personnel, including service technicians and managers, possible
adverse effects on earnings resulting from amortization of goodwill created in
purchase transactions and the contingent and latent risks associated with the
past operations and other unanticipated problems arising in the acquired
businesses. The success of the Company's acquisition strategy will depend on
the extent to which it is able to acquire, successfully absorb and profitably
manage additional businesses, and no assurance can be given that the Company's
strategy will succeed. The increasing competition for suitable acquisition
targets could limit the Company's ability to locate suitable acquisition
targets and could increase the cost of purchasing such acquisition targets.
EXPOSURE TO DOWNTURNS IN HOUSING STARTS OR NEW COMMERCIAL CONSTRUCTION
A substantial portion of the Company's business involves installation of
HVAC and/or plumbing systems in newly constructed residences and commercial
buildings. The extent to which the Company is able to maintain or increase
revenues from new installation services in the residential market will depend
in part on the levels of housing starts from time to time in the geographic
markets in which it operates and likely will reflect the cyclical nature of
the housing industry. The housing industry is affected significantly by
changes in general and local economic conditions, such as employment and
income levels, the availability and cost of financing for home buyers
(including the continued deductibility of mortgage interest in determining
federal income tax), consumer confidence and housing demand. The level of new
commercial installation services is similarly affected by fluctuations in the
level of new construction of commercial buildings in the markets in which the
Company operates, due to local economic conditions, changes in interest rates
and other similar factors. Downturns in the
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levels of housing starts and/or new commercial construction could have a
material adverse effect on the Company's business, financial condition and
results of operations. See"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality and Cyclicality."
AVAILABILITY OF TECHNICIANS
The Company's ability to provide high-quality HVAC, plumbing and electrical
services on a timely basis requires an adequate supply of skilled technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified technicians, and there can be
no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor
expenses will not increase as a result of a shortage in the supply of skilled
technicians or that the Company will not have to curtail its planned internal
growth as a result of labor shortages. See"Business--Centralized Support
Services--Employee Screening, Training and Development."
WEATHER
The Company's service business tends to be adversely affected by moderate
weather patterns, with comparatively warm winters and cool summers generally
reducing the demand for the Company's maintenance, repair and replacement
services. Additionally, the Company's new installation business is adversely
affected by extremely cold weather and by the amount of precipitation that an
area receives during the construction season. Prolonged climate or weather
conditions may cause unpredictable fluctuations in operating results. The
Company's operations are also subject to seasonal variations. See"Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality and Cyclicality."
COMPETITION
The HVAC, plumbing and electrical service industries are highly fragmented
with low barriers to entry. Therefore, these industries are very competitive
and are served principally by small, owner-operated private companies. Certain
of these smaller competitors have lower overhead cost structures and may be
able to provide their services at lower rates than the Company. The Company
believes the HVAC, plumbing and electrical service industries are subject to
rapid consolidation on both a national and a regional scale. Several
companies, in addition to the Company, have completed initial public
offerings, have begun consolidation efforts and have entered into some of the
Company's markets. Other companies, including unregulated affiliates of
electric and gas public utilities and HVAC equipment manufacturers, have
entered the industry and others may do so in the future. These consolidators
and other entrants may have greater financial resources, name recognition, or
other competitive advantages than the Company and may be willing to pay higher
prices than the Company for the same opportunities. Consequently, the Company
may encounter significant competition in its efforts to achieve its growth
objectives. See"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and senior management personnel, and the Company will depend on the
senior management of significant businesses it acquires in the future. The
business of the Company could be affected adversely if any of these persons
does not continue in his or her management role with the Company and the
Company is unable to attract and retain qualified replacements.
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
The Company historically has financed capital expenditures and acquisitions
primarily through the issuance of equity securities, secured bank borrowings
and internally generated cash flow. The timing, size and success of
5
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the Company's acquisition efforts and the associated capital commitments
cannot be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for a significant portion of
the consideration to be paid. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to initiate and maintain its acquisition
program. There can be no assurance the Company will be able to raise
sufficient capital at reasonable rates, if at all. If the Company does not
have sufficient cash resources, its growth could be limited unless it is able
to obtain additional capital through debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
As of March 31, 1998, the executive officers, directors and certain founding
shareholders of the Company will beneficially own in the aggregate
approximately 25% of GroupMAC's outstanding Common Stock. Accordingly, such
persons will have substantial influence on the Company, which influence might
not be consistent with the interests of other shareholders, and on the outcome
of any matters submitted to GroupMAC's shareholders for approval. In addition,
although there is no current agreement, understanding or arrangement for these
shareholders to act together on any matter, these shareholders may have
economic and business reasons to act together, and would be in a position to
execute significant influence over the affairs of the Company if they were to
act together in the future. If these persons were to act in concert, they
might, as a practical matter, be able to exercise control over the Company's
affairs, including the election of the entire Board of Directors and (subject
to Article Thirteen of the Texas Business Corporation Act (the "TBCA") which
applies to transactions between the Company and certain interested persons)
any matter submitted to a vote of shareholders.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of March 31, 1998, 23,297,410 shares of Common Stock were outstanding.
The 8,340,000 shares sold in the IPO (other than shares that were purchased by
affiliates of the Company) are freely tradable. Additionally, the Company
registered under the Securities Act of 1933, as amended (the "Securities
Act"), approximately 725,000 shares in connection with the acquisition of
MacDonald-Miller Industries, Inc. ("MacDonald-Miller") and approximately 3.3
million shares in connection with the acquisition of the Post Offering
Companies. The remaining shares outstanding may be resold publicly only
following their effective registration under the Securities Act or pursuant to
an available exemption (such as provided by Rule 144 following a holding
period for unregistered shares) from the registration requirements of the
Securities Act. The holders of approximately 3.6 million shares of Common
Stock have the right (subject to minimum participation requirements) to
require the Company to register such shares pursuant to the Securities Act for
the purpose of allowing them to effect a public offering of all or a portion
of such shares (a "Demand Registration"), and such holders and substantially
all of the other holders of unregistered shares of Common Stock also have the
right to require the Company to register their shares of Common Stock under
the Securities Act in connection with a public offering of Common Stock
contemplated by the Company (a "Piggyback Registration"). The number of Demand
Registrations that may be requested is limited, and the Company will not be
obligated to effect a Demand Registration within 60 days prior to the proposed
filing date of a registration statement relating to an offering by the Company
of its securities (with certain exceptions) or within 120 days after the
effective date of such a registration statement. Further, the Company may
delay a Demand Registration for up to 120 days if the Company determines that
such registration would be detrimental to the Company. In connection with a
Piggyback Registration involving an underwritten offering, the number of
shares to be registered by selling shareholders may be limited or eliminated
entirely if the managing underwriter determines marketing factors require a
limitation on the number of shares to be underwritten. See "Shares Eligible
for Future Sale." The holders of Demand Registration rights have agreed with
the Company and the underwriters of the Company's IPO (the "Underwriters") not
to exercise their respective demand rights for the two year period following
the IPO except for Gordon A. Cain who has agreed not to exercise his demand
rights for one year. In addition, such holders and the holders of Common Stock
issued in connection with the acquisition of businesses have agreed with the
Company that they generally will not sell,
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transfer or otherwise dispose of any of their shares for one year following
the date of acquisition of such shares and for one additional year will limit
sales to no more than 36% of their holdings. Sales made pursuant to Rule 144
must comply with its applicable volume limitations and other requirements. At
the date of this Prospectus, approximately 1.4 million "restricted" shares of
Common Stock are eligible for resale pursuant to Rule 144, subject to the
volume, manner of sale and other limitations thereof and an additional 12.7
million shares will become available for resale pursuant to Rule 144 in the
second quarter of 1998. The remaining "restricted" shares will become eligible
for resale pursuant to Rule 144 from time to time thereafter.
The Company has outstanding options and warrants to purchase up to a total
of approximately 3.2 million shares of Common Stock, of which only warrants
and options to purchase approximately 0.7 million shares are exercisable
within 60 days after the date of this Prospectus. The Company intends to
register substantially all the shares subject to these options and warrants
under the Securities Act for public resale.
The Company, its directors and executive officers and certain other
shareholders have agreed not to offer or sell any shares until May 6, 1998
without the prior written consent of The Robinson-Humphrey Company, LLC,
except (A) that the Company may issue Common Stock in connection with
acquisitions generally, and pursuant to the exercise of stock options which
are either (i) outstanding on the date of the IPO, (ii) issued under the
Company's 1997 Stock Awards Plan or (iii) issued under the Company's stock
option plan for non-management employees, and (B) that such directors,
executive officers and shareholders may sell Common Stock pursuant to a
cashless exercise of such stock options or make a bona fide gift of Common
Stock provided the donee agrees to be bound by the terms of the donor's lockup
agreement.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
RESTRICTIONS ON DIVIDENDS; DEPENDENCE ON SUBSIDIARIES
The Company will conduct its operations through subsidiaries, and is
therefore dependent upon the cash flow of and the transfer of funds by those
subsidiaries to the Company in the form of loans, dividends or otherwise to
meet its financial obligations. Each subsidiary of the Company will be a
distinct legal entity and will have no obligation, contingent or otherwise, to
transfer funds to the Company. The Company's ability to pay dividends on the
Common Stock is restricted by the terms of the $75 million bank credit
facility (the "Credit Agreement") and could be restricted by the terms of
subsequent financings and subsequent series of preferred stock that may be
issued in future transactions. See "Description of Capital Stock."
Additionally, the ability of the Company's subsidiaries to pay dividends to
the Company is limited by the terms of the Credit Agreement. See "Description
of Credit Agreement."
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the IPO, no public market for the Common Stock existed. The market
price of the Common Stock may be subject to significant fluctuations from time
to time in response to numerous factors, including variations in the reported
financial results of the Company and changing conditions in the economy in
general or in the Company's industry in particular. In addition, stock markets
generally experience significant price and volume volatility from time to time
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
POTENTIAL ANTI-TAKEOVER EFFECTS
Provisions of the Company's Articles of Incorporation and Bylaws and the
TBCA may have the effect of delaying, discouraging, inhibiting, preventing or
rendering more difficult an attempt to obtain control of the Company by means
of a tender offer, business combination, proxy contest or otherwise. These
provisions include
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the authorization in the Company's Articles of Incorporation of preferred
stock having such preferences, powers and relative, participating, optional
and other rights (including preferences over the Common Stock respecting
dividends, distributions and voting rights) as the Board of Directors may
determine, classification of the Board of Directors, a TBCA restriction on the
ability of shareholders to take actions by written consent and a TBCA
provision imposing restrictions on business combinations with certain
interested parties. See "Description of Capital Stock."
ASSET ENCUMBRANCE
The obligations of the Company under the Credit Agreement are secured by a
first priority security interest on the accounts receivable and inventory of
the Company and its material subsidiaries and all the capital stock of its
domestic subsidiaries. In addition, borrowings under the Credit Agreement have
been guaranteed by the Company's material subsidiaries, and must be guaranteed
by any future material subsidiaries. If the Company becomes insolvent or is
liquidated, if there were a breach of the restrictions in the Credit Agreement
so as to result in a default thereunder or if the Company were unable to repay
its borrowings thereunder, lenders under the Credit Agreement could declare
all amounts outstanding thereunder to be due and payable and the obligations
of the lenders to make further extensions of credit could be terminated. The
lenders under the Credit Agreement also would be entitled to proceed against
the collateral securing such indebtedness. Accordingly, such lenders would
have a prior claim on certain assets of the Company and its subsidiaries. See
"Description of Credit Agreement."
OTHER FACTORS
In addition to the factors described above, the Company may be impacted by a
number of other matters and uncertainties, including: (i) potential
legislation or regulatory changes; (ii) the ability of the Company and those
with which it conducts business to timely resolve the Year 2000 issue
(relating to potential computer and equipment failures by or at the change in
the century), unanticipated costs of resolving the Year 2000 issue, and the
costs and impacts if the Year 2000 issue is not timely resolved; (iii) changes
in competitive conditions in the markets where the Company operates; (iv)
changes in capital availability or costs, changes in interest rates, or market
perceptions of the industries in which the Company operates; (v) increases in
the cost of compliance with regulations, including environmental regulations,
and environmental liabilities; (vi) incurrence of losses arising from the
risks normally associated with the Company's business in excess of the
insurance coverage maintained by the Company; and (vii) changes by the
Financial Accounting Standards Board or the Securities and Exchange Commission
of authoritative generally accepted accounting principles or policies.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Prospectus may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that are based on management's beliefs, as well as
assumptions made by, and information currently available to, management. When
used herein, words such as "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal" or similar words are intended to identify
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Such statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated, projected or expected. Important factors
that could cause future results to differ include the effects of competition,
legislative and regulatory changes, fluctuations in the weather and changes in
the economy.
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PRICE RANGE OF COMMON STOCK
The Common Stock trades on the New York Stock Exchange under the symbol
"MAK." The following table sets forth the high and low sale prices for the
Common Stock (as reported by National Quotation Bureau, LLC) for the periods
indicated:
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HIGH LOW
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1997:
Fourth Quarter (from November 7, 1997 through
December 31, 1997)..................................... 17 3/16 13
1998:
First Quarter........................................... 17 1/8 14
Second Quarter (from April 1, 1998 through April 29,
1998).................................................. 17 15 1/2
</TABLE>
On April 29, 1998, the closing price of the Common Stock on the New York
Stock Exchange was $15 13/16 and there were 243 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar for the
Common Stock. The number of record holders does not bear any relationship to
the number of beneficial owners of the Common Stock. The Company has never
declared a dividend with respect to its Common Stock.
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CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of December 31, 1997 and (ii) the pro forma capitalization of the
Company as of December 31, 1997, giving effect to the acquisition of the Post-
Offering Companies and related financings. For a description of the
adjustments, see Notes to Unaudited Pro Forma Combined Financial Statements
included elsewhere herein. This presentation should be read in conjunction
with the historical and pro forma combined financial statements of the Company
and related notes thereto included elsewhere herein (in thousands, except par
value).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
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ACTUAL PRO FORMA
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Short-Term Debt, Including Current Maturities.......... $ 2,769 $ 3,704
======== ========
Long-Term Debt, Net of Current Maturities.............. $ 169 $ 29,243
Subordinated Debt...................................... -- 820
Shareholders' Equity:
Preferred Stock: $1.00 par value, 50,000 shares
authorized; none issued and outstanding............... -- --
Common Stock: $0.001 par value, 100,000 shares
authorized; 20,629 shares issued and outstanding;
24,442 shares issued and outstanding, pro forma(1).... 21 24
Additional Paid-In Capital............................. 169,143 209,688
Retained Deficit....................................... (32,511) (32,511)
-------- --------
Total Shareholders' Equity............................. 136,653 177,201
-------- --------
Total Capitalization................................... $136,822 $207,264
======== ========
</TABLE>
- --------
(1) Excludes approximately 3.2 million shares of Common Stock issuable upon
exercise of outstanding stock options and warrants. See "Management--
Option Grants" and "--Stock Awards Plan."
DIVIDEND POLICY
The Company has not paid a dividend on Common Stock since its incorporation
and does not anticipate paying any dividends on Common Stock in the
foreseeable future because it intends to retain earnings to finance the
expansion of its business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
relevant factors. The Bank Credit Agreement restricts the payment of
dividends. See "Description of Bank Credit Agreement."
10
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The first and largest acquisition made by the Company was that of Airtron,
Inc. ("Airtron"). For accounting purposes, this transaction was accounted for
as a reverse acquisition, as if Airtron acquired GroupMAC, because the former
shareholders of Airtron owned a majority of GroupMAC's Common Stock upon
consummation of the transaction. As such, the summary historical financial
data set forth below as of and for the three-year period ended February 28,
1997 have been derived from the financial statements of Airtron, which have
been audited by KPMG Peat Marwick LLP, independent public accountants. The
financial statements of GroupMAC and its subsidiaries, other than Airtron, as
of December 31, 1997, are included in the financial statements from their
respective dates of acquisition. The consolidated financial statements of the
Company as of December 31, 1997 and February 28, 1997, and for each of the
periods then ended and the year ended February 29, 1996, and the report
thereon, are included elsewhere herein.
The selected pro forma financial data presents certain information for the
Company, as adjusted for (i) the effects of the acquisitions of Airtron, 10
other companies (the "Pre-Offering Companies") purchased during June and July
1997 and 13 additional companies (the "Offering Acquisition Companies" and,
together with Airtron and the Pre-Offering Companies, the "GroupMAC
Companies") purchased concurrently with the IPO and (ii) the effects of
certain pro forma adjustments to the historical financial statements of the
GroupMAC Companies and Post-Offering Companies which are directly related to
these acquisitions. The selected pro forma financial data of the Company do
not purport to represent what the Company's results of operations or financial
position actually would have been had these events, in fact, occurred on
January 1, 1997, nor are they intended to project the Company's results of
operations or financial position for any future date or period.
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and the related notes and the
unaudited pro forma combined financial statements and the related notes
included elsewhere herein.
11
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------
PRO FORMA TEN MONTHS FISCAL YEAR ENDED FEBRUARY 28 OR 29,(3)
YEAR ENDED ENDED ------------------------------------------
DECEMBER 31, DECEMBER 31,
1997(1) 1997(2) 1997 1996 1995 1994
------------ ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $509,263 $138,479 $81,880 $73,765 $72,226 $66,281
Gross Profit............ 121,411 36,717 23,374 21,091 21,766 18,977
Selling, General and
Administrative
Expenses............... 87,904(4) 35,862(5) 19,811 17,615 20,282(6) 15,760
Goodwill
Amortization(7)........ 3,874 633 -- -- -- --
-------- -------- --------- --------- --------- ---------
Income from Operations.. 29,633 222 3,563 3,476 1,484 3,217
Interest Income
(Expense), Net......... (1,417) (1,144) 89 68 76 127
Other Income, Net....... 575 112 256 246 140 33
-------- -------- --------- --------- --------- ---------
Income (Loss) Before
Income Tax Provision... 28,791 (810) 3,908 3,790 1,700 3,377
Income Tax Provision.... 13,066 2,832 1,572 1,651 911 1,300
-------- -------- --------- --------- --------- ---------
Net Income (Loss)....... $ 15,725 $ (3,642) $ 2,336 $ 2,139 $ 789 $ 2,077
======== ======== ========= ========= ========= =========
Net Earnings (Loss) Per
Share:
Basic................. $ 0.64 $ (0.34)
======== ========
Diluted............... $ 0.64 $ (0.34)
======== ========
Weighted Average Shares
Outstanding:
Basic................. 24,442 10,800
======== ========
Diluted............... 24,701 10,800
======== ========
<CAPTION>
PRO FORMA FEBRUARY 28 OR 29,
DECEMBER 31, DECEMBER 31, ------------------------------------------
1997(1) 1997 1997 1996 1995 1994
------------ ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash
Equivalents............ $ 5,036 $ 25,681 $ 4,339 $ 1,774 $ 650 $ 186
Working Capital......... 31,900 40,478 6,337 3,285 4,561 3,473
Total Assets............ 287,763 192,687 27,153 28,282 23,528 15,221
Total Debt.............. 33,767 2,938 1,290 -- -- --
Shareholders' Equity.... 177,201 136,653 5,991 6,373 5,955 2,175
</TABLE>
- --------
(1) Pro forma financial data give effect to the acquisitions that are
described in the notes to consolidated financial statements, as if they
had all occurred at January 1, 1997. Such results are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred on January 1, 1997.
(2) The Company's acquisitions of the GroupMAC Companies (other than Airtron)
and GroupMAC have been accounted for as purchases and, accordingly, the
operations of these acquired businesses are included in the financial data
from the effective date of their respective acquisition.
(3) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31.
(4) Reflects a decrease of $16.3 million for the pro forma reductions in
salaries, bonuses and benefits to former owners of the GroupMAC Companies
to which they have agreed and includes $5.0 million of expenses for the
formation and build-up of corporate management and infrastructure. Also
excludes non-recurring, non-cash compensation expense of $7.0 million
related to the reverse acquisition of GroupMAC during the second quarter
of 1997.
(5) Includes $7.0 million of non-recurring, non-cash compensation expenses
related to the reverse acquisition of GroupMAC during the ten months ended
December 31, 1997.
(6) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(7) Consists of amortization recorded or to be recorded, as a result of the
acquisition of the GroupMAC Companies, over a 40-year period and computed
on the basis described in the notes to consolidated financial statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company's revenues are derived from providing new installation services
and maintenance, repair and replacement services for HVAC, plumbing,
electrical and other systems to residential and commercial customers.
Approximately 55% of the Company's combined 1997 revenues of $329.0 million
were derived from new installation services and 45% were attributable to
maintenance, repair and replacement services. Maintenance, repair and
replacement revenues are recognized as the services are performed, except for
service contract revenue, which is recognized ratably over the life of the
contract. Revenues from fixed price installation and retrofit contracts are
generally accounted for on a percentage-of-completion basis, using the cost-
to-cost method.
The Company intends to make additional acquisitions across the three main
technical disciplines (HVAC, plumbing and electrical) within the residential
and commercial markets. The Company's long-term objective is to develop
maintenance, repair and replacement capabilities (both residential and
commercial) in the top 100 markets within the United States, while offering
new installation services across a more limited range of markets where new
construction in the residential and/or commercial sectors is expected to out-
pace the national average over the long term. Over time, this objective is
expected to shift revenues of the Company to an increased percentage of
service revenue.
Cost of services consists primarily of components, parts and supplies
related to the Company's new installation and maintenance, repair and
replacement services, salaries and benefits of service and installation
technicians, subcontracted services, depreciation, fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for prior owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
The Company's diversified business mix is reflected to varying degrees in
its gross margins. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
gross margins, averaging 36.2% for the combined twelve months ended December
31, 1997. The combined gross margin for the GroupMAC Companies providing
primarily maintenance, repair and replacement services in the commercial
markets was 20.3% for the combined twelve months ended December 31, 1997. On
average, the GroupMAC Companies primarily engaged in residential new
installation services have lower gross margins. Such companies' combined gross
margin was 21.2% for the combined twelve months ended December 31, 1997. The
company primarily providing HVAC services in the residential new installation
market had a gross margin of 28.2%, which was somewhat offset by the companies
providing primarily plumbing service to this market at gross margins ranging
from 11.1% to 15.0%. Future consolidated gross margins may vary depending on,
among other things, shifts in the business mix within the GroupMAC Companies
as well as the impact of future acquisitions on the business mix.
The Company believes that it will, and in certain cases has already begun
to, realize savings from (i) greater volume discounts from suppliers of
components, parts and supplies; (ii) consolidation of insurance and bonding
programs; (iii) other general and administrative expenses such as training and
advertising; and (iv) the Company's ability to borrow at lower interest rates
than most, if not all, of the GroupMAC Companies. Offsetting these savings
will be costs related to the Company's new corporate management, costs
associated with being a public company and integration costs.
The following discussion should be read in conjunction with the historical
financial statements and related notes and "Selected Historical and Pro Forma
Financial Data" contained elsewhere herein.
13
<PAGE>
RESULTS OF OPERATIONS--GROUPMAC AND SUBSIDIARIES
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Agreement") with Airtron, in which $20.4 million in cash, 14.9
million shares of GroupMAC preferred stock and 4.7 million shares of GroupMAC
Common Stock were issued to shareholders of Airtron in exchange for all of the
then outstanding shares of Airtron. Although for legal purposes Airtron was
acquired by GroupMAC, for accounting purposes, the transaction was accounted
for as a reverse acquisition, as if Airtron acquired GroupMAC, due to the fact
that the former shareholders of Airtron then owned a majority of the
outstanding GroupMAC Common Stock. In connection with the purchase of
GroupMAC, the consideration paid to the shareholders of GroupMAC was recorded
as non-recurring compensation expense of $7.0 million in the accompanying
statements of operations for the ten months ended December 31, 1997. The
consolidated financial statements presented elsewhere herein for the periods
prior to the effective date of the acquisition only include the accounts of
Airtron. The consolidated statements of shareholders' equity have been
converted from Airtron's capital structure to GroupMAC's capital structure to
reflect the exchange of shares pursuant to the Agreement. Concurrent with the
IPO, the Company changed its fiscal year end from February 28 to December 31.
During June and July 1997, the Company acquired in separate transactions the
Pre-Offering Companies through a combination of cash, preferred stock, Common
Stock and warrants to purchase shares of Common Stock of GroupMAC. During the
fourth quarter of 1997, the Company acquired, concurrently with the IPO, the
Offering Acquisition Companies through a combination of cash and Common Stock
of the Company.
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
TEN MONTHS FISCAL YEAR ENDED
ENDED FEBRUARY 28 OR 29,
DECEMBER 31, ----------------------------
1997 1997 1996
--------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $138,479 100.0% $81,880 100.0% $73,765 100.0%
Cost of Services............... 101,762 73.5 58,506 71.5 52,674 71.4
-------- ----- ------- ----- ------- -----
Gross profit................... 36,717 26.5 23,374 28.5 21,091 28.6
Selling, General and
Administrative Expenses....... 36,495 26.3 19,811 24.1 17,615 23.9
-------- ----- ------- ----- ------- -----
Income from Operations......... 222 0.2 3,563 4.4 3,476 4.7
Interest, Net.................. (1,144) (0.8) 89 0.1 68 0.1
Other.......................... 112 -- 256 0.3 246 0.3
-------- ----- ------- ----- ------- -----
Income (Loss) Before Income Tax
Provision..................... (810) (0.6) 3,908 4.8 3,790 5.1
Income Tax Provision........... 2,832 2.0 1,572 1.9 1,651 2.2
-------- ----- ------- ----- ------- -----
Net Income (Loss).............. $ (3,642) (2.6)% $ 2,336 2.9% $ 2,139 2.9%
======== ===== ======= ===== ======= =====
</TABLE>
Ten Months Ended December 31, 1997 Compared to Twelve Months Ended February
28, 1997
Revenues. Revenues increased $56.6 million, or 69.1%, to $138.5 million for
the ten months ended December 31, 1997 from $81.9 million for the twelve
months ended February 28, 1997. The increase in revenues was attributable to
the acquisitions of the Pre-Offering Companies in June and July of 1997 and
the acquisitions of the Offering Acquisition Companies during November 1997.
The increase in revenues was partially offset as the period ended December 31,
1997 included ten months while the period ended February 28, 1997 included
twelve months.
Gross Profit. Gross profit increased $13.3 million, or 56.8%, to $36.7
million for the ten months ended December 31, 1997 from $23.4 million for the
twelve months ended February 28, 1997. The increase in gross
14
<PAGE>
profit was primarily attributable to the acquisitions of the Pre-Offering
Companies in June and July of 1997, the acquisitions of the Offering
Acquisition Companies during November 1997 and lower material costs at
Airtron. The increase in gross profit was partially offset as the period ended
December 31, 1997 included ten months while the period ended February 28, 1997
included twelve months. Gross profit margin decreased 2.0% for the ten months
ended December 31, 1997 compared to the twelve months ended December 31, 1997
because certain of the GroupMAC Companies' gross profit margins were
considerably lower than those achieved at Airtron.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.7 million, or 84.3%, to $36.5 million
for the ten months ended December 31, 1997 from $19.8 million for the twelve
months ended February 28, 1997. Such increase was primarily attributable to
(i) a $7.0 million non-recurring non-cash compensation charge related to the
reverse acquisition of GroupMAC in May 1997, (ii) a $0.2 million non-
recurring, non-cash compensation charge related to the issuance of management
shares and options, (iii) the aforementioned acquisitions and (iv) a $4.1
million increase in corporate expenses representing the formation of the
corporate management team and infrastructure necessary to execute the
Company's operating and acquisition strategies. As a percentage of revenues,
selling, general and administrative expenses, excluding the aforementioned
items, decreased to 17.5% for the ten months ended December 31, 1997 from
24.1% for the twelve months ended February 28, 1997, respectively, due
primarily to prospective reductions in compensation to former owners, to which
they agreed. These reductions in salaries are in accordance with the terms of
their employment agreements.
Net Interest. Net interest was an expense of $1.1 million for the ten months
ended December 31, 1997. For the twelve months ended February 28, 1997, net
interest income was $0.1 million. Interest charges increased during the ten
months ended December 31, 1997 due to borrowings under the Company's credit
facilities to fund the cash portion of the acquisition of Airtron and the Pre-
Offering Companies. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $1.2 million, or
75.0%, to $2.8 million for the ten months ended December 31, 1997 from $1.6
million for the twelve months ended February 28, 1997 while pre-tax income
decreased $4.7 million. Excluding the effect of the $7.2 million non-
deductible compensation charge discussed above, the effective tax rate for the
ten months ended December 31, 1997 was 44.2% compared to 40.2% for the twelve
months ended February 28, 1997, resulting primarily from the non-deductible
goodwill amortization of $0.6 million in the ten months ended December 31,
1997.
Twelve Months Ended February 28, 1997 Compared to Twelve Months Ended
February 29, 1996
Revenues. Revenues increased $8.1 million, or 11.0%, to $81.9 million for
the twelve months ended February 28, 1997 from $73.8 million for the twelve
months ended February 29, 1996. The increase in revenues was attributable to
increased market penetration in new residential construction in the
Indianapolis, Indiana and Dallas, Texas markets, resulting in a larger volume
of new home starts.
Gross Profit. Gross profit increased $2.3 million, or 10.9%, to $23.4
million for the twelve months ended February 28, 1997 from $21.1 million for
the twelve months ended February 29, 1996. Gross profit margin remained
relatively constant at 28.5% and 28.6% for the twelve months ended February
28, 1997 and February 29, 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.2 million, or 12.5%, to $19.8 million for
the twelve months ended February 28, 1997 from $17.6 million for the same
period ended February 29, 1996. Such increase was primarily attributable to an
increase in compensation, vehicle leases and professional fees of the Company.
As a percentage of revenues, selling, general and administrative expenses
remained relatively constant at 24.1% and 23.9% for the twelve months ended
February 28, 1997 and February 29, 1996, respectively.
Income Tax Provision. The income tax provision decreased $0.1 million, or
5.9%, to $1.6 million for the twelve months ended February 28, 1997 from $1.7
million for the same period ended February 29, 1996. The effective tax
15
<PAGE>
rate for the twelve months ended February 28, 1997 was 40.2% compared to 43.6%
for the same period ended February 29, 1996. The decrease in the effective tax
rate was due to a higher state income tax provision for the twelve months
ended February 29, 1996.
MACDONALD-MILLER
MacDonald-Miller was founded in 1965 and provides a full range of HVAC
services to commercial and industrial customers in the Northwestern United
States including design and engineering; fabrication and installation of sheet
metal, piping, plumbing and controls; and HVAC service and maintenance.
MacDonald-Miller's revenues for fiscal 1996 were $66.1 million and income from
operations was $2.1 million. MacDonald- Miller derived 59% of its 1996
revenues from maintenance, repair and replacement services and 41% from new
installation services. MacDonald-Miller is headquartered in Seattle,
Washington and has facilities in Seattle and Portland, Oregon.
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $39,534 100.0% $45,508 100.0% $66,059 100.0% $52,184 100.0% $54,560 100.0%
Cost of Services........ 32,256 81.6 36,927 81.1 56,373 85.3 45,192 86.6 46,400 85.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 7,278 18.4 8,581 18.9 9,686 14.7 6,992 13.4 8,160 15.0
Selling, General and
Administrative
Expenses............... 6,088 15.4 7,338 16.2 7,632 11.6 5,567 10.7 6,239 11.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,190 3.0 1,243 2.7 2,054 3.1 1,425 2.7 1,921 3.5
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased $2.4 million, or 4.6%, from $52.2 million for
the nine months ended September 30, 1996 to $54.6 million for the nine months
ended September 30, 1997. The increase in revenues was attributable to
continuing strength in the company's Northwest commercial markets, principally
Seattle, Washington and Portland, Oregon, including a $20 million contract
with a large software company to be completed in 1997, an increase in revenues
from the company's Special Projects and Tenant Improvement operations, and an
increase in revenues from the company's Commercial Service operations.
Gross Profit. Gross Profit increased $1.2 million, or 17.1%, from $7.0
million for the nine months ended September 30, 1996 to $8.2 million for the
nine months ended September 30, 1997. Gross margin increased from 13.4% for
the first nine months of 1996 to 15.0% for the same period of 1997. The gross
profit increase was attributable principally to higher volume and realized
gross margins in the MacDonald-Miller's Special Projects and Tenant
Improvement operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 10.7%, from $5.6 million
for the nine months ended September 30, 1996 to $6.2 million for the nine
months ended September 30, 1997. Both the dollar and percentage of revenue
changes were attributable to the higher revenue levels in 1997 compared to
1996. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.7% for the nine months of 1996 to 11.5%
for the same period of 1997.
16
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $20.6 million, or 45.3%, from $45.5 million for
the year ended December 31, 1995 to $66.1 million for the year ended December
31, 1996. The increase in revenues was attributable to a 15%, or $1.6 million,
increase in revenues from Service and Maintenance operations, and a 23%, or
$2.0 million, increase in revenues from the company's Special Projects and
Tenant Improvement operations. The $17 million balance of the increase was
attributable to contracted design and build projects, HVAC system retrofits
and remodels, lighting energy retrofits and technical services, together
representing a revenue increase of 65.4% over 1995. This increase was
primarily volume driven and directly related to the company's effort to
increase its market presence in the Seattle, Washington and Portland, Oregon
metropolitan areas, fueled by continued strength of commercial activity in the
Northwest.
Gross Profit. Gross profit increased $1.1 million, or 12.8%, from $8.6
million for the year ended December 31, 1995 to $9.7 million for the year
ended December 31, 1996. Gross margin decreased from 18.9% to 14.7% due to the
acceptance of certain lower margin projects and increased direct costs related
to the rapid revenue growth experienced in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 4.1%, from $7.3 million for
the year ended December 31, 1995 to $7.6 million for the year ended December
31, 1996. The increase in these expenses was directly attributable to
incremental costs incurred to implement a job cost and accounting software
conversion and other management information systems processes and
infrastructure. As a percentage of revenues, selling, general and
administrative expenses decreased from 16.2% to 11.6% due to the increased
revenue levels.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $6.0 million, or 15.2%, from $39.5 million for
the year ended December 31, 1994 to $45.5 million for the year ended December
31, 1995. The increase in revenues was attributable to a $1.2 million, or
10.5%, increase in revenues from Service and Maintenance operations, a $1.9
million, or 27.8%, increase in revenues from the company's Special Projects
and Tenant Improvement operations, and a $2.9 million, or 12.6%, increase in
revenues from installation operations, including design and build projects,
retrofits and remodeling. The broad-based increase in revenues was primarily
volume driven and attributable to generally increasing activity in the Seattle
area, the Company's principal market, and continued efforts to increase the
underlying base of service and maintenance business.
Gross Profit. Gross profit increased $1.3 million, or 17.8%, from $7.3
million for the year ended December 31, 1994 to $8.6 million for the year
ended December 31, 1995. Gross margin increased from 18.4% to 18.9% for the
years ending December 31, 1994 and 1995, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 19.7%, from $6.1 million
for the year ended December 31, 1994 to $7.3 million for the year ended
December 31, 1995. The increase was attributable generally to the higher level
of revenues and an approximate $200,000 increase relating to the initial
stages of the aforementioned job cost and accounting software conversion and
other management information system processes and infrastructure that
continued into 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 15.4% to 16.2% for the years ending
1994 and 1995, respectively.
17
<PAGE>
MASTERS
Masters, Inc. ("Masters") was founded in 1986 and provides HVAC and plumbing
services in the Washington, D.C. area. Masters' revenues for fiscal 1996 were
$39.8 million and income from operations for fiscal 1996 was $1.5 million.
Masters derived 100% of its 1996 revenues from new installation services.
Masters is headquartered in Gaithersburg, Maryland and has its facilities in
Gaithersburg and Chantilly, Virginia.
RESULTS OF OPERATIONS--MASTERS
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $30,327 100.0% $35,160 100.0% $39,826 100.0% $29,088 100.0% $31,166 100.0%
Cost of Services........ 28,018 92.4 31,746 90.3 35,854 90.0 26,308 90.4 27,956 89.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,309 7.6 3,414 9.7 3,972 10.0 2,780 9.6 3,210 10.3
Selling, General and
Administrative
Expenses............... 1,664 5.5 2,373 6.7 2,484 6.3 1,739 6.0 2,015 6.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 645 2.1 1,041 3.0 1,488 3.7 1,041 3.6 1,195 3.8
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues. Revenues increased $2.1 million, or 7.2%, from $29.1 million for
the nine months ended September 30, 1996 to $31.2 million for the nine months
ended September 30, 1997. The increase in revenues was primarily attributable
to an additional volume of housing starts generated from existing customers.
Gross Profit. Gross profit increased $0.4 million, or 14.3%, from $2.8
million for the nine months ended September 30, 1996 to $3.2 million for the
nine months ended September 30, 1997. Gross margin increased from 9.6% for the
nine months ended September 30, 1996 to 10.3% for the nine months ended
September 30, 1997. The increase was primarily attributable to a higher mix of
fire sprinkler installations that typically produce higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 17.6%, from $1.7 million
for the nine months ended September 30, 1996 to $2.0 million for the nine
months ended September 30, 1997. The increase in selling, general and
administrative expenses was primarily due to staff additions to keep pace with
the growth of the company, increased bad debts and an increase in professional
fees. As a percentage of revenues, selling, general and administrative
expenses increased from 6.0% to 6.5% over the respective periods.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $4.6 million, or 13.1%, from $35.2 million for
the year ended December 31, 1995 to $39.8 million for the year ended December
31, 1996. The increase was attributable to an additional volume of housing
starts generated from existing customers and increased market penetration.
Gross Profit. Gross profit increased $558,000, or 16.4%, from $3.4 million
for the year ended December 31, 1995 to $4.0 million for the year ended
December 31, 1996. Gross margins increased slightly from 9.7% to 10.0% for the
years ending 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $111,000, or 4.6%, from $2.4 million for the
year ended December 31, 1995 to $2.5 million for the year ended December 31,
1996. As a percentage of revenues, selling, general and administrative
expenses decreased from 6.7% to 6.3% over the same period. This decrease was
primarily attributable to the net increase in revenue and the relatively fixed
nature of these expenses.
18
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $4.9 million, or 16.2%, from $30.3 million for
the year ended December 31, 1994 to $35.2 million for the year ended December
31, 1995. The increase was attributable to an additional volume of housing
starts generated from existing customers, increased market penetration and a
greater volume of HVAC new installations resulting from management efforts to
further expand this service line.
Gross Profit. Gross profit increased $1.1 million, or 47.8%, from $2.3
million for the year ended December 31, 1994 to $3.4 million for the year
ended December 31, 1995. Gross margin increased from 7.6% to 9.7% due to a
greater volume of higher margin HVAC new installations coupled with margin
expansion in plumbing new installations from more efficient production.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $709,000, or 41.7%, from $1.7 million for
the year ended December 31, 1994 to $2.4 million for the year ended December
31, 1995. As a percentage of revenues, selling, general and administrative
expenses increased from 5.5% to 6.7% due to an increase in bad debt expense,
an increase in personnel necessary to effectively manage the Company's rapid
growth and the addition of an executive incentive program.
K&N
K&N Plumbing, Heating and Air Conditioning, Inc. ("K&N") was founded in 1978
and provides plumbing services to the residential new construction market in
the Dallas, Fort Worth and Austin, Texas and Las Vegas, Nevada markets. K&N
also designs, sells, installs and services HVAC systems in Dallas and Fort
Worth. K&N's revenues for fiscal 1996 were $24.3 million and income from
operations was $936,000. K&N derived 89% of its 1996 revenues from new
installation services and 11% from maintenance, repair and replacement
services. K&N is headquartered in Arlington, Texas and has facilities in
Arlington and Austin, Texas and Las Vegas, Nevada.
RESULTS OF OPERATIONS--K&N
The following table sets forth certain unaudited financial data for the
periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1995 1996 1997 1996 1997(1)
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $21,458 100.0% $22,709 100.0% $24,279 100.0% $11,893 100.0% $12,355 100.0%
Cost of Services........ 18,843 87.8 20,350 89.6 20,705 85.3 10,433 87.7 10,662 86.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,615 12.2 2,359 10.4 3,574 14.7 1,460 12.3 1,693 13.7
Selling, General and Ad-
ministrative
Expenses............... 2,275 10.6 2,478 10.9 2,638 10.8 1,349 11.4 1,605 13.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 340 1.6 (119) (0.5) 936 3.9 111 0.9 88 0.7
</TABLE>
- --------
(1) The operating results of K&N represent six months of activity, even though
K&N was acquired, for accounting purposes, by Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $462,000, or 3.9%, from $11.9 million for the
six months ended June 30, 1996 to $12.4 million for the six months ended June
30, 1997. The increase in revenues was attributable to a higher volume of new
home construction in the Austin and Las Vegas markets.
19
<PAGE>
Gross Profit. Gross profit increased $233,000, or 15.5%, from $1.5 million
for the six months ended June 30, 1996 to $1.7 million for the six months
ended June 30, 1997. Gross margin increased from 12.3% to 13.7% due to
increases in operational efficiency.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $256,000, or 19.7%, from $1.3 million for
the six months ended June 30, 1996 to $1.6 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to additional owners' compensation expense. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.4% to 13.0% for 1996 and 1997, respectively.
Year Ended March 31, 1997 Compared to Unaudited Year Ended March 31, 1996
Revenues. Revenues increased $1.6 million, or 7.0%, from $22.7 million for
the year ended March 31, 1996 to $24.3 million for the year ended March 31,
1997. The increase in revenues was primarily volume driven and attributable to
the expansion of the Company's customer base to include several new home
builders in the Austin and Las Vegas markets.
Gross Profit. Gross profit increased $1.2 million, or 50.0%, from $2.4
million for the year ended March 31, 1996 to $3.6 million for the year ended
March 31, 1997. The increase was due to a decline in production labor and
material costs for start ups in Austin, Texas and Las Vegas, Nevada, and the
savings from the closing during fiscal 1996 of an unsuccessful operation in
Palmdale, California. Gross margin increased from 10.4% to 14.7% for the years
ending March 31, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $160,000, or 6.4%, from $2.5 million for the
year ended March 31, 1996 to $2.6 million for the year ended March 31, 1997.
As a percentage or revenues, selling, general and administrative expenses
remained relatively constant at 10.9% and 10.8% for the years ending March 31,
1996 and 1997, respectively.
Unaudited Year Ended March 31, 1996 Compared to Unaudited Year Ended March
31, 1995
Revenues. Revenues increased $1.2 million, or 5.6%, from $21.5 million for
the year ended March 31, 1995 to $22.7 million for the year ended March 31,
1996. The increase in revenues was primarily volume driven and attributable to
the new operating facilities in Austin, Texas and Las Vegas, Nevada and a
higher level of new home construction in the Dallas and Fort Worth
metropolitan area.
Gross Profit. Gross Profit decreased $256,000, or 9.8%, from $2.6 million
for the year ended March 31, 1995 to $2.4 million for the year ended March 31,
1996. Gross margin decreased from 12.2% to 10.4% for the years ended March 31,
1995 and 1996, respectively. The gross margin decline was primarily
attributable to aggressive pricing and start-up labor costs for the two new
divisions in Austin, Texas and Las Vegas, Nevada.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $203,000, or 8.8% from $2.3 million for the
year ended March 31, 1995 to $2.5 million for the year ended March 31, 1996.
The increase in selling, general and administrative expenses was primarily
attributable to incremental costs relating to the closing of the Palmdale,
California operation and the implementation of a new management information
system. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.6% to 10.9%.
OTHER RESIDENTIAL SERVICE COMPANIES
Pre-Offering Companies
A-ABC Appliance, Inc. and A-1 Appliance and Air Conditioning, Inc.
(collectively, "A-ABC"), founded in 1976 and 1994, respectively, provide
maintenance, repair and replacement services for HVAC equipment, as well as
home appliances, to residential customers in the Dallas and Garland, Texas
areas. A-ABC also offers
20
<PAGE>
plumbing repair and replacement services. Combined revenues for fiscal 1996
totaled $8.5 million and combined income from operations totaled $333,000. A-
ABC is headquartered in Dallas, Texas.
Callahan Roach Products & Publications, Inc. ("Callahan Roach") and its
affiliates provide marketing products and pricing programs nationally to over
1,300 independent service companies, manufacturers and associations. Callahan
Roach's revenues for fiscal 1996 were $1.9 million and income from operations
for fiscal 1996 was $8,257. Callahan Roach, founded in 1989, is headquartered
in Englewood, Colorado and has facilities in Dublin, Ohio and Englewood,
Colorado.
Costner Brothers, Inc. ("Costner") was founded in 1985 and provides HVAC
maintenance, repair and replacement services to residential customers in the
Rock Hill, South Carolina and Charlotte, North Carolina areas. Costner's
revenues for fiscal 1996 were $3.0 million, and income from operations was
$7,487. Costner is headquartered in Rock Hill, South Carolina.
Hallmark Air Conditioning, Inc. ("Hallmark") was founded in 1951 and
provides HVAC maintenance, repair and replacement services to residential
customers in the Houston, Texas area. Hallmark's revenues for fiscal 1996 were
$6.5 million, and income from operations was $8,749. Hallmark is headquartered
in Houston, Texas and has facilities in Houston and San Antonio, Texas.
AA JARL, Inc. (d/b/a Jarrell Plumbing) ("Jarrell") was founded in 1959 and
provides plumbing repair services to residential customers in the Houston,
Texas area. Jarrell's revenues for the fiscal year ended February 28, 1997
were $1.2 million and it had income from operations of $34,547 during that
year. Jarrell is headquartered in Houston, Texas.
Way Residential (the residential service business formerly owned by Way
Service, Inc.) was founded in 1977 and provides HVAC services to residential
customers in Houston, Texas. Way Residential's revenues for fiscal 1996 were
$659,000 and income from operations was $123,000. Way Residential's operations
have been combined with Hallmark's operations.
Offering Acquisition Companies
Central Carolina Air Conditioning Company ("Central Carolina") was founded
in 1967 and provides HVAC maintenance, repair and replacement services to
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas. Central Carolina's revenues for fiscal 1996 were $8.2
million and income from operations was $381,000. In addition, Central Carolina
has deferred $967,000 of service contract revenues due to five-year extended
service contracts. Other GroupMAC Companies typically do not have extended
service contracts in excess of one year. Central Carolina is headquartered in
Greensboro, North Carolina.
Evans Services, Inc. ("Evans") was founded in 1901 and provides plumbing and
HVAC services to residential customers in the Birmingham, Alabama area. Evans'
revenues for fiscal 1996 were $2.3 million and income from operations was
$86,000. Evans is headquartered in Birmingham, Alabama.
Paul E. Smith Co., Inc. ("Paul E. Smith") was founded in 1967 and installs
and maintains, repairs and replaces plumbing systems in new and existing
residences in the Indianapolis, Indiana area. Paul E. Smith's revenues for
fiscal 1996 were $5.6 million and income from operations was $297,000. Paul E.
Smith is headquartered in Indianapolis, Indiana.
Van's Comfortemp Air Conditioning, Inc. ("Van's") was founded in 1965 and
provides HVAC services to residential and light commercial customers in the
Palm Beach-Ft. Lauderdale, Florida area. Van's revenues for fiscal 1996 were
$4.3 million and income from operations was $7,000. Van's is headquartered in
Delray Beach, Florida.
Willis Refrigeration, Air Conditioning & Heating, Inc. ("Willis") was
founded in 1954 and installs, maintains and repairs HVAC systems in new and
existing residences in the greater Cincinnati and northern
21
<PAGE>
Kentucky areas. Willis' revenues for fiscal 1996 were $6.8 million and income
from operations was $542,000. Willis is headquartered in Cincinnati, Ohio.
RESULTS OF OPERATIONS--OTHER RESIDENTIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Residential Services Companies
derive a majority of their revenues from residential new installation and
maintenance, repair and replacement services. In the aggregate, these 11
companies derived 84% of their revenue in fiscal 1996 from residential service
and 16% from light commercial service. The following table sets forth certain
unaudited financial data for periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997(2)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $38,481 100.0% $43,216 100.0% $48,964 100.0% $23,255 100.0% $24,886 100.0%
Cost of Services ....... 25,397 66.0 27,537 63.7 30,628 62.6 14,762 63.5 14,799 59.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 13,084 34.0 15,679 36.3 18,336 37.4 8,493 36.5 10,087 40.5
Selling, General and Ad-
ministrative
Expenses................ 11,432 29.7 14,210 32.9 16,506 33.7 8,082 34.7 8,277 33.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,652 4.3 1,469 3.4 1,830 3.7 411 1.8 1,810 7.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
(2) The operating results of the Other Residential Service Companies,
including Hallmark and A-ABC, represent six months of activity, even
though Hallmark and A-ABC were acquired, for accounting purposes, by
Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $1.6 million, or 6.9%, from $23.3 million for
the six months ended June 30, 1996 to $24.9 million for the six months ended
June 30, 1997. The increase in revenues was primarily volume driven and
attributable to expansion of Central Carolina's commercial service and
replacement business, an increase in replacement sales at Willis and the
occurrence of a significant light commercial job at Jarrell.
Gross Profit. Gross profit increased $1.6 million, or 18.8%, from $8.5
million for the six months ended June 30, 1996 to $10.1 million for the six
months ended June 30, 1997. Gross margin increased from 36.5% to 40.5% from
the six month period ended June 30, 1996 to the corresponding period in 1997.
The increase in gross margin was attributable to higher margins at Central
Carolina from operational efficiencies and from increased higher margin
replacement sales at Willis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $195,000, or 2.4%, from $8.1 million for the
six months ended June 30, 1996 to $8.3 million for the six months ended June
30, 1997. As a percentage of revenues, selling, general and administrative
expenses decreased from 34.7% to 33.2% for the six month period ended June 30,
1996 compared to the corresponding period in 1997.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $5.8 million, or 13.4%, from $43.2 million in
fiscal 1995 to $49.0 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to the continued internal expansion
of HVAC services to an appliance company acquired by A-ABC in late 1994, an
acquisition made during early 1996 by Hallmark of an operation in San Antonio
and an aggressive advertising campaign at Costner. Also, revenues increased
significantly at Van's and Willis due to a higher level of replacement sales.
22
<PAGE>
Gross Profit. Gross profit increased $2.6 million, or 16.6%, from $15.7
million in fiscal 1995 to $18.3 million in fiscal 1996. The increase in gross
profit was attributable to the continued internal expansion of HVAC services
at A-ABC, an acquisition by Hallmark of a high margin operation in San Antonio
and revenue increases at Costner and other higher margin companies. Gross
margin increased from 36.3% to 37.4% for fiscal 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 16.2%, from $14.2 million
in fiscal 1995 to $16.5 million in fiscal 1996. The increase in selling,
general and administrative expenses was mainly due to the acquisition of an
operation in San Antonio by Hallmark during the period, a higher level of
spending on advertising at Costner and an increase in owner compensation among
all of the residential service companies of $116,000. As a percentage of
revenues, selling, general and administrative expenses increased from 32.9% to
33.7% for fiscal 1995 and 1996, respectively.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $4.7 million, or 12.2%, from $38.5 million in
fiscal 1994 to $43.2 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to incremental revenues from an
acquisition made by A-ABC in late 1994, the expansion of the customer base at
Central Carolina to include the commercial sector and an increased emphasis on
the selling of service agreements and a higher level of replacement revenues
at Van's.
Gross Profit. Gross profit increased $2.6 million, or 19.8%, from $13.1
million in fiscal 1994 to $15.7 million in fiscal 1995. The increase in gross
profits was primarily attributable to the expanded revenue volumes. Gross
margin increased from 34.0% to 36.3% for fiscal years 1994 and 1995,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 24.6%, from $11.4 million
in fiscal 1994 to $14.2 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 29.7% to 32.9% due
to incremental overhead at the company acquired in late 1994 by A-ABC,
incremental owners' compensation of $378,000 across the residential service
companies and an overall increase in infrastructure to keep pace with the
internal growth at each company within the group.
OTHER COMMERCIAL SERVICE COMPANIES
Pre-Offering Companies
Charlie Crawford, Inc. (d/b/a Charlie's Plumbing) ("Charlies") was founded
in 1979 and provides plumbing maintenance, repair and replacement services to
commercial and residential customers in the Houston, Texas area and
specializes in the high-rise condominium market in Houston. Charlie's revenues
for fiscal 1996 were $3.1 million, and income from operations was $65,000.
Charlie's is headquartered in South Houston, Texas.
Sibley Services, Incorporated ("Sibley") was founded in 1974 and provides
HVAC and refrigeration maintenance, repair and replacement services to
commercial and industrial customers in the greater Memphis, Tennessee area
which includes northern Mississippi and northeast Arkansas. Sibley also offers
design and build services, including facility automation. Sibley's revenues
for fiscal 1996 were $7.0 million and income from operations was $130,018.
Sibley is headquartered in Memphis, Tennessee.
United Service Alliance ("USA") was founded in 1988 and provides marketing
products and training materials to over 100 member companies across the
country. USA's revenues for fiscal 1996 were $763,000 and income from
operations was $33,000. USA is headquartered in Englewood, Colorado.
23
<PAGE>
Offering Acquisition Companies
All Service Electric, Inc. ("All Service") was founded in 1990 and provides
electrical contracting services (including new installation and repair
services) primarily to commercial customers in the Jacksonville, Florida area.
All Service's revenues for fiscal 1996 were $2.8 million and income from
operations was $687,000. All Service is headquartered in Jacksonville,
Florida.
Arkansas Mechanical Services, Inc. ("Arkansas Mechanical") was founded in
1988 and provides HVAC maintenance, repair and replacement services to
commercial and industrial customers in the greater Little Rock and
Fayetteville, Arkansas areas. Arkansas Mechanical also provides engineering
services for retrofit upgrades and replacements. Arkansas Mechanical's
revenues were $3.3 million and income from operations was $325,000. Arkansas
Mechanical is headquartered in North Little Rock, Arkansas and has facilities
in the North Little Rock and Fayetteville, Arkansas areas.
Linford Service Company ("Linford") was founded in 1960 and provides HVAC
maintenance, repair and replacement services to commercial customers
throughout California. Linford's revenues for fiscal 1996 were $11.3 million
and the loss from operations was $267. Linford is headquartered in Oakland,
California and has facilities in Oakland, Ontario, Sacramento, San Diego and
San Jose, California.
Mechanical Services, Inc. ("Mechanical") was founded in 1993 and provides
design and build, engineering and installation services in the mechanical
trades industry in the Little Rock and Fayetteville, Arkansas areas.
Mechanical Services' revenues for fiscal 1996 were $2.9 million and income
from operations was $56,000. Mechanical Services is headquartered in North
Little Rock, Arkansas and has facilities in North Little Rock and
Fayetteville, Arkansas.
Southeast Mechanical Service, Inc. ("Southeast Mechanical") was founded in
1979 and provides HVAC maintenance, repair and replacement services in the
Miami and Fort Lauderdale, Florida areas. Southeast Mechanical's revenues for
fiscal 1996 were $5.3 million and income from operations was $585,000.
Southeast Mechanical is headquartered in Hollywood, Florida.
Yale Incorporated ("Yale") was founded in 1939 and provides HVAC services to
commercial customers throughout Minnesota. Yale's revenues for fiscal 1996
were $10.1 million and income from operations was $405,000. Yale is
headquartered in Minneapolis, Minnesota.
RESULTS OF OPERATIONS--OTHER COMMERCIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Commercial Services Companies
derive a majority of their revenues from commercial new installation and
maintenance, repair and replacement services. In the aggregate, these nine
companies derive 96% of their revenue from commercial services and 4% of their
revenues from residential services. The following table sets forth certain
unaudited financial data for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $33,208 100.0% $38,476 100.0% $46,499 100.0% $24,460 100.0% $23,870 100.0%
Cost of Services........ 23,774 71.6 27,613 71.8 33,845 72.8 17,575 71.9 17,177 72.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 9,434 28.4 10,863 28.2 12,654 27.2 6,885 28.1 6,693 28.0
Selling, General and
Administrative
Expenses............... 7,669 23.1 9,129 23.7 10,367 22.3 4,703 19.2 5,198 21.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,765 5.3 1,734 4.5 2,287 4.9 2,182 8.9 1,495 6.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
24
<PAGE>
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues declined $590,000, or 2.4%, from $24.5 million for the
six months ended June 30, 1996 to $23.9 million for the six months ended June
30, 1997. The decrease in revenues was primarily volume driven and
attributable to a $2.0 million decline in revenues at Sibley which resulted
from an internal decision to discontinue a large, low margin customer
relationship. Such decline was offset by growth at Linford from incremental
service agreements and at Mechanical Services from incremental "design and
build" project work.
Gross Profit. Gross profit declined $192,000, or 2.9%, from $6.9 million for
the six months ended June 30, 1996 to $6.7 million for the six months ended
June 30, 1997. The decline in gross profit primarily resulted from the
discontinuance of the customer relationship discussed above. Gross margin
remained consistent at 28.1% and 28.0% for the six month periods ended June
30, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $494,000, or 10.6%, from $4.7 million for
the six months ended June 30, 1996 to $5.2 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to incremental owners' compensation and additional
personnel to support the growth in sales at Linford and an intentional shift
in business mix at Yale toward higher margin service contract work. As a
percentage of revenues, selling, general and administrative expenses increased
from 19.2% to 21.7% over the six month periods ended June 30, 1996 and 1997,
respectively.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $8.0 million, or 20.8%, from $38.5 million in
fiscal 1995 to $46.5 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to incremental service agreements at
Linford, incremental design and build projects at Mechanical Services and an
increase in maintenance, repair and replacement sales at Southeast Mechanical
and Sibley Services.
Gross Profit. Gross profit increased $1.8 million, or 16.5%, from $10.9
million in fiscal 1995 to $12.7 million in fiscal 1996. The largest factor
impacting the increase in gross profit was volume growth in revenues at
Linford, although the growth was at slightly lower margins. Additionally,
significant increases in gross profit were due to rapid service revenue growth
combined with margin expansion at All Service and Yale. Gross margin decreased
slightly from 28.2% to 27.2% between fiscal 1995 and fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 14.3%, from $9.1 million in
fiscal 1995 to $10.4 million in fiscal 1996. The overall increase in selling,
general and administrative expenses was due to the expansion and relocation of
facilities as well as an increase in administrative and sales personnel at
Linford. As a percentage of revenues, selling, general and administrative
expenses decreased slightly from 23.7% to 22.3% in fiscal 1996.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $5.3 million, or 16.0%, from $33.2 million in
fiscal 1994 to $38.5 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to an increase in design and build
jobs at Yale and Mechanical and an increase in service agreement volumes at
Linford.
Gross Profit. Gross profit increased $1.5 million, or 16.0%, from $9.4
million in fiscal 1994 to $10.9 million in fiscal 1995. The increase in gross
profit was primarily attributable to a $2.0 million increase in revenues at
Linford at slightly higher margins, volume increases at Yale and Mechanical
and gross margin expansion at Charlie's and Arkansas Mechanical. As a
percentage of revenues, gross margin declined slightly from 28.4% in fiscal
1994 to 28.2% in fiscal 1995.
25
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 18.2%, from $7.7 million in
fiscal 1994 to $9.1 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 23.1% to 23.7% due
primarily to an increase in owners' compensation of $503,000 and personnel
additions necessary to adequately manage the revenue growth at Linford.
RESULTS OF OPERATIONS--PRO FORMA
During 1998, GroupMAC acquired 15 platform companies and executed definitive
agreements to acquire two additional platform companies (the "Post-Offering
Companies" and, together with the GroupMAC Companies, the "GroupMAC Pro Forma
Combined Companies"). The following table sets forth certain unaudited pro
forma financial data for the twelve month period ended December 31, 1997:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER
31, 1997
------------------------------
GROUPMAC
PRO FORMA
GROUPMAC COMBINED
COMPANIES COMPANIES
-------------- --------------
<S> <C> <C> <C> <C>
Revenues........................................ $329,038 100.0% $509,263 100.0%
Cost of Services................................ 251,362 76.4 387,852 76.2
-------- ----- -------- -----
Gross Profit.................................... 77,676 23.6 121,411 23.8
</TABLE>
The acquisition of the Post-Offering Companies added $180.3 million of
revenues bringing the total pro forma revenues for the GroupMAC Pro Forma
Combined Companies to $509.3 million for the twelve months ended December 31,
1997. This resulted in the Company decreasing its dependence on new
installation business from 55% of total revenues to 50%. The Post-Offering
Companies' revenue mix changed the revenue mix of the GroupMAC Pro Forma
Combined Companies as follows:
<TABLE>
<CAPTION>
GROUPMAC
PRO FORMA
GROUPMAC COMBINED
COMPANIES COMPANIES
--------- ---------
<S> <C> <C>
Residential Services:
New Installation.......................................... 42% 28%
Maintenance, Repair and Replacement....................... 17% 17%
---- ----
Total Residential....................................... 59% 45%
Commercial Services:
New Installation.......................................... 13% 22%
Maintenance, Repair and Replacement....................... 28% 33%
---- ----
Total Commercial........................................ 41% 55%
---- ----
Total................................................. 100% 100%
==== ====
</TABLE>
The Company's diversified business mix is reflected to varying degrees in
its gross margin. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
margins than businesses providing similar services to the commercial markets.
The addition of the Post-Offering Companies increase the Company's pro forma
gross profit margin from 23.6% to 23.8%. This increase was primarily
attributable the addition of a commercial electric company with a gross profit
margin of 33.4% and the addition of a commercial service company with a gross
profit margin of 25.1%. These increases were partially offset by the
acquisition of a commercial mechanical company with a gross profit margin of
15.1% and a commercial HVAC, electrical and control systems services company
with a gross profit margin of 22.2%.
The above discussion should be read in conjunction with the unaudited pro
forma combined financial statements and related notes contained elsewhere
herein. The pro forma combined financial data do not purport
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to represent what the Company's results of operations would actually have been
if such transactions had in fact occurred on January 1, 1997 and are not
necessarily representative of the Company's results of operations for any
future period. Since the acquisitions have not historically been under common
control or management, historical pro forma combined results may not be
indicative of or comparable to future performance.
YEAR 2000
Many computer software programs, as well as certain hardware and equipment
containing date sensitive data, were structured to utilize a two-digit date
field meaning that they may not be able to properly recognize dates in the
year 2000 and later. This could result in significant system and equipment
failures. The Company recognizes that it must take action to ensure that its
products and operations will not be adversely impacted by Year 2000 software
failures and is currently developing detailed assessments and action plans to
address Year 2000 issues. Irrespective of the Year 2000 issue, the Company is
in the process of developing data processing systems throughout the
organization for its overall information needs which will be free of any Year
2000 limitations. The common data processing system will be implemented first
at GroupMAC Companies with identified Year 2000 constraints which are not
expected to be corrected by other means. The Company expects to commence user-
acceptance testing of the new data processing system by the end of 1998 with
implementation beginning in 1999. The Company currently does not have an
overall estimate of the cost associated with the purchase and implementation
of the new processing system.
The Year 2000 considerations may have an effect on some of the Company's
customers and suppliers, and thus indirectly on the Company. The Company has
not assessed the potential adverse effect on the Company with respect to
customers and suppliers with Year 2000 problems.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due
to reduced construction activities during inclement weather and less use of
air conditioning during the colder months. Demand for HVAC services is
generally higher in the second and third quarters. Accordingly, the Company
expects its revenues and operating results generally will be lower in the
first and fourth quarters. Historically, the construction industry has been
highly cyclical. As a result, the Company's volume of business may be
adversely affected by declines in new installation projects in various
geographic regions of the United States.
INFLATION
Inflation did not have a significant effect on the results of operations of
the GroupMAC Companies for the ten months ended December 31, 1997 or the years
ended February 28, 1997 or February 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of Common Stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of one Pre-Offering Company
and the Offering Acquisition Companies, $42.6 million to repay corporate
indebtedness and debt assumed in connection with the acquisition of the
GroupMAC Companies, $19.3 million to retire all of the then outstanding
preferred stock and $11.9 million for general corporate purposes including
working capital, final consideration settlements related to the GroupMAC
Companies and acquisitions consummated in 1998 to date.
Historically, the operations and growth of the Company have been financed
through internally generated working capital and borrowings from commercial
banks or other lenders. These borrowings were generally secured by
substantially all of the assets of the Company, as well as personal guarantees
of the respective owners.
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On December 11, 1997, the Company entered into a three year agreement with
Texas Commerce Bank National Association, (now Chase Bank of Texas National
Association) as Agent, and four other banks to provide a revolving credit
facility (the "Credit Agreement") with an initial borrowing capacity of up to
$75.0 million. Under this Credit Agreement, the Company is required to
maintain (i) a minimum fixed charge coverage ratio; (ii) a minimum tangible
net worth that is positive; (iii) a maximum ratio of total indebtedness for
borrowed money to capitalization (as defined in the Credit Agreement); (iv) a
maximum ratio of debt to historical earnings before interest, taxes,
depreciation and amortization; (v) a maximum amount of other indebtedness in
relation to consolidated shareholders' equity and (vi) a minimum amount of
consolidated net worth. The Company is presently in compliance with those
covenants. The Credit Agreement matures on December 11, 2000. No borrowings
existed under this facility as of December 31, 1997.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing vehicles, inventory and supplies used in
the operation of the business. During the ten months ended December 31, 1997,
capital expenditures aggregated $2.0 million. The Company anticipates that its
cash flow from operations will provide cash in excess of the Company's normal
working capital needs, debt service requirements and planned capital
expenditures for property and equipment.
For the ten months ended December 31, 1997 and the years ended February 28,
1997 and February 29, 1996, the Company generated $4.4 million, $3.7 million
and $4.0 million in cash from operating activities, respectively. For the ten
months ended December 31, 1997, net income, depreciation, amortization,
deferred taxes and non-cash compensation generated $7.5 million and changes in
asset and liability accounts utilized a net $3.1 million. For the twelve
months ended February 28, 1997, net income, depreciation, amortization and
deferred taxes generated $4.9 million, and changes in asset and liability
accounts utilized a net $1.2 million. For the twelve months ended February 29,
1996, net income, depreciation, amortization and deferred taxes generated $1.0
million, and changes in asset and liability accounts generated a net $3.0
million.
For the ten months ended December 31, 1997, the Company used $37.9 million
in investing activities. The cash expended during the ten months ended
December 31, 1997 consisted of $35.8 million for acquisitions and $2.0 million
for capital expenditures. The cash impact of investing activities for the
twelve months ended February 28, 1997 and February 29, 1996 was not
significant.
For the ten months ended December 31, 1997, the Company generated $54.9
million in cash from its financing activities. These activities principally
consisted of issuance of Common Stock for $109.7 million and proceeds from
long-term debt of $32.5 million less distributions to shareholders of $20.4
million, payments of long-term debt of $47.7 million and retirement of
preferred stock of $19.3 million. The cash impact of financing activities for
the twelve months ended February 28, 1997 and February 29, 1996 was not
significant.
During the fourth quarter of 1997, the Company registered seven million
shares of Common Stock under the Securities Act of 1933, as amended, for its
use in connection with future acquisitions. After their issuance, those
registered shares generally are freely tradable by persons not affiliated with
the Company unless the Company contractually restricts the resale.
Substantially all of the shares of Common Stock issued in connection with the
acquisition of the GroupMAC Companies were not registered under the Securities
Act and were also subject to contractual restrictions on transfer. However,
the holders of these shares will be permitted to transfer a limited amount of
these shares during 1998. During the first quarter of 1998, the Company
completed the acquisition of 15 platform companies that will be accounted for
as purchases. The combined annual revenues of these companies were $151.7
million. Total consideration paid was $68.3 million, which included cash
payments of $36.7 million, $0.8 million of subordinated convertible debt and
2.5 million shares of Common Stock. The Company financed the cash portion of
the purchase price using (i) remaining funds from the IPO, (ii) cash borrowed
under the Credit Agreement and (iii) internally generated funds. As of March
27, 1998, the funds available through the Credit Agreement totaled $55.2
million, subject to the maintenance of financial ratios and covenants.
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<PAGE>
The Company has signed definitive agreements to purchase two platform
companies with combined annual revenues of $28.5 million. Total consideration
to be paid is approximately $21.7 million which includes cash payments of
$11.9 million and 0.8 million shares of Common Stock. Both acquisitions will
be accounted for as purchases.
The Company intends to aggressively pursue acquisition opportunities.
Management believes that funds provided by operations, together with funds
available under the Credit Agreement, will be adequate to meet the Company's
anticipated requirements for acquisitions. Estimates as to working capital
needs and other expenditures may be materially affected if the foregoing
sources are not available or do not otherwise provide sufficient funds to meet
the Company's obligations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, Reporting Comprehensive Income, which the Company is required to
adopt for annual periods beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. It is
expected that this statement will not significantly affect the Company's
financial statements, as the Company does not have significant transactions
and other events from non-owner sources that affect equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which the Company is required to adopt for
annual periods beginning after December 15, 1997 and interim periods beginning
in fiscal year 1999. SFAS No. 131 establishes standards for the way that
public companies report information about operating segments in annual
financial statements and requires that those companies report information
about segments in interim financial reports issued to shareholders. The
Company has not yet completed its analysis of this statement and the impact on
its financial statements.
29
<PAGE>
BUSINESS
GENERAL
The Company is one of the largest diversified providers of HVAC, plumbing
and electrical services to residential and commercial customers in the United
States.
GroupMAC was incorporated in 1997 as the successor to a corporation which
developed a business plan to consolidate businesses engaged in the HVAC,
plumbing and electrical service industries. Prior to that time, the
predecessor company assembled a management team and support staff to implement
its business plan, obtained equity financing from a private investor, and
obtained a commitment from a bank to provide debt financing for its
acquisition program and for working capital.
During 1997, the Company acquired the GroupMAC Companies. At December 31,
1997, the Company had $329.0 million in pro forma 1997 revenues. Since that
date, the Company has acquired other businesses and currently operates 36
platform companies in 44 cities in 21 states.
The Company intends to make additional acquisitions across the three main
technical disciplines (HVAC, plumbing and electrical) within the residential
and commercial markets. The Company's long-term objective is to develop
maintenance, repair and replacement capabilities (both residential and
commercial) in the top 100 markets within the United States, while offering
new installation services across a more limited range of markets where new
construction in the residential and/or commercial sectors is expected to out-
pace the national average over the long term. Over time, this objective is
expected to shift the revenues of the Company to an increased percentage of
service revenue.
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of its Common Stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of several GroupMAC
Companies, $42.6 million to repay corporate indebtedness and debt assumed in
connection with the acquisition of the GroupMAC Companies, $19.3 million to
retire all of the then outstanding preferred stock and $11.9 million for
general corporate purposes including working capital, final consideration
settlements related to the GroupMAC Companies and future acquisitions.
INDUSTRY OVERVIEW
Based on available industry data, the Company believes the HVAC, plumbing
and electrical service industries in the United States represent a market with
annual revenues of approximately $100 billion. The HVAC service industry is
believed to generate approximately $65 billion in annual revenues, the
plumbing service industry generates approximately $19 billion in annual
revenues and the electrical service industry generates approximately $16
billion in annual revenues. The Company also believes these industries are
highly fragmented with over 100,000 businesses, consisting predominantly of
small, owner-operated companies focusing on a single local geographic area and
providing a limited range of services. The Company believes that the majority
of owners in its industry have limited access to adequate capital for
modernization, training and expansion and limited opportunities for liquidity
in their business. As a result of this fragmentation, several publicly traded
consolidators, in addition to the Company, have emerged in some or all of
these markets. The combined revenues of these consolidators and the Company
represent less than 3% of the revenues for the HVAC, plumbing and electrical
market.
Growth in the HVAC service industry is affected by a number of factors,
particularly (i) the aging of the installed base of equipment, (ii) the
increasing efficiency, sophistication and complexity of HVAC systems and
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(iii) the increasing restrictions on the use of refrigerants commonly used in
older HVAC systems. These factors also mitigate the effect on the HVAC service
industry of economic cycles inherent in the traditional construction industry.
An aging installed base has also positively affected growth in the plumbing
service industry. Industry sources report that 75% of the kitchen market and
65% of the bath market now consist of remodeling rather than new construction.
Growth in electrical services is closely tied to the new construction market,
although the retrofitting of existing structures is driven by increased demand
for computer networks and other modernization.
The HVAC, plumbing and electrical service industries can be broadly divided
into the new installation market and the maintenance, repair and replacement
market. The new installation market includes the installation of HVAC,
plumbing and electrical systems in new homes and commercial buildings for
contractors, builders, developers and other users. The maintenance, repair and
replacement market includes the maintenance, repair and replacement and
reconfiguration of existing systems in residential homes and commercial
buildings. In the HVAC industry, the new installation market represents
approximately 34% of industry revenues, while the maintenance, repair and
replacement market represents 66% of industry revenues.
The Company believes significant opportunities are available to a well
capitalized, national company employing professionally trained, customer-
oriented service technicians and providing a full complement of high quality
residential and commercial services in an industry that has been characterized
by inconsistent quality, reliability and pricing. In addition, the increasing
complexity of HVAC systems has led to a need for better trained technicians to
install, monitor and service these systems. The cost of recruiting, training
and retaining a sufficient number of qualified technicians makes it more
difficult for smaller HVAC companies to expand their businesses. The Company
also believes the highly fragmented nature of the residential and commercial
service industries will provide it with significant opportunities to
consolidate a large number of existing residential and commercial service
businesses.
SERVICES PROVIDED
The Company provides a broad variety of maintenance, repair and replacement
services for HVAC, plumbing, electrical and other systems to both residential
and commercial customers. These services include preventive maintenance
(periodic checkups, cleaning and filter change-outs), emergency repairs, and
the replacement (in conjunction with the retrofitting or remodeling of a
residence or commercial building, or as a result of an emergency repair
request) of HVAC systems and associated parts, plumbing fixtures, pipes, water
feed and sewer lines, water heaters, softeners, filters and controls, and
electrical control systems, wiring, data cabling, switches and panels. The
Company also acts as a subcontractor for a variety of national, regional and
local residential home builders in the installation of HVAC, plumbing,
electrical and other systems in new residential construction, as well as
designing and installing HVAC, plumbing, electrical and other systems on
behalf of owners or general contractors in commercial buildings. In a few of
its operating locations, the Company provides certain specialized services,
including repair of home appliances, duct cleaning, installation and repair of
fireplaces, installation of fire sprinkler systems and the provision of
technical facilities management services to commercial building owners or
building managers. In connection with both its new installation business and
its maintenance, repair and replacement services, the Company sells a wide
range of HVAC, plumbing and electrical equipment, parts and supplies.
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The following table shows the approximate percentages of the combined
revenues of the GroupMAC Pro Forma Combined Companies during the calendar year
1997 represented by new installation services and maintenance, repair and
replacement services.
<TABLE>
<CAPTION>
ELECTRICAL
HVAC PLUMBING & OTHER TOTAL
---- -------- ---------- -----
<S> <C> <C> <C> <C>
Residential Services:
New Installation............................... 18% 10% --% 28%
Maintenance, Repair and Replacement............ 14% 2% 1% 17%
--- --- --- ---
Total Residential............................ 32% 12% 1% 45%
--- --- --- ---
Commerical Services:
New Installation............................... 16% 5% 1% 22%
Maintenance, Repair and Replacement............ 25% 4% 4% 33%
--- --- --- ---
Total Commercial............................. 41% 9% 5% 55%
--- --- --- ---
Total...................................... 73% 21% 6% 100%
=== === === ===
</TABLE>
FIELD OPERATIONS
The Company's field operations are conducted out of the individual operating
locations of the various subsidiaries. Typically, the subsidiaries specialize
in one of the technical disciplines in either the residential or commercial
market. However, a few of the subsidiaries that operate principally in the
residential new installation or residential maintenance, repair and
replacement markets also engage to a limited extent in projects or service
work for "light commercial" customers (i.e., smaller commercial buildings
where systems are similar in design to residential systems). The Company
permits its subsidiaries to function in a largely autonomous manner in
delivering products and services to their respective markets. The Company
believes this flexible operating strategy improves each location's ability to
respond quickly to opportunities and competition.
New Installation
New installation service in the residential market begins with the home
builder providing architectural plans or mechanical drawings for the
particular type or types of residences within the tract to be developed, and
requesting a bid or contract proposal for the work (often broken into phases
within the tract). Company personnel analyze the plans and drawings and
estimate the equipment, materials and parts and the direct and supervisory
labor required for the project. The Company delivers a written bid or
negotiates the written agreement for the job. In HVAC installations, a portion
of the required air ducts are fabricated and pre-assembled with other
components in the Company's own facilities prior to delivery to the job site.
Other equipment and materials for the particular project are ordered from
manufacturers, distributors or other suppliers for delivery in time for the
scheduled onsite construction work. The installation work is coordinated by
the Company's field supervisors along with the builder's construction
supervisors. Draw payments for the project are generally obtained within 30
days of completing the installation, at which time any mechanics' and
materialmen's liens securing such payments are released. Interim payments are
often obtained to cover labor and materials costs on larger installation
projects.
Commercial new installation work begins with a design request from the owner
or general contractor. Initial meetings with the parties allow the contractor
to prepare preliminary and then more detailed design specifications,
engineering drawings and cost estimates. Once a project is awarded, it is
conducted in pre-agreed phases and progress billings are rendered to the owner
for payment, less a retainage. Actual field work (ordering of equipment and
materials, fabrication or assembly of certain components, delivery of such
materials and components to the job site, scheduling of work crews with the
necessary skills, and inspection and quality
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control) is coordinated in these same phases. The Company has established a
policy to review and approve any new installation project by an operating unit
that exceeds 5% of the projected annual revenue of that unit.
Substantially all the equipment and component parts the Company sells or
installs are purchased from manufacturers and other outside suppliers. The
Company is not materially dependent on any of these outside sources.
Maintenance, Repair and Replacement
The operating units engaged in maintenance, repair and replacement services
use specialized systems to log service orders, schedule service calls,
identify and ready the necessary repair parts or equipment, track the work
order, provide information for communication with the service technicians and
customers, and prepare accurate invoices. Service histories and specific
product information are generally accessible to the dispatcher in a database
that may be searched by customer name or address. Maintenance, repair and
replacement service calls are initiated when a customer requests emergency
repair service or the Company calls the client to schedule periodic service
agreement maintenance. Service technicians are scheduled for the call or
routed to the customer's residence or business by the dispatcher via a
scheduling board or daily work sheet (for non-emergency service) or through
cellular telephone, pager or radio. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools,
parts and supplies needed to complete the typical variety of jobs. The
technician assigned to a service call travels to the residence or business,
interviews the customer, diagnoses the problem, prepares and discusses a price
quotation, performs the work and often collects payment from the customer.
Service technicians may carry a Customer Assurance Pricing manual developed by
the Company which lists labor and equipment parts required to fulfill certain
tasks and the associated prices. This manual is custom generated for each
company from a database containing over 15,000 different repair operations and
which is updated for price changes periodically. This "flat rate pricing"
strategy allows the Company to monitor margins and labor productivity at the
point of sale, while increasing the level of customer satisfaction by
demonstrating greater fairness and objectivity in pricing. Payment for
maintenance, repair and replacement services not covered by a warranty or
service contract is generally requested in cash or by check or credit card at
the service location.
A portion of the Company's service work is done to satisfy factory
warranties. For such services, the Company is generally compensated by the
manufacturer responsible for the defective equipment under warranty. The
Company attempts to enter into service contracts whereby the customer pays an
annual or semi-annual fee for periodic diagnostic services. The customers
under service contracts receive specific discounts from standard prices for
repair and replacement services.
CENTRALIZED SUPPORT SERVICES
The Company provides certain management, financial, accounting and
logistical support services for its subsidiaries, including the following:
Purchasing
The Company has structured or believes it will be able to structure volume
purchasing arrangements or otherwise achieve purchasing economies of scale in
each of the following areas: (i) HVAC, plumbing and electrical equipment,
parts and supplies, (ii) purchase or lease and maintenance of service
vehicles, (iii) casualty and liability insurance, (iv) health insurance and
related benefits, (v) retirement benefits administration, (vi) office
equipment, (vii) marketing and advertising (including Yellow Pages), (viii)
long distance services and (ix) a variety of accounting, financial management,
marketing and legal services. The principal manufacturers of the products sold
by the Company include Carrier Air Conditioning, Inc., The Trane Company,
Lennox Industries, Inc., Goodman Manufacturing Corp., Amana, and International
Comfort Products.
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Management Information Systems
With limited exceptions, the Company intends to continue to operate for the
near-term with the existing accounting and other computer systems currently in
place at the various operating units. The Company, however, requires each
operating unit to adopt a uniform chart of accounts and to standardize its
budgeting process and reports so that results among the operating units more
easily can be compared and integrated. In addition, where an operating unit
has a system in place that is inadequate for its existing or near-term needs,
the Company will begin the migration to a standard that will allow for greater
consistency (and a longer term change to a Company-wide, integrated system).
The Company has implemented regular financial and operational "flash reports"
and other mechanisms to allow for management control and oversight. The
Company will utilize this information to establish and monitor performance of
individual operating units against operating benchmarks and ratios.
Employee Screening, Training and Development
The Company is committed to providing the highest level of customer service
through the development of a highly trained workforce. Prior to employment,
the Company makes an assessment of the technical competence level of all
potential new employees, confirms background references and conducts criminal
and driving record checks. In addition, all employees of the Company are
subject to random drug testing. Once hired, employees of the Company are
required to complete a progressive training program to advance their technical
competencies and to ensure that they understand and follow the Company's
safety practices and other internal policies. Both technical and customer
service personnel are given intensive training in customer communication,
sales and problem-solving skills.
The Company also conducts a detailed internal evaluation of each operating
unit's strengths, weaknesses and compliance with recognized industry or
Company "best practices," and then designs a training program to develop and
enhance the communication, sales, management and other relevant skills of its
employees and management to bring about continuous improvement in these areas.
The Company acquired Callahan Roach and USA in part for their professional
training and consulting capabilities and intends to implement their market-
leading training programs throughout the Company.
Callahan Roach provides Customer Assurance Pricing models to over 1,300 HVAC
and plumbing service companies across the United States. Callahan Roach has
been an industry leader in the development and commercialization of this flat
rate pricing best practice known as Customer Assurance Pricing. USA provides
training and other products and services to a network of 85 independent
service companies focused on maintenance, repair and replacement of commercial
HVAC systems.
In order to ensure that best practices are shared among each of the
individual operating units, the Company has created a Council of Presidents
composed of the president or senior executive of each unit. The Council meets
on a regular basis, as well as dividing into smaller working committees, to
share operating practices and develop additional means to improve the overall
performance of the Company and the individual operating units. Best practices
that result from the work of the Council will be included in the training and
monitoring programs developed and disseminated throughout the Company and to
USA members.
Advertising and Marketing
The Company uses both general advertising and a direct sales force to market
its residential and commercial services (both new installation and repair
services) in its geographic markets. The Company continues to preserve and
enhance the value of the unique and long-standing trade names and customer
identification enjoyed by the individual operating units. The GroupMAC logo
and identifying marks will be featured on service trucks, marketing materials
and advertising of the operating units, but in a manner that does not detract
from the local brand. The Company proposes to develop (initially for its
subsidiaries, but ultimately for delivery to the market
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through licensed affiliates developed by Callahan Roach and USA) market-
leading warranty and service programs for the residential and commercial
markets, as well as an aggressive national account sales program focused on
national and large regional home builders, as well as major corporations,
governmental and private institutions, real estate investment trusts, real
estate management firms and other multi-location commercial property owners
and managers. For the ten months ended December 31, 1997, advertising and
marketing expenditures represented 1.2% of the Company's combined revenue.
COMPETITION
The market for HVAC, plumbing and electrical services is highly competitive.
The Company believes that the principal competitive factors in the residential
and commercial services industry are (i) timeliness, reliability and quality
of services provided, (ii) range of services offered, (iii) market share and
visibility and (iv) price. The Company believes its strategy of creating a
leading national provider of comprehensive services directly addresses these
factors. The ability of the Company to employ, train and retain highly
motivated service technicians to provide quality services should be enhanced
by its ability to utilize professionally managed recruiting and training
programs. In addition, the Company expects to offer compensation, health and
savings benefits that are more comprehensive than most offered in the
industry, including stock options for substantially all employees. Competitive
pricing is possible through purchasing economies and other cost saving
opportunities that exist across each of the service lines offered and from
productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single market. Certain of these smaller competitors may
have lower overhead cost structures and may be able to provide their services
at lower rates. Moreover, many homeowners have traditionally relied on
individual persons or small repair service firms with whom they have long-
established relationships for a variety of home repairs. There are currently a
limited number of public companies focused on providing residential or
commercial services in some of the same service lines provided by the Company.
In addition, there are a number of national retail chains that sell a
variety of plumbing fixtures and equipment and HVAC equipment for residential
use and offer, either directly or through various subcontractors,
installation, warranty and repair services. Other companies or trade groups
engage in franchising their names and marketing programs in some service
lines. In the future, competition may be encountered from, among others, HVAC
equipment manufacturers, the unregulated business segments of regulated gas
and electric utilities or from newly deregulated utilities entering into
various residential or commercial service areas. Certain of the Company's
competitors and potential competitors have greater financial resources than
the Company to finance acquisition and development opportunities, to pay
higher prices for the same opportunities or to develop and support their own
residential or commercial service operations if they decide to enter the
field.
EMPLOYEES
As of December 31, 1997, the Company had approximately 2,800 full and part-
time employees, of whom approximately 1,900 are installation/service
technicians. In the course of performing installation work, the Company may
utilize the services of subcontractors. Approximately 500 employees (in four
of the commercial subsidiaries) are members of unions and work under
collective bargaining agreements. The collective bargaining agreements have
expiration dates between April 1998 and March 2003. The Company believes that
its relationship with its employees is generally satisfactory.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their
respective trades, (ii) building, HVAC, plumbing and electrical codes and
zoning ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and
protection of human health and
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the environment. In Florida, warranties provided for in the Company's service
agreements subject the Company and such agreements to some aspects of that
state's insurance laws and regulations. Specifically, the Company is required
to maintain funds on deposit with the Florida Office of Insurance Commissioner
and Treasurer, the amount of which is not material to the Company's business.
The Company is in compliance with these deposit requirements.
The Company believes it has all required permits and licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services trades require various permits and licenses to be held by
individuals. In some cases, a required permit or license held by a single
individual may be sufficient to authorize specified activities for all the
Company's service technicians who work in the geographic area covered by the
permit or licenses.
The Company's operations are subject to numerous federal, state and local
environmental laws and regulations, including those governing vehicle
emissions and the use and handling of refrigerants. These laws are
administered by the United States Environmental Protection Agency, the Coast
Guard, the Department of Transportation and various state and local
governmental agencies. The technical requirements of these laws and
regulations are becoming increasingly complex, stringent and expensive.
Federal and state environmental laws include statutes intended to allocate the
cost of remedying contamination among specifically identified parties. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund") can impose strict, joint and several liability on past and
present owners or operators of facilities at, from, or to which a release of
hazardous substances has occurred, on parties who generated hazardous
substances that were released at such facilities and on parties who arranged
for the transportation of hazardous substances to such facilities. A majority
of states have adopted "Superfund" statutes comparable to, and in some cases
more stringent than, CERCLA. If the Company were to be found to be a
responsible party under CERCLA or a similar state statute, the Company could
be held liable for all investigative and remedial costs associated with
addressing such contamination, even though the releases were caused by a prior
owner or operator or third party. In addition, claims alleging personal injury
or property damage may be brought against the Company as a result of alleged
exposure to hazardous substances resulting from the Company's operations.
Prior to entering into the agreements relating to the acquisition of
businesses, the Company evaluated the properties owned or leased by such
companies and in some cases engaged an independent environmental consulting
firm to conduct or review assessments of environmental conditions at certain
of those properties. No material environmental problems were discovered in
these reviews, and the Company is not otherwise aware of any actual or
potential environmental liabilities that would be material to the Company.
There can be no assurance that all such liabilities have been identified, that
such liabilities will not occur in the future, that a party could not assert a
material claim against the Company with respect to such liabilities, or that
the Company would be required or able to answer for such claim.
The Company's operations are subject to federal, state and local laws and
regulations protecting the health and safety of workers. These laws are
administered by the federal Occupational Safety & Health Administration and
state and local health and safety governmental agencies. The Company's
operations are subject to the Clean Air Act, Title VI of which governs air
emissions and imposes specific requirements on the use and handling of
substances known or suspected to cause or contribute significantly to harmful
effects on the stratospherical ozone layer, such as chlorofluorocarbons and
certain other refrigerants ("CFCs"). Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
systems, equipment and appliances containing these refrigerants and also
regulate the containment and recycling of these refrigerants. These
requirements have increased the Company's training expenses and expenditures
for containment and recycling equipment. The Clean Air Act is intended
ultimately to eliminate the use of CFCs in the United States and require
alternative refrigerants to be used in replacement HVAC systems. The
implementation of the Clean Air
36
<PAGE>
Act restrictions has also increased the cost of CFCs in recent years and is
expected to continue to increase such costs in the future. As a result, the
number of conversions of existing HVAC systems that use CFCs to systems using
alternative refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles
in large vehicle fleets to use "alternative fuels," such as compressed natural
gas or propane, and meet reduced emissions standards. The Company does not
anticipate that the cost of fleet conversion that may be required under
current laws will be material. Future costs of compliance with these laws will
be dependent upon the number of vehicles purchased in the future for use in
the covered geographic regions, as well as the number and size of future
business acquisitions by the Company in these regions. The Company cannot
determine to what extent its future operations and earnings may be affected by
new regulations or changes in existing regulations relating to vehicle
emissions.
Capital expenditures related to environmental matters during the ten month
period ended December 31, 1997 were not material. The Company does not
currently anticipate any material adverse effect on its business or
consolidated financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may
be material.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James P. Norris...................... 59 Chairman of the Board; Director
J. Patrick Millinor, Jr. ............ 52 Chief Executive Officer; Director
Donald L. Luke....................... 61 President and Chief Operating
Officer; Director
William Michael Callahan............. 52 Executive Vice President-Training,
Technology and Field Support
Chester J. Jachimiec................. 43 Executive Vice President-
Acquisitions; Director
Alfred R. Roach, Jr. ................ 54 Executive Vice President
Richard S. Rouse..................... 51 Executive Vice President-Corporate
Development and Administration;
Director
Randolph W. Bryant................... 47 Senior Vice President, General
Counsel and Secretary
Darren B. Miller..................... 38 Senior Vice President and Chief
Financial Officer
Ronald D. Bryant..................... 51 President of Masters; Director
David L. Henninger................... 53 President of Van's; Director
James D. Jennings.................... 55 President and Chief Executive
Officer of Airtron; Director
Timothy Johnston..................... 42 Senior Vice President and Chief
Financial Officer of Airtron;
Director
Andrew Jeffrey Kelly................. 43 President of K&N; Director
Fredric J. Sigmund................... 56 President of MacDonald-Miller;
Director
Thomas B. McDade..................... 74 Director
Lucian L. Morrison................... 61 Director
John M. Sullivan..................... 62 Director
James D. Weaver...................... 48 Director
</TABLE>
JAMES P. NORRIS became a Director and Chairman of the Board of the Company
in June 1997. From 1969 to May 1997, he served as Executive Vice President of
Air Conditioning Contractors of America ("ACCA"), an industry trade
association based in Washington, D.C.
J. PATRICK MILLINOR, JR. is a Director and Chief Executive Officer of the
Company and has served in such capacities with the Company and its predecessor
since October 1996. From April 1997 to August 1997, he served as President of
the Company. From September 1994 to October 1996, Mr. Millinor worked directly
for Gordon Cain, a major shareholder in the Company, assisting in the
formation and management of Agennix Incorporated and Lexicon Genetics, two
biotechnology companies. From March 1993 to September 1994, he served as Chief
Executive Officer of UltrAir, Inc., a start-up passenger airline. From October
1992 to March 1993, he served as Chief Financial Officer of UltrAir, Inc. He
currently serves as a director of Agennix Incorporated and Haelan Health(R)
Corporation.
DONALD L. LUKE became a Director and President and Chief Operating Officer
of the Company in August 1997. From November 1996 to July 1997, he served as
Chairman of Arriva Air International, Inc., a start-up commercial air cargo
business, and a partner in McFarland Grossman Capital Ventures, L.C., a
consolidator of fastener distribution companies. From September 1996 to August
1997, he served as Chief Executive Officer of CTW, Inc., a privately held
acquisitions and management company, and a consultant to Batteries Batteries,
Inc., a consolidator of specialty battery distribution companies which
completed its initial public offering in April 1996. From 1995 to September
1996, he served as President, Chief Executive Officer and Director of
Batteries
38
<PAGE>
Batteries, Inc. From 1991 to 1995, Mr. Luke served as President and Chief
Executive Officer of Miracle Ear New York City.
WILLIAM MICHAEL CALLAHAN became Executive Vice President of the Company in
August 1997. From 1989 to July 1997, Mr. Callahan was a partner in Callahan
Roach & Associates. From 1972 to 1989, Mr. Callahan served as President of
Capital City Heating & Cooling, a company he founded. In 1988, Mr. Callahan
served as President of ACCA.
CHESTER J. JACHIMIEC is a Director and Executive Vice President-Acquisitions
of the Company having served in such capacities with the Company and its
predecessor since October 1996. From February 1994 to October 1996, Mr.
Jachimiec served as the Director of Acquisitions & Investments for Tenneco
Energy. From 1990 to 1994, he was an investor in or consultant to various
private ventures engaged in natural gas gathering, processing and exploration
as well as computer software development. Prior to 1990, Mr. Jachimiec
practiced securities law and public accounting with several professional
firms.
ALFRED R. ROACH, JR. became Executive Vice President of the Company in
August 1997. From 1989 to July 1997, Mr. Roach was a partner in Callahan Roach
& Associates. From 1986 to 1989, he served as President and General Counsel of
Service America Corporation, an HVAC franchise company. From 1970 to 1986, Mr.
Roach engaged in the private practice of law.
RICHARD S. ROUSE is a Director and Executive Vice President-Corporate
Development and Administration of the Company and has served in such
capacities with the Company and its predecessor since October 1996. From July
1994 to July 1996, Mr. Rouse served as Vice President and General Manager of
Southcoast Services, a privately held landfill operating company. From 1992 to
1994, he served as Vice President and General Manager of SWS, an industrial
services company.
RANDOLPH W. BRYANT became Senior Vice President, General Counsel and
Secretary of the Company upon its formation in April 1997. From December 1996
to April 1997, Mr. Bryant served as Associate General Counsel of El Paso
Natural Gas Company. From 1984 to 1996, he was an attorney with Tenneco Inc.
and Tenneco Energy, Inc., last serving as Associate General Counsel.
DARREN B. MILLER is Senior Vice President and Chief Financial Officer of the
Company and has served in such capacities with the Company and its predecessor
since October 1996. From 1989 to 1996, Mr. Miller served in several capacities
at Allwaste, Inc., a consolidator of industrial service companies, including
Vice President-Treasurer and Controller from 1995 to 1996. Prior to 1989, he
was employed in the audit practice of Arthur Andersen LLP.
JAMES D. JENNINGS became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1985, Mr. Jennings has served as
President, Chief Executive Officer and a director of Airtron. Prior to 1985,
Mr. Jennings was employed by Airtron in various other capacities.
TIMOTHY JOHNSTON became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1995, Mr. Johnston has served as a
Senior Vice President of Airtron. Mr. Johnston has served as
Secretary/Treasurer of Airtron since 1991 and as Chief Financial Officer of
Airtron since 1988.
RONALD D. BRYANT became a Director of the Company in November 1997. He
founded Masters, which installs HVAC and plumbing systems in the Washington,
D.C. area, in 1986 and has served as its president since that time.
DAVID L. HENNINGER became a Director of the Company in November 1997. He
acquired Van's, which provides HVAC services to residential and light
commercial customers in the Palm Beach-Ft. Lauderdale, Florida area, in 1975
and has served as its president since that time.
39
<PAGE>
ANDREW JEFFREY KELLY became a Director of the Company in November 1997. He
founded K&N, which provides plumbing services to residential new construction
markets, in 1979 and has served as its president since that time.
FREDRIC J. SIGMUND became a Director of the Company in November 1997. Since
1986, he has served as Chief Executive Officer of MacDonald-Miller, which
provides a full range of HVAC services to commercial and industrial customers
in the Northwestern United States. From 1967 to 1986, he served in various
positions with MacDonald-Miller.
THOMAS B. MCDADE became a Director of the Company in November 1997. He has
been engaged in consulting and managing his personal investments since 1985.
From 1957 to 1985, he was employed by Texas Commerce Bancshares, last serving
in the capacity of Vice Chairman. He currently serves as a director of Bankers
Trust Co. of the Southwest, TransTexas Gas, TransAmerican Energy Corp. and
TransAmerican Refining Corp.
LUCIAN L. MORRISON became a Director of the Company in November 1997. He has
been engaged as a trustee and consultant with respect to trust, estate,
probate and qualified plan matters since 1992. From 1990 through 1992, he
served as Chief Fiduciary Officer of Northern Trust Bank of Texas. From 1979
until 1990, he served as Chief Executive Officer of Heritage Trust Company.
JOHN M. SULLIVAN became a Director of the Company upon its formation in
1997. Since 1994, Mr. Sullivan has been Vice President of Beta Consulting,
Inc., a financial and tax consulting firm. From 1992 through 1994, he was an
International Tax Director for General Motors Corporation. Prior to 1992, Mr.
Sullivan was a tax partner with Arthur Andersen LLP. He currently serves as a
director of Atlantic Coast Airlines, Inc.
JAMES D. WEAVER became a Director of the Company upon its formation in 1997.
Mr. Weaver has been the President of the Gordon and Mary Cain Foundation, a
nonprofit organization, since 1989 and the Director of the Good Samaritan
Foundation, a nonprofit organization, since 1986.
The Board of Directors of the Company consists of 15 members divided into
three classes of five directors serving staggered three-year terms expiring at
the annual meetings of shareholders in 1998, 1999 and 2000, respectively. At
each annual meeting of shareholders, one class of directors will be elected
for a full term of three years to succeed the class of directors whose terms
are expiring.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees--the Audit
Committee, the Compensation Committee and the Acquisitions Committee. Pursuant
to resolutions of the Board, these committees have the following described
responsibilities and authority.
The Audit Committee has the responsibility, among other things, for (i)
recommending the selection of the Company's independent public accountants,
(ii) reviewing and approving the scope of the independent public accountants'
audit activity and extent of non-audit services, (iii) reviewing with
management and such independent public accountants the adequacy of the
Company's basic accounting system and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with management and the
independent public accountants the Company's financial statements and
exercising general oversight of the Company's financial reporting process, (v)
reviewing with the Company litigation and other legal matters that may affect
the Company's financial condition, and (vi) monitoring compliance with the
Company's business ethics and other policies. The members of the Audit
Committee are Messrs. Morrison (Chair), McDade and Sullivan.
The Compensation Committee has the responsibility, among other things, for
(i) establishing the salary rates of officers and employees of the Company and
its subsidiaries, (ii) examining periodically the compensation structure of
the Company and (iii) supervising the welfare and pension plans and
compensation plans of the Company. The members of the Compensation Committee
are Messrs. Sullivan (Chair), Morrison and Weaver.
40
<PAGE>
The Acquisitions Committee has the authority to approve the terms and
conditions of acquisitions by the Company of businesses having less than $40
million of revenues and $20 million of assets, including the authority to
approve the issuance of debt and equity securities of the Company in
connection with such acquisitions, provided that the consideration paid by the
Company for each such business is less than $20 million. The members of the
Acquisitions Committee are Messrs. Millinor (Chair), Jachimiec and Rouse.
The Company's Board may also establish other committees.
COMPENSATION OF DIRECTORS
In December 1997, the Company granted to each director of the Company who is
not an employee of the Company or any of its subsidiaries an option to
purchase 4,000 shares of Common Stock at a purchase price of $14.00 per share.
Such options will remain in effect for five years after the date of grant and
1,000 shares of each such grant will become exercisable on each anniversary of
the date of grant. If a director ceases to serve in such capacity because of
his death, disability or retirement, the options granted to that director will
become exercisable for a one-year period. Each director also will be
reimbursed for travel expenses incurred for each meeting of the Board or for
each Board Committee meeting attended.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the remuneration paid by the Company to the
Chairman of the Board, the Chief Executive Officer and the President of the
Company and the four other most highly compensated key executive officers of
the Company based on 1997 salaries and bonuses.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
James P. Norris................. 1997 $ 87,500 $43,750 84,500 --
Chairman of the Board
J. Patrick Millinor, Jr......... 1997 150,000 87,500 56,500 1,080
Chief Executive Officer
Donald L. Luke.................. 1997 62,500 31,250 70,969 --
President and Chief Operating
Officer
Chester J. Jachimiec............ 1997 140,000 73,500 53,300 860
Executive Vice President--
Acquisitions
Richard S. Rouse................ 1997 140,000 73,500 53,300 2,446
Executive Vice President--
Administration and Development
James D. Jennings............... 1997 108,850 289,047 53,078 4,050
President of Airtron
Timothy Johnston................ 1997 99,000 122,000 53,078 1,000
Senior Vice President and Chief
Financial Officer of Airtron
</TABLE>
Messrs. Millinor, Jachimiec and Rouse commenced their employment with the
predecessor of the Company in October 1996; Mr. Norris commenced his
employment with the Company in June 1997; and Mr. Luke commenced his
employment with the Company in August 1997. The compensation of Messrs.
Jennings and Johnston does not include compensation for periods prior to the
acquisition of Airtron by the Company.
42
<PAGE>
STOCK OPTION GRANTS IN 1997
The following table sets forth the number of stock options that were granted
during 1997 to the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (3)
--------------------------------------------- ----------------
% OF TOTAL
OPTIONS OPTIONS EXERCISE
GRANTED GRANTED TO OR BASE
(NO. OF EMPLOYEES IN PRICE EXPIRATION
NAME SHARES)(1) FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
James P. Norris......... 28,000(2) 1.4% $ 3.08 6-01-2007 $54,236 $137,444
56,500 2.7 14.00 11-06-2002 218,539 482,913
J. Patrick Millinor,
Jr..................... 56,500 2.7 14.00 11-06-2002 218,539 482,913
Donald L. Luke.......... 14,469(2) 0.7 3.08 8-01-2007 28,026 71,024
56,500 2.7 14.00 11-06-2002 218,539 482,913
Chester J. Jachimiec.... 53,300 2.6 14.00 11-06-2002 206,161 455,563
Richard S. Rouse........ 53,300 2.6 14.00 11-06-2002 206,161 455,563
James D. Jennings....... 53,078 2.6 14.00 11-06-2002 205,303 453,665
Timothy Johnston........ 53,078 2.6 14.00 11-06-2002 205,303 453,665
</TABLE>
- --------
(1) Except as otherwise noted, all options were granted on the date of the
Company's initial public offering (November 6, 1997), have a five year
term and become exercisable with respect to 25% of the shares subject to
the option on each anniversary of the date of grant.
(2) Options granted to Messrs. Norris and Luke at the time they commenced
employment with the Company (on June 1, 1997 and August 1, 1997,
respectively). These options have a ten-year term from the date of grant
and become exercisable with respect to 33 1/3% of the shares subject to
the option on each anniversary of the date of grant. Because the Company's
Common Stock was not publicly traded on the date of each grant, this
presentation assumes the exercise price of these options equaled the fair
market value on the date of grant.
(3) The dollar amounts in these columns were calculated on the basis of the
indicated rates of appreciation in the value of the Common Stock,
compounded annually from the fair market value (or assumed fair market
value) on the grant date, from the grant date to the end of the option
term and, therefore, are not intended to forecast possible future
appreciation.
OPTIONS EXERCISED IN 1997 AND
1997 YEAR-END VALUES
The following table presents information as to the value of stock options
held, as of December 31, 1997, by the persons named in the Summary
Compensation Table. No options to acquire shares were exercised during 1997.
<TABLE>
<CAPTION>
TOTAL NO. OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS HELD
DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James P. Norris............. -- 84,500 -- $543,205
J. Patrick Millinor, Jr..... 18,868 94,237 259,057 676,895
Donald L. Luke.............. -- 70,969 -- 357,424
Chester J. Jachimiec........ 16,801 86,902 230,678 611,128
Richard S. Rouse............ 14,752 82,804 202,545 554,863
James D. Jennings........... -- 53,078 -- 149,149
Timothy Johnston............ -- 53,078 -- 149,149
</TABLE>
- --------
(1) The closing price for the Common Stock on the New York Stock Exchange on
December 31, 1997, was $16.81. Value is calculated on the basis of the
difference between the option exercise price and $16.81, multiplied by the
number of shares of Common Stock underlying the options.
43
<PAGE>
GROUP MAINTENANCE AMERICA CORP. COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The Compensation Committee (the "Committee") of the Board of Directors is
responsible for overseeing the development and implementation of the executive
compensation philosophy, plans and programs of the Company as described below.
The Committee is composed entirely of non-employee Directors.
Compensation Philosophy
The Company is a new publicly-traded company and has established a
philosophy for compensation of the Company executives and those of its
principal subsidiaries that is intended to appropriately align the interests
of the executives with those of the Company shareholders and be based on
awarding compensation in line with performance.
In implementing this philosophy, the program has been structured to:
. Provide as current compensation a base salary with a variable incentive
award premised on achieving the Company's business objectives for the
year, with primary emphasis on targeted earnings per share.
. Develop and administer stock ownership programs for executives that
provide strong incentives for long-term retention of senior executives.
. Encourage stock ownership at all levels of the organization through stock
option plans.
. As the Company is a newly-formed company, the Committee will carefully
review the effects in operation of the plans implemented to date to
insure that the desired results are achieved, and will recommend to
management any changes deemed desirable as a result of such review.
Annual Cash Compensation Program
BASE SALARIES
As described elsewhere, each of the executive officers named in the Summary
Compensation Table entered into an employment agreement upon initial
employment with the Company providing for a specified base salary and an
annual cash bonus depending on the actual performance of the Company. Upon the
successful completion of the Company's initial public offering in November
1997 the Company paid a special cash bonus to each of its executives based
upon their respective salaries and length of time employed by the Company.
During 1998, further study of the salary structures of comparably-situated
companies will be made to determine what adjustment to salaries, if any, are
appropriate, consistent with the duties and responsibilities of each position.
INCENTIVE BONUS PLANS
The Board of Directors of the Company approved a cash incentive bonus plan
for its headquarters employees in 1998. Individual amounts payable under this
plan are dependent on (1) achieving a targeted earnings-per-share result; (2)
influence of the individual position on ability to achieve overall corporate
objectives; and (3) assessment of individual performance in carrying out the
assigned responsibilities.
The Company has previously implemented a cash bonus program for the key
employees of its subsidiaries under which awards will be determined based upon
the performance of each subsidiary. The size of the bonus pool will be equal
to a defined percentage of the amount by which the subsidiary's after-tax net
operating profit (as defined) less a charge for capital allocated to the
subsidiary exceeds a similar calculation of the previous year's results. A
certain percentage of earned bonuses are carried over to the following year
for retention purposes and to promote long-term goal achievement. Messrs.
Jennings and Johnston participated in the program in 1997. Messrs. Bryant,
Henninger, Kelly and Sigmund will also participate in 1998.
44
<PAGE>
LONG-TERM INCENTIVES--STOCK AWARDS PLANS
The Company's long-term incentive plans (1997 Stock Awards Plan and 1997
Stock Option Plan) are intended to be a significant portion of the total
compensation package of the Company's senior executives and to provide an
ownership opportunity to employees at all levels of the organization. Pursuant
to this objective, awards were made at the time of the initial public offering
and will continue to be made periodically based on individual performance
evaluations and recommendations of the Chief Executive Officer and/or the
chief executive officer of each subsidiary corporation, as applicable.
1997 CHIEF EXECUTIVE OFFICER COMPENSATION
The base compensation of the Chief Executive Officer for 1997 continued at
the level of $150,000 as established in his initial employment agreement in
1996. While information provided by compensation consultants indicates that
this compensation is below base salaries of chief executive officers of
comparable companies, the Committee believes the Company's management group,
including the Chief Executive Officer, is properly incentivized by the overall
compensation program as described above.
At the successful completion of the Company's initial public offering, the
Chief Executive Officer, as well as other senior officers of the Company,
received cash bonuses and awards under the 1997 Stock Awards Plan. Mr.
Millinor received an $87,500 cash bonus and an option to purchase 56,500
shares of stock. These options are exercisable at $14.00 per share over a
period of five years with 25% of such shares becoming exercisable at each
anniversary of the date of grant.
The Chief Executive Officer's contribution for the period is most clearly
evidenced by the successful completion of the Company's initial public
offering several months ahead of schedule. Mr. Millinor demonstrated
outstanding leadership in directing the Company during the period leading to
the initial public offering in November 1997. Implementation of the Company's
business plan required identifying and employing additional members of the
management team needed to successfully manage and coordinate the acquisition
program and working closely with the group in identifying and negotiating the
terms of the acquisitions. In addition, he led the effort required to develop
a plan to effectively coordinate the ongoing operations of the acquired
companies after the initial public offering.
COMPENSATION COMMITTEE
John M. Sullivan, Chairman
Lucian L. Morrison
James D. Weaver
45
<PAGE>
PERFORMANCE GRAPH
The following graph compares the percentage change in the market value of
the Company's Common Stock to the cumulative total stockholder return (change
in stock price plus reinvested dividends) of the Standard & Poor's 500 Stock
Index ("S&P 500 Index") and a group of three peer issuers (the "Peer Group
Index") for the portion of 1997 that the Company's Common Stock was registered
pursuant to Section 12 of the Exchange Act, assuming the investment of $100 on
November 7, 1997, the date immediately following the date of the IPO, and the
reinvestment of all dividends since that date to December 31, 1997. The three
peer issuers are American Residential Services, Inc., Comfort Systems USA,
Inc. and Service Experts, Inc., each of which is a publicly traded company
engaged (either directly or through subsidiaries) in the same or similar
business as the Company. The Peer Group Index was weighted for market
capitalization.
[GRAPH APPEARS HERE]
The performance of the Company's Common Stock reflected above is not
necessarily indicative of future performance of the Common Stock. The total
return on investment for the period shown for the Company, the S&P 500 Index
and the Peer Group Index is based on the stock price or composite index at
November 7, 1997.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In 1997, Mr. Norris entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on June 1, 2000. In the event of Mr. Norris' death, the agreement will
terminate. In the event of Mr. Norris' disability, the Company will continue
payment of compensation during the first 12 month period of such disability to
the extent not covered by the Company's disability insurance policies. In the
event his employment is terminated, Mr. Norris will receive compensation for
the periods described in the agreement. In addition, Mr. Norris has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1996, Mr. Millinor entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
of up to 100% of Mr. Millinor's annual base salary depending on the actual
annual performance of the Company. The agreement expires on October 24, 1999.
In the event of Mr. Millinor's death, the agreement will terminate. In the
event of Mr. Millinor's disability, the Company will continue payment of
compensation during the first 12 month period of such disability to the extent
46
<PAGE>
not covered by the Company's disability insurance policies. In the event his
employment is terminated, Mr. Millinor will receive compensation for the
periods described in the agreement. In addition, Mr. Millinor has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1997, Mr. Luke entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on August 1, 2000. In the event of Mr. Luke's death, the agreement
will terminate. In the event of Mr. Luke's disability, the Company will
continue payment of compensation during the first 12 month period of such
disability to the extent not covered by the Company's disability insurance
policies. In the event his employment is terminated, Mr. Luke will receive
compensation for the periods described in the agreement. In addition, Mr. Luke
has agreed not to compete with the Company during the six-month period
following his termination of employment.
In 1996, Mr. Jachimiec entered into an employment agreement with the Company
which provides for an annual base salary of $140,000 and an annual cash bonus
of up to 100% of Mr. Jachimiec's annual base salary depending on the actual
annual performance of the Company. The agreement expires on October 24, 1999.
In the event of Mr. Jachimiec's death, the agreement will terminate. In the
event of Mr. Jachimiec's disability, the Company will continue payment of
compensation during the first 12 month period of such disability to the extent
not covered by the Company's disability insurance policies. In the event his
employment is terminated, Mr. Jachimiec will receive compensation for the
periods described in the agreement. In addition, Mr. Jachimiec has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1996, Mr. Rouse entered into an employment agreement with the Company
which provides for an annual base salary of $140,000 and an annual cash bonus
of up to 100% of Mr. Rouse's annual base salary depending on the actual annual
performance of the Company. The agreement expires on October 24, 1999. In the
event of Mr. Rouse's death, the agreement will terminate. In the event of Mr.
Rouse's disability, the Company will continue payment of compensation during
the first 12 month period of such disability to the extent not covered by the
Company's disability insurance policies. In the event his employment is
terminated, Mr. Rouse will receive compensation for the periods described in
the agreement. In addition, Mr. Rouse has agreed not to compete with the
Company during the six-month period following his termination of employment.
In 1997, Mr. Jennings entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Jennings also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 3.55% of Airtron's EBITDA before corporate bonus not to exceed
$366,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Jennings' death, the agreement will terminate. In the event of Mr.
Jennings' disability, Airtron will continue payment of compensation during the
first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Jennings will receive compensation for the periods described
in the agreement. In addition, Mr. Jennings has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
In 1997, Mr. Johnston entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Johnston also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 1.50% of Airtron's EBITDA before corporate bonus, not to exceed
$154,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Johnston's death, the agreement will terminate. In the event of Mr.
Johnston's disability, Airtron will continue payment of compensation during
the first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Johnston will receive compensation for the periods described
in the agreement. In addition, Mr. Johnston has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
Each of the foregoing employment agreements (other than the employment
agreements of Messrs. Jennings and Johnston) grants the executive certain
rights in the event of a change in control of the Company. Under the
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terms of each agreement, the Company must pay the executive an amount equal to
twelve months compensation at the executive's current salary and provide
benefits to the executive for twelve months if the Company terminates the
executive's employment without "cause." In addition, if an executive's
employment terminates within six months after a sale of all or substantially
all of the assets of the Company or a merger, consolidation, liquidation or
reorganization of the Company, the Company shall pay the executive an amount
equal to three times the executive's severance benefits otherwise available
under the employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, Messrs. Morrison, Sullivan and Weaver (none of whom was or had
been an officer or employee of the Company or any of its subsidiaries) served
on the Company's Compensation Committee. There were no interlocks or insider
participation with other companies within the meaning of the proxy rules of
the Securities and Exchange Commission during 1997.
INCENTIVE BONUS PROGRAM
The Company has implemented a cash bonus program for the key employees of
its subsidiaries under which awards will be determined based upon the
performance of each subsidiary. The size of the bonus pool will be equal to a
defined percentage of the amount by which the subsidiary's after-tax net
operating profit (as defined) less a charge for capital allocated to the
subsidiary exceeds a similar calculation of the previous year's results. A
certain percentage of earned bonuses are carried over to the following year
for retention purposes and to promote long-term goal achievement. Messrs.
Jennings and Johnston participated in such program in 1997 and will also
participate in 1998. Messrs. Bryant, Henninger, Kelly and Sigmund will
participate in 1998.
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RELATED PARTY TRANSACTIONS
Airtron leases its headquarters offices in Dayton, Ohio and its operating
facilities in Cincinnati and Cleveland, Ohio, Indianapolis, Indiana,
Clearwater, Florida, Dallas, Houston and San Antonio, Texas and Wichita,
Kansas from entities controlled by certain former shareholders of Airtron,
including Messrs. Jennings and Johnston. None of these leases expire prior to
2008. The aggregate annual base rent to be paid under these leases is
approximately $735,000 with annual increases based on the consumer price
index. The Company believes that the terms of such leases are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties.
In the Company's acquisition of Airtron, Mr. Jennings received $3,729,653,
together with 933,908 shares of Common Stock and 2,711,344 shares of Series A
Preferred Stock, and Mr. Johnston received $1,393,474, together with 374,713
shares of Common Stock and 1,057,473 shares of Series A Preferred Stock. All
of such shares of preferred stock were redeemed at a redemption price of $1.00
per share. Additionally, Messrs. Jennings and Johnston have the right to
receive payments from the Company equal to the tax benefits received by the
Company with respect to payments of deferred compensation to them. The Company
estimates these payments will be $3.2 million and $1.4 million, respectively.
In the Company's acquisition of K&N, Andrew Jeffrey Kelly received
$1,568,000, together with 362,800 shares of Common Stock and 1,568,000 shares
of Series D Preferred Stock. All of such shares of preferred stock were
redeemed at a redemption price of $1.00 per share. Mr. Kelly may receive
contingent consideration based on the operating results of K&N for the 15
month period ended June 30, 1998. The Company estimates that such payments
will be approximately $600,000. K&N entered into a new five year renewable
lease with Sigma Management, a company owned by Mr. Kelly, to replace the
existing lease for the Company's Arlington, Texas facility. The annual base
rent to be paid under this lease is approximately $94,800. The Company
believes that the terms of such lease are no less favorable to the Company
than could have been negotiated by the Company with unaffiliated third
parties.
In the Company's acquisition of MacDonald-Miller, Fredric J. Sigmund
received approximately $1,937,000 and 207,588 shares of Common Stock. Mr.
Sigmund will receive a portion of the contingent consideration payable to the
former shareholders of MacDonald-Miller based on the operating results of
MacDonald-Miller for the 12 month period ended December 31, 1997. The Company
estimates that such payments will be approximately $763,700. MacDonald-Miller
has entered into a new ten year renewable lease with F&V Investments, a
company owned by Mr. Sigmund, to replace the existing lease for MacDonald-
Miller's Seattle, Washington facility. The annual base rent to be paid under
this lease is approximately $475,000. The Company believes that the terms of
such lease are no less favorable to the Company than could have been
negotiated by the Company with unaffiliated third parties.
In the Company's acquisition of Masters, Ronald D. Bryant received
approximately $5,325,000 and 466,806 shares of Common Stock. Additionally,
Masters entered into a new six year renewable lease with Mr. Bryant to replace
the existing lease for Masters' Gaithersburg, Maryland facility. The annual
base rent to be paid under this lease is approximately $242,000, with annual
increases of 4%. The Company believes that the terms of such lease are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties.
In the Company's acquisition of Van's, David L. Henninger received, together
with his spouse, approximately $1,497,000 and 112,200 shares of Common Stock.
Additionally, Van's entered into a new five-year renewable lease with Mr.
Henninger to replace the existing lease for Van's Delray Beach, Florida
facility. The initial annual base rent to be paid under this lease is
approximately $90,000 with annual increases of 3%. The Company believes that
the terms of such lease are no less favorable to the Company than could have
been negotiated by the Company with unaffiliated third parties. Finally, Mr.
Henninger owed approximately $80,000 to Van's at the time it was acquired by
the Company. This indebtedness was satisfied in December 1997 by an offset to
a purchase price adjustment owed by the Company to Mr. Henninger.
In 1997, Mr. Sullivan, a director of the Company, exercised options to
purchase 10,000 shares at a price of $3.08 per share.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, certain information
known by the Company with respect to the ownership of shares of Common Stock
as to (i) all persons who are beneficial owners of 5% or more of the
outstanding shares of Common Stock, (ii) each director, (iii) each executive
officer, and (iv) all executive officers and directors of the Company as a
group. Unless otherwise indicated, each of the following persons may be deemed
to have sole voting and dispositive power with respect to such shares.
Information set forth in the table with respect to beneficial ownership of the
Common Stock has been provided to the Company by such holders. Unless
otherwise indicated, each person's address is c/o the Company's principal
executive offices at 8 Greenway Plaza, Suite 1500, Houston, Texas 77046.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)(2)
---------------------
NUMBER PERCENT
--------- -------
<S> <C> <C>
Ronald D. Bryant......................................... 466,806 2.0%
David L. Henninger....................................... 112,202(3) *
Chester J. Jachimiec..................................... 147,401(4) *
James D. Jennings........................................ 738,470(5) 3.2%
Timothy Johnston......................................... 374,713(5) 1.6%
Andrew J. Kelly.......................................... 362,800 1.6%
Donald L. Luke........................................... 1,000 *
Thomas B. McDade......................................... 8,000 *
J. Patrick Millinor, Jr.................................. 239,313(6) 1.0%
Lucian A. Morrison....................................... 5,500 *
James P. Norris.......................................... 500 *
Richard S. Rouse......................................... 126,602 *
Fredric J. Sigmund....................................... 207,588(7) *
John M. Sullivan......................................... 112,050(8) *
James D. Weaver.......................................... 86,500 *
William M. Callahan...................................... 301,137(9) 1.3%
Alfred R. Roach.......................................... 301,137(9) 1.3%
Randolph W. Bryant....................................... 7,666(2) *
Darren B. Miller......................................... 64,002 *
Gordon Cain.............................................. 2,417,950 10.4%
8 Greenway Plaza, Suite 705
Houston, Texas 77046
All executive officers and directors as a group.......... 3,663,387(10) 15.7%
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise noted, each shareholder, director and executive
officer has sole voting and investment power over the shares beneficially
owned as set forth in this column.
(2) Includes shares that are subject to options granted by the Company
exercisable at March 31, 1998, or within 60 days thereafter, for Messrs.
Millinor, Jachimiec, Rouse, Bryant and Miller to purchase 18,868, 16,801,
14,752, 6,666 and 10,002 shares, respectively.
(3) Includes 55,001 shares held by Mr. Henninger's spouse.
(4) Includes 32,000 shares held by Mr. Jachimiec as trustee of two trusts for
the benefit of his children as to which Mr. Jachimiec disclaims beneficial
ownership.
(5) Includes 281,572 and 329,285 shares beneficially owned by Messrs. Jennings
and Johnston through Airtron, Inc. employee benefit plans.
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(6) Includes 200 shares held by Mr. Millinor's children as to which Mr.
Millinor disclaims beneficial ownership.
(7) Includes 33,748 shares beneficially owned by Mr. Sigmund through the
MacDonald-Miller Industries, Inc. Employee Stock Ownership Plan.
(8) Includes 82,050 shares with respect to which Mr. Sullivan has a limited
power of attorney to vote and exercise investment powers until revoked by
the actual owner.
(9) Includes 257,000 shares that each of Messrs. Callahan and Roach has the
right to acquire pursuant to warrants that are presently exercisable.
(10) Includes 67,089 shares that are subject to options that are exercisable
by all executive officers and directors as a group.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the Company's Articles of Incorporation, as amended (the "Articles"),
the Company has authority to issue 150,000,000 shares of capital stock,
consisting of 50,000,000 shares of Preferred Stock, par value $0.001 per share
(the "Preferred Stock"), and 100,000,000 shares of Common Stock, par value
$0.001 per share. As of March 31, 1998, the Company had outstanding 23,297,410
shares of Common Stock and no shares of Preferred Stock.
The following summary description of the material features of the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the Articles, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Articles authorize the issuance of Preferred Stock in one or more series
having designations, rights and preferences determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without approval of holders of Common Stock, to issue Preferred Stock with
dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present
intention to issue any additional shares of its Preferred Stock, there can be
no assurance that it will not do so in the future.
COMMON STOCK
Voting Rights. Holders of Common Stock are entitled to one vote for each
share on all matters on which shareholders generally are entitled to vote,
including elections of directors. The Board of Directors is classified into
three classes of five directors, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. The Articles do not provide for cumulative voting for
the election of directors.
Dividends. Subject to the preferential rights of any outstanding Preferred
Stock that may be created by the Board of Directors under the Articles,
dividends may be paid to holders of Common Stock when, as and if declared by
the Board of Directors out of funds legally available for such purpose. The
declaration and payment of dividends on Common Stock could be restricted by
the terms of any Preferred Stock issued. Under the TBCA, dividends may be paid
by the Company out of "surplus" (as defined under Article 1.02 of the TBCA)
or, if
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there is no surplus, out of net profits for the fiscal year in which the
dividends are declared and/or the preceding fiscal year. However, the Company
does not intend to pay dividends at the present time. See "Dividend Policy"
and "Description of Bank Credit Agreement."
Liquidation. In the event of the dissolution or winding up of the Company,
after payment or provision for payment of debts and other liabilities of the
Company and any other series or class of the Company's stock hereafter issued
that ranks senior as to liquidation rights to the Common Stock, the holders of
Common Stock will be entitled to receive pro rata all remaining assets of the
Company available to such holders.
Miscellaneous. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights.
The Common Stock is listed on the New York Stock Exchange under the symbol
"MAK."
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Article 13 of the TBCA ("Article 13") which, with
certain exceptions, prohibits a Texas corporation from engaging in a "business
combination" (as defined in Article 13) with any shareholder who is a
beneficial owner of 20% or more of the corporation's outstanding stock for a
period of three years after such shareholder's acquisition of a 20% ownership,
unless: (i) the board of directors of the corporation approves the transaction
or the shareholder's acquisition of shares prior to the acquisition or (ii)
two-thirds of the unaffiliated shareholders of the corporation approve the
transaction at a shareholders' meeting. Shares that are issuable, but have not
yet been issued, pursuant to options, conversion or exchange rights or other
agreements are not considered outstanding for purposes of Article 13.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles contain a "fair price" provision which generally requires that
certain mergers, business combinations and similar transactions constituting a
"Business Combination" with an "Interested Shareholder" (generally the
beneficial owner of at least 10 percent of the Company's voting stock) be
approved by the holders of a least 80 percent of the Company's voting stock,
unless (i) the transaction is approved by at least 80 percent of the
"Continuing Directors" of the Company, who constitute a majority of the entire
board or (ii) certain "fair price" and procedural requirements are satisfied.
The Articles define "Business Combination" as (i) any merger or consolidation
involving the Company or a subsidiary of the Company, (ii) any sale, lease,
exchange, transfer or other disposition (in one transaction or a series of
transactions), including without limitation a mortgage or any other security
device, of all or any substantial part of the assets either of the Company or
of a subsidiary of the Company to or with any Interested Shareholder, (iii)
the issuance, sale, exchange, transfer or other disposition by the Company or
a subsidiary of the Company of any securities of the Company or any subsidiary
of the Company to or with any Interested Shareholder, (iv) any
recapitalization or reclassification of the Company's securities (including
without limitation, any reverse stock split) or other transaction that would
have the effect of increasing the voting power of an Interested Shareholder,
(v) any liquidation, spinoff, splitoff, splitup or dissolution of the Company
proposed by or on behalf of any Interested Shareholder, and (vi) any
agreement, contract or other arrangement providing for any of the transactions
described in this definition of Business Combination. "Continuing Director" is
defined to mean a director who either was a member of the Board of Directors
of the Company prior to the time such Interested Shareholder became an
Interested Shareholder or who subsequently became a director of the Company
and whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least 80 percent of the Continuing Directors then
on the Board of Directors, either by a specific vote or by approval of the
proxy statement issued by the Company on behalf of the Board of Directors in
which such person is named as nominee for director, without an objection to
such nomination; provided, however, that in no event shall a director be
considered a "Continuing Director" if
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such director is an Interested Shareholder and the Business Combination to be
voted upon is with such Interested Shareholder or is one in which such
Interested Shareholder otherwise has an interest (except proportionately as a
shareholder of the Company).
In accordance with the Company's Bylaws, a shareholder of the Company may
nominate persons for election to the Board of the Company if the shareholder
submits such nomination, together with certain related information required by
the Company's Bylaws, in writing to the Secretary of the Company not less than
50 days nor more than 75 days prior to the date of any annual meeting of
shareholders.
DESCRIPTION OF CREDIT AGREEMENT
GENERAL
The lenders under the Company's Credit Agreement are committed to provide
the Company, subject to certain terms and conditions, the entire $75 million
principal amount of the revolving credit facility described below. The
following description summarizes the material provisions of the Credit
Agreement. The following description does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions
of the Credit Agreement, filed as an exhibit to the registration statement
relating to this Prospectus.
AMORTIZATION; PREPAYMENTS
Loans under the Credit Agreement may be prepaid at any time without premium
or penalty in reasonable minimum amounts. Prepayments of Eurodollar borrowings
on any day other than the last day of an interest period must be accompanied
by a payment to the Lenders of various costs, expenses or losses, if any,
incurred as a result of such prepayment. Any loans under the Credit Agreement
are payable in full on December 9, 2000.
SECURITY; GUARANTEES
Borrowings under the Credit Agreement are guaranteed by the Company's
Material Subsidiaries (as defined in the Credit Agreement), including future
Material Subsidiaries. The obligations of the Company under the Credit
Agreement and the obligations under the guarantees are secured by a first
priority lien on the accounts receivable and inventory of the Company and its
Material Subsidiaries, including any future subsidiaries, and by a pledge of
stock of its domestic subsidiaries.
INTEREST RATES
Loans under the Credit Agreement bear interest at a rate per annum, at the
Company's option, of either (i) the Alternate Base Rate which is equal to the
greater of the Federal Funds Effective Rate (as defined in the Credit
Agreement) plus 0.5% or the Prime Rate (as defined in the Bank Credit
Agreement) plus a margin depending on the ratio of indebtedness for borrowed
money to Adjusted EBITDA (as defined in the Credit Agreement), or (ii) the
Eurodollar Rate (as defined in the Credit Agreement) plus a margin depending
on the ratio of indebtedness for borrowed money to Adjusted EBITDA.
FEES, EXPENSES AND COSTS; CREDIT FACILITIES
The terms of the Credit Agreement require the Company to pay the following
fees in connection with the maintenance of loans under the Credit Agreement:
(i) commitment fees to be paid to the Lenders in amounts between 0.25% and
0.375% per annum with respect to the unused commitments under the Credit
Agreement depending on the ratio of indebtedness for borrowed money to
Adjusted EBITDA, payable quarterly in arrears until such time as such facility
is terminated; and (ii) administration fees payable annually to the Agent. In
addition, the Company paid various underwriting and arrangement fees and
closing costs in connection with the origination and syndication of the Credit
Agreement.
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The Company is required to reimburse the Agent for all reasonable out-of-
pocket costs and expenses incurred in the preparation, documentation and
administration of the Credit Agreement and to reimburse the Lenders for all
reasonable costs and expenses incurred in connection with the enforcement of
their rights in connection with a default or the enforcement of the Credit
Agreement. The Company must indemnify the Agent and the Lenders and their
respective officers, directors, shareholders, employees, agents and attorneys
against certain costs, expenses (including fees and reimbursements of counsel)
and liabilities arising out of or relating to the Credit Agreement and the
transactions contemplated thereby. The Lenders also are entitled to be
reimbursed for certain reserve requirements and increases therein, changes in
law and circumstances, taxes (other than on overall net income), capital
adequacy, and consequential costs. Further, the inability to determine
Eurodollar Rates or the possible future illegality of the Eurodollar Rate
option will result in such rate option being unavailable.
COVENANTS
The Credit Agreement contains substantial restrictive covenants limiting the
ability of the Company and its subsidiaries to: (i) incur Indebtedness (as
defined in the Credit Agreement), including contractual contingent
obligations; (ii) pay certain debt after default; (iii) create or allow to
exist liens or other encumbrances; (iv) transfer assets except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business; (v) enter into mergers, consolidations and asset
dispositions of all or substantially all of its properties; (vi) make
investments; (vii) extend credit to any entity; (viii) sell, transfer or
otherwise dispose of any class of stock or the voting rights of any subsidiary
of the Company; (ix) enter into transactions with related parties other than
on an arm's-length basis on terms no less favorable to the Company than those
available from third parties; (x) amend certain agreements; (xi) make any
material change in the nature of the business conducted by the Company; (xii)
pay dividends or redeem shares of capital stock; and (xiii) make capital
expenditures.
In addition, the Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company and its subsidiaries
to: (i) maintain the existence, qualification and good standing of the Company
and its subsidiaries; (ii) comply in all material respects with all material
applicable laws; (iii) maintain material properties, rights and franchises;
(iv) deliver certain financial and other information; (v) maintain specified
insurance; (vi) pay taxes; and (vii) notify the Lenders of any default under
the Loan Documents (as defined in the Credit Agreement) and of certain other
material events.
Under the Credit Agreement, the Company is required to satisfy certain
financial covenants and tests, including (i) a minimum fixed charge coverage
ratio; (ii) a minimum tangible net worth that is positive; (iii) a maximum
ratio of total indebtedness for borrowed money to Capitalization (as defined
in the Credit Agreement); and (iv) a minimum Consolidated Net Worth (as
defined in the Credit Agreement). Changes in generally accepted accounting
principles that materially affect financial covenants may result in
modifications to the financial covenants with the view to placing the
covenants on the same economic basis as before the change in generally
accepted accounting principles.
EVENTS OF DEFAULT
Events of Default under the Credit Agreement include, subject to certain
applicable notice and grace periods, the following: (i) a default in the
payment when due of any principal, interest, fees or other amount under the
Credit Agreement; (ii) a default by the Company under any debt instrument in
excess of $500,000, or the occurrence of any event or condition that enables
the holder of such debt to accelerate the maturity thereof; (iii) any material
breach of any representation, warranty or statement in, or failure to perform
any duty or covenant under the Credit Agreement or any of the Loan Documents;
(iv) commencement of voluntary or involuntary bankruptcy, insolvency or
similar proceedings by or against the Company or any Material Subsidiary; (v)
any judgment or order in excess of $500,000 net of confirmed insurance
remaining undischarged or unstayed for longer than certain periods; and (vi) a
Change of Control (as defined in the Credit Agreement).
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SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1998, the Company had outstanding 23,297,410 shares of
Common Stock. Of these shares, the 8,340,000 shares sold in the IPO are freely
tradeable in the public market without restriction or limitation under the
Securities Act, except for any shares held by an "affiliate" (as defined in
the Securities Act) of the Company. Approximately 9.4 million shares of Common
Stock held by existing shareholders of the Company immediately prior to the
IPO and the 3.3 million shares of Common Stock which were issued in connection
with the acquisition of the Offering Acquisition Companies, Costner, Way
Residential and Callahan Roach, are "restricted securities" within the meaning
of Rule 144, except for the approximately 725,000 shares of Common Stock
registered under the Securities Act in connection with the acquisition of
MacDonald-Miller. The approximately 3.3 million shares issued or to be issued
in connection with the acquisition of the Post-Offering Companies are
registered and freely tradeable under the Securities Act, but are subject to
contractual restrictions on resale during the two years from the date of
issuance. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares issued by
the Company to affiliates of any of the Post-Offering Companies for a period
of one year from the date of issuance.
In addition, certain of the Company's directors, executive officers and
principal shareholders, who hold an aggregate of approximately 3.6 million
shares of Common Stock, have entered into lock-up agreements with the
Representatives of the Underwriters. These persons have agreed not to offer,
sell, contract to sell, grant any option with respect to, pledge, hypothecate
or otherwise dispose of, any shares of Common Stock owned by them until May 6,
1998 without the prior written consent of The Robinson-Humphrey Company, LLC.
All such approximately 3.6 million shares will become available for sale on
May 6, 1998 upon expiration of these lock-up agreements, subject to compliance
with Rule 144 promulgated under the Securities Act. Furthermore, the former
shareholders of the Pre-Offering Companies and most of the shareholders of the
Offering Acquisition Companies, who collectively hold approximately 9 million
shares of Common Stock, have entered into Stock Transfer Restriction
Agreements that impose restrictions on the transferability of their shares.
See "--Transfer Restrictions."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock that does not exceed the greater of (i) one percent of the number of the
then outstanding shares or (ii) the average weekly reported trading volume of
the Common Stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain notice requirements and to the
availability of current public information about the Company and must be made
in unsolicited brokers' transactions or to a market maker. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company
under the Securities Act during the three months preceding a sale and who has
beneficially owned such shares for at least two years is entitled to sell such
shares under Rule 144(k) without regard to the information, volume, manner of
sale and notice provisions of such Rule. At the date of this Prospectus,
approximately 1.4 million "restricted" shares of Common Stock are eligible for
resale pursuant to Rule 144, subject to the volume, manner of sale and other
limitations thereof and an additional 12.7 million shares will become
available for resale pursuant to Rule 144 in the second quarter of 1998. The
remaining "restricted" shares will become eligible for resale pursuant to Rule
144 from time to time thereafter.
On the date of this Prospectus, the Company had outstanding options and
warrants to purchase approximately 3.2 million shares of Common Stock,
approximately 0.7 million of which are exercisable within 60 days of the date
of this Prospectus. The Company has filed a registration statement on Form S-8
under the Securities Act to register the shares of Common Stock issuable upon
the exercise of options granted under the Stock Awards Plan and the stock
option plan for nonmanagement employees. Accordingly, such shares will be
freely tradeable by holders who are not affiliates of the Company and, subject
to the volume and manner of sale limitations of Rule 144, by holders who are
affiliates of the Company.
No predictions can be made of the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have
on the market price prevailing from time to time. Nevertheless,
55
<PAGE>
sales of significant amounts of Common Stock could adversely affect the
prevailing market price of Common Stock, as well as impair the ability of the
Company to raise capital through the issuance of additional equity securities.
TRANSFER RESTRICTIONS
Purchasers of Common Stock in the acquisitions of the GroupMAC Companies and
Post-Offering Companies entered into substantially similar Stock Transfer
Restrictions Agreements, which generally require that, at any time that the
Company is engaged in an underwritten public offering of its securities, each
shareholder who is a party thereto shall refrain from making any disposition
of Common Stock on a securities exchange, in the over-the-counter or any other
public trading market for the period of time requested by the Company;
provided, however, that (i) the restrictions on the transfer of Common Stock
shall not limit any shareholder's right to sell Common Stock pursuant to any
piggyback registration right that such shareholder may have pursuant to any
registration rights or similar agreement binding upon the Company and (ii)
such restrictions are no more restrictive than those imposed on the management
of the Company. Additionally, each Stock Transfer Restriction Agreement
provides that, during the one-year period following the date of such agreement
(the "First Holding Period"), the shareholder will not dispose of his or her
shares of Common Stock (subject to certain limited exceptions generally
involving transfers to family members and trusts or pursuant to an effective
registration statement). In addition to the foregoing restrictions, during the
one year period following the First Holding Period (the "Second Holding
Period"), no shareholder who is a party thereto may dispose of any Common
Stock in any calendar month in an amount greater than 3% of the number of
shares of Common Stock issued to such shareholder increasing cumulatively for
months in which less than 3% was sold. After expiration of the Second Holding
Period, all such restrictions under the Stock Transfer Restriction Agreements
lapse. Finally, any shareholder who is a party thereto shall provide five
business days' notice to the Company prior to any proposed disposition until
the later of (i) the end of the one-year period following the Second Holding
Period, (ii) for as long as such shareholder is an officer or director of the
Company or any of its subsidiaries and (iii) the date on which such
shareholder ceases to hold the greater of 20,000 shares of Common Stock or 20%
of the number of shares originally held.
No shareholder who is a party thereto shall make a transfer of any Common
Stock if such action would constitute (i) a violation of any federal or state
securities law, (ii) a breach of any condition to any exemption from
registration of the Common Stock under any such laws or (iii) a breach of any
undertaking or agreement of such shareholder entered into pursuant to such
laws or in connection with obtaining an exemption thereunder.
The summary herein of certain provisions of the Stock Transfer Restriction
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions thereof, the form of
which is filed as an exhibit to the Registration Statement.
REGISTRATION RIGHTS
Pursuant to several Registration Rights Agreements, as amended (the
"Registration Rights Agreements"), the Company has agreed to register under
the Securities Act up to 12,472,525 shares of Common Stock. Pursuant to the
Registration Rights Agreements, the shareholders who are parties thereto will
be entitled, subject to certain limitations, to include their shares of Common
Stock in a registration of shares of Common Stock subsequent to the IPO which
is initiated by the Company under the Securities Act. The Registration Rights
Agreement with respect to the founding shareholders of the Company
additionally provides that any one or more shareholders holding a minimum
number of shares of Common Stock has the right to require the Company to
effect a registration of all or any part of the shares of Common Stock under
the Securities Act (a "Demand Registration"). In the event the aggregate
number of shares of Common Stock which the shareholders request the Company to
include in any registration, together, in the case of a registration initiated
by the Company, with the shares of Common Stock of the Company to be included
in such registration, exceeds the number that in the opinion of the managing
underwriter can be sold in such offering without materially affecting the
offering price of such shares, the number of shares of each shareholder to be
included in such registration will be reduced pro rata based on the aggregate
number of shares for which registration was requested.
56
<PAGE>
The Company at its option may delay the filing of a registration statement
required pursuant to any Demand Registration for up to 120 days if it has
determined that filing a registration statement would be seriously detrimental
to the Company or its shareholders or that a delay in filing the registration
statement is necessary in light of a pending corporate development. In
addition, although the Company's founding shareholders have the right to have
the shares of Common Stock owned by them registered by the Company under the
Securities Act, each of them has agreed not to exercise their respective
demand rights for the two year period following the IPO except for Mr. Cain
who has agreed to not exercise his demand rights for one year.
The Registration Rights Agreements contain customary provisions whereby the
Company and the shareholders party thereto agree to indemnify and contribute
to the other with regard to losses caused by the misstatement of any
information or the omission of any information required to be provided in a
registration statement filed under the Securities Act. The Registration Rights
Agreements require the Company to pay the expenses associated with any
registration other than sales discounts, commissions, transfer taxes and
amounts to be borne by underwriters or as otherwise required by law.
The summary herein of certain provisions of the Registration Rights
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions of the forms of
Registration Rights Agreements, copies of which are filed as exhibits to the
registration statement relating to this Prospectus.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 7,000,000 shares of
Common Stock, which the Company may issue from time to time in connection with
future direct and indirect acquisitions of other businesses, properties or
securities in business combination transactions.
The Company expects that the (i) terms on which it may issue the shares of
Common Stock covered hereby will be determined by direct negotiations with the
owners or controlling persons of the businesses or assets to be acquired and
(ii) the shares of Common Stock issued will be valued at prices reasonably
related to market prices prevailing either at the time an acquisition
agreement is executed or at or about the time of delivery of shares.
EXPERTS
The historical financial statements of Group Maintenance America Corp.
(GroupMAC), Group Maintenance America Corp. and Subsidiaries, K&N Plumbing,
Heating and Air Conditioning, Inc., A-ABC Appliance, Inc. and A-1 Appliance &
Air Conditioning, Inc., Arkansas Mechanical Services, Inc. and Mechanical
Services, Inc., Callahan Roach Products and Publications, Inc., Central
Carolina Air Conditioning Company, Hallmark Air Conditioning, Inc. and
Subsidiary, Sibley Services, Incorporated, Southeast Mechanical Service, Inc.,
Willis Refrigeration, Air Conditioning & Heating, Inc., Yale, Incorporated,
Hungerford Mechanical Corporation and Mechanical Interiors, Inc. to the extent
and for the periods indicated in their reports, have been included herein and
in the registration statement in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Masters, Inc. as of December 31, 1995, December
31, 1996 and June 30, 1997 and for each of the three years in the period ended
December 31, 1996 and for the six month period ended June 30, 1997 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
57
<PAGE>
The financial statements and schedules of MacDonald-Miller Industries, Inc.
included in this Prospectus and elsewhere in the registration statement, to
the extent and for the periods indicated in their reports, have been audited
by Moss Adams LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term encompasses any and all
amendments thereto) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which is filed as part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain items of which were
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus concerning the contents of any contract,
agreement or other document referred to are summaries of the terms of such
contract, agreement or other document and are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is hereby made to the exhibit for a
more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained
from the Public Reference facilities of the Commission, upon payment of the
prescribed fees. The Registration Statement is also available on the Internet
at the Commission's World Wide Web site at http://www.sec.gov.
The Common Stock is listed on the NYSE under the symbol "MAK," and reports,
proxy statements and other information concerning the Company can be inspected
and copied at the offices of the New York Stock Exchange at 20 Broad Street,
New York, New York 10005.
The Company is subject to the reporting requirements under the Exchange Act
and, in accordance therewith, files reports, proxy statements, information
statements and other information with the Commission. The Company intends to
furnish annual reports to its shareholders containing audited financial
statements reported on by an independent certified public accounting firm and
quarterly reports containing unaudited summary financial information for each
of the first three quarters of each year.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GROUP MAINTENANCE AMERICA CORP. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements........ F-4
Unaudited Pro Forma Combined Balance Sheet............................... F-6
Unaudited Pro Forma Combined Statement of Operations..................... F-7
Notes to Unaudited Pro Forma Combined Financial Statements............... F-8
HISTORICAL FINANCIAL STATEMENTS
GROUP MAINTENANCE AMERICA CORP. (GROUPMAC PARENT)
Report of Independent Public Accountants................................. F-12
Balance Sheets........................................................... F-13
Statements of Operations................................................. F-14
Statements of Shareholders' Equity....................................... F-15
Statements of Cash Flows................................................. F-16
Notes to Financial Statements............................................ F-17
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-22
Consolidated Balance Sheets.............................................. F-23
Consolidated Statements of Operations.................................... F-24
Consolidated Statements of Shareholders' Equity.......................... F-25
Consolidated Statements of Cash Flows.................................... F-26
Notes to Consolidated Financial Statements............................... F-27
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-39
Consolidated Balance Sheets.............................................. F-40
Consolidated Statements of Income........................................ F-41
Consolidated Statements of Shareholders' Equity.......................... F-42
Consolidated Statements of Cash Flows.................................... F-43
Notes to Consolidated Financial Statements............................... F-44
MASTERS, INC.
Report of Independent Public Accountants................................. F-54
Balance Sheets........................................................... F-55
Statements of Operations................................................. F-56
Statements of Shareholder's Equity....................................... F-57
Statements of Cash Flows................................................. F-58
Notes to Financial Statements............................................ F-59
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. F-66
Balance Sheet............................................................ F-67
Statement of Operations.................................................. F-68
Statement of Shareholders' Equity........................................ F-69
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Cash Flows................................................. F-70
Notes to Financial Statements........................................... F-71
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................ F-76
Combined Balance Sheets................................................. F-77
Combined Statements of Operations....................................... F-78
Combined Statements of Shareholders' Equity............................. F-79
Combined Statements of Cash Flows....................................... F-80
Notes to Combined Financial Statements.................................. F-81
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................ F-86
Combined Balance Sheets................................................. F-87
Combined Statements of Operations....................................... F-88
Combined Statements of Shareholders' Equity............................. F-89
Combined Statements of Cash Flows....................................... F-90
Notes to Combined Financial Statements.................................. F-91
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................ F-97
Balance Sheets.......................................................... F-98
Statements of Operations................................................ F-99
Statements of Shareholders' Equity...................................... F-100
Statements of Cash Flows................................................ F-101
Notes to Financial Statements........................................... F-102
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................ F-105
Balance Sheets.......................................................... F-106
Statements of Operations................................................ F-107
Statements of Shareholders' Equity...................................... F-108
Statements of Cash Flows................................................ F-109
Notes to Financial Statements........................................... F-110
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-115
Consolidated Balance Sheets............................................. F-116
Consolidated Statements of Operations................................... F-117
Consolidated Statements of Shareholders' Equity......................... F-118
Consolidated Statements of Cash Flows................................... F-119
Notes to Consolidated Financial Statements.............................. F-120
SIBLEY SERVICES, INCORPORATED
Report of Independent Public Accountants................................ F-126
Balance Sheets.......................................................... F-127
Statements of Operations................................................ F-128
Statements of Shareholders' Equity...................................... F-129
Statements of Cash Flows................................................ F-130
Notes to Financial Statements........................................... F-131
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants.............................. F-137
Balance Sheets........................................................ F-138
Statements of Operations.............................................. F-139
Statements of Shareholders' Equity.................................... F-140
Statements of Cash Flows.............................................. F-141
Notes to Financial Statements......................................... F-142
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants.............................. F-146
Balance Sheets........................................................ F-147
Statements of Operations.............................................. F-148
Statements of Shareholders' Equity.................................... F-149
Statements of Cash Flows.............................................. F-150
Notes to Financial Statements......................................... F-151
YALE, INCORPORATED
Report of Independent Public Accountants.............................. F-156
Balance Sheets........................................................ F-157
Statements of Operations.............................................. F-158
Statements of Shareholders' Equity.................................... F-159
Statements of Cash Flows.............................................. F-160
Notes to Financial Statements......................................... F-161
HUNGERFORD MECHANICAL CORPORATION
Report of Independent Public Accountants.............................. F-166
Balance Sheet......................................................... F-167
Statement of Operations............................................... F-168
Statement of Shareholder's Equity..................................... F-169
Statement of Cash Flows............................................... F-170
Notes to Financial Statements......................................... F-171
MECHANICAL INTERIORS, INC.
Report of Independent Public Accountants.............................. F-175
Balance Sheet......................................................... F-176
Statement of Operations............................................... F-177
Statement of Shareholders' Equity..................................... F-178
Statement of Cash Flows............................................... F-179
Notes to Financial Statements......................................... F-180
PREMEX, INC. AND SUBSIDIARY
Report of Independent Public Accountants.............................. F-184
Balance Sheet......................................................... F-185
Statement of Operations............................................... F-186
Statement of Shareholders' Equity..................................... F-187
Statement of Cash Flows............................................... F-188
Notes to Financial Statements......................................... F-189
GROUP MAINTENANCE AMERICA CORP. UNAUDITED SUPPLEMENTAL PRO FORMA
FINANCIAL INFORMATION
Introduction to Unaudited Supplemental Pro Forma Financial
Information.......................................................... F-195
Unaudited Supplemental Pro Forma Balance Sheet........................ F-196
Unaudited Supplemental Pro Forma Statement of Operations.............. F-197
Notes to Unaudited Supplemental Pro Forma Financial Information....... F-198
</TABLE>
F-3
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Although for legal purposes Airtron, Inc. ("Airtron") was acquired by Group
Maintenance America Corp. ("GroupMAC"), for accounting purposes, the
transaction was accounted for as a reverse acquisition, as if Airtron acquired
GroupMAC, due to the fact that the former shareholders of Airtron then owned a
majority of the GroupMAC common stock. The following unaudited pro forma
combined financial statements give effect to the acquisition of Airtron and
(i) 10 companies acquired prior to the IPO (the "Pre-Offering Companies"),
(ii) 13 companies acquired in connection with the IPO (the "Offering
Acquisition Companies") and (iii) 15 platform companies acquired subsequent to
December 31, 1997 and two additional platform companies subject to executed
definitive acquisition agreements (the "Post-Offering Companies" and together
with Airtron, the Pre-Offering Companies and the Offering Acquisition
Companies, the "GroupMAC Pro Forma Combined Companies"). The Post-Offering
Companies are as follows:
<TABLE>
<CAPTION>
DATE
COMPANY ACQUIRED
- ------- --------
<S> <C>
Sterling Air Conditioning, Inc......................................... 1/6/98
A-1 Mechanical of Lansing, Inc......................................... 1/15/98
Air Conditioning Engineers, Inc........................................ 1/15/98
Air Conditioning, Plumbing & Heating Company, Inc...................... 1/15/98
Hungerford Mechanical Corporation...................................... 1/15/98
Mechanical Interiors, Inc.............................................. 1/15/98
Valley Wide Plumbing & Heating, Inc.................................... 1/15/98
Weigold & Sons, Inc.................................................... 1/15/98
A.A. Advance Air, Inc.................................................. 2/12/98
DIVCO, Inc............................................................. 2/12/98
J. D. Steward Air Conditioning, Inc.................................... 2/13/98
New Construction Air Conditioning, Inc................................. 2/13/98
Aircon Energy, Incorporated............................................ 3/13/98
Ray & Claude Goodwin, Inc. (d/b/a "Ray's Plumbing, Inc.").............. 3/13/98
Sun Plumbing, Inc...................................................... 3/13/98
Barr Electric Corp..................................................... *
Premex, Inc. (d/b/a "Commercial Air, Power & Cable, Inc.")............. *
</TABLE>
- --------
*GroupMAC has executed definitive agreements to acquire these companies.
All of the acquisitions were or will be accounted for under the purchase
method of accounting. These unaudited pro forma combined financial statements
are based on the historical financial statements of the acquired companies and
estimates and assumptions set forth below and in the notes to the unaudited
pro forma combined financial statements.
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheet of the Company and the balance sheets of the Post-
Offering Companies, as if these acquisitions had occurred on December 31,
1997. The accompanying unaudited pro forma statement of operations of the
Company combines the historical statements of operations of the Company and
the statements of operations of the acquisitions as if such acquisitions had
occurred on January 1, 1997.
GroupMAC has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and certain benefits to the owners. To the extent
the owners of the GroupMAC Pro Forma Combined Companies have agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in
F-4
<PAGE>
the pro forma combined statements of operations. With respect to other
potential cost savings, GroupMAC cannot fully quantify these savings at this
time. It is anticipated that these savings will be partially offset by costs
related to GroupMAC's corporate management and by the costs associated with
being a public company. However, because these savings and costs cannot be
accurately quantified at this time, they have not been included in the pro
forma combined financial information of GroupMAC.
The pro forma adjustments are based on available information and certain
assumptions that management deems appropriate and may be revised as additional
information becomes available. Certain acquisitions are subject to final
equity adjustments, of which an estimate is reflected in the pro forma
adjustments. The pro forma combined financial data do not purport to represent
what GroupMAC's financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of GroupMAC's financial position or results of
operations for any future period. Since the acquisitions have not historically
been under common control or management, historical pro forma combined results
may not be indicative of or comparable to future performance. The unaudited
pro forma combined financial statements should be read in conjunction with
other financial statements and notes thereto included elsewhere in this
Prospectus. See "Risk Factors" included elsewhere herein.
F-5
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROUPMAC
PRO FORMA
GROUPMAC AND POST-OFFERING PRO FORMA COMBINED
ASSETS SUBSIDIARIES COMPANIES ADJUSTMENTS COMPANIES
- ------ ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............ $ 25,681 $ 5,402 $(26,047) $ 5,036
Accounts receivable--
Trade, net of
allowance............ 45,516 28,289 -- 73,805
Other................. -- 395 -- 395
Due from related
parties................ -- 1,535 (1,535) --
Inventories............. 8,834 3,527 -- 12,361
Costs and estimated
earnings in excess of
billings on uncompleted
contracts.............. 3,116 3,608 -- 6,724
Refundable income
taxes.................. -- 8 -- 8
Deferred tax assets..... 1,647 229 (132) 1,744
Prepaid expenses and
other current assets... 1,013 855 (342) 1,526
-------- ------- -------- --------
Total current
assets............. 85,807 43,848 (28,056) 101,599
PROPERTY AND EQUIPMENT,
net...................... 11,312 7,919 -- 19,231
GOODWILL, net............. 84,533 671 69,761 154,965
DEFERRED TAX ASSETS....... 4,739 334 (136) 4,937
OTHER NONCURRENT ASSETS... 6,296 849 (114) 7,031
-------- ------- -------- --------
Total assets........ $192,687 $53,621 $ 41,455 $287,763
======== ======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and
accrued expenses....... $ 27,222 $16,724 $ -- $ 43,946
Short-term debt,
including current
maturities............. 2,769 3,668 (2,733) 3,704
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. 4,737 5,409 -- 10,146
Liability for warranty
costs.................. 1,297 171 -- 1,468
Deferred service
revenue................ 3,305 203 -- 3,508
Income taxes payable.... 31 928 -- 959
Deferred tax
liabilities............ -- 254 (254) --
Other current
liabilities............ 2,610 -- -- 2,610
Due to related parties.. 3,358 121 (121) 3,358
-------- ------- -------- --------
Total current
liabilities........ 45,329 27,478 (3,108) 69,699
LONG-TERM DEBT, net of
current maturities....... 169 2,088 26,986 29,243
SUBORDINATED DEBT......... -- -- 820 820
LEASE OBLIGATIONS......... -- 402 (402) --
DEFERRED TAX LIABILITIES.. -- 63 (63) --
DEFERRED COMPENSATION..... -- 932 (678) 254
DUE TO RELATED PARTIES.... 9,745 1,780 (1,780) 9,745
OTHER LONG-TERM
LIABILITIES.............. 791 10 -- 801
SHAREHOLDERS' EQUITY:
Common stock............ 21 409 (406) 24
Additional paid-in
capital................ 169,143 1,205 39,340 209,688
Retained earnings
(deficit).............. (32,511) 20,283 (20,283) (32,511)
Treasury stock.......... -- (1,029) 1,029 --
-------- ------- -------- --------
Total shareholders'
equity............. 136,653 20,868 19,680 177,201
-------- ------- -------- --------
Total liabilities
and shareholders'
equity............. $192,687 $53,621 $ 41,455 $287,763
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-6
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-OFFERING GROUPMAC
AND OFFERING POST- PRO FORMA
GROUPMAC AND ACQUISITION OFFERING PRO FORMA COMBINED
SUBSIDIARIES COMPANIES COMPANIES ADJUSTMENTS COMPANIES
------------ ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................ $138,479 $190,559 $180,225 $ -- $509,263
COST OF SERVICES........ 101,762 149,600 136,490 -- 387,852
-------- -------- -------- ------- --------
Gross profit.......... 36,717 40,959 43,735 -- 121,411
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 35,862 39,202 36,125 (23,285)(a) 87,904
GOODWILL AMORTIZATION... 633 -- -- 3,241 (b) 3,874
-------- -------- -------- ------- --------
Income from
operations........... 222 1,757 7,610 20,044 29,633
OTHER INCOME (EXPENSE):
Interest expense...... (1,542) (882) (912) 1,084 (c) (2,252)
Interest income....... 398 192 319 (74)(d) 835
Other................. 112 603 (140) -- 575
-------- -------- -------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION... (810) 1,670 6,877 21,054 28,791
INCOME TAX PROVISION.... 2,832 -- 1,414 8,820 (e) 13,066
-------- -------- -------- ------- --------
NET INCOME (LOSS)....... $ (3,642) $ 1,670 $ 5,463 $12,234 $ 15,725
======== ======== ======== ======= ========
BASIC EARNINGS (LOSS)
PER SHARE:
EARNINGS (LOSS) PER
SHARE................ $ (0.34) $ 0.64
======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING... 10,800 24,442 (f)
======== ========
DILUTED EARNINGS (LOSS)
PER SHARE:
EARNINGS (LOSS) PER
SHARE................ $ (0.34) $ 0.64
======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING... 10,800 24,701 (f)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-7
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
The respective results of operations for the Pre-Offering and Offering
Acquisition Companies from January 1, 1997 to the dates of the acquisitions
were combined with the Company and the Post-Offering Companies', excluding
Premex, Inc. ("Commercial Air"), actual results of operations for the twelve
months ended December 31, 1997 and Commercial Air for the twelve months ended
March 31, 1998 to determine the pro forma results of operations for the twelve
months ended December 31, 1997.
2. ACQUISITIONS:
The acquisitions of the Pre-Offering Companies were financed by borrowings
under a credit agreement dated May 2, 1997 (the "Original Credit Agreement").
The Original Credit Agreement provided secured facilities consisting of (a) an
18-month revolving credit facility providing up to $3 million in revolving
loans (the "Revolving Credit Facility"), (b) a six-year term loan of $20
million to help fund the acquisition of Airtron (the "Airtron Term Loan"), and
(c) a term loan facility available until October 31, 1998, providing for up to
$12 million in term loans having a final maturity six years after the date of
the Original Credit Agreement (the "Acquisition Credit Facility"). Borrowings
under this facility were repaid with proceeds from the IPO.
The results of operations of the acquired businesses are included in the
actual results of operations of the Company from the date of acquisition and
the historical balance sheet at December 31, 1997 includes the acquisitions
completed as of that date. All of the acquisitions are accounted for as
purchases. The cash consideration associated with the acquisition of the
Offering Acquisition Companies and the Post-Offering Companies was provided by
proceeds from the IPO and borrowings under a credit agreement dated December
11, 1997 (the "Credit Agreement"). The Credit Agreement is more fully
described in Note 7 to the GroupMAC and subsidiaries consolidated financial
statements and notes thereto included elsewhere herein.
The following table sets forth the consideration paid or to be paid in (a)
cash, (b) subordinated debt, (c) shares of non-convertible, non-voting
Preferred Stock to the shareholders of the Pre-Offering Companies and (d)
shares of Common Stock to the shareholders of the Pre-Offering, Offering
Acquisition and Post-Offering Companies. The Preferred Stock was redeemable at
any time after the initial issuance, in whole or in part, at the option of the
Company, at an amount equal to the liquidation value of $1.00 per share plus
any accrued but unpaid dividends. Redemption of all outstanding Preferred
Stock occurred in connection with the IPO.
For purposes of computing the estimated purchase price for accounting
purposes for the Post-Offering Companies, the value of the Common Stock is
determined using an estimated weighted average fair value of $12.32 per share,
which represents a discount rate of 20% from the weighted average stock price
of $15.40 at the respective dates of acquisition due primarily to restrictions
on the sale and transferability of such shares. The restrictions are created
by the limitations on future sales caused by existing securities laws, and an
additional contractual restriction imposed on the shares issued in connection
with the acquisition of the acquired businesses. This contractual provision
prohibits the shareholders from selling, transferring or otherwise disposing
of any shares for one year following the date of acquisition of such shares
and limiting dispositions for one additional year to no more than 36% of their
holdings.
The total estimated purchase price of $188.7 million for the GroupMAC Pro
Forma Combined Companies (excluding Airtron, the accounting acquirer) is
comprised of (a) cash of $92.8 million, (b) Subordinated Debt of $0.8 million,
(c) Preferred Stock of $4.4 million and (d) Common Stock of $90.7 million.
F-8
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The estimated purchase price and related allocations of the excess purchase
price for the Post-Offering Companies are based upon preliminary estimates and
are subject to certain purchase price adjustments at and following closing.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the assets and liabilities of the Post-Offering
Companies (representing $20.2 million) will approximate fair value. This
results in an allocation to goodwill of approximately $69.8 million.
Management has not identified any other material tangible or identifiable
intangible assets to which a portion of the purchase price could reasonably be
allocated. Amounts in thousands.
<TABLE>
<CAPTION>
SUBORDINATED SHARES OF SHARES OF TOTAL
CASH DEBT PREFERRED STOCK(1) COMMON STOCK CONSIDERATION(2)
-------- ------------ ------------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Airtron(3).............. $ 20,849 $ -- 14,873 4,652 $ 58,192
-------- ---- ------ ------ --------
Pre-Offering Companies
(excluding Airtron)(3). 12,488 -- 4,405 1,422 31,883
Offering Acquisition
Companies(3)........... 31,674 -- -- 3,099 66,877
Post-Offering Companies. 48,597 820 -- 3,292 89,965
-------- ---- ------ ------ --------
Total Acquisitions.... 92,759 820 4,405 7,813 188,725
-------- ---- ------ ------ --------
Totals................ $113,608 $820 19,278 12,465 $246,917
======== ==== ====== ====== ========
</TABLE>
- --------
(1) The preferred stock is valued at $1 per share. This stock was redeemed for
$1 per share in connection with the IPO.
(2) The total consideration specified above has been reduced by distributions
totaling $5.2 million representing substantially all of the previously
taxed undistributed earnings of such acquired companies from the acquired
companies that are S corporations.
(3) Fully reflected in the Company's December 31, 1997 historical
consolidated balance sheet. See the GroupMAC and subsidiaries
consolidated financial statements and notes thereto included elsewhere
herein.
F-9
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Records the S Corporation distributions of $0.9 million on two of the
Post-Offering Companies to be satisfied with notes to the selling
shareholders. Also records the deferred income tax liabilities associated with
converting all acquired companies taxed under Subchapter S of the Internal
Revenue Code (the Code) to corporations taxed under Subchapter C of the Code.
b) Records the settlement of all shareholder receivables and payables with
cash at closing.
c) Records the elimination of all assets and liabilities of the Post-
Offering Companies that are specifically excluded as part of the purchase
transaction.
d) Records the elimination of the historical equity accounts of the Post-
Offering Companies.
e) Records the purchase of the Post-Offering Companies, including the cash,
subordinated convertible debt and Common Stock consideration due to these
companies. In connection with the acquisitions of certain of the acquired
businesses, the Company has agreed to make contingent payments, if earned, to
the former owners in 1998 through 2000 based on formulas in their respective
acquisition agreements. These payments will be made through a combination of
cash and shares of Common Stock. Amounts earned under the terms of the
agreements will be recorded as additional goodwill and amortized over the
remaining amortization period.
f) Records the retirement of debt assumed in connection with the acquisition
of the Post-Offering Companies.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----- ------- ---- -------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ -- $ (366) $ -- $ -- $(25,681) $ -- $(26,047)
Due from related
parties................ -- (1,535) -- -- -- -- (1,535)
Deferred tax assets..... (132) -- -- -- -- -- (132)
Prepaid expenses and
other current assets... -- -- (342) -- -- -- (342)
Goodwill................ (49) -- (222) (19,933) 89,965 -- 69,761
Deferred tax assets
(noncurrent)........... (136) -- -- -- -- -- (136)
Other noncurrent assets. -- -- (114) -- -- -- (114)
Short-term debt,
including current
maturities............. (935) -- -- -- -- 3,668 2,733
Deferred tax
liabilities............ 254 -- -- -- -- -- 254
Due to related parties.. -- 121 -- -- -- -- 121
Long-term debt, net of
current maturities..... -- -- -- -- (22,916) (4,070) (26,986)
Subordinated debt....... -- -- -- -- (820) -- (820)
Lease obligations....... -- -- -- -- -- 402 402
Deferred tax liabilities
(noncurrent)........... 63 -- -- -- -- -- 63
Deferred compensation... -- -- 678 -- -- -- 678
Due to related parties.. -- 1,780 -- -- -- -- 1,780
Common stock............ -- -- -- 409 (3) -- 406
Additional paid-in
capital................ -- -- -- 1,205 (40,545) -- (39,340)
Retained earnings....... 935 -- -- 19,348 -- -- 20,283
Treasury stock.......... -- -- -- (1,029) -- -- (1,029)
----- ------- ---- -------- -------- ------ --------
Total................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
===== ======= ==== ======== ======== ====== ========
</TABLE>
F-10
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the acquired businesses to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the terms
of the employment agreements. Such employment agreements are primarily for
three years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
The salaries, bonuses, benefits and other compensation items recorded in the
individual financial statements of each of the acquired businesses amounted to
$22.0 million for the periods presented. The contractually agreed upon
compensation and benefits for these same businesses, on a going forward basis,
amount to $5.7 million for the periods presented. The difference between these
amounts equates to $16.3 million and is reflected as a pro forma adjustment.
Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $7.0 million recorded by the
Company in the second quarter of 1997 related to the reverse acquisition of
GroupMAC.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
c) Reflects the elimination of historical interest expense related to the
Original Credit Agreement and the assumed debt of the Pre-Offering and the
Offering Acquisition Companies resulting from the payoff of such debt with the
proceeds of the IPO. Offsetting this reduction is interest expense related to
borrowings under the Credit Agreement to fund the cash portion of the purchase
price and the assumption of debt related to the Post-Offering Companies,
interest related to the Subordinated Debt discussed in Note 3e and interest
related to the notes issued to fund the S Corporation distributions discussed
in Note 3a.
d) Reflects the reduction to historical interest income earned on the IPO
proceeds assumed to be used for the acquisition of the Post-Offering
Companies.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
f) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<S> <C>
Shares issued in Initial Public Offering................................. 8,340
Shares issued under Subscription Agreement dated October 24, 1996........ 2,600
Shares issued to Pre-Offering Companies.................................. 6,074
Shares issued to Offering Acquisition Companies.......................... 3,099
Shares issued to Post-Offering Companies................................. 3,292
Shares issued to Founding Management and Directors....................... 1,037
------
Weighted average shares outstanding--basic............................... 24,442
Incremental effect of options and warrants on shares outstanding......... 194
Incremental effect of Subordinated Debt.................................. 65
------
Weighted average shares outstanding--diluted............................. 24,701
======
</TABLE>
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp.
We have audited the accompanying balance sheets of Group Maintenance America
Corp. (the Company) as of December 31, 1996 and April 30, 1997, and the
related statements of operations, shareholders' equity (deficit), and cash
flows for the periods from October 21, 1996 (inception) to December 31, 1996
and the four months ended April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Group Maintenance America
Corp. as of December 31, 1996 and April 30, 1997 and the results of its
operations and its cash flows for the periods from October 21, 1996
(inception) to December 31, 1996 and the four months ended April 30, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 11, 1997
F-12
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 228,036 $ 516,838
Due from employee.................................. 1,200 6,759
Prepaid expenses................................... 2,341 --
---------- -----------
Total current assets............................. 231,577 523,597
PROPERTY AND EQUIPMENT, net.......................... 100,996 120,694
OTHER NONCURRENT ASSETS.............................. 19,473 1,094,708
---------- -----------
Total assets..................................... $ 352,046 $ 1,738,999
========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 137,377 $ 527,869
Accrued expenses................................... 6,118 1,478,898
---------- -----------
Total current liabilities........................ 143,495 2,006,767
LONG-TERM DEBT....................................... 75,000 75,000
OTHER LONG-TERM LIABILITIES.......................... -- 73,424
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.00 par value; 50,000,000 shares
authorized; none issued or outstanding............ -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 1,211,345 and 1,611,345 shares issued,
respectively...................................... 1,211 1,611
Additional paid-in capital......................... 8,238,857 8,238,457
Retained earnings.................................. (722,517) (2,503,260)
Subscriptions receivable........................... (7,384,000) (6,153,000)
---------- -----------
Total shareholders' equity (deficit)............. 133,551 (416,192)
---------- -----------
Total liabilities and shareholders' equity
(deficit)....................................... $ 352,046 $ 1,738,999
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
REVENUES............................................. -- --
COST OF SERVICES..................................... -- --
--------- -----------
Gross profit....................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 724,006 1,783,409
--------- -----------
Loss from operations............................. (724,006) (1,783,409)
OTHER INCOME (EXPENSE):
Interest expense................................... (1,118) (2,000)
Interest income.................................... 2,607 4,666
--------- -----------
Loss before income tax provision................. (722,517) (1,780,743)
INCOME TAX PROVISION................................. -- --
--------- -----------
NET LOSS............................................. $(722,517) $(1,780,743)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL SHAREHOLDERS'
NUMBER OF PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 21,
1996 -- $ -- $ -- $ -- $ -- $ --
Net loss.............. -- -- -- (722,517) -- (722,517)
Issuance of
subscription
agreement............ -- -- 8,000,000 -- (8,000,000) --
Issuance of common
stock................ 791,345 791 32,807 -- -- 33,598
Shares issued under
subscription
agreement............ 200,000 200 (200) -- 616,000 616,000
Compensation expense
related to issuance
of management shares. 220,000 220 206,250 -- -- 206,470
--------- ------ ---------- ----------- ----------- -----------
BALANCE, December 31,
1996................... 1,211,345 1,211 8,238,857 (722,517) (7,384,000) 133,551
Net loss.............. -- -- -- (1,780,743) -- (1,780,743)
Shares issued under
subscription
agreement............ 400,000 400 (400) -- 1,231,000 1,231,000
--------- ------ ---------- ----------- ----------- -----------
BALANCE, April 30, 1997. 1,611,345 $1,611 $8,238,457 $(2,503,260) $(6,153,000) $ (416,192)
========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(722,517) $(1,780,743)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 3,343 12,877
Noncash compensation charge....................... 206,250 --
Changes in operating assets and liabilities:
(Increase) decrease in--
Prepaid expenses and other assets............... (3,541) (3,218)
Other noncurrent assets......................... -- (1,567)
Increase (decrease) in--
Accounts payable................................ 137,377 390,492
Accrued expenses................................ 6,118 979,562
--------- -----------
Net cash used in operating activities.......... (372,970) (402,597)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (104,339) (32,575)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 649,818 1,231,000
Proceeds from borrowings............................ 75,000 --
Deferred offering costs............................. (19,473) (439,205)
Deferred financing costs............................ -- (67,821)
--------- -----------
Net cash provided by financing activities...... 705,345 723,974
--------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS................ 228,036 288,802
CASH AND CASH EQUIVALENTS, beginning of period....... -- 228,036
--------- -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 228,036 $ 516,838
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. (the Company or GroupMAC Parent) was
incorporated in October 1996 and, therefore, the financial statements reflect
the period since the Company's inception through December 31, 1996 and the
four months ended April 30, 1997. The Company's primary business is to build a
national company providing heating, ventilation and air conditioning (HVAC),
plumbing and electrical services.
Effective April 30, 1997, GroupMAC Parent entered into an Agreement and Plan
of Exchange (the Agreement) with Airtron, Inc. (Airtron), in which $20,366,951
in cash, 14,873,133 shares of GroupMAC Parent preferred stock and 4,652,140
shares of GroupMAC Parent common stock were issued to shareholders of Airtron
in exchange for 100 percent of the then outstanding shares of Airtron. In
connection with this merger the combined company is referred to as GroupMAC
and Subsidiaries. The Agreement closed on May 2, 1997 with the cash portion
funded by the Company's available credit facility and a capital contribution
from a shareholder pursuant to a stock subscription agreement (see note 6).
For accounting purposes, the transaction was accounted for as a reverse
acquisition, as if Airtron acquired GroupMAC Parent, as the former
shareholders of Airtron now own a majority of GroupMAC Parent's common stock.
Concurrent with this transaction, the resulting combined entity will be named
Group Maintenance America Corp. and Subsidiaries. The Company is included in
the consolidated financial statements of GroupMAC and Subsidiaries, presented
elsewhere herein, for periods subsequent to the effective date of the
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. There were no cash payments for interest or
income taxes in 1996 or in the four months ended April 30, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures of major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109. Under
this method deferred income taxes are recorded based upon differences between
the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
F-17
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has recorded a full valuation allowance against all deferred tax
assets due to the uncertainty of ultimate realizability. Accordingly, no income
tax benefit has been recorded for the losses incurred.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Deferred offering costs......................... $ 13,648 $ 452,853
Deferred financing costs........................ -- 634,463
Other noncurrent assets......................... 5,825 7,392
-------- ----------
$ 19,473 $1,094,708
======== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Accrued compensation............................ $ -- $ 767,476
Accrued financing costs......................... -- 566,642
Other accrued expenses.......................... 6,118 144,780
------- ----------
$ 6,118 $1,478,898
======= ==========
</TABLE>
F-18
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, APRIL 30,
LIVES 1996 1997
---------- ------------ ---------
<S> <C> <C> <C>
Office equipment, furniture and fixtures..... 3--7 years $ 104,339 $136,358
Less accumulated depreciation................ (3,343) (15,664)
--------- --------
$ 100,996 $120,694
========= ========
</TABLE>
5. LONG-TERM DEBT
CREDIT AGREEMENT
In May 1997, the Company entered into a credit agreement (the Credit
Agreement) with a group of banks providing for secured facilities consisting
of an 18-month revolving credit line of $3 million, a six-year term loan of
$20 million used in connection with the acquisition of Airtron (see note 1)
and a term loan facility, available until October 31, 1998, providing for up
to $12 million in term loans having a final maturity six years after the date
of the Credit Agreement, to be used in connection with future acquisitions.
Loans under the revolving credit facility are limited to a borrowing base
consisting of 70% of eligible accounts receivable. Interest on outstanding
borrowings is payable in quarterly installments beginning August 31, 1997. A
commitment fee of .25% is payable on the unused portion of the revolving
credit line.
The Credit Agreement contains covenants which, among other matters, restrict
or limit the ability of the Company to pay dividends, incur indebtedness, make
capital expenditures and repurchase capital stock. The Company must also
maintain a minimum fixed charge coverage ratio (as defined) and certain other
ratios, among other restrictions.
As of June 30, 1997, available borrowing capacity under the Credit Agreement
was $5.4 million.
LONG-TERM DEBT
On October 24, 1996, the Company executed a $75,000 subordinated note with a
Texas limited liability company. The note bears interest at eight percent (8%)
and is payable upon the earlier of (i) the closing of the Company's first
public offering of its common stock or (ii) two years from the date of the
note. The note is subordinate to all indebtedness of the Company to the banks
and is guaranteed by certain officers of the Company.
6. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
The Company is authorized to issue 100 million shares of common stock, $.001
par value. There were 1,211,345 and 1,611,345 shares of common stock issued
and outstanding at December 31, 1996 and April 30, 1997, respectively. In
connection with the sale of certain shares of common stock to management, a
nonrecurring, noncash compensation charge of $206,250 was recorded in 1996 to
reflect the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale.
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual allowing for the purchase of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. Under this agreement, 0.2
million shares were purchased in October 1996, 0.2 million in January 1997 and
0.2 million in
F-19
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
April 1997 and additional shares are required to be purchased upon written
notice from the Company, but in no event later than October 24, 1998.
Subsequent to April 30, 1997, an additional 1.658 million shares have been
purchased under the Subscription Agreement.
PREFERRED STOCK
The Company is authorized to issue up to 50 million shares of preferred
stock, par value $.001 per share, in one or more series. As of December 31,
1996 and April 30, 1997, none were outstanding.
OPTIONS
Under an option agreement dated October 24, 1996, the Company is authorized
to grant stock options with respect to 388,800 shares of the Company's common
stock to directors and senior management.
The following is a summary of stock option activity and number of shares
reserved for outstanding options.
<TABLE>
<CAPTION>
OPTION NUMBER
PRICE PER OF
SHARE SHARES
--------- -------
<S> <C> <C>
Granted................................................ $3.08 291,600
-------
Balance at December 31, 1996........................... 291,600
Granted................................................ $3.08 69,200
-------
Balance at April 30, 1997.............................. 360,800
=======
</TABLE>
At April 30, 1997, options representing 28,000 shares were available to be
granted under the option agreement.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
option agreement as all options have an exercise price equal to or greater
than the fair value of the underlying stock at date of grant. Had compensation
cost for the Company's stock option plan been determined consistent with the
provisions of SFAS No. 123, net loss would have been increased by the
following pro forma amounts:
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Net loss:
As reported......................................... $(722,517) $(1,780,743)
Pro forma........................................... $(745,602) $(1,837,870)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
F-20
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used by the plan for fiscal 1996 and for the four months ending
April 30, 1997: no dividend yield; expected volatility of 0%; risk-free
interest rate of 6.26%; and expected lives of ten years. The weighted average
fair value per share of the options granted during fiscal 1996 and in the four
months ending April 30, 1997 is estimated to be $1.425.
7. INCOME TAXES
There is no Federal income tax provision as losses were incurred and a
valuation allowance has been established against future benefits deriving from
the carryforward of these losses.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements, primarily
for office space, furniture and service equipment. Minimum annual rental
payments under non-cancelable operating leases as of June 30, 1997, were
approximately as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDING APRIL
30,
------------
<S> <C>
1997......................................... $46,000
1998......................................... 600
1999......................................... 300
</TABLE>
Rental expense under operating leases was $9,032 for the period ended
December 31, 1996 and $49,194 for the four months ending April 30, 1997.
9. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT--STOCK SPLIT
On August 16, 1997, the Company's Board of Directors declared a 1-for-2.5
reverse stock split of the Company's common stock. All share data included in
the consolidated financial statements have been restated to reflect the stock
split.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1997 and
February 28, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for the ten months ended December 31, 1997
and the years ended February 28, 1997 and February 29, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1997 and
February 28, 1997 and the results of their operations and their cash flows for
the ten months endedDecember 31, 1997 and the years ended February 28, 1997
and February 29, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
February 23, 1998
F-22
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 25,681 $ 4,339
Accounts receivable, net of allowance for doubtful
accounts of $1,825 and $480, respectively......... 45,516 7,811
Inventories........................................ 8,834 3,354
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 3,116 13
Prepaid expenses and other current assets.......... 1,013 359
Deferred tax assets................................ 1,647 765
Refundable income taxes............................ -- 3,236
-------- -------
Total current assets............................... 85,807 19,877
PROPERTY AND EQUIPMENT, net.......................... 11,312 1,289
GOODWILL, net of accumulated amortization of $633.... 84,533 --
DEFERRED TAX ASSETS.................................. 4,739 3,195
REFUNDABLE INCOME TAXES.............................. 4,529 --
OTHER LONG-TERM ASSETS............................... 1,767 2,792
-------- -------
Total assets..................................... $192,687 $27,153
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt.................................... $ 2,769 $ 149
Accounts payable and accrued expenses.............. 28,519 10,647
Due to related parties............................. 3,358 --
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 4,737 1,469
Deferred service contract revenue.................. 3,305 739
Income taxes payable............................... 31 536
Other current liabilities.......................... 2,610 --
-------- -------
Total current liabilities........................ 45,329 13,540
LONG-TERM DEBT, net of current maturities............ 169 1,141
COMPENSATION AND BENEFITS PAYABLE.................... -- 5,831
DUE TO RELATED PARTIES............................... 9,745 --
OTHER LONG-TERM LIABILITIES.......................... 791 650
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 50,000 shares au-
thorized; none issued and outstanding............. -- --
Common stock, $0.001 par value; 100,000 shares au-
thorized; 20,629 and 4,652 shares issued and out-
standing, respectively............................ 21 5
Additional paid-in capital......................... 169,143 2,646
Retained earnings (deficit)........................ (32,511) 3,340
-------- -------
Total shareholders' equity....................... 136,653 5,991
-------- -------
Total liabilities and shareholders' equity....... $192,687 $27,153
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES................................ $138,479 $81,880 $73,765
COSTS OF SERVICES....................... 101,762 58,506 52,674
-------- ------- -------
Gross profit........................ 36,717 23,374 21,091
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 28,643 19,811 17,615
AMORTIZATION OF GOODWILL................ 633 -- --
COMPENSATION EXPENSE FROM REVERSE
ACQUISITION AND ISSUANCE OF MANAGEMENT
SHARES AND STOCK OPTIONS............... 7,219 -- --
-------- ------- -------
Income from operations................ 222 3,563 3,476
OTHER INCOME (EXPENSE):
Interest expense...................... (1,542) (82) --
Interest income....................... 398 171 68
Other................................. 112 256 246
-------- ------- -------
Income (loss) before income tax
provision.......................... (810) 3,908 3,790
INCOME TAX PROVISION.................... 2,832 1,572 1,651
-------- ------- -------
NET INCOME (LOSS)....................... $ (3,642) $ 2,336 $ 2,139
======== ======= =======
BASIC EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE............. $ (0.34) $ 0.45 $ 0.35
======== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING... 10,800 5,172 6,190
======== ======= =======
DILUTED EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE............. $ (0.34) $ 0.45 $ 0.35
======== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING... 10,800 5,172 6,190
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS TREASURY SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK RECEIVABLE EQUITY
------ ------ ---------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28,
1995................... 6,688 $ 7 $ 2,754 $ 3,476 $ (281) $ -- $ 5,956
Purchases of stock..... -- -- -- -- (2,658) -- (2,658)
Cancellation of trea-
sury stock............ (996) (1) (53) (1,948) 2,002 -- --
Contributions to bene-
fit trust............. -- -- -- -- 937 -- 937
Net income............. -- -- -- 2,139 -- -- 2,139
------ --- -------- -------- ------- ------ --------
BALANCE, February 29,
1996................... 5,692 6 2,701 3,667 -- -- 6,374
Purchases of stock..... -- -- -- -- (2,112) -- (2,112)
Repurchase of warrants. -- -- -- (600) -- -- (600)
Cancellation of trea-
sury stock............ (1,040) (1) (55) (2,056) 2,112 -- --
Distributions to share-
holders............... -- -- -- (7) -- -- (7)
Net income............. -- -- -- 2,336 -- -- 2,336
------ --- -------- -------- ------- ------ --------
BALANCE, February 28,
1997................... 4,652 5 2,646 3,340 -- -- 5,991
Purchase of acquired
companies............. 5,612 6 58,781 -- -- (6,153) 52,634
Public offering, net of
offering costs........ 8,340 8 103,543 -- -- -- 103,551
Compensation expense
from issuance of man-
agement shares and
stock options......... 5 -- 241 -- -- -- 241
Preferred stock issued
to Airtron sharehold-
ers in reverse
acquisition........... -- -- -- (14,873) -- -- (14,873)
Distribution to Airtron
shareholders in re-
verse acquisition..... -- -- -- (17,336) -- -- (17,336)
Shares issued under
subscription agree-
ment.................. 2,000 2 -- -- -- 6,153 6,155
Exercise of stock op-
tions................. 20 -- 61 -- -- -- 61
Common stock to be is-
sued in
acquisitions.......... -- -- 3,871 -- -- -- 3,871
Net loss............... -- -- -- (3,642) -- -- (3,642)
------ --- -------- -------- ------- ------ --------
BALANCE, December 31,
1997................... 20,629 $21 $169,143 $(32,511) $ -- $ -- $136,653
====== === ======== ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................... $ (3,642) $ 2,336 $ 2,139
Adjustments to reconcile net income
(loss) to net cash provided by oper-
ating
activities:
Depreciation and amortization........ 1,413 208 238
Gain from sale of property and equip-
ment................................ (32) (224) (9)
Deferred income taxes................ 2,482 2,336 (1,401)
Non-cash compensation expense........ 7,219 -- --
Changes in operating assets and lia-
bilities, net of effect of acquisi-
tions
accounted for as purchases:
(Increase) decrease in--
Accounts receivable............... (2,849) (402) (403)
Inventories....................... (656) 332 172
Costs and estimated earnings in
excess of billings on uncom-
pleted contracts................. 503 23 163
Prepaid expenses and other cur-
rent assets...................... 46 (8) (34)
Refundable income taxes........... 1,665 (3,235) --
Other long-term assets............ (299) -- --
Increase (decrease) in--
Accounts payable.................. (918) (77) 425
Accrued expenses.................. (4,598) 2,534 667
Due to related parties............ (732) -- --
Billings in excess of costs and
estimated earnings on uncom-
pleted contracts................. 1,572 (86) (144)
Deferred service contract reve-
nue.............................. 94 6 24
Income tax payable................ 1,586 (296) 591
Other current liabilities......... 1,442 -- --
Compensation and benefits pay-
able............................. (8) 255 1,579
Other long-term liabilities....... 120 -- --
-------- ------- -------
Net cash provided by operating
activities.................... 4,408 3,702 4,007
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of
cash acquired of $5,263............... (35,767) -- --
Deferred acquisition costs............. (246) -- --
Purchases of property and equipment.... (2,017) (182) (246)
Proceeds from sale of property and
equipment............................. 83 296 57
Proceeds from note receivable.......... -- 156 --
-------- ------- -------
Net cash provided by (used in)
investing activities.......... (37,947) 270 (189)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock.............. -- (787) (2,658)
Retirement of preferred stock.......... (19,277) -- --
Repurchase of warrants................. -- (539) --
Proceeds from long-term debt........... 32,500 -- --
Payments of long-term debt............. (47,742) (35) --
Payments of other long-term obliga-
tions................................. -- (39) (36)
Issuance of common stock............... 109,706 -- --
Exercise of stock options.............. 61 -- --
Distributions to shareholders prior to
initial public offering............... (20,367) (7) --
-------- ------- -------
Net cash provided by (used in)
financing activities.......... 54,881 (1,407) (2,694)
-------- ------- -------
NET INCREASE IN CASH AND EQUIVALENTS.... 21,342 2,565 1,124
CASH AND CASH EQUIVALENTS, beginning of
period................................. 4,339 1,774 650
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of peri-
od..................................... $ 25,681 $ 4,339 $ 1,774
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. ("GroupMAC") was incorporated as a Texas
corporation to build a national company providing commercial and residential
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services.
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Agreement") with Airtron, Inc. ("Airtron") and certain of its
shareholders, pursuant to which $20.4 million in cash, 14.9 million shares of
GroupMAC preferred stock and 4.7 million shares of GroupMAC common stock were
issued to shareholders of Airtron in exchange for all of the then outstanding
shares of Airtron.
Although for legal purposes Airtron was acquired by GroupMAC, for accounting
purposes, the transaction was accounted for as a reverse acquisition, as if
Airtron acquired GroupMAC, due to the fact that the former shareholders of
Airtron then owned a majority of GroupMAC common stock. In connection with the
purchase of GroupMAC, the consideration paid to the shareholders of GroupMAC
was recorded as nonrecurring compensation expense of $7.0 million in the
accompanying statements of operations for the ten months ended December 31,
1997. The consolidated financial statements presented herein for the periods
prior to the effective date of the acquisition only include the accounts of
Airtron. The consolidated statements of shareholders' equity have been
converted from Airtron's capital structure to GroupMAC's capital structure to
reflect the exchange of shares pursuant to the Agreement. The cash and
redeemable preferred stock paid to the Airtron shareholders, net of existing
liabilities to former shareholders, has been treated as a distribution to the
Airtron shareholders. The consolidated group of companies are collectively
referred to herein as GroupMAC and Subsidiaries or the "Company." All
significant intercompany balances have been eliminated. Concurrent with the
initial public offering of GroupMAC's common stock (the "IPO"), the Company
changed its fiscal year end fromFebruary 28 to December 31.
Airtron was incorporated in 1970 as a Delaware corporation. Airtron installs
and services brand name heating and air conditioning equipment for residential
and commercial customers located in Ohio, Indiana, Kansas, Kentucky, Florida
and Texas.
In June and July 1997, the Company acquired, in separate transactions, 10
additional companies (the "Pre-Offering Companies") through a combination of
cash, preferred stock, common stock and warrants to purchase shares of common
stock of GroupMAC. During the fourth quarter of 1997, the Company acquired,
concurrently with the IPO, 13 additional companies (the "Offering Acquisition
Companies" and, together with Airtron and the Pre-Offering Companies, the
"GroupMAC Companies") through a combination of cash and common stock of the
Company.
The acquisitions of the GroupMAC Companies (other than Airtron) were
accounted for as purchase business combinations, with the results of
operations included in the Company's financial statements from the effective
date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-27
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
from service and maintenance contracts are recognized over the life of
contracts. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost methods. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. There were no cash payments
for income taxes during the ten months ended December 31, 1997. Cash payments
for income taxes were approximately $2.6 million and $2.5 million for the
fiscal years ended February 28, 1997 and February 29, 1996, respectively. Cash
payments for interest were approximately $1.5 million for the ten months ended
December 31, 1997. Cash payments for interest for the fiscal years ended
February 28, 1997 and February 29, 1996 were not significant.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out ("FIFO") basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the useful lives of the
assets. Leasehold improvements are amortized over the shorter of the remaining
lease term or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
Debt Issue Costs
Debt issue costs related to the Company's Credit Agreement dated December
11, 1997 (see Note 7) are included in other noncurrent assets and amortized to
interest expense over the scheduled maturity of the debt.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
F-28
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of GroupMAC's common stock
at the date of the grant over the amount an employee must pay to acquire the
common stock.
Warranty Costs
The Company generally warrants all of its work for a period of one year from
the date of installation. A provision for estimated warranty costs is made at
the time a product is sold or service is rendered.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, Earnings Per Share, which the Company is required to
adopt for both interim and annual periods ending after December 15, 1997. SFAS
No. 128 simplifies the earnings per share calculation. Basic earnings per
share, which excludes the impact of common share equivalents, replaces primary
earnings per share. Diluted earnings per share, which utilizes the average
market price per share as opposed to the greater of the average market price
per share or ending market price per share when applying the treasury stock
method in determining common share equivalents, replaces fully diluted
earnings per share.
Weighted average shares outstanding for each of the periods presented were
as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Shares issued in the acquisition of
Airtron................................ 4,652 5,172 6,190
Shares issued, excluding acquisitions
and the IPO............................ 3,628 -- --
Shares issued for the acquisition of the
Pre-Offering Companies................. 763 -- --
Shares issued for the acquisition of the
Offering Acquisition Companies......... 496 -- --
Shares issued in the IPO................ 1,261 -- --
------ ----- -----
Weighted average shares outstanding... 10,800 5,172 6,190
====== ===== =====
</TABLE>
Basic earnings per share have been calculated by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings
per share are typically computed by dividing net income by the weighted
average number of common shares outstanding plus potentially dilutive common
shares. Because the Company reported a net loss for the ten months ended
December 31, 1997, the potentially dilutive
F-29
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common shares (including warrants and stock options discussed in Note 9) had
an anti-dilutive effect on earnings per share. Accordingly, diluted earnings
per share is the same as basic earnings per share for each of the periods
presented.
3. BUSINESS COMBINATIONS
During June and July 1997, the Company acquired the Pre-Offering Companies
for approximately $12.5 million in cash, 1.4 million shares of common stock,
4.4 million shares of redeemable preferred stock (which were retired in
connection with the IPO), options to acquire 60,000 shares of common stock and
warrants to purchase 514,000 shares of common stock. Of the total
consideration, approximately $0.4 million of cash and 22,500 shares of common
stock is due to former owners at December 31, 1997.
During the fourth quarter of 1997, the Company acquired the Offering
Acquisition Companies for approximately $31.7 million in cash, 3.1 million
shares of common stock and 42,000 options to acquire shares of common stock.
Of the total consideration, approximately $2.8 million of cash and 0.3 million
shares of common stock is due to former owners at December 31, 1997.
In conjunction with the above mentioned acquisitions the Company assumed
$16.1 million of debt.
For the above mentioned acquisitions, the common stock was valued at its
estimated fair value at the time of the respective acquisition and the
preferred stock was valued at its redemption value of $1 per share. The
allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of
fair value and may be revised as additional information becomes available.
However, the Company does not expect any significant adjustments to the
purchase price allocations or amount of goodwill at December 31, 1997.
Several former owners of the GroupMAC Companies have the ability to receive
additional amounts of purchase price, payable in cash and common stock in 1998
through 2000, contingent upon the occurence of future events. The Company will
record such contingent consideration as additional purchase price when earned.
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC, Airtron and the other GroupMAC Companies as if
the acquisitions were effective on the first day of the period being reported
(in thousands, except for per share amounts).
<TABLE>
<CAPTION>
PRO FORMA DATA
(UNAUDITED)
-------------------------
TWELVE TWELVE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues........................................ $329,038 $306,025
Net income...................................... $ 10,436 $ 10,926
Net income per share:
Basic......................................... $ 0.49 $ 0.52
Diluted....................................... $ 0.49 $ 0.51
</TABLE>
Pro forma adjustments included in the amounts above include compensation
differentials, adjustment for goodwill amortization over a period of 40 years,
elimination of historical interest expense on long-term debt which was repaid
with the proceeds of the IPO, and adjustment to the federal and state income
tax provisions based on pro forma operating results. Net income per share
assumes all shares issued for the acquisitions were outstanding for the
periods presented.
F-30
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other long-term assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Investments restricted for benefit of
employees, recorded at cost.................. $ -- $2,792
Deferred financing costs...................... 727 --
Real estate held for sale..................... 632 --
Other long-term assets........................ 408 --
------ ------
$1,767 $2,792
====== ======
</TABLE>
Accounts payable and accrued expense consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Accounts payable, trade......................... $13,804 $ 2,882
Accrued payroll costs and benefits.............. 11,167 7,007
Warranties...................................... 1,297 544
Other accrued expenses.......................... 2,251 214
------- -------
$28,519 $10,647
======= =======
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The summary of the status of uncompleted contracts is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Costs incurred.................................. $ 85,101 $ 13,126
Estimated earnings recognized................... 27,268 2,275
--------- --------
112,369 15,401
Less billings on contracts...................... (113,990) (16,857)
--------- --------
$ (1,621) $ (1,456)
========= ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 3,116 $ 13
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (4,737) (1,469)
------- -------
$(1,621) $(1,456)
======= =======
</TABLE>
F-31
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, FEBRUARY 28,
LIVES 1997 1997
----------- ------------ ------------
<S> <C> <C> <C>
Land...................... -- $ 218 $ 217
Buildings and
improvements............. 20-30 years 677 640
Service and other
vehicles................. 4-7 years 5,385 135
Machinery and equipment... 5-10 years 4,118 686
Office equipment,
furniture and fixtures... 5-10 years 2,516 724
Leasehold improvements.... -- 1,220 550
------- -------
14,134 2,952
Less accumulated depre-
ciation................ (2,822) (1,663)
------- -------
$11,312 $ 1,289
======= =======
</TABLE>
7. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Notes payable to the former shareholders of GroupMAC
Companies at 6%, payable May 1998................... $ 2,466 $ --
Equipment installment loans payable to banks and
other lenders, interest varying from 7.5% to 10%,
secured by certain equipment, payable in monthly and
quarterly installments including interest, final
installment due December 1999....................... 228 --
Other notes payable to former shareholders at
interest rates ranging from 4.8%
to 8.25%, payable in monthly installments through
March 2002.......................................... 244 1,290
------- ------
Total short- and long-term debt.................. 2,938 1,290
Less short-term borrowings and current maturities.... (2,769) (149)
------- ------
$ 169 $1,141
======= ======
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the "Original
Credit Agreement") with a total commitment of $35 million. The Original Credit
Agreement consisted of three portions: (i) a revolving credit agreement
providing up to $3 million for use as working capital, (ii) a $12 million
advancing acquisition line of credit to finance acquisitions, and (iii) a $20
million term loan to finance the acquisition of Airtron. Borrowings under the
Original Credit Agreement totaled $32.5 million to fund the cash portion of
the purchase prices related to Airtron and the Pre-Offering Companies. The
Original Credit Agreement was repaid from the proceeds of the IPO and
terminated in December 1997.
In connection with the acquisition of certain Offering Acquisition Companies
taxed under Subchapter S of the Internal Revenue Code, distributions totalling
$4.2 million were made to former shareholders, with $1.8 million paid from
acquired cash and $2.5 million satisfied with a note to the selling
shareholders. These notes bear interest at 6% and are payable in May 1998.
On December 11, 1997, the Company entered into a three-year revolving credit
agreement (the "Credit Agreement") with an initial borrowing capacity of $75
million. Borrowings under the Credit Agreement bear interest either at the
prime rate or Eurodollar rate adjusted for margins ranging from 0% to 0.5% or
1.0% to 2.0%, respectively, depending on the ratio of the Company's funded
debt to its historical earnings before interest,
F-32
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
taxes, depreciation and amortization. The Company is subject to commitment
fees ranging from 0.25% to 0.375% for the unutilized portion under the Credit
Agreement. Under the Credit Agreement, the Company is required to maintain (i)
a minimum fixed charge coverage ratio; (ii) a minimum tangible net worth that
is positive; (iii) a maximum ratio of total indebtedness for borrowed money to
capitalization (as defined in the Credit Agreement); (iv) a maximum ratio of
debt to historical earnings before interest, taxes, depreciation and
amortization; (v) a maximum amount of third party indebtedness in relation to
consolidated shareholders' equity; and (vi) a minimum amount of consolidated
net worth (as defined in the Credit Agreement). The Credit Agreement places
limitations upon the amount of letters of credit which may be drawn,
investments which may be permitted (as defined in the Credit Agreement), and
liens which may be granted to secure other debt. The Company may not pay any
dividends or redeem, retire or guarantee the value of shares of any class of
stock in the Company without prior approval from the lending banks, other than
the purchase of outstanding shares of the Company's stock within defined
limits. The Credit Agreement matures on December 11, 2000.
The aggregate maturities of debt as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998................................................................... $2,769
1999................................................................... 77
2000................................................................... 41
2001................................................................... 45
2002................................................................... 6
Thereafter............................................................. --
------
$2,938
======
</TABLE>
8. DUE TO RELATED PARTIES (NONCURRENT)
Under the Agreement, part of the cash purchase price payable to former
shareholders relates to the tax benefits which will be received by the Company
related to the exercise of previously outstanding warrants and distributions
under deferred compensation arrangements. A liability of $9.7 million has been
recognized in the accompanying consolidated financial statements for an
estimate of these amounts as of December 31, 1997. This amount will be funded
to the former shareholders as the tax benefit is realized by the Company
either through receipt of net operating loss carryback claims or utilization
of current deductions and net operating loss carryforwards to reduce estimated
tax payments. As such tax benefits are not expected to be realized by December
31, 1998, the $9.7 million liability and the related refundable income taxes
and deferred tax assets have all been reflected as long-term in the
accompanying consolidated balance sheet.
9. STOCK-BASED COMPENSATION PLANS
The Group Maintenance America Corp. 1997 Stock Awards Plan was adopted by
the Board of Directors of GroupMAC to further promote and align the interests
of directors, key employees and other persons providing services to the
Company with those of its shareholders. Pursuant to this plan and a stock
option plan for non-management employees, on November 6, 1997, GroupMAC
granted options to purchase approximately 1.9 million shares of common stock
at an exercise price equal to the IPO price of $14.00 per share. These options
vest at a rate of 25% per year for four years on the anniversary of the grant
date and expire on November 6, 2002. The cumulative number of shares of common
stock that may be issued under both plans may not exceed 12% of the number of
shares outstanding (determined quarterly), subject to adjustment for corporate
transactions and changes that affect GroupMAC, its shares or share status.
Both stock option plans expire on June 30, 2007.
F-33
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, the Company granted to directors, senior management and other
employees options to purchase an aggregate of 388,800 shares of common stock
at an exercise price of $3.08. During 1997, options to purchase 20,000 shares
of common stock were exercised, 25,000 options terminated and the remaining
options were outstanding at December 31, 1997. These options vest and expire
over various periods.
In connection with the purchase of one of the Pre-Offering Companies, the
Company issued warrants to purchase 514,000 shares of common stock at $17.50.
The following is a summary of stock option and warrant activity (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE OPTIONS
EXERCISE OR
PRICE WARRANTS
-------- ---------
<S> <C> <C>
Granted...................................................... $ 3.08 292
-----
Balance at December 31, 1996................................. 3.08 292
Granted...................................................... 3.08 69
-----
Balance at April 30, 1997, date of Agreement................. 3.08 361
Granted...................................................... 14.33 2,611
Exercised.................................................... 3.08 (20)
Surrendered.................................................. 3.08 (25)
-----
Balance at December 31, 1997................................. 13.07 2,927
=====
</TABLE>
Exercisable options at February 28, 1997 and February 29, 1996 were zero. A
summary of outstanding and exercisable options and warrants as of December 31,
1997 follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE NUMBER OF AVERAGE WEIGHTED AVERAGE NUMBER OF
OPTION OUTSTANDING REMAINING EXERCISABLE PRICE EXERCISABLE
RANGE OF OR OPTIONS OR CONTRACTUAL OF EXERCISABLE OPTIONS OR
OPTION OR WARRANT WARRANTS LIFE OPTIONS OR WARRANTS
WARRANT PRICES PRICES (THOUSANDS) (YEARS) WARRANTS (THOUSANDS)
- --------------- -------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$0.00 to $3.08 $ 3.08 369 9.0 $ 3.08 128
$3.09 to $7.00 $ 7.00 42 3.5 $ 7.00 25
$7.01 to $17.50 $14.63 2,516 5.9 $17.50 514
----- ---
2,927 667
===== ===
</TABLE>
The Company applies Accounting Principle Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its stock option plans.
Accordingly, compensation cost has been recognized only for the options that
have an exercise price less than the fair market value of the underlying stock
at date of grant. A compensation charge of $0.2 million is reflected in the
consolidated statements of operations and shareholders' equity for the ten
months ended December 31, 1997 related to the issuance of management shares
and stock options at prices below the fair market value at the date of issue
or grant.
The following unaudited pro forma data is calculated as if compensation
expense for the Company's stock option plans were determined based on the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation:
F-34
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, 1997
---------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss.................................................. $(3,642) $(3,983)
Net loss per share:
Basic................................................... $ (0.34) $ (0.37)
Diluted................................................. $ (0.34) $ (0.37)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
SUBSEQUENT TO PRIOR TO THE
THE AGREEMENT AGREEMENT
------------- ------------
<S> <C> <C>
Dividend yield.................................. -- --
Expected volatility............................. 33.0% 0%
Risk-free interest rate......................... 5.83% 6.26%
Expected lives.................................. 6.6 years 10 years
Fair value of options at grant date............. $ 5.425 $ 1.425
</TABLE>
In July 1994, Airtron granted warrants to purchase 60,000 common shares at
$1 each until August 1, 2011. The appraised value of Airtron's stock at that
time was $40 per share, resulting in a charge of $2.4 million and an
offsetting increase in retained earnings in fiscal 1995. All 60,000 warrants
were outstanding at February 29, 1996. In August 1996, 15,000 of these
warrants were purchased from a former shareholder for $0.5 million, resulting
in a reduction in retained earnings for the original recorded value of the
warrants of $0.6 million with the offset recorded as other income. At February
28, 1997, 45,000 warrants were outstanding. In connection with the Agreement
these warrants were exchanged for cash and preferred and common shares of
GroupMAC.
Airtron had deferred compensation arrangements for certain members of its
management and its board of directors. The assets and liabilities previously
recorded by the Company have been reflected as distributions in the
accompanying financial statements.
10. SHAREHOLDERS' EQUITY
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual providing for the sale of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. At December 31, 1997, the
Company had sold all of the 2.6 million shares.
On August 16, 1997, the Board of Directors of GroupMAC approved a 1-for-2.5
reverse stock split on the Company's common stock. The reverse stock split was
approved by the shareholders of GroupMAC on September 24, 1997 and became
effective shortly thereafter. All share and per share data have been restated
to reflect the reverse stock split.
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of common stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of one Pre-Offering Company
and the Offering Acquisition Companies, $42.6 million to repay corporate
indebtedness and debt assumed in connection with the acquisition of the
GroupMAC Companies, $19.3
F-35
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million to retire all of the then outstanding preferred stock and $11.9
million for general corporate purposes including working capital, final
consideration settlements related to the GroupMAC Companies and future
acquisitions.
11. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................ $ -- $(1,020) $ 2,530
State and local........................ 489 385 536
------ ------- -------
489 (635) 3,066
Deferred:
Federal, state and local............... 2,343 2,207 (1,415)
------ ------- -------
$2,832 $ 1,572 $ 1,651
====== ======= =======
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. federal statutory income tax rate of 34% to income (loss) before income
tax provision as a result of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory
rate................................... $ (275) $1,329 $1,289
Increase (decrease) resulting from:
State income taxes, net of federal
benefit.............................. 323 254 354
Compensation expense from reverse
acquisition.......................... 2,455 -- --
Non-deductible goodwill amortization.. 199 -- --
Other................................. 130 (11) 8
------ ------ ------
$2,832 $1,572 $1,651
====== ====== ======
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts..................... $ 713 $ 187
Inventories......................................... 279 246
Accrued expenses.................................... 2,489 577
Deferred revenue.................................... 348 --
Compensation and benefits........................... 3,736 2,987
Net operating loss carryforward..................... 1,231 --
Other............................................... 183 --
------- ------
Total deferred income tax assets.................. 8,979 3,997
------- ------
Deferred income tax liabilities:
Depreciation........................................ (585) (37)
Completed contract accounting for tax purposes...... (1,836) --
Other............................................... (172) --
------- ------
Total deferred income tax liabilities............. (2,593) (37)
------- ------
Net deferred income tax assets.................. $ 6,386 $3,960
======= ======
</TABLE>
F-36
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These deferred income tax assets and liabilities are included in the
accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Deferred tax assets--current.................... $1,647 $ 765
Deferred tax assets--long-term.................. 4,739 3,195
------ ------
$6,386 $3,960
====== ======
</TABLE>
Management believes it is more likely than not the Company will realize the
benefits of the net deferred tax assets. Accordingly, no valuation allowance
has been recorded as of December 31, 1997 or February 28, 1997.
12. LEASES
Operating leases for certain facilities and transportation equipment expire
at various dates through 2011. Certain leases contain renewal options.
Approximate minimum future rental payments as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998............................................................ $ 5,508
1999............................................................ 4,827
2000............................................................ 3,964
2001............................................................ 3,270
2002............................................................ 2,716
Thereafter...................................................... 8,742
-------
$29,027
=======
</TABLE>
Total rental expense for the ten months ended December 31, 1997 and the
years ended February 28, 1997 and February 29, 1996 was approximately $2.3
million, $1.7 million and $2.0 million, respectively (including $1.2 million,
$0.6 million and $0.4 million, respectively, to related parties).
13. EMPLOYEE BENEFIT PLANS
Several of the GroupMAC Companies maintain defined contribution employee
retirement plans, which are open to certain employees after various lengths of
service. Employee contributions and employer matching contributions occur at
different rates and the matched portions of the funds vest over a period of
years. Company contributions to these plans totaled approximately $0.4
million, $0.2 million and $0.2 million for the ten months ended December 31,
1997 and the years ended February 28, 1997 and February 29, 1996,
respectively.
Certain of the GroupMAC Companies make contributions to union-administered
benefit funds which cover the majority of these companys' employees. For the
ten months ended December 31, 1997, the participant costs charged to
operations were approximately $0.6 million. Governmental regulations impose
certain requirements relative to multi-employer plans. In the event of plan
termination or employer withdrawal, an employer may be liable for a portion of
the plan's unfunded vested benefits, if any. The Company has not yet received
information from the plans' administrators to determine its share of any
unfunded vested benefits. The Company does not anticipate withdrawal from the
plans, nor is the Company aware of any expected plan terminations.
F-37
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Many computer software programs, as well as certain hardware and equipment
containing date sensitive data, were structured to utilize a two-digit date
field meaning that they may not be able to properly recognize dates in the
year 2000 and later. This could result in significant system and equipment
failures. The Company recognizes that it must take action to ensure that its
products and operations will not be adversely impacted by Year 2000 software
failures and is currently developing detailed assessments and action plans to
address Year 2000 issues. Irrespective of the Year 2000 issue, the Company is
in the process of developing data processing systems throughout the
organization for its overall information needs which will be free of any Year
2000 limitations. The common data processing system will be implemented first
at GroupMAC Companies with identified Year 2000 constraints which are not
expected to be corrected by other means. The Company expects to commence user-
acceptance testing of the new data processing system by the end of 1998 with
implementation beginning in 1999. The Company currently does not have an
overall estimate of the cost associated with the purchase and implementation
of the new processing system.
The Year 2000 considerations may have an effect on some of the Company's
customers and suppliers, and thus indirectly on the Company. The Company has
not assessed the potential adverse effect on the Company with respect to
customers and suppliers with Year 2000 problems.
15. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
restricted investments (carried at cost--see Note 4) and debt. The Company
believes that the carrying values of these instruments on the accompanying
consolidated balance sheets approximate their fair value.
16. SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 1998, the Company completed the acquisition of
15 platform and four tuck-in companies (the "Post-Offering Companies"). The
combined annual revenues of the Post-Offering Companies were approximately
$155.0 million. Total consideration paid was $68.5 million, which included
cash payments of $36.9 million, $0.8 million of subordinated convertible debt
and 2.5 million shares of common stock. All such acquisitions will be
accounted for as purchases.
The Company has signed definitive agreements to purchase two platform
companies with combined annual revenues of $28.4 million. Total consideration
to be paid is approximately $21.7 million which includes cash payments of
$11.9 million and 0.8 million shares of common stock. Both acquisitions will
be accounted for as purchases.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
MacDonald-Miller Industries, Inc.
We have audited the accompanying consolidated balance sheets of MacDonald-
Miller Industries, Inc. and subsidiaries as of December 31, 1995, 1996 and
June 30, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1996, and the six-month period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MacDonald-
Miller Industries, Inc. and subsidiaries as of December 31, 1995 and 1996, and
June 30, 1997, and the results of their operations and cash flows for each of
the three years ended December 31, 1996 and the six-month period ended June
30, 1997 in conformity with generally accepted accounting principles.
Moss Adams LLP
Seattle, Washington
August 7, 1997, except for Notes 2 and 11,
as to which the date
is August 18, 1997
F-39
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------- ----------- -------------
1995 1996 1997 1997
----------- ----------- ----------- -------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ -- $ -- $ -- $ --
Receivables, less allowance for
doubtful accounts of $145,000,
$137,378 and $149,653,
respectively:
Trade......................... 9,771,993 13,287,714 14,728,290 10,691,894
Related parties and employees. 108,840 341,186 672,407 85,169
Unconsolidated affiliate...... 279,000 321,000 388,000 388,000
Inventories..................... 651,442 713,726 814,093 986,467
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 1,356,980 1,342,213 1,015,468 926,113
Prepaid expenses................ 45,835 117,368 63,403 144,991
Income taxes refundable......... -- 114,396 -- --
----------- ----------- ----------- -----------
Total current assets........ 12,214,090 16,237,603 17,681,661 13,222,634
PROPERTY AND EQUIPMENT, net....... 1,159,820 1,436,293 1,555,323 1,496,919
OTHER NONCURRENT ASSETS
Real estate held for investment. 510,000 508,066 411,066 --
Other assets.................... 106,610 145,861 107,523 66,668
Deferred income taxes........... 148,000 105,000 196,000 196,000
----------- ----------- ----------- -----------
764,610 758,927 714,589 262,668
----------- ----------- ----------- -----------
Total assets................ $14,138,520 $18,432,823 $19,951,573 $14,982,221
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 100,136 $ 96,000 $ 96,000 $ 96,000
Accounts payable................ 4,525,382 5,148,905 5,241,881 3,139,915
Notes payable:
Bank.......................... 2,199,134 5,395,816 4,790,113 2,476,008
Shareholders and related
parties...................... 673,523 30,000 35,340 --
Accrued expenses................ 1,915,968 1,840,699 2,416,748 2,182,373
Income taxes payable............ 28,764 -- 396,001 278,880
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 1,076,700 1,660,159 1,715,783 1,828,520
----------- ----------- ----------- -----------
Total current liabilities... 10,519,607 14,171,579 14,691,866 10,001,696
LONG-TERM DEBT, net of current
maturities....................... 699,098 758,149 708,285 288,000
DEFERRED COMPENSATION............. 355,085 189,848 189,848 189,848
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
150,000 shares authorized...... 198,473 291,539 355,133 355,971
Retained earnings............... 2,366,257 3,021,708 4,006,441 4,146,706
----------- ----------- ----------- -----------
Total shareholders' equity.. 2,564,730 3,313,247 4,361,574 4,502,677
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity....... $14,138,520 $18,432,823 $19,951,573 $14,982,221
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ------------------------ ------------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $39,534,230 $45,508,339 $66,058,958 $36,382,305 $38,835,662 $52,184,305 $54,560,008
COST OF SERVICES........ 32,256,651 36,927,012 56,372,933 31,590,195 33,451,024 45,192,195 46,400,433
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......... 7,277,579 8,581,327 9,686,025 4,792,110 5,384,638 6,992,110 8,159,575
SELLING, GENERAL AND AD-
MINISTRATIVE EXPENSES.. 6,088,076 7,338,381 7,631,851 3,705,694 3,787,822 5,566,694 6,239,243
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from opera-
tions............... 1,189,503 1,242,946 2,054,174 1,086,416 1,596,816 1,425,416 1,920,332
OTHER INCOME (EXPENSE):
Interest expense....... (275,490) (370,603) (519,842) (244,135) (214,381) (386,135) (333,334)
Other.................. (25,865) (42,527) 7,926 66,751 167,209 23,751 183,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
(301,355) (413,130) (511,916) (177,384) (47,172) (362,384) (149,824)
Income before income
tax provision....... 888,148 829,816 1,542,258 909,032 1,549,644 1,063,032 1,770,508
INCOME TAX PROVISION.... 325,730 344,238 574,000 347,059 569,001 402,059 649,600
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643 $ 660,973 $ 1,120,908
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993.......... 102,603 $117,535 $2,527,242 $2,644,777
Issuance of common stock.......... 2,777 55,540 -- 55,540
Purchase and retirement of common
stock............................ (2,834) (79,919) -- (79,919)
Effects of adjustments related to
unconsolidated affiliate......... -- -- (738,816) (738,816)
Net income........................ -- -- 562,418 562,418
------- -------- ---------- ----------
BALANCE, December 31, 1994.......... 102,546 93,156 2,350,844 2,444,000
Issuance of common stock.......... 4,802 108,514 -- 108,514
Purchase and retirement of common
stock............................ (100) (3,197) -- (3,197)
Effects of adjustments related to
unconsolidated affiliate......... -- -- (470,165) (470,165)
Net income........................ -- -- 485,578 485,578
------- -------- ---------- ----------
BALANCE, December 31, 1995.......... 107,248 198,473 2,366,257 2,564,730
Issuance of common stock.......... 3,977 93,066 -- 93,066
Effects of adjustments related to
unconsolidated affiliate......... -- -- (312,807) (312,807)
Net income........................ -- -- 968,258 968,258
------- -------- ---------- ----------
BALANCE, December 31, 1996.......... 111,225 291,539 3,021,708 3,313,247
Issuance of common stock.......... 1,800 63,594 -- 63,594
Effects of adjustments related to
unconsolidated affiliate......... -- -- 4,090 4,090
Net income........................ -- -- 980,643 980,643
------- -------- ---------- ----------
BALANCE, June 30, 1997.............. 113,025 $355,133 $4,006,441 $4,361,574
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------------------- ------------------------ ------------------------
1994 1995 1996 1996 1997 1996 1997
--------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643 $ 660,973 $ 1,120,908
Adjustments to
reconcile net income
to cash flows provided
by (used in) operating
activities:
Depreciation and
amortization.......... 250,162 266,763 376,391 167,654 210,208 277,842 319,756
(Gain) loss on
disposal of property
and equipment......... (7,897) 8,623 18,857 -- 24,294 -- --
Allowance for loss on
real estate held for
investment............ -- -- 25,000 25,000 97,000 25,000 --
Deferred income taxes.. (9,000) (67,000) 43,000 (81,000) (91,000) -- (91,000)
Changes in operating
assets and
liabilities:
(Increase) decrease
in:
Trade receivables.... (46,296) (2,700,456) (3,515,721) (1,181,851) (1,440,576) (2,395,546) 2,599,910
Receivables from
related parties and
employees........... (141,194) 32,354 (232,346) 7,226 (331,221) 21,187 256,016
Receivable from
unconsolidated
affiliate........... (176,000) (103,000) (42,000) (21,000) (67,000) (21,000) (67,000)
Inventories.......... (76,019) 66,366 (62,284) (310,598) (100,367) (370,944) (272,741)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... 41,276 (325,574) 14,767 (1,038,698) 326,745 203,850 416,100
Prepaid expenses..... 51,746 1,525 (71,533) (106,776) 53,965 112,072 (27,621)
Income taxes
refundable.......... -- -- (114,396) (154,537) 114,396 -- 114,396
Other assets......... 57,860 (43,860) (39,251) (145,625) 38,338 (6,750) 79,193
Increase (decrease)
in:
Accounts payable..... (105,101) 906,917 83,013 (652,636) 691,425 885,865 (1,249,558)
Accrued expenses..... 446,596 353,195 (75,269) 551,774 576,049 285,685 321,341
Income taxes payable. (216,105) 25,894 (28,764) (28,764) 396,001 (21,960) 278,880
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... (159,552) 649,570 583,459 643,626 55,624 (1,076,700) 168,361
Deferred
compensation........ -- 355,085 (165,237) -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 472,894 (88,020) (2,234,056) (1,764,232) 1,534,524 (1,420,426) 3,966,941
--------- ----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (452,306) (654,940) (686,586) (534,042) (365,461) (607,845) (380,382)
Proceeds from sale of
property and
equipment............. 9,975 73,841 14,865 -- 11,929 -- 508,066
Additions to real
estate held for
investment............ -- (510,000) (23,066) (21,289) -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (442,331) (1,091,099) (694,787) (555,331) (353,532) (607,845) 127,684
--------- ----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Disbursements in
transit............... -- 198,590 540,510 1,338,474 (598,449) 13,835 (739,100)
Increase (decrease) of
notes payable to bank,
net................... 895,548 394,297 3,196,682 1,331,530 (605,703) 2,904,742 (2,919,808)
Effect of adjustment
related to
unconsolidated
affiliate............. (738,816) (470,165) (312,807) (345,641) 4,090 (345,641) --
Proceeds from notes
payable to related
parties............... 239,613 673,523 55,000 69,452 30,340 -- --
Payments of notes
payable to related
parties............... (288,454) (231,268) (698,523) (20,000) (25,000) (643,523) --
Proceeds (payments) of
long-term borrowings.. -- 816,932 312,021 -- -- 61,332 (500,149)
Payments of long-term
debt.................. (99,457) (331,050) (257,106) (91,778) (49,864)
Proceeds from issuance
of common stock....... 55,540 108,514 93,066 37,526 63,594 37,526 64,432
Purchase and retirement
of common stock....... (79,919) (3,197) -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. (15,945) 1,156,176 2,928,843 2,319,563 (1,180,992) 2,028,271 (4,094,625)
--------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 14,618 (22,943) -- -- -- -- --
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 8,325 22,943 -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 22,943 $ -- $ -- $ -- $ -- $ -- $ --
========= =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MacDonald-Miller Industries, Inc. (the Company) (MMI), a Washington
corporation, is a mechanical contractor and service company engaged in the
design, installation and maintenance of heating, ventilating, air
conditioning, plumbing, refrigeration, and automated control systems for
commercial and industrial properties. The main areas of operation are in the
states of Washington and Oregon.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
On August 18, 1997, the Company signed an agreement and plan of merger with
Group Maintenance America Corp. (GroupMAC), whereby GroupMAC will acquire the
Company in a merger transaction for a combination of cash and common shares of
GroupMAC. The merger will close concurrent with the closing of the initial
public offering of the common stock of GroupMAC (the "GroupMAC IPO"). Prior to
the closing of the acquisition, the Company will distribute the net assets of
MacDonald-Miller Residential (MMR) (a division of MMI), to its shareholders,
in a tax-free distribution. See Note 17.
The accompanying financial statements exclude MMR, include only the
operations of MMI to be acquired in the merger and have been prepared on the
basis that the distribution of the net assets of MMR had been completed as of
December 31, 1993. Therefore, these financial statements do not include any of
the net assets or operations of MMR for the periods presented which were
included in previously issued financial statements of MMI. Effects of
adjustments related to the unconsolidated affiliate have been shown as a
reduction in shareholders' equity for each of the years presented.
The following provides summary financial information of MMI, including MMR,
as presented in previously issued financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $42,806,970 $50,371,690 $71,597,840 $38,979,761 $41,972,630
Income from operations.. 816,888 1,007,683 1,238,957 395,035 1,605,945
Net income.............. 322,226 388,738 384,718 113,768 963,965
Total assets............ 15,213,014 19,318,982 20,828,390
Net assets.............. 3,317,211 3,794,995 4,822,554
</TABLE>
MMR is a separate operating entity with separate facilities and management.
Following is a summary of the net assets of MMR as of June 30, 1997 which will
be distributed to shareholders (unaudited):
<TABLE>
<S> <C>
Receivables...................................................... $ 726,675
Inventories...................................................... 230,574
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... 102,038
Property and equipment........................................... 189,649
Other assets..................................................... 15,881
Accounts payable................................................. (230,250)
Accrued expenses................................................. (185,587)
Due to MMI....................................................... (388,000)
---------
Net assets..................................................... $ 460,980
=========
</TABLE>
F-44
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts reported as due from affiliate in the accompanying balance sheets
represent the allocation of bank borrowings attributed to MMR and are expected
to be remitted to the Company at the completion of the planned acquisition as
separate financing of the division is established.
The consolidated financial statements include the accounts of MacDonald-
Miller Industries, Inc. and its wholly-owned subsidiaries MacDonald-Miller
Co., Inc. and MacDonald-Miller Service, Inc. (collectively "the Company").
Intercompany balances and transactions are eliminated in consolidation.
Interim Financial Information
The interim financial statements as of June 30, 1996 and September 30, 1997
and for the six and nine months then ended, respectively, are unaudited, and
certain information and footnote disclosures have been omitted. In the opinion
of management, all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates used in preparing these financial statements include
estimated costs to complete contracts in progress which have a direct effect
on gross profit.
Revenue Recognition
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage-of-completion basis using the cost-to-cost
method. This method is used because the Company considers contract costs to be
the best available measure of progress on these contracts. Revenues from cost-
plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned, measured by the same method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and revenues and are recognized in the period in which the revisions are
determined.
Inventories
Inventories consist of parts and supplies used in the Company's operations.
The inventories are valued at the lower of cost (determined using the first-
in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
straight-line and accelerated methods over the useful life of the assets.
Leasehold improvements are amortized over the life of the related lease.
Disbursements in Transit
Under the Company's cash management system, checks issued, but not presented
to the bank frequently result in overdraft balances for financial accounting
purposes. These balances are classified as accounts payable in the balance
sheets and as a financing activity in the statements of cash flows.
F-45
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for one year on new construction and 90 days
after servicing of air conditioning and heating units. A reserve for warranty
costs is recorded upon completion of installation or services.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123). The new standard measures compensation cost using a fair value
method, which computes compensation cost as the difference between the
options' fair value and the option price on the grant date. However, SFAS No.
123 allows companies to continue to measure compensation cost using the
intrinsic value method, which computes compensation cost as the difference
between a company's stock price and the option price at the grant date. The
Company has elected to continue to use the intrinsic value method.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities at the applicable
enacted tax rates. Income taxes are explained further in Note 9.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
billed receivables, loans, short-term debt (a revolving line of credit with a
variable interest rate) and long-term debt. The carrying value of these
instruments approximate fair value.
Asset Impairment
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
Reclassifications
Certain amounts in the financial statements for 1994 and 1995 have been
reclassified to conform with the 1996 presentation. These changes had no
effect on operating results.
F-46
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. CONTRACTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Contracts receivable
Completed contracts..................... $ 3,257 $ 511,903 $ 767,621
Contracts in progress................... 7,065,294 9,843,152 11,231,253
Retentions.............................. 1,413,742 1,549,731 1,631,527
---------- ----------- -----------
8,482,293 11,904,786 13,630,401
Service and maintenance................... 1,110,384 1,219,618 1,195,211
Other..................................... 324,316 300,688 52,331
---------- ----------- -----------
9,916,993 13,425,092 14,877,943
Less allowance for doubtful accounts...... 145,000 137,378 149,653
---------- ----------- -----------
$9,771,993 $13,287,714 $14,728,290
========== =========== ===========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Costs incurred on uncompleted
contracts........................... $29,427,252 $36,199,700 $32,045,499
Estimated earnings................... 5,377,340 5,029,941 4,227,719
----------- ----------- -----------
34,804,592 41,229,641 36,273,218
Less billings to date................ 34,524,312 41,547,587 36,973,533
----------- ----------- -----------
$ 280,280 $ (317,946) $ (700,315)
=========== =========== ===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... $ 1,356,980 $ 1,342,213 $ 1,015,468
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... (1,076,700) (1,660,159) (1,715,783)
----------- ----------- -----------
$ 280,280 $ (317,946) $ (700,315)
=========== =========== ===========
</TABLE>
F-47
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL --------------------- JUNE 30,
LIVES 1995 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Machinery and equipment........... 5 years $ 709,983 $ 763,572 $ 887,108
Vehicles.......................... 5 years 188,267 167,810 139,232
Office furniture and equipment.... 7 years 553,565 600,376 608,090
Data processing equipment......... 5 years 736,129 955,399 1,039,165
Communication equipment........... 5 years 90,759 112,419 108,145
Leasehold improvements............ 9 years 179,322 220,432 312,194
---------- ---------- ----------
2,458,025 2,820,008 3,093,934
Less accumulated depreciation..... 1,298,205 1,383,715 1,538,611
---------- ---------- ----------
$1,159,820 $1,436,293 $1,555,323
========== ========== ==========
</TABLE>
6. REAL ESTATE HELD FOR INVESTMENT
During 1995, the Company purchased certain real property which was not
intended to be used in business operations. The property is encumbered with
debt. The debt service payments are calculated using an amortization period of
30 years with interest at 7.88%. Monthly payments, including interest, are
$3,000 with the remaining balance due in full in October 2000. The balances of
the net book value and long-term debt of the real estate held for investment
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cost basis.................................... $560,000 $583,066 $ 583,066
Loss reserve.................................. (50,000) (75,000) (172,000)
-------- -------- ---------
Net book value.............................. $510,000 $508,066 $ 411,066
======== ======== =========
Long-term debt................................ $401,664 $398,149 $ 396,285
======== ======== =========
</TABLE>
7. NOTE PAYABLE TO BANK
The note payable to bank represents the outstanding balance on a $6,000,000
revolving line of credit with interest at the bank's prime rate plus .75%. The
weighted average interest rate for December 31, 1995, 1996 and June 30, 1997
was 9.83%, 9.15% and 9.27%, respectively. The line of credit is subject to
annual renewal. The note is collateralized by receivables and inventory, and
is guaranteed by the executive officers. The Company is required under the
agreement to maintain certain financial covenants. These financial covenants
include current ratio and tangible net worth requirements, fixed asset
addition restrictions, dividend payment restrictions, and certain restrictions
regarding changes in ownership.
F-48
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Note payable to bank, due in monthly installments
of $8,000 plus interest at prime plus 1%,
collateralized by equipment..................... $352,000 $456,000 $408,000
Note payable, paid in full during 1996........... 45,570 -- --
Note payable related to real estate (see Note 6). 401,664 398,149 396,285
-------- -------- --------
799,234 854,149 804,285
Less current portion............................. 100,136 96,000 96,000
-------- -------- --------
$699,098 $758,149 $708,285
======== ======== ========
</TABLE>
The aggregate maturities of the long-term debt for future years ending June
30 are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 96,000
1999............................................................. 96,000
2000............................................................. 492,285
2001............................................................. 96,000
2002............................................................. 24,000
--------
$804,285
========
</TABLE>
9. INCOME TAXES
The income tax provision consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current..................... $334,730 $411,238 $531,000 $428,059 $660,001
Deferred.................... (9,000) (67,000) 43,000 (81,000) (91,000)
-------- -------- -------- -------- --------
$325,730 $344,238 $574,000 $347,059 $569,001
======== ======== ======== ======== ========
</TABLE>
Total income tax expense differs from the amounts computed by applying the
United States statutory income tax rate to income before income tax provision
as a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
1994 % 1995 % 1996 % 1996 % 1997 %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax provision at
statutory rate......... $301,970 34.0 $282,138 34.0 $524,368 34.0 $309,071 34.0 $526,879 34.0
Increase (reduction) in
income taxes resulting
from:
State income taxes..... 3,200 0.4 2,600 0.3 6,600 0.4 3,300 0.4 10,800 0.7
Meals and
entertainment......... 18,100 2.0 22,800 2.7 23,800 1.5 11,900 1.3 13,600 0.9
Other non-deductible
expenses.............. 2,210 0.2 19,700 2.4 5,600 0.4 5,800 0.6 2,800 0.2
Other.................. 250 -- 17,000 2.0 13,632 0.9 16,988 1.9 14,922 0.9
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
$325,730 36.6 $344,238 41.4 $574,000 37.2 $347,059 38.2 $569,001 36.7
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
F-49
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Warranty reserve............................. $ 44,000 $ 45,000 $ 41,000
Allowance for doubtful accounts.............. 56,000 48,000 51,000
Loss on sale reserve......................... 17,000 26,000 58,000
Deferred Compensation........................ 121,000 65,000 65,000
Other........................................ -- 18,000 60,000
-------- -------- --------
Total deferred income tax assets........... 238,000 202,000 275,000
-------- -------- --------
Deferred tax liabilities:
Contracts in progress........................ (17,000) (36,000) (8,000)
Depreciation................................. (73,000) (61,000) (71,000)
-------- -------- --------
Total deferred income tax liabilities...... (90,000) (97,000) (79,000)
-------- -------- --------
Net deferred income taxes.................. $148,000 $105,000 $196,000
======== ======== ========
</TABLE>
10. ACCRUED LIABILITIES
Accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Payroll................................. $1,176,450 $1,269,823 $1,718,077
Payroll and business taxes.............. 495,867 309,251 488,115
Other................................... 243,651 261,625 210,556
---------- ---------- ----------
$1,915,968 $1,840,699 $2,416,748
========== ========== ==========
</TABLE>
11. COMMITMENTS
The Company conducts its operation from facilities which are leased from an
affiliated entity. The lease was amended on August 18, 1997 resulting in
increased rental payments which now expire July 2007. The lease modifications
are reflected in the schedule below. The Company also leases vehicles and
facilities from unrelated companies under agreements expiring at various times
through 2001. The Company accounts for these leases as operating leases.
Aggregate minimum annual lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
JUNE 30, PARTY OTHER TOTAL
------------ ---------- ---------- ----------
<S> <C> <C> <C>
1998...................................... $ 418,000 $ 511,000 $ 929,000
1999...................................... 475,000 467,000 942,000
2000...................................... 475,000 350,000 825,000
2001...................................... 475,000 211,000 686,000
2002...................................... 475,000 59,000 534,000
Thereafter................................. 2,177,000 -- 2,177,000
---------- ---------- ----------
$4,495,000 $1,598,000 $6,093,000
========== ========== ==========
</TABLE>
F-50
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense under operating leases:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
DECEMBER 31, PARTY OTHER TOTAL
------------ -------- -------- --------
<S> <C> <C> <C>
1994............................................ $380,000 $368,000 $748,000
1995............................................ 380,000 521,000 901,000
1996............................................ 380,000 582,000 962,000
<CAPTION>
PERIOD ENDING
JUNE 30,
-------------
<S> <C> <C> <C>
1996............................................ $190,000 $300,000 $490,000
1997............................................ 190,000 320,000 510,000
</TABLE>
12. RELATED PARTY BALANCES AND TRANSACTIONS
Notes Payable
During 1996, the note payable to shareholder was paid in full, which
included interest payments of $57,000.
Receivables
These balances represent short-term loans granted by the company to
shareholders and employees not incurred in the ordinary course of business.
The receivables are unsecured.
Leases
As further described in Note 11, the Company leases its main plant and
office facilities from the Company's president and principal shareholder.
13. EMPLOYEE BENEFIT PLANS
Pension Plan
The Company contributes monthly to several union-sponsored pension plans for
the benefit of most hourly employees. Such contributions aggregated
approximately $2,162,000, $958,000 and $480,000 in 1996, 1995 and 1994,
respectively, and $1,214,000 and $1,140,520 for the period ending June 30,
1997 and 1996, respectively.
ESOP
The Company has established an employee stock ownership plan (ESOP) which
permits participation by eligible nonunion employees. Contributions are
determined at the discretion of the Board of Directors. ESOP expense amounted
to $87,000, $360,000 and $354,000 in 1996, 1995 and 1994, respectively. There
were no contributions for the periods ending June 30, 1997 and 1996.
Subsequent to the sale of the Company to GroupMAC (see Note 2), the ESOP plan
will be terminated.
401(k)
The Company sponsors a 401(k) salary savings plan for the benefit of all
eligible union and nonunion employees. All contributions to the plan are
elective by the participants. Matching contributions amounted to $27,371,
$29,000 and $26,400 in 1996, 1995 and 1994, respectively, and $88,262 and
$14,430 for the period ending June 30, 1997 and 1996, respectively.
F-51
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
In 1989, several key employees were granted options to purchase 25,000
shares of common stock at fair market value at the date of grant of $20 per
share. The options vest and become exercisable in substantially equal annual
amounts through December 1998. Unexercised options expire one year after
becoming vested or 90 days following termination of employment for reasons
other than death or disability, if earlier. Unexercised options may be
extended to a maximum of two years after becoming vested with the approval of
the Board of Directors.
During 1995, the Company granted options to six employees to purchase 2,000
shares each of common stock at $31.97 per share, the fair market value at the
date of grant. These options are exercisable at the rate of 200 shares
annually through June 2004. During 1997, the Company amended the plan and
granted options to three additional employees to purchase shares of common
stock at $42.05 per share, the fair market value at date of grant.
The following table shows changes in stock options outstanding:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS
-----------------------------
AUTHORIZED GRANTED AVAILABLE PRICE
---------- ------- --------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.......... 80,000 19,469* 52,100 $20.00
Creation of new plan.............. 20,000 -- 20,000
Granted........................... -- 12,000 (12,000) $31.97
Exercised......................... -- (4,702) -- $20 to $26.16
Canceled.......................... -- (975) -- --
------- ------ -------
Balance, December 31, 1995.......... 100,000 25,792* 60,100 $20 to $31.97
Exercised......................... -- (3,977) -- $20 to $31.97
------- ------ -------
Balance, December 31, 1996.......... 100,000 21,815* 60,100 $20 to $31.97
Granted........................... -- 5,000 (5,000) $42.05
Exercised......................... -- (1,800) -- $20 to $42.05
------- ------ -------
Balance, June 30, 1997.............. 100,000 25,015* 55,100 $20 to $42.05
======= ====== =======
</TABLE>
- --------
* At the periods ended, the cumulative number of options vested were as
follows:
<TABLE>
<S> <C>
December 31, 1994................................................... 5,444
December 31, 1995................................................... 5,444
December 31, 1996................................................... 5,444
June 30, 1997....................................................... 2,777
</TABLE>
Upon successful completion of the sale of MMI, all options in the key
employees plan will be vested and exercised. The employee plan will be
eliminated.
Incentive Compensation Plan
During 1995, the Board of Directors established an Incentive Compensation
Plan (ICP) on behalf of executive management. The ICP provides that a portion
of net income, in excess of an established rate of return on equity, be
expensed as incentive compensation. The 1996 and 1995 incentive compensation
expense is $10,000 and $710,000, respectively. There was no expense for the
period ending June 30, 1997 and 1996. The deferred portion at December 31,
1996 and 1995 of $190,000 and $355,000 is payable in future years depending on
operating results of the Company. In the event of operating losses, the
deferred pool will be reduced by the lesser of the operating loss, or the
deferred pool. Participation in the ICP is subject to certain employment and
vesting provisions. The deferred amounts are subordinated to bank and surety
credits.
F-52
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of receivables and costs and earnings in
excess of billings on uncompleted contracts. Concentrations of credit risk
with respect to billed and unbilled receivables are limited due to the large
number of customers comprising the Company's customer base. The Company
generally does not require collateral, but in most cases can place liens
against the property constructed if a default takes place.
15. SIGNIFICANT CUSTOMERS
During the period ending June 30, 1997, the Company had $17,706,000 or 45%
of the periods revenues, and $6,840,000 or 45% of the ending accounts
receivable from two customers. The accounts receivable and revenue represent
four jobs.
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash paid during the year
for:
Income taxes............ $427,105 $370,000 $405,300 $200,000 $150,000
======== ======== ======== ======== ========
Interest................ $275,490 $370,604 $519,842 $244,135 $214,381
======== ======== ======== ======== ========
</TABLE>
17. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS REPORT (UNAUDITED)
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the GroupMAC IPO (acquisition to be effective
October 31, 1997).
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Masters, Inc.
Gaithersburg, Maryland
We have audited the accompanying balance sheets of Masters, Inc. as of
December 31, 1995, December 31, 1996 and June 30, 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and for the six month period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Masters, Inc., as of December 31, 1995,
December 31, 1996 and June 30, 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996
and for the six month period ended June 30, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
July 24, 1997
F-54
<PAGE>
MASTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER
1995 1996 1997 30, 1997
ASSETS ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.. $ 535,255 $ 670,776 $ 637,330 $ 635,196
Accounts receivable, less
allowance for doubtful
accounts of $50,000,
$99,290 and $257,839,
respectively.............. 6,257,622 6,859,307 6,859,621 7,465,103
Costs and estimated
earnings in excess of
billings on uncompleted
contracts................. 1,506,793 1,866,172 1,419,830 1,603,699
Inventories................ 489,063 588,715 621,912 417,064
Prepaid expenses and other
assets.................... 50,166 48,829 70,818 90,803
----------- ----------- ----------- -----------
Total current assets..... 8,838,899 10,033,799 9,609,511 10,211,865
PROPERTY AND EQUIPMENT, net.. 590,229 625,125 609,719 596,024
OTHER NONCURRENT ASSETS...... 673,570 673,570 673,570 673,570
----------- ----------- ----------- -----------
Total assets............. $10,102,698 $11,332,494 $10,892,800 $11,481,459
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S
EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and
current maturities of
long-term debt............ $ 1,406,634 $ 1,979,616 $ 1,069,777 $ 1,221,742
Accounts payable........... 1,781,218 1,761,200 2,152,392 2,164,751
Accrued expenses........... 1,042,627 1,241,727 1,160,127 1,250,206
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 721,159 627,052 850,687 792,035
Other current liabilities.. 406,163 319,904 395,275 318,130
----------- ----------- ----------- -----------
Total current
liabilities............. 5,357,801 5,929,499 5,628,258 5,746,864
LONG-TERM DEBT, net of
current maturities.......... 827,492 800,238 764,932 747,397
COMMITMENTS AND CONTINGENCIES
(Note 11)
SHAREHOLDER'S EQUITY:
Common stock, par value $1
per share; 50,000 shares
authorized; 5,100 shares
issued and outstanding.... 5,100 5,100 5,100 5,100
Retained earnings.......... 3,912,305 4,597,657 4,494,510 4,982,098
----------- ----------- ----------- -----------
Total shareholder's
equity.................. 3,917,405 4,602,757 4,499,610 4,987,198
----------- ----------- ----------- -----------
Total liabilities and
shareholder's equity.... $10,102,698 $11,332,494 $10,892,800 $11,481,459
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
MASTERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------------------- ----------------------- -----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $30,327,333 $35,160,419 $39,825,843 $18,278,841 $19,318,196 $29,088,014 $31,166,233
COST OF SERVICES........ 28,018,280 31,746,287 35,854,155 16,639,076 17,457,471 26,308,282 27,955,896
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 2,309,053 3,414,132 3,971,688 1,639,765 1,860,725 2,779,732 3,210,337
SELLING, GENERAL AND AD-
MINISTRATIVE
EXPENSES............... 1,664,069 2,373,300 2,483,875 1,008,650 1,196,777 1,738,751 2,014,689
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations. 644,984 1,040,832 1,487,813 631,115 663,948 1,040,981 1,195,648
INTEREST EXPENSE........ 86,940 102,428 134,718 58,888 64,672 100,546 90,934
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 558,044 $ 938,404 $ 1,353,095 $ 572,227 $ 599,276 $ 940,435 $ 1,104,714
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
MASTERS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
BALANCE, January 1, 1994....................... $5,100 $3,125,114 $3,130,214
Net income................................... 558,044 558,044
Dividends paid............................... (219,912) (219,912)
------ ---------- ----------
BALANCE, December 31, 1994..................... 5,100 3,463,246 3,468,346
Net income................................... 938,404 938,404
Dividends paid............................... (489,345) (489,345)
------ ---------- ----------
BALANCE, December 31, 1995..................... 5,100 3,912,305 3,917,405
Net income................................... 1,353,095 1,353,095
Dividends paid............................... (667,743) (667,743)
------ ---------- ----------
BALANCE, December 31, 1996..................... 5,100 4,597,657 4,602,757
Net income................................... 599,276 599,276
Dividends paid............................... (702,423) (702,423)
------ ---------- ----------
BALANCE, June 30, 1997......................... $5,100 $4,494,510 $4,499,610
====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
MASTERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ----------------------- ----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING
ACTIVITIES:
Net income............. $ 558,044 $ 938,404 $ 1,353,095 $572,227 $ 599,276 $ 940,435 $ 1,104,714
Adjustments to recon-
cile net income to net
cash provided by (used
in) operating activi-
ties:
Depreciation........... 227,572 236,131 258,079 144,065 139,740 189,589 210,017
Loss(Gain) on disposal
of assets............. 20,576 8,480 2,223 -- (305) 2,223 1,601
Bad debt expense....... 425,602 626,625 434,250 100,000 169,741 223,250 279,241
Changes in operating
assets and liabili-
ties:
(Increase) decrease
in--
Notes and accounts
receivable.......... (517,095) (1,881,816) (1,035,935) (701,119) (170,055) (910,274) (885,037)
Costs and estimated
earnings in excess
of billings on un-
completed contracts. (104,401) (278,186) (359,379) (667,721) 446,342 (825,871) 262,473
Inventories.......... 116,978 9,039 (99,652) 31,423 (33,197) 86,925 171,651
Prepaid expenses and
other assets........ (16,255) (17,607) 1,337 9,945 (21,989) 16,862 (41,974)
Increase (decrease)
in--
Accounts payable..... 380,925 120,221 (20,018) 326,793 391,192 435,238 403,551
Billings in excess of
costs and estimated
earnings on uncom-
pleted contracts.... 43,624 209,499 (94,107) 26,087 223,635 (6,538) 164,983
Accrued salaries and
wages............... 2,662 16,042 17,360 58,963 40,363 93,177 70,593
Accrued profit shar-
ing and bonus....... 143,148 256,752 189,431 (43,433) (162,176) 86,425 (150,903)
Accrued vacation ben-
efits............... 53,589 40,105 61,561 29,600 35,858 68,284 66,769
Payroll taxes and
withholding......... 22,291 (5,665) (69,252) 57,517 4,356 61,390 22,021
Other current liabil-
ities............... 238,406 80,814 (86,259) (52,484) 75,371 (29,779) (1,774)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) operating ac-
tivities............... 1,595,666 358,838 552,734 (108,137) 1,738,152 431,336 1,677,926
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM INVEST-
ING
ACTIVITIES:
Purchases of property
and equipment......... (284,326) (1,045,919) (295,198) (169,080) (130,357) (226,027) (188,846)
Proceeds from sale of
equipment............. 18,208 566 -- -- 6,327 -- 6,327
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash used in in-
vesting activities.... (266,118) (1,045,353) (295,198) (169,080) (124,030) (226,027) (182,519)
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM FINANC-
ING
ACTIVITIES:
Proceeds from long-term
debt.................. 160,000 1,604,746 659,234 944,234 -- 659,234 --
Payments of long-term
debt.................. (1,237,110) (345,617) (113,506) (51,018) (945,145) (83,925) (810,714)
Dividends paid......... (219,912) (489,345) (667,743) (567,324) (702,423) (609,348) (720,273)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ (1,297,022) 769,784 (122,015) 325,892 (1,647,568) (34,039) (1,530,987)
----------- ----------- ----------- -------- ----------- --------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIV-
ALENTS................. 32,526 83,269 135,521 48,675 (33,446) 171,270 (35,580)
CASH AND CASH EQUIVA-
LENTS, beginning of pe-
riod................... 419,460 451,986 535,255 535,255 670,776 535,255 670,776
----------- ----------- ----------- -------- ----------- --------- -----------
CASH AND CASH EQUIVA-
LENTS, end of
period................. $ 451,986 $ 535,255 $ 670,776 $583,930 $ 637,330 $ 706,525 $ 635,196
=========== =========== =========== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Masters, Inc. (the Company) is a Mechanical Contractor primarily engaged in
the installation of residential and commercial plumbing, heating, air
conditioning and sprinkler systems within a 100-mile radius of the Washington,
D.C. area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1996 and
as of September 30, 1997 and for the nine months ended September 30, 1996 and
1997 are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
Revenue Recognition
The Company reports revenues from long-term construction contracts in
progress based on the percentage-of-completion method of accounting and,
therefore, takes into account the costs, estimated earnings and revenues to
date on contracts not yet completed.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final total cost, based on current estimates of the cost to complete. Revenue
recognized is not necessarily related to the progress billings to customers.
As contracts extend over one or more years, revisions in estimates of cost
and earnings during the course of the work are reflected in the accounting
period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements.
Cash and Cash Equivalents
The Company has a cash management system with its bank that provides for the
investment of excess cash balances. The bank transfers the Company's excess
cash balances daily to investments that are under the bank's control. At
December 31, 1995, December 31, 1996 and June 30, 1997, the balances invested
under the cash management system were $1,294,005, $1,198,620 and $1,106,523,
respectively. The Company considers its investments with initial maturities of
less than 90 days to be cash equivalents.
F-59
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist primarily of purchased materials and supplies.
Inventories are stated at the lower of cost or market with cost determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by the
straight-line method based on the estimated useful lives of the assets.
Leasehold improvements are depreciated over the lesser of the remaining lease
term or the estimated useful life of the asset. Expenditures for repairs and
maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment,
are capitalized and depreciated. Upon retirement or disposition of property or
equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the statement of
operations.
Warranty Costs
The Company provides one to two year warranties on their contracts. At
December 31, 1995, December 31, 1996 and June 30, 1997, the Company's warranty
reserve was $80,000, $159,000 and $192,388, respectively.
Income Taxes
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. Accordingly, the current taxable income of the Company is
taxable to the shareholder who is responsible for the payment of taxes
thereon.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
Reclassification
Certain amounts reported in the 1995 and 1996 financial statements have been
reclassified to conform with the June 30, 1997 presentation.
F-60
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Trade accounts receivable.......... $5,337,781 $6,064,444 $5,919,387
Retentions......................... 288,552 226,646 521,686
Shareholder........................ 224,658 238,579 245,539
Service............................ 63,332 50,487 62,057
Trade notes receivable............. 57,672 36,557 25,366
Other.............................. 335,627 341,884 343,425
---------- ---------- ----------
6,307,622 6,958,597 7,117,460
Allowance for sales adjustments and
doubtful accounts................. (50,000) (99,290) (257,839)
---------- ---------- ----------
$6,257,622 $6,859,307 $6,859,621
========== ========== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C> <C>
Accrued salaries and wages.............. $ 195,815 $ 213,175 $ 253,538
Accrued profit sharing and bonus........ 415,837 605,268 443,092
Accrued vacation benefits............... 307,523 369,084 404,941
Payroll taxes and withholding........... 123,452 54,200 58,556
---------- ---------- ----------
$1,042,627 $1,241,727 $1,160,127
========== ========== ==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs incurred................. $ 37,064,954 $ 62,376,659 $ 58,243,065
Estimated earnings recognized.. 15,929,952 26,073,509 24,889,245
------------ ------------ ------------
52,994,906 88,450,168 83,132,310
Less billings on contracts..... (52,209,272) (87,211,048) (82,563,167)
------------ ------------ ------------
$ 785,634 $ 1,239,120 $ 569,143
============ ============ ============
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... $ 1,506,793 $ 1,866,172 $ 1,419,830
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... (721,159) (627,052) (850,687)
------------ ------------ ------------
$ 785,634 $ 1,239,120 $ 569,143
============ ============ ============
</TABLE>
F-61
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, DECEMBER 31, JUNE 30,
LIVES 1995 1996 1997
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Leasehold improvements....... 2-7 years $ 215,396 $ 221,265 $ 223,012
Office furniture and
equipment................... 5-10 years 784,498 838,904 858,900
Automotive equipment......... 3-5 years 399,942 435,623 470,864
Construction machinery and
equipment................... 8-10 years 1,003,995 1,132,070 1,174,761
----------- ----------- -----------
2,403,831 2,627,862 2,727,537
Less accumulated
depreciation................ (1,813,602) (2,002,737) (2,117,818)
=========== =========== ===========
$ 590,229 $ 625,125 $ 609,719
=========== =========== ===========
</TABLE>
6. OTHER NONCURRENT ASSETS
During the fourth quarter of 1995, the Company purchased three model homes
from a customer for $673,570 in order to settle certain accounts receivable
balances. The Company is not in the real estate business, and intends to sell
this real estate. Management believes that the carrying value of these homes
approximates their net realizable value based on recent sales in this
development.
The related mortgage note totaling $630,462, $619,627 and $612,915 as of
December 31, 1995, December 31, 1996 and June 30, 1997, respectively, matures
October 5, 2000, and is payable in monthly installments of $5,843 including
principal and interest at 9.25%. The operating results of the investment are
not significant.
Maturities of the mortgage note are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998........................................................... $ 14,159
1999........................................................... 15,525
2000........................................................... 17,024
2001........................................................... 566,207
--------
$612,915
========
</TABLE>
7. SHORT AND LONG-TERM DEBT
The Company has a revolving loan agreement with a bank, which as of December
31, 1995, December 31, 1996 and June 30, 1997, provided for maximum borrowings
of $3,000,000, $3,500,000 and $3,500,000, respectively. The agreement has a
maturity date of September 1, 1997. Borrowings under this agreement at
December 31, 1995, December 31, 1996 and June 30, 1997, amounted to
$1,300,000, $1,890,000 and $1,000,000, respectively, with interest at 8.5
percent at December 31, 1995, 8.25 percent at December 31, 1996 and 8.5
percent at June 30, 1997. All advances under the revolving note are cross-
collateralized with the notes and mortgage payable discussed below. The debt
agreements require among other provisions, the maintenance of certain levels
of net worth and working capital, and place restrictions on cash dividends.
The Company's long term debt for December 31, 1995, December 31, 1996 and
June 30, 1997, was $303,664, $270,227 and $221,794, respectively.
F-62
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
7.75%, due 2/28/97, secured by equipment... $ 44,484 $ 9,198 $ --
8.0%, due 6/25/97, secured by equipment.... 33,582 12,999 --
8.25%, due 11/22/00, secured by equipment.. 200,002 166,431 148,539
-------- -------- --------
Total Notes Payable...................... 278,068 188,628 148,539
-------- -------- --------
Capitalized lease, payable in monthly
installments, interest at 15.35%, due
6/30/00, secured by equipment............. 25,596 21,321 18,928
Capitalized lease, payable in monthly
installments, interest at 9.07%, due
4/30/01, secured by equipment............. $ -- $ 60,278 $ 54,327
-------- -------- --------
Total Capitalized Leases................. 25,596 81,599 73,255
-------- -------- --------
Total long-term debt................... 303,664 270,227 221,794
-------- -------- --------
Less current maturities................ (94,303) (76,095) (55,618)
-------- -------- --------
$209,361 $194,132 $166,176
======== ======== ========
</TABLE>
The aggregate maturities of the long-term debt as of June 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................. $ 37,507
1999............................................................. 40,721
2000............................................................. 44,211
2001............................................................. 26,100
--------
$148,539
========
</TABLE>
Total borrowings under the notes payable with the bank are collateralized by
accounts receivable, inventory, and property and equipment of the Company, the
personal guarantee of the shareholder, and an assignment of the proceeds of a
$2,000,000 life insurance policy on the life of the shareholder.
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998........................................................... $25,183
1999........................................................... 25,183
2000........................................................... 25,183
2001........................................................... 12,954
-------
Total minimum lease payments..................................... 88,503
Less: Amount representing interest............................... (15,248)
-------
Present value of net minimum lease payments...................... 73,255
Less: Current Portion............................................ (18,111)
-------
Long-term Portion................................................ $55,144
=======
</TABLE>
Interest paid by Company on short and long-term debt was as follows:
<TABLE>
<S> <C>
Year ending December 31, 1994................................... $106,083
Year ending December 31, 1995................................... 115,031
Year ending December 31, 1996................................... 157,435
Six months ending June 30, 1997................................. 77,445
</TABLE>
F-63
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LEASES
The Company occupies warehouse and office space which is subject to
operating leases. These leases provide for the following annual rental
payments:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998......................................................... $ 283,558
1999......................................................... 280,881
2000......................................................... 278,094
2001......................................................... 289,008
2002......................................................... 296,522
Thereafter................................................... 165,858
----------
$1,593,921
==========
</TABLE>
Total rent expense was $285,353, $268,419 and $293,074 for the years ended
December 31, 1994, December 31, 1995 and December 31, 1996, respectively. Rent
expense was $140,766 for the six months ended June 30, 1997.
Office furniture and equipment at December 31, 1995, December 31, 1996 and
June 30, 1997, includes $27,500, $96,734 and $96,734, respectively, of
equipment under leases that have been capitalized. Accumulated depreciation
for such equipment was $2,750 at December 31, 1995, $17,940 at December 31,
1996 and $27,613 at June 30, 1997.
9. RELATED PARTY TRANSACTIONS
On January 22, 1997, the Company entered into a partnership with the
shareholder of the Company for the lease of warehouse and office space. The
lease requires an annual base rental of $233,700. The lease extends through
February 1, 2003. Rent increases on each anniversary at the rate of 4%. All
expenses except base period real estate taxes are paid by the Company. Total
rental expense under this lease for the six months ended June 30, 1997, was
$97,375.
The Company leases equipment from a company owned by the shareholder and an
officer of the Company. Expense for this equipment was $210,000, $199,925, and
$207,972, for the years ended December 31, 1994, December 31, 1995 and
December 31, 1996, respectively. Expense for this equipment was $100,803 for
the six months ended June 30, 1997.
The Company makes a monthly payment for advertising to a company owned by
the shareholder of the Company. Payments to this company were $0 for the year
ended December 31, 1994, and approximately $48,000 for each year ending
December 31, 1995 and December 31, 1996. Payments were $24,000 for the six
months ended June 30, 1997.
The Company has an outstanding receivable of $131,633 as of December 31,
1995, December 31, 1996 and June 30, 1997 from a company owned by the
shareholder of the Company.
The shareholder of the Company owes the Company $224,658, $238,579 and
$245,539 in notes receivable as of December 31, 1995, December 31, 1996 and
June 30, 1997, respectively. The balance includes accrued interest at rates
ranging from 7.0% to 8.5% and the notes are payable on demand.
F-64
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company adopted a qualified Profit-Sharing and 401(k) Retirement Plan in
December 1994. The Plan covers substantially all full time employees. The
401(k) portion of the Plan was effective in January 1995. Contributions are
determined based upon the discretion of the Company's Board of Directors. The
Company contributed $120,500 and $181,915 to the plan for the years ended
December 31, 1995 and December 31, 1996, respectively. A contribution of
$70,292 was made for the six months ended June 30, 1997. A favorable
determination letter dated January 29, 1996, has been obtained from the
Internal Revenue Service.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximate their fair
value.
13. SUBSEQUENT EVENT
In April 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC (the "GroupMAC IPO").
14. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS REPORT (UNAUDITED)
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the GroupMAC IPO (acquisition to be effective
October 31, 1997).
The Company made distributions in respect to the Company's estimated S
Corporation accumulated adjustment account of approximately $1.7 million at
the time of closing.
F-65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
K & N Plumbing, Heating and Air Conditioning, Inc.
We have audited the accompanying balance sheet of K & N Plumbing, Heating
and Air Conditioning, Inc. as of March 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of K & N Plumbing, Heating
and Air Conditioning, Inc. as of March 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 20, 1997, except for note 12, for which the date is June 1, 1997
F-66
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
ASSETS
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance of $98,098....................... $3,410,659
Inventories............................................................ 254,135
Other receivables...................................................... 191,056
Prepaid expenses and other current assets.............................. 155,270
Deferred income taxes.................................................. 109,892
----------
Total current assets................................................. 4,121,012
PROPERTY AND EQUIPMENT, net.............................................. 1,483,869
OTHER NONCURRENT ASSETS.................................................. 20,895
----------
Total assets......................................................... $5,625,776
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt......... $1,285,189
Accounts payable....................................................... 1,399,235
Accrued expenses....................................................... 627,263
Deferred service contract revenue...................................... 27,970
Income taxes payable................................................... 120,187
----------
Total current liabilities............................................ 3,459,844
LONG-TERM DEBT, net of current maturities................................ 305,685
DEFERRED INCOME TAXES.................................................... 252,091
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares authorized;
5,000 shares issued and outstanding................................... 5,000
Retained earnings...................................................... 1,603,156
----------
Total shareholders' equity........................................... 1,608,156
----------
Total liabilities and shareholders' equity........................... $5,625,776
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1997
-----------
<S> <C>
REVENUES........................................................... $24,279,160
COST OF SERVICES................................................... 20,704,965
-----------
Gross profit..................................................... 3,574,195
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 2,638,037
-----------
Income from operations........................................... 936,158
OTHER INCOME (EXPENSE):
Interest expense................................................. (97,390)
Other............................................................ (3,222)
-----------
Income before income tax provision............................. 835,546
INCOME TAX PROVISION............................................... 314,764
-----------
NET INCOME......................................................... $ 520,782
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
BALANCE, March 31, 1996......................... $5,000 $1,082,374 $1,087,374
Net income.................................... -- 520,782 520,782
------ ---------- ----------
BALANCE, March 31, 1997......................... $5,000 $1,603,156 $1,608,156
====== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
MARCH 31,
1997
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 520,782
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation...................................................... 500,679
Loss on sales of property and equipment........................... 10,982
Deferred income taxes............................................. 79,621
Changes in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable............................................. (566,374)
Inventories..................................................... (100,496)
Other receivables............................................... 141,343
Prepaid expenses and other current assets....................... 45,096
Other noncurrent assets......................................... (4,972)
Increase (decrease) in--
Accounts payable................................................ 71,813
Accrued expenses................................................ 11,445
Deferred service contract revenue............................... 27,970
Income taxes payable............................................ 112,851
---------
Net cash provided by operating activities..................... 850,740
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (661,326)
Proceeds from sales of property and equipment...................... 14,442
---------
Net cash used in investing activities......................... (646,884)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Checks outstanding in excess of bank balance....................... (425,718)
Net borrowings on line of credit................................... 66,382
Principal payments on shareholder debt............................. (12,658)
Proceeds from issuance of installment debt......................... 479,093
Principal payments on installment debt............................. (310,955)
---------
Net cash used in financing activities......................... (203,856)
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ --
CASH AND CASH EQUIVALENTS, beginning of year........................ --
---------
CASH AND CASH EQUIVALENTS, end of year.............................. $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. BUSINESS AND ORGANIZATION
K & N Plumbing, Heating and Air Conditioning, Inc., (the Company) is
primarily engaged in the business of installing plumbing, heating and air
conditioning systems for new single-family detached homes in the areas in and
around Dallas and Austin, Texas and Las Vegas, Nevada. In addition, the
Company is involved in the replacement and repair market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $99,838 and
$114,955, respectively, for the year ended March 31, 1997.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis, using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease-term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
F-71
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for one to two years after installation of new
air conditioning and heating units. The Company generally warrants labor for
one year after servicing of existing air conditioning and heating units. A
reserve for warranty costs is recorded upon completion of installation or
service.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consist of the following at March
31, 1997:
<TABLE>
<S> <C>
Prepaid expenses.................................................. $ 94,808
Due from employees................................................ 60,462
--------
$155,270
========
Accrued expenses consist of the following at March 31, 1997:
Accrued payroll and related expense............................... $242,845
Other accrued expenses............................................ 384,418
--------
$627,263
========
</TABLE>
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Machinery and equipment............................. 5--7 years $ 554,461
Service and other vehicles.......................... 5 years 2,239,457
Office equipment, furniture and fixtures............ 5--7 years 290,702
Leasehold improvements.............................. -- 290,875
-----------
3,375,495
Less accumulated depreciation....................... (1,891,626)
-----------
$ 1,483,869
===========
</TABLE>
F-72
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<S> <C>
Credit facility in the amount of $1,000,000 with a bank, bearing
interest at prime plus 1.5%, secured by trade receivables and
inventory....................................................... $ 970,321
Equipment installation loans payable to banks and other financial
institutions, interest varying from 7.5% to 10.24%,
collateralized by certain equipment, payable in monthly
installments including interest, final installment due January
1998............................................................ 620,553
----------
Total short- and long-term debt.............................. 1,590,874
Less short-term borrowings and current maturities............... (1,285,189)
----------
$ 305,685
==========
</TABLE>
The Company had a revolving credit agreement with a bank to provide
borrowings up to $1,000,000. The agreement expires on August 30, 1997. The
revolving credit agreement was collateralized by accounts receivable,
inventories and the personal guarantee of the shareholder. The agreement
contained certain covenants with regard to minimum net worth and lending
limits of up to 80% of accounts receivable less than 60 days old. Borrowings
under the agreement in effect on March 31, 1997, bear interest at 10.0%, which
represents prime plus 1.5%. Borrowings outstanding at March 31, 1997 were
$970,321. The agreement was repaid in connection with the Company's
acquisition, see note 12.
The aggregate maturities of the short- and long-term debt as of March 31,
1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $1,285,189
1999............................................................... 246,605
2000............................................................... 59,080
----------
$1,590,874
==========
</TABLE>
6. INCOME TAXES
Income tax expense for the year ended March 31, 1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
Federal............................................ $216,077 $73,166 $289,243
State.............................................. 19,066 6,455 25,521
-------- ------- --------
$235,143 $79,621 $314,764
======== ======= ========
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<S> <C>
Tax provision at statutory rate...................................... $284,086
Increase resulting from:
State income taxes, net of federal benefit......................... 16,844
Other.............................................................. 13,834
--------
$314,764
========
</TABLE>
F-73
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Warranty reserves.................................................. $ 41,440
Deferred service contract revenues................................. 10,349
Allowance for doubtful accounts.................................... 36,296
Vacation accrual................................................... 21,807
--------
Total deferred income tax asset.................................. 109,892
--------
Deferred income tax liabilities:
Depreciation....................................................... $112,936
Other.............................................................. 139,155
--------
Total deferred income tax liability.............................. 252,091
--------
Net deferred income tax liability................................ $142,199
========
</TABLE>
7. LEASES
The Company incurred rent expenses under operating leases of $137,351 for
the year ended March 31, 1997. Of such amount, $107,760 related to a facility
that is leased by the Company from its shareholder. Under the lease agreement,
the Company is to pay for all maintenance, certain taxes and insurance for the
facility.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 31, 1997
are as follows:
<TABLE>
<S> <C>
1998................................................................. $137,760
1999................................................................. 107,760
2000................................................................. 107,760
2001................................................................. 107,760
2002 and thereafter.................................................. 53,880
--------
$514,920
========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) profit-sharing plan covering all
employees. Employees may choose to defer up to 15% of their compensation
during the Plan year, not to exceed Internal Revenue Service limitations, by
contributing to the Plan. The Company matches 50% of each employee's
contributions up to a maximum of 5% of the employee's gross earnings.
Contributions made by the Company of $57,400 were charged to operations in the
year ended March 31, 1997.
9. SALES TO SIGNIFICANT CUSTOMERS
During the year ended March 31, 1997, two customers accounted for
approximately 30% of the Company's revenues.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-74
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheet approximates their fair
value.
12. SUBSEQUENT EVENT
Effective June 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
all the outstanding shares of the Company for a combination of cash, preferred
stock and common stock of GroupMAC. All of the preferred shares issued in
connection with the acquisition of the business were redeemed for cash
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC.
F-75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
A-ABC Appliance, Inc. and
A-1 Appliance & Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of A-ABC Appliance,
Inc. and A-1 Appliance & Air Conditioning, Inc. (collectively referred to as
the Company) as of December 31, 1996 and May 31, 1997, and the related
combined statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1996 and the five months ended May 31, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of A-ABC Appliance,
Inc. and A-1 Appliance & Air Conditioning, Inc. as of December 31, 1996 and
May 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1996 and the five months ended May 31, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-76
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 760,291 $ 654,324
Accounts receivable.................................. 144,519 217,461
Other receivables.................................... 35,226 --
Inventories.......................................... 570,007 517,587
Due from related parties and employees............... 30,912 162,580
Prepaid expenses..................................... 13,289 57,090
---------- ----------
Total current assets............................... 1,554,244 1,609,042
PROPERTY AND EQUIPMENT, net............................ 905,447 702,310
GOODWILL, net of accumulated amortization of $9,195 and
$9,820, respectively.................................. 50,808 50,183
OTHER NONCURRENT ASSETS................................ 334,372 263,599
---------- ----------
Total assets....................................... $2,844,871 $2,625,134
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 176,717 $ 168,425
Accounts payable..................................... 265,080 425,196
Accrued expenses..................................... 183,797 213,732
Due to related parties............................... 315,474 342,584
Deferred service contract revenue.................... 196,217 175,134
---------- ----------
Total current liabilities.......................... 1,137,285 1,325,071
LONG-TERM DEBT, net of current maturities.............. 844,549 779,511
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock......................................... 3,300 3,300
Additional paid-in capital........................... 304,140 304,140
Retained earnings.................................... 555,597 213,112
---------- ----------
Total shareholders' equity......................... 863,037 520,552
---------- ----------
Total liabilities and shareholders' equity......... $2,844,871 $2,625,134
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-77
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED MAY 31,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $8,546,450 $3,382,901 $3,419,026
COST OF SERVICES.......................... 5,446,934 2,147,150 2,227,471
---------- ---------- ----------
Gross profit............................ 3,099,516 1,235,751 1,191,555
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 2,766,293 1,124,839 996,082
---------- ---------- ----------
Income from operations.................. 333,223 110,912 195,473
OTHER INCOME (EXPENSE):
Interest expense........................ (94,434) (36,628) (34,313)
Interest income......................... 10,653 1,619 3,702
Other................................... 779 (15,130) (7,760)
---------- ---------- ----------
NET INCOME................................ $ 250,221 $ 60,773 $ 157,102
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-78
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $3,300 $304,140 $ 305,376 $ 612,816
Net income......................... -- -- 250,221 250,221
------ -------- --------- ---------
BALANCE, December 31, 1996........... 3,300 304,140 555,597 863,037
Net income......................... -- -- 157,102 157,102
Distributions to shareholders...... -- -- (499,587) (499,587)
------ -------- --------- ---------
BALANCE, May 31, 1997................ $3,300 $304,140 $ 213,112 $ 520,552
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-79
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED MAY 31,
DECEMBER 31, ---------------------
1996 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 250,221 $ 60,773 $ 157,102
Adjustments to reconcile net income to net
cash
provided by (used in) operating
activities:
Depreciation and amortization........... 318,259 138,454 133,448
Gain from sales of property and
equipment.............................. (18,765) (18,765) --
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable................... (8,567) (194,850) (72,942)
Other receivables..................... (28,778) 1,611 35,226
Inventories........................... 17,073 (31,888) 52,420
Due from related parties and
employees............................ 1,703 6,000 (11,186)
Prepaid expenses...................... 40,965 (16,391) (43,801)
Other noncurrent assets............... (4,952) (4,391) 24,940
Increase (decrease) in--
Accounts payable...................... (33,128) 143,415 160,116
Accrued expenses...................... (120,496) 69,937 29,935
Due to related parties................ (43,945) (359,419) (315,474)
Deferred service contract revenue..... 36,714 94,838 (21,083)
--------- --------- ---------
Net cash provided by (used in)
operating activities............ 406,304 (110,676) 128,701
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (456,877) (277,614) (4,335)
Proceeds from sales of property and
equipment................................ 20,585 20,585 --
--------- --------- ---------
Net cash used in investing
activities.......................... (436,292) (257,029) (4,335)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............. 376,714 376,714 --
Payments of long-term debt................ (135,202) (71,677) (73,330)
Distributions to shareholders............. -- -- (157,003)
--------- --------- ---------
Net cash provided by (used in)
financing activities............ 241,512 305,037 (230,333)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 211,524 (62,668) (105,967)
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 548,767 548,767 760,291
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period... $ 760,291 $ 486,099 $ 654,324
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-80
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
A-ABC Appliance, Inc. (A-ABC) and A-1 Appliance & Air Conditioning, Inc. (A-
1), (collectively referred to as the Company), are under common ownership. As
common control exists among the entities, the financial statements have been
combined for all periods presented. There have been no intercompany
transactions between the entities. A-ABC and A-1 are primarily engaged in the
installation and servicing of heating and air conditioning systems, as well as
home appliances, for residential and light commercial customers in the Dallas,
Texas area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim combined financial statements for the five months ended May 31,
1996 are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the combined interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results of the entire fiscal year.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized upon completion of service. Revenues on service and
maintenance contracts are recognized over the life of the contract.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $92,052 and $34,313 for
the year ended December 31, 1996 and the five months ended May 31, 1997,
respectively.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-81
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ --------
<S> <C> <C>
Covenant not to compete, net of accumulated
amortization of $247,500 and $293,333, respectively... $302,500 $256,667
Other noncurrent assets................................ 31,872 6,932
-------- --------
$334,372 $263,599
======== ========
Accrued expenses consists of the following:
Accrued payroll costs and benefits..................... $100,151 $165,233
Other accrued expenses................................. 83,646 48,499
-------- --------
$183,797 $213,732
======== ========
</TABLE>
F-82
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, MAY 31,
LIVES 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Land.................................. -- $ 15,000 $ --
Buildings and improvements............ 20-30 years 138,958 --
Service and other vehicles............ 4-7 years 1,191,155 1,193,253
Office equipment, furniture and
fixtures............................. 5-10 years 450,086 452,323
Leasehold improvements................ -- 214,691 214,691
----------- -----------
2,009,890 1,860,267
Less accumulated depreciation......... (1,104,443) (1,157,957)
----------- -----------
$ 905,447 $ 702,310
=========== ===========
</TABLE>
5. GOODWILL AND OTHER NONCURRENT ASSETS
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
Other noncurrent assets include a covenant not to compete and deferred
charges related to the "Asset Purchase and Sale Agreement" made between the
Company's shareholders and former owners. The covenant not to compete and
deferred charges are amortized on a straight-line basis for a period of five
years, which is the period of the covenant in the agreement.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ ---------
<S> <C> <C>
Equipment installment loans payable to banks and
other financial institutions, interest varying from
8.75% to 9.0%, secured by certain equipment,
payable in monthly and quarterly installments
including interest, final installment
due November 2000.................................. $ 471,554 $ 419,900
Notes payable to the former shareholders of A-1
Appliance & Air Conditioning, Inc. at 8%, payable
in monthly installments of $7,783, including
interest, final installment due November 2004...... 549,712 528,036
---------- ---------
Total long-term debt............................ 1,021,266 947,936
Less current maturities............................. (176,717) (168,425)
---------- ---------
$ 844,549 $ 779,511
========== =========
</TABLE>
F-83
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the long-term debt as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
A-ABC A-1 COMBINED
-------- -------- ----------
<S> <C> <C> <C>
1997............................................ $ 97,304 $ 79,413 $ 176,717
1998............................................ 101,507 80,613 182,120
1999............................................ 108,743 71,823 180,566
2000............................................ 79,251 66,660 145,911
2001............................................ 23,435 72,477 95,912
Thereafter...................................... -- 240,040 240,040
-------- -------- ----------
$410,240 $611,026 $1,021,266
======== ======== ==========
</TABLE>
7. SHAREHOLDERS' EQUITY
The authorized, issued and outstanding common stock of the Company at
December 31, 1996 and May 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------ COMMON
AUTHORIZED ISSUED OUTSTANDING STOCK
---------- ------- ----------- ------
<S> <C> <C> <C> <C>
A-ABC voting........................... 50 50 50 $ 250
A-ABC non-voting....................... 50 50 50 50
A-1.................................... 300,000 300,000 300,000 3,000
------- ------- ------- ------
Total................................ 300,100 300,100 300,100 $3,300
======= ======= ======= ======
</TABLE>
The voting common stock and non-voting common stock of A-ABC have stated
values of $5 and $1 per share, respectively. The common stock of A-1 has a
stated value of $0.01 per share.
8. LEASES
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
A-ABC A-1 COMBINED
---------- ------- ----------
<S> <C> <C> <C>
1997........................................... $ 99,000 $27,000 $ 126,000
1998........................................... 99,000 27,000 126,000
1999........................................... 99,000 27,000 126,000
2000........................................... 99,000 11,250 110,250
2001........................................... 99,000 -- 99,000
Thereafter..................................... 717,750 -- 717,750
---------- ------- ----------
$1,212,750 $92,250 $1,305,000
========== ======= ==========
</TABLE>
Total rental expense for the year ended December 31, 1996 and the five
months ended May 31, 1997 was $136,200 and $58,200, respectively.
9. RELATED PARTY TRANSACTIONS
The Company leases the office building and warehouse from a shareholder of
A-ABC and A-1. The Company also pays management fees to a company owned by a
shareholder for administrative and operational services. The management
agreement is renewed annually.
F-84
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, the Company sold land and buildings and improvements to a
shareholder for the recorded book value of $120,482. In addition, the Company
declared $342,584 of distributions to shareholders, which were not paid as of
May 31, 1997.
At December 31, 1996 and May 31, 1997, the Company had amounts due to
related parties of $315,474 and $342,584, respectively, and amounts due from
related parties of $23,174 and $145,070, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) plan covering substantially all
employees. Contributions to this plan, determined annually, are at the
discretion of the Board of Directors. Authorized contributions for the year
ended December 31, 1996 and the five months ended May 31, 1997 amounted to
$20,258 and $9,942, respectively.
11. ADVERTISING
The Company expenses advertising costs as incurred. Total advertising
expense for the year ended December 31, 1996 and the five months ended May 31,
1997 amounted to $401,722 and $136,350, respectively, and is included in
selling, general and administrative expenses in the accompanying combined
statements of operations.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying combined balance sheets approximates their
fair value.
14. SUBSEQUENT EVENT
Effective June 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash and
common stock of GroupMAC.
F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Arkansas Mechanical Services, Inc.
and Mechanical Services, Inc.:
We have audited the accompanying combined balance sheets of Arkansas
Mechanical Services, Inc. and Mechanical Services, Inc. (collectively referred
to as the Company) as of December 31, 1996 and June 30, 1997, and the related
combined statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1996 and the six months ended June 30, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Arkansas
Mechanical Services, Inc. and Mechanical Services, Inc. as of December 31,
1996 and June 30, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1996 and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-86
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997
ASSETS ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 124,687 $ 20,123 $ 94,626
Accounts receivable................... 960,574 1,337,571 1,153,299
Inventories........................... 55,036 75,862 80,063
Costs and estimated earnings in excess
of billings on uncompleted contracts. 52,310 36,203 --
Due from related parties.............. 21,291 17,553 41,440
Prepaid expenses and other current
assets............................... 8,795 11,508 27,690
---------- ---------- ----------
Total current assets................ 1,222,693 1,498,820 1,397,118
PROPERTY AND EQUIPMENT, net............. 634,996 632,862 610,222
GOODWILL, net of accumulated
amortization of $11,265, $11,922 and
$12,249, respectively.................. 14,975 14,318 13,991
OTHER NONCURRENT ASSETS................. 1,217 1,383 --
---------- ---------- ----------
Total assets........................ $1,873,881 $2,147,383 $2,021,331
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt......... $ 513,157 $ 500,352 $ 321,703
Accounts payable...................... 529,497 725,177 387,349
Accrued expenses...................... 157,811 69,571 113,363
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ 117,526 99,690 35,268
Due to related parties................ -- 35,150 98,780
---------- ---------- ----------
Total current liabilities........... 1,317,991 1,429,940 956,463
LONG-TERM DEBT, net of current
maturities............................. 205,170 192,645 244,920
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.......................... 26,000 26,000 26,000
Retained earnings..................... 371,983 546,061 841,211
Treasury stock, at cost............... (47,263) (47,263) (47,263)
---------- ---------- ----------
Total shareholders' equity.......... 350,720 524,798 819,948
---------- ---------- ----------
Total liabilities and shareholders'
equity............................. $1,873,881 $2,147,383 $2,021,331
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-87
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE NINE MONTHS ENDED
YEAR ENDED 30, SEPTEMBER 30,
DECEMBER 31, ---------------------- ----------------------
1996 1996 1997 1996 1997
------------ ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $6,237,166 $3,460,144 $4,028,775 $4,755,144 $5,962,959
COST OF SERVICES........ 4,773,451 2,663,083 3,168,537 3,639,083 4,497,390
---------- ---------- ---------- ---------- ----------
Gross profit........ 1,463,715 797,061 860,238 1,116,061 1,465,569
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,082,470 525,206 583,120 783,206 890,309
---------- ---------- ---------- ---------- ----------
Income from
operations......... 381,245 271,855 277,118 332,855 575,260
OTHER INCOME (EXPENSE):
Interest expense...... (51,408) (22,908) (32,160) (37,908) (41,323)
Other................. 30,104 17,321 2,120 27,321 8,269
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 359,941 $ 266,268 $ 247,078 $ 322,268 $ 542,206
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-88
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------- --------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $26,000 $ 252,756 $(47,263) $ 231,493
Net income......................... -- 359,941 -- 359,941
Distributions to shareholders...... -- (240,714) -- (240,714)
------- --------- -------- ---------
BALANCE, December 31, 1996........... 26,000 371,983 (47,263) 350,720
Net income......................... -- 247,078 -- 247,078
Distributions to shareholders...... -- (73,000) -- (73,000)
------- --------- -------- ---------
BALANCE, June 30, 1997............... $26,000 $ 546,061 $(47,263) $ 524,798
======= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-89
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
DECEMBER 31, -------------------- ------------------
1996 1996 1997 1996 1997
------------ --------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............ $ 359,941 $ 266,268 $ 247,078 $322,268 $542,206
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and am-
ortization.......... 109,624 65,735 89,354 100,008 114,932
Gain on sale of prop-
erty and equipment.. -- -- -- -- (5,627)
Changes in operating
assets and liabili-
ties:
(Increase) decrease
in--
Accounts receivable. (368,388) (366,932) (376,997) (81,715) (192,725)
Inventories......... (10,142) (34) (20,826) (10,117) (25,027)
Costs and estimated
earnings in excess
of billings on un-
completed con-
tracts............. (27,750) (52,223) 16,107 12,542 112,313
Due from related
parties............ 69,661 85,066 3,738 90,952 (20,149)
Prepaid expenses and
other current as-
sets............... (5,009) (20,847) (2,879) (23,044) (17,678)
Increase (decrease)
in--
Accounts payable.... 215,954 367,492 195,680 75,850 (142,147)
Accrued expenses.... 43,524 10,842 (88,240) 4,933 (104,452)
Billings in excess
of costs and esti-
mated earnings on
uncompleted con-
tracts............. 23,641 (71,807) (17,836) (89,241) (82,258)
Due to related par-
ties............... (41,609) (41,609) 35,150 (41,609) 98,780
Other long-term lia-
bilities........... -- -- -- (55,000) --
--------- --------- --------- -------- --------
Net cash provided
by operating ac-
tivities......... 369,447 241,951 80,329 305,827 278,168
--------- --------- --------- -------- --------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of property
and equipment........ (237,113) (130,895) (86,563) (31,898) (95,525)
Proceeds from sales of
property and equip-
ment................. 15,000 -- -- -- 12,000
--------- --------- --------- -------- --------
Net cash used in
investing activi-
ties............. (222,113) (130,895) (86,563) (31,898) (83,525)
--------- --------- --------- -------- --------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from short-
term borrowings...... 590,000 440,000 110,000 -- 110,000
Payments of short-term
borrowings........... (410,000) (260,000) (100,000) -- (191,454)
Proceeds from long-
term debt............ 194,326 98,775 37,499 120,764 39,750
Payments of long-term
debt................. (145,389) (39,145) (72,829) -- (110,000)
Distributions to
shareholders......... (295,714) (155,000) (73,000) (370,715) (73,000)
--------- --------- --------- -------- --------
Net cash provided
by (used in)
financing
activities....... (66,777) 84,630 (98,330) (249,951) (224,704)
--------- --------- --------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 80,557 195,686 (104,564) 23,978 (30,061)
CASH AND CASH EQUIVA-
LENTS, beginning of
period................ 44,130 44,130 124,687 44,130 124,687
--------- --------- --------- -------- --------
CASH AND CASH EQUIVA-
LENTS, end of period.. $ 124,687 $ 239,816 $ 20,123 $ 68,108 $ 94,626
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-90
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Arkansas Mechanical Services, Inc. (AMS) and Mechanical Services, Inc.
(MSI), (collectively referred to as the Company), are under common ownership.
As common control exists among the entities, the financial statements have
been combined for all periods. All significant intercompany transactions and
balances have been eliminated in combination. The Company is primarily engaged
in the installation and servicing of heating and air conditioning systems for
commercial and industrial customers in Little Rock and Fayetteville, Arkansas
and the surrounding areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim combined financial statements for the six months ended June 30,
1996 and as of September 30, 1997 and for the nine months ended September 30,
1996 and 1997 are unaudited, and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the combined interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $51,408 and $32,160 for
the year ended December 31, 1996 and the six months ended June 30, 1997.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
F-91
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Accrued payroll costs and benefits.................. $ 115,949 $63,339
Other accrued expenses.............................. 41,862 6,232
--------- -------
$ 157,811 $69,571
========= =======
</TABLE>
F-92
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Costs incurred.................................. $1,493,806 $2,232,909
Estimated earnings recognized................... 246,687 247,900
---------- ----------
1,740,493 2,480,809
Less billings on contracts...................... 1,805,709 2,544,296
---------- ----------
$ (65,216) $ (63,487)
========== ==========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............... $ 52,310 $ 36,203
Billings in excess of costs and estimated
earnings on uncompleted contracts............... (117,526) (99,690)
--------- --------
$ (65,216) $(63,487)
========= ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, JUNE 30,
LIVES 1996 1997
---------- ------------ ----------
<S> <C> <C> <C>
Service and other vehicles........... 4-7 years $ 654,491 $ 696,871
Machinery and equipment.............. 5-10 years 228,766 233,744
Office equipment, furniture and
fixtures............................ 5-10 years 69,698 98,121
Leasehold improvements............... -- 75,785 86,567
---------- ----------
1,028,740 1,115,303
Less accumulated depreciation........ (393,744) (482,441)
---------- ----------
$ 634,996 $ 632,862
========== ==========
</TABLE>
6. GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
F-93
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Revolving line of credit with a bank with a maximum
amount of $300,000; interest accrues at prime plus
.75% and is payable monthly; secured by accounts
receivable and the personal guarantee of the
shareholders; due on demand.......................... $ 100,000 $ 75,000
Revolving line of credit with a bank with a maximum
amount of $250,000; interest accrues at 10.0% and is
payable monthly; secured by accounts receivable and
the personal guarantee of the shareholders; due on
demand with a maturity date of June 1997............. 180,000 --
Revolving line of credit with a bank with a maximum
amount of $400,000; interest accrues at prime plus
1.5% and is payable monthly; secured by accounts
receivable and the personal guarantee of the
shareholders; due on demand with a maturity date of
February 1998........................................ -- 215,000
Equipment installment notes to a bank; interest
accrued at various rates, payable in monthly
installments, including interest, of $14,256, final
installment due 2001; secured by service and other
vehicles and the personal guarantee of stockholders.. 275,603 259,718
Note payable to a bank; interest accrues at 9.5%;
payable in monthly installments including interest,
of $2,025, final installments, due August 1997;
secured by personal guarantee of the shareholder..... 92,512 83,731
Equipment installment notes to a bank; interest
varying from 7.5% to 10.0%; payable in monthly
installments of various amounts, including interest,
through 2000; secured by service and other vehicles.. 39,366 33,287
Note payable to a company affiliated through common
ownership; interest accrued at 9.0%; payable in
monthly installments, including interest of $981,
final installment due December 1999; unsecured....... 30,846 26,261
--------- ---------
Total short- and long-term debt..................... 718,327 692,997
Less short-term borrowings and current maturities..... (513,157) (500,352)
--------- ---------
$ 205,170 $ 192,645
========= =========
</TABLE>
The aggregate maturities of the short- and long-term debt as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
AMS MSI COMBINED
-------- -------- --------
<S> <C> <C> <C>
1997........................................... $320,107 $193,050 $513,157
1998........................................... 69,749 12,758 82,507
1999........................................... 68,141 10,827 78,968
2000........................................... 40,023 2,723 42,746
2001........................................... 949 -- 949
-------- -------- --------
$498,969 $219,358 $718,327
======== ======== ========
</TABLE>
F-94
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY
The authorized, issued and outstanding common stock of the Company at
December 31, 1996 and June 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------
TREASURY COMMON
AMORTIZED ISSUED OUTSTANDING STOCK STOCK
--------- ------ ----------- -------- -------
<S> <C> <C> <C> <C> <C>
AMS......................... 100,000 6,000 6,000 1,900 $ 6,000
MSI......................... 1,000 400 333 -- 20,000
------- ----- ----- ----- -------
Total..................... 101,000 6,400 6,333 1,900 $26,000
======= ===== ===== ===== =======
</TABLE>
The common stock of AMS has a par value of $1 per share. The common stock of
MSI has a par value of $1 per share, but has a stated value of $60 per share.
MSI must maintain $20,000 in shareholders' equity in order to retain its
contractors license.
9. LEASES
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as December 31, 1996
are as follows:
<TABLE>
<CAPTION>
AMS MSI COMBINED
------- ------ --------
<S> <C> <C> <C>
1997.............................................. $17,608 $6,912 $24,520
1998.............................................. 14,400 2,656 17,056
1999.............................................. 14,400 -- 14,400
------- ------ -------
$46,408 $9,568 $55,976
======= ====== =======
</TABLE>
In addition to the above lease commitments, the Company leases office and
warehouse space under a month-to-month operating lease, with monthly payments
of $3,200. Total rental expense for the year ended December 31, 1996 and the
six months ended June 30, 1997 was $76,409 and $38,421, respectively.
10. RELATED PARTY TRANSACTIONS
The Company rents certain facilities from related parties. Total rent
expense for these facilities for the year ended December 31, 1996 and the six
months ended June 30, 1997 was $75,696 and $29,608, respectively. AMS rents
certain vehicles from a company affiliated through common ownership. Total
rent expense for these vehicles for the year ended December 31, 1996 and the
six months ended June 30, 1997 was $7,300 and $3,300, respectively.
The Company obtains data processing and other services from a company
affiliated through common ownership. The total expense for these services for
the year ended December 31, 1996 and the six months ended June 30, 1997 was
$120,564 and $60,282, respectively.
11. EMPLOYEE BENEFIT PLAN
Non-office employees are participants in a multi-employer defined
contribution plan pursuant to the collective bargaining agreement of the
union. Contributions for the year ended December 31, 1996 and the six months
ended June 30, 1997, were $91,316 and $57,512, respectively.
F-95
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying combined balance sheets approximates
their fair value.
14. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS REPORT--ACQUISITION OF COMPANY
(UNAUDITED)
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC.
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the initial public offering of the common
stock of GroupMAC (acquisition to be effective October 31, 1997).
The Company made distributions in respect to the Company's estimated S
Corporation accumulated adjustment account of approximately $0.9 million at
the time of closing.
F-96
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Callahan Roach Products and Publications, Inc.
We have audited the accompanying balance sheet of Callahan Roach Products
and Publications, Inc. as of February 28, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Callahan Roach Products
and Publications, Inc. as of February 28, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 30, 1997
F-97
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, JUNE 30,
1997 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 27,161 $105,939
Accounts receivable................................. 10,104 --
Inventories......................................... 44,567 46,837
-------- --------
Total current assets.............................. 81,832 152,776
PROPERTY AND EQUIPMENT, net........................... 126,374 117,843
-------- --------
Total assets...................................... $208,206 $270,619
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 60,595 $ 60,629
Accounts payable.................................... 76,043 71,427
Accrued expenses.................................... 21,892 18,436
Income taxes payable................................ 2,576 14,407
-------- --------
Total current liabilities......................... 161,106 164,899
LONG-TERM DEBT, net of current maturities............. 24,558 17,607
DEFERRED INCOME TAXES................................. 8,260 8,760
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares
authorized;
1,000 shares issued and outstanding................ 1,000 1,000
Retained earnings................................... 13,282 78,353
-------- --------
Total shareholders' equity........................ 14,282 79,353
-------- --------
Total liabilities and shareholders' equity........ $208,206 $270,619
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED ------------------
FEBRUARY 28, JUNE 30, JUNE 30,
1997 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES....................................... $1,552,708 $639,702 $597,042
COST OF SERVICES............................... 310,816 108,479 130,710
---------- -------- --------
Gross profit................................. 1,241,892 531,223 466,332
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 1,238,075 438,965 379,697
---------- -------- --------
Income from operations....................... 3,817 92,258 86,635
OTHER INCOME (EXPENSES):
Interest expense............................. (9,196) (2,187) (5,197)
Other........................................ (6,497) 9 (1,367)
---------- -------- --------
Income (loss) before income taxes........... (11,876) 90,080 80,071
INCOME TAX PROVISION........................... -- 19,000 15,000
---------- -------- --------
NET INCOME (LOSS).............................. $ (11,876) $ 71,080 $ 65,071
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, February 28, 1996....................... $1,000 $ 25,158 $ 26,158
Net loss....................................... -- (11,876) (11,876)
------ -------- --------
BALANCE, February 28, 1997....................... 1,000 13,282 14,282
Net income (unaudited)......................... -- 65,071 65,071
------ -------- --------
BALANCE, June 30, 1997 (unaudited)............... $1,000 $ 78,353 $ 79,353
====== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-100
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED ------------------
FEBRUARY 28, JUNE 30, JUNE 30,
1997 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ (11,876) $ 71,080 $ 65,071
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation....................... 26,587 2,395 17,872
Deferred income taxes.............. -- -- 500
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable.............. (8,890) (9,983) 10,104
Inventories...................... 7,673 8,551 (2,270)
Increase (decrease) in--
Accounts payable................. (4,555) (54,180) (4,616)
Accrued expenses................. 14,051 2,462 (3,456)
Income taxes payable............. (589) 18,858 11,831
--------- -------- --------
Net cash provided by operating
activities..................... 22,401 39,183 95,036
--------- -------- --------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property and equipment.. (103,577) (43,945) (9,341)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on bank
line of credit...................... 35,701 1,535 (443)
Proceeds from long-term debt......... 46,100 28,174 --
Payment on long-term debt............ (11,405) (723) (6,474)
--------- -------- --------
Net cash provided by (used in)
financing activities........... 70,396 28,986 (6,917)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH....... (10,780) 24,224 78,778
CASH AND CASH EQUIVALENTS, beginning
of period............................ 37,941 37,941 27,161
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period............................... $ 27,161 $ 62,165 $105,939
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Callahan Roach Products and Publications, Inc., (the Company) is primarily
engaged in the business of selling marketing products and pricing models to
independent service companies which install and service heating and air
conditioning systems nationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
Interim financial statements as of June 30, 1997 and for the four months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from service contracts are recognized as services are performed.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $9,196 and
$3,123, respectively, for the year ended February 28, 1997.
Inventories
Inventories consists of supplies used in providing the Company's products
and services. The inventory is valued at the lower of cost or market, with
cost determined on a first-in, first-out (FIFO) basis.
Property, Equipment and Depreciation
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
F-102
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective March 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consist of the following at February 28, 1997:
<TABLE>
<S> <C>
Accrued payroll and related expense................................. $14,051
Other accrued expenses.............................................. 7,841
-------
$21,892
=======
</TABLE>
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at February 28, 1997 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Furniture and fixtures................................ 3-7 years $179,641
Less accumulated depreciation......................... (53,267)
--------
Property and equipment, net......................... $126,374
========
</TABLE>
4. INCOME TAXES
There is no Federal income tax provision as losses were incurred and a
valuation allowance has been established against future benefits deriving from
the carryforward of these losses. The deferred income tax liability results
primarily from tax depreciation in excess of book depreciation on property and
equipment.
F-103
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following at February 28, 1997:
<TABLE>
<S> <C>
Credit facility in the amount of $100,000 with a bank, bearing
interest at 12.75%................................................ $42,584
Equipment loans payable to financial institutions, interest varying
from 12% to 19%, collateralized by certain equipment, payable in
monthly installments including interest,
final installment due February 2000............................... 42,569
-------
85,153
Less short-term borrowings and current maturities.................. (60,595)
-------
$24,558
=======
</TABLE>
The Company has a revolving credit agreement with a bank to provide
borrowings up to $100,000. The revolving credit agreement is collateralized by
the personal guarantees of shareholders. Borrowings under the agreement in
effect on February 28, 1997, bear interest at 12.5%. Borrowings outstanding at
February 28, 1997 were $42,584.
Maturities of short- and long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28,
------------
<S> <C>
1998................................................................ $60,595
1999................................................................ 16,375
2000................................................................ 8,183
-------
$85,153
=======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
7. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
8. SUBSEQUENT EVENT
Effective July 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
the Company in a merger transaction for a combination of cash, preferred stock
and common stock of GroupMAC. All of the preferred shares issued in connection
with the acquisition of the Company were redeemed for cash concurrent with the
consummation of the initial public offering of the common stock of GroupMAC.
F-104
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Central Carolina Air Conditioning Company:
We have audited the accompanying balance sheets of Central Carolina Air
Conditioning Company (the Company) as of October 31, 1996 and June 30, 1997,
and the related statements of operations, shareholders' equity and cash flows
for the year ended October 31, 1996 and the eight months ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Central Carolina Air
Conditioning Company as of October 31, 1996 and June 30, 1997, and the results
of its operations and its cash flows for the year ended October 31, 1996 and
the eight months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-105
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 440,289 $ 457,132 $1,107,250
Accounts receivable...................... 627,783 867,913 598,271
Inventories.............................. 292,215 246,225 231,435
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 113,653 168,226 --
Due from related parties................. 505,003 175,448 7,000
Prepaid expenses and other current
assets.................................. 240,089 219,149 54,620
---------- ---------- ----------
Total current assets.................... 2,219,032 2,134,093 1,998,576
PROPERTY AND EQUIPMENT, net............... 459,553 674,948 615,057
OTHER NONCURRENT ASSETS................... 37,098 38,498 --
---------- ---------- ----------
Total assets............................ $2,715,683 $2,847,539 $2,613,633
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt............ $ 64,283 $ 979 $ --
Accounts payable......................... 322,848 274,887 131,494
Accrued expenses......................... 261,300 232,751 124,682
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 48,399 39,131 8,083
Deferred service contract revenue........ 755,047 762,821 794,931
---------- ---------- ----------
Total current liabilities............... 1,451,877 1,310,569 1,059,190
DEFERRED SERVICE CONTRACT REVENUE......... 211,397 204,304 162,865
DEFERRED COMPENSATION LIABILITY........... 55,373 60,670 29,600
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$10 par value; 2,000 shares
authorized,
issued and outstanding.................. 20,000 20,000 20,000
Additional paid-in capital............... 23,140 23,140 23,140
Retained earnings........................ 953,896 1,228,856 1,318,838
---------- ---------- ----------
Total shareholders' equity.............. 997,036 1,271,996 1,361,978
---------- ---------- ----------
Total liabilities and shareholders'
equity................................. $2,715,683 $2,847,539 $2,613,633
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED ELEVEN MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
OCTOBER 31, ---------------------- ----------------------
1996 1996 1997 1996 1997
----------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $8,161,356 $5,139,628 $5,463,051 $7,581,628 $7,552,586
COST OF SERVICES........ 5,182,045 3,267,848 3,224,802 4,710,848 4,619,763
---------- ---------- ---------- ---------- ----------
Gross profit.......... 2,979,311 1,871,780 2,238,249 2,870,780 2,932,823
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 2,598,253 1,672,596 1,648,388 2,419,596 2,184,021
---------- ---------- ---------- ---------- ----------
Income from
operations........... 381,058 199,184 589,861 451,184 748,802
OTHER INCOME (EXPENSE):
Interest expense....... (9,841) (6,073) (3,087) (2,073) 4,137
Interest income........ 30,219 17,611 28,472 14,611 28,472
Other.................. (40,166) 13,487 11,233 28,487 9,727
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 361,270 $ 224,209 $ 626,479 $ 492,209 $ 791,138
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1995.......... $20,000 $23,140 $ 973,595 $1,016,735
Net income........................ -- -- 361,270 361,270
Distributions to shareholders..... -- -- (380,969) (380,969)
------- ------- ---------- ----------
BALANCE, October 31, 1996.......... 20,000 23,140 953,896 997,036
Net income........................ -- -- 626,479 626,479
Distributions to shareholders..... -- -- (351,519) (351,519)
------- ------- ---------- ----------
BALANCE, June 30, 1997............. $20,000 $23,140 $1,228,856 $1,271,996
======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED ELEVEN MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
OCTOBER 31, --------------------- ---------------------
1996 1996 1997 1996 1997
----------- ---------- --------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 361,270 $ 224,209 $ 626,479 $ 492,209 $ 791,138
Adjustments to
reconcile net income
to net cash
provided by (used in)
operating activities:
Depreciation........ 200,548 140,707 142,535 135,838 102,760
Gain on sales of
property and
equipment.......... (13,811) (3,344) -- -- --
Changes in operating
assets and
liabilities:
(Increase) decrease
in--
Accounts
receivable....... (144,095) (243,215) (240,130) (253,900) 49,839
Inventories....... 6,516 62,058 45,990 35,210 60,780
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts........ (73,301) (52,611) (54,573) (518,822) 113,653
Due from related
parties.......... (340,792) (481,044) 329,555 19,736 498,003
Prepaid expenses
and other current
assets........... (55,800) 91,214 20,940 86,692 165,142
Other noncurrent
assets........... 1,750 1,050 (1,400) (597,685) 37,098
Increase (decrease)
in--
Accounts payable.. 75,239 7,192 (47,961) (126,068) (191,354)
Accrued expenses.. (82,481) (123,859) (28,549) (84,685) (22,759)
Billings in excess
of costs and
estimated
earnings on
uncompleted
contracts........ 31,913 71,245 (9,268) 712,099 (40,316)
Deferred service
contract revenue. 17,670 (31,809) 681 (13,160) (122,508)
Deferred
compensation
liability........ 7,945 5,297 5,297 -- (25,773)
---------- ---------- --------- --------- ----------
Net cash provided
by (used in)
operating
activities...... (7,429) (332,910) 789,596 (112,536) 1,415,703
---------- ---------- --------- --------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (244,128) (266,117) (357,930) (412,493) (216,409)
Proceeds from sales of
property and
equipment............ 25,615 3,344 -- -- --
---------- ---------- --------- --------- ----------
Net cash used in
investing
activities...... (218,513) (262,773) (357,930) (412,493) (216,409)
---------- ---------- --------- --------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from short-
and long-term debt... 125,000 125,000 -- 102,154 --
Payments of short- and
long-term debt....... (120,203) (14,655) (63,304) (45,203) (64,283)
Distributions to
shareholders......... (380,969) (196,994) (351,519) (82,772) (468,050)
---------- ---------- --------- --------- ----------
Net cash used in
financing
activities...... (376,172) (86,649) (414,823) (25,821) (532,333)
---------- ---------- --------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (602,114) (682,332) 16,843 (550,850) 666,961
CASH AND CASH
EQUIVALENTS, beginning
of period............. 1,042,403 1,042,403 440,289 911,809 440,289
---------- ---------- --------- --------- ----------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 440,289 $ 360,071 $ 457,132 $ 360,959 $1,107,250
========== ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Central Carolina Air Conditioning Company (the Company) is primarily engaged
in the installation and servicing of heating and air conditioning systems for
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the eight months ended June 30, 1996
and as of September 30, 1997 and for the eleven months ended September 30,
1996 and 1997, are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $9,841 and $3,087 for the
year ended October 31, 1996 and the eight months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
F-110
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company also offers an extended service
warranty on sales of air conditioning and heating units, for coverage up to
five years after installation. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal and
North Carolina tax purposes as an S Corporation whereby the shareholders'
respective equitable shares in the taxable income of the Company are
reportable on their individual tax returns. The Company makes distributions to
the shareholders' each year at least in amounts necessary to pay personal
income tax payable on the Company's taxable income.
New Accounting Pronouncement
Effective November 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Prepaid expenses....................................... $ 96,620 $ 69,732
Cash value of life insurance........................... 119,331 130,801
Other current assets................................... 24,138 18,616
-------- --------
$240,089 $219,149
======== ========
</TABLE>
Cash value of life insurance represents the cash value of six life insurance
policies.
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C>
Accrued payroll costs and benefits........................ $124,208 $175,831
Accrued bonus and profit sharing.......................... 95,195 --
Other accrued expenses.................................... 41,897 56,920
-------- --------
$261,300 $232,751
======== ========
</TABLE>
F-111
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs incurred......................................... $464,107 $526,315
Estimated earnings recognized.......................... 177,188 269,364
-------- --------
641,295 795,679
Less billings on contracts............................. 576,041 666,584
-------- --------
$ 65,254 $129,095
======== ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $113,653 $168,226
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (48,399) (39,131)
-------- --------
$ 65,254 $129,095
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31, JUNE 30,
USEFUL LIVES 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Service and other vehicles........... 4-7 years $ 1,026,498 $ 1,320,858
Machinery and equipment.............. 5-10 years 203,362 206,399
Office equipment, fixtures and
fixtures............................ 5-10 years 373,146 392,231
Leasehold improvements............... -- 294,877 306,087
----------- -----------
1,897,883 2,225,575
Less accumulated depreciation........ (1,438,330) (1,550,627)
----------- -----------
$ 459,553 $ 674,948
=========== ===========
</TABLE>
F-112
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Revolving line of credit with a bank, with a maximum
amount
of $200,000 through February 1, 1997; interest
accrues at prime
(8.25% as of October 31, 1996) and is payable
monthly;
unpaid principal due on demand....................... $50,000 $--
Note payable to bank, due in monthly installments of
$1,167, with interest
of 8% per annum and secured by vehicles; matures July
15, 1997............................................. 9,998 979
Note payable to bank, due in monthly installments of
$1,093, with interest
of 7.25% per annum and secured by vehicles; matures
February 15, 1997.................................... 4,285 --
------- ----
$64,283 $979
======= ====
</TABLE>
The Company had a revolving line of credit with a bank to provide unsecured
borrowings of up to $200,000. Interest accrued at prime and was payable
monthly. This agreement matured in February 1997. Upon maturity, the Company
obtained another revolving line of credit to provide borrowings of up to
$300,000 with a loan maturity date of March 1, 1998. Other terms of the
agreement were unchanged.
7. LEASES
The Company leases its office building and warehouse from a shareholder
under a 20-year lease terminating in October 2016. The rent is $9,125 for the
first three years and increases by 2.5% at the beginning of the fourth,
seventh, tenth, thirteenth, sixteenth and nineteenth years.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31, 1996
are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 109,500
1998.............................................................. 109,500
1999.............................................................. 109,500
2000.............................................................. 112,238
2001.............................................................. 112,238
Thereafter........................................................ 1,799,369
----------
$2,352,345
==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company leases its office building and warehouse from shareholders of
the Company. For the year ended October 31, 1996 and the eight months ended
June 30, 1997, the Company paid $119,526 and $81,741, respectively, related to
these leases. As of October 31, 1996 and June 30, 1997, the Company has
unsecured advances to various shareholders totaling $444,933 and $136,400,
respectively. In addition, the Company has a mortgage receivable from the
President and shareholder of $60,070 and $39,048 as of October 31, 1996 and
June 30, 1997, respectively. These amounts are included in the amounts due
from related parties in the accompanying balance sheets.
F-113
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) plan (the Plan) covering its
qualified employees. Employees may choose to defer up to 10% of their
compensation during the Plan year, not to exceed Internal Revenue Service
limitations, by contributing to the Plan. The Company matches 100% of each
employee's contributions up to a maximum of 5% of the employee's gross
earnings. Contributions made by the Company of $18,902 and $10,938 were
charged to operations in the year ended October 31, 1996 and the eight months
ended June 30, 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
12. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS REPORT--ACQUISITION OF COMPANY
(UNAUDITED)
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC.
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the initial public offering of the common
stock of GroupMAC (acquisition to be effective October 31, 1997).
The Company made distributions in respect to the Company's estimated S
Corporation accumulated adjustment account of approximately $0.5 million at
the time of closing.
F-114
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hallmark Air Conditioning, Inc.:
We have audited the accompanying consolidated balance sheets of Hallmark Air
Conditioning, Inc. and subsidiary (the Company) as of February 28, 1997 and
May 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended February 28, 1997 and
the three months ended May 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hallmark
Air Conditioning, Inc. and subsidiary as of February 28, 1997 and May 31,
1997, and the results of their operations and their cash flows for the year
ended February 28, 1997 and the three months ended May 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 11, 1997
F-115
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 203,739 $ 229,466
Accounts receivable, net of allowance for doubtful
accounts
of $4,039 and $8,078, respectively.................. 139,143 220,122
Inventories.......................................... 359,380 395,684
Due from related parties............................. 43,977 38,140
Deferred income taxes................................ 163,673 160,527
Prepaid expenses and other current assets............ 244,257 184,829
---------- ----------
Total current assets............................... 1,154,169 1,228,768
PROPERTY AND EQUIPMENT, net............................ 224,504 203,424
GOODWILL, net of accumulated amortization of $6,418 and
$8,344, respectively.................................. 109,113 107,187
DUE FROM RELATED PARTIES............................... 29,476 29,476
OTHER NONCURRENT ASSETS................................ 131,990 128,040
---------- ----------
Total assets....................................... $1,649,252 $1,696,895
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt........................................... $ 46,989 $ 31,896
Current obligations under capital leases............. 69,628 69,628
Accounts payable..................................... 75,655 224,327
Accrued expenses..................................... 146,658 197,154
Deferred service contract revenue.................... 310,927 294,453
---------- ----------
Total current liabilities.......................... 649,857 817,458
LONG-TERM DEBT, net of current maturities.............. 181,570 191,434
OBLIGATIONS UNDER CAPITAL LEASES, net of current
maturities............................................ 54,733 45,440
DEFERRED SERVICE CONTRACT REVENUE...................... 159,708 144,204
DEFERRED INCOME TAXES.................................. 22,429 19,283
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$100 par value; 500 shares authorized;
180 shares issued and outstanding................... 18,000 18,000
Retained earnings.................................... 560,889 459,761
Net unrealized gain on marketable securities......... 2,066 1,315
---------- ----------
Total shareholders' equity......................... 580,955 479,076
---------- ----------
Total liabilities and shareholders' equity......... $1,649,252 $1,696,895
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-116
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31,
FEBRUARY 28, ----------------------
1997 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.......................... $6,516,181 $1,642,422 $1,558,526
COST OF SERVICES.................. 3,461,490 879,293 826,626
---------- ---------- ----------
Gross profit.................... 3,054,691 763,129 731,900
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 3,045,942 676,118 811,982
---------- ---------- ----------
Income (loss) from operations... 8,749 87,011 (80,082)
OTHER INCOME (EXPENSE):
Interest expense................ (30,647) (7,436) (30,135)
Interest income................. 16,106 4,082 11,652
Other........................... 3,227 (11,319) --
---------- ---------- ----------
Income (loss) before income tax
provision..................... (2,565) 72,338 (98,565)
INCOME TAX PROVISION.............. 18,114 12,120 2,563
---------- ---------- ----------
NET INCOME (LOSS)................. $ (20,679) $ 60,218 $ (101,128)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-117
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
COMMON RETAINED MARKETABLE SHAREHOLDERS'
STOCK EARNINGS SECURITIES EQUITY
------- --------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, February 29, 1996......... $18,000 $ 581,568 $ 853 $ 600,421
Net loss......................... -- (20,679) -- (20,679)
Net unrealized gain on marketable
securities...................... -- -- 1,213 1,213
------- --------- ------ ---------
BALANCE, February 28, 1997......... 18,000 560,889 2,066 580,955
Net loss......................... -- (101,128) -- (101,128)
Net unrealized loss on marketable
securities...................... -- -- (751) (751)
------- --------- ------ ---------
BALANCE, May 31, 1997.............. $18,000 $ 459,761 $1,315 $ 479,076
======= ========= ====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-118
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31,
FEBRUARY 28, ---------------------
1997 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (20,679) $ 60,218 $(101,128)
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating
activities:
Depreciation and amortization........... 171,417 33,426 40,806
Deferred income tax benefit............. (114) -- --
Changes in operating assets and
liabilities, net of effect of
acquisitions accounted for as
purchases:
(Increase) decrease in--
Accounts receivable................... 17,294 (107,706) (80,979)
Inventories........................... (7,915) (70,635) (36,304)
Due from related parties.............. 10,175 46,610 5,837
Prepaid expenses and other current
assets............................... (65,977) 88,660 58,677
Increase (decrease) in--
Accounts payable...................... (21,832) 105,401 148,672
Accrued expenses...................... (105,520) 61,281 50,496
Deferred service contract revenue..... (41,539) 6,911 (31,978)
--------- --------- ---------
Net cash provided by (used in)
operating activities................ (64,690) 224,166 54,099
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through acquisition......... 36,881 36,881 --
Purchases of property and equipment....... (35,742) (12,629) (13,850)
Proceeds from sales of property and
equipment................................ 15,831 -- --
Payment for covenant not to compete....... (130,000) (130,000) --
Proceeds from redemption of marketable
securities, net.......................... 1,663 30,475 --
--------- --------- ---------
Net cash used in investing
activities.......................... (111,367) (75,273) (13,850)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............. 16,010 -- 9,864
Payments of long-term debt................ (23,649) (1,681) (15,093)
Payments of obligations under capital
leases................................... (66,055) -- (9,293)
--------- --------- ---------
Net cash used in financing
activities.......................... (73,694) (1,681) (14,522)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (249,751) 147,212 25,727
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 453,490 453,490 203,739
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period... $ 203,739 $ 600,702 $ 229,466
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-119
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Hallmark Air Conditioning, Inc. and subsidiary (the Company) is primarily
engaged in the installation and servicing of heating and air conditioning
systems for residential and light commercial customers in Houston and San
Antonio, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
Hallmark Air Conditioning, Inc. (Hallmark) and its wholly-owned subsidiary,
Jerry Albert Air Conditioning, Inc. (Jerry Albert). All significant
intercompany balances and transactions have been eliminated in consolidation.
Interim Financial Information
The interim consolidated financial statements for the three months ended May
31, 1996 are unaudited, and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the consolidated interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenue is recognized upon completion of service. Revenues on service and
maintenance contracts are recognized over the life of the contract.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $32,261 and
$54,300, respectively, for the year ended February 28, 1997, and $28,310 and
$-0-, respectively, for the three months ended May 31, 1997.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
F-120
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective March 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Prepaid expenses....................................... $ 36,484 $ 14,313
Cash value of life insurance........................... 131,434 93,387
Marketable securities.................................. 30,015 30,805
Federal income taxes receivable........................ 46,324 46,324
-------- --------
$244,257 $184,829
======== ========
Other noncurrent assets consists of the following:
Covenant not to compete, net of accumulated
amortization of
$10,833 and $14,033, respectively..................... $119,167 $115,967
Other noncurrent assets................................ 12,823 12,073
-------- --------
$131,990 $128,040
======== ========
Accrued expenses consists of the following:
Accrued payroll costs and benefits..................... $100,330 $147,290
Other accrued expenses................................. 46,328 49,864
-------- --------
$146,658 $197,154
======== ========
</TABLE>
F-121
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED FEBRUARY 28, MAY 31,
USEFUL LIVES 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Service and other vehicles............ 4-7 years $ 731,913 $ 756,447
Machinery and equipment............... 5-10 years 303,791 265,097
Office equipment, furniture and
fixtures............................. 5-10 years 43,643 43,643
Leasehold improvements................ -- 122,205 122,205
---------- ----------
1,201,552 1,187,392
Less accumulated depreciation......... (977,048) (983,968)
---------- ----------
$ 224,504 $ 203,424
========== ==========
</TABLE>
During the year ended February 28, 1997 and the three months ended May 31,
1997, the Company acquired $74,506 and $31,387, respectively, of property and
equipment in exchange for obligations under capital leases.
5. GOODWILL AND OTHER ASSETS
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
Other assets include a covenant not to compete related to the acquisition of
Jerry Albert. The covenant not to compete is being amortized on a straight-
line basis over the life of the covenant, which is five years.
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Revolving bank line of credit; borrowings not to
exceed $175,000; interest accrues at 8.75% and is
payable monthly; unpaid principal due in October
1997............................................... $ 10,000 $ --
Equipment installment notes to a bank, interest
varying from 8.5% to 9.5%; payable in monthly
installments of various amounts, including
interest, through July 1999; secured by certain
machinery and equipment............................ 28,402 36,596
Note payable to the former shareholder relating to
the purchase of all of the shares of Jerry Albert;
interest accrues at 8.5%; payable in monthly
installments, including interest, of $2,480, final
installment due May 2006........................... 190,157 186,734
-------- --------
Total short- and long-term debt................... 228,559 223,330
Less short-term borrowings and current maturities... (46,989) (31,896)
-------- --------
$181,570 $191,434
======== ========
</TABLE>
F-122
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of short- and long-term debt as of February 28, 1997
are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 46,989
1999................................................................ 33,798
2000................................................................ 31,263
2001................................................................ 29,756
2002................................................................ 29,756
Thereafter.......................................................... 56,997
--------
$228,559
========
</TABLE>
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
FEBRUARY 28, MAY 31,
1997 1997
------------ -------
<S> <C> <C>
Federal:
Current............................................... $ 7,976 $ --
Deferred.............................................. (114) --
State:
Current............................................... 10,252 2,563
Deferred.............................................. -- --
------- ------
$18,114 $2,563
======= ======
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to loss before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Benefit at the statutory rate........................ $ (872) $(33,512)
Increase resulting from:
State income taxes, net of federal benefit......... 10,252 2,563
Nondeductible expenses............................. 3,468 1,192
Increase in valuation allowance.................... -- 34,239
Other.............................................. 5,266 (1,919)
------- --------
$18,114 $ 2,563
======= ========
</TABLE>
F-123
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward..................... $ -- $ 31,043
Deferred service contract revenues.................. 133,160 135,757
Accrued customer protection......................... 15,358 13,131
Allowance for doubtful accounts..................... 1,288 2,747
Other............................................... 13,867 12,088
Valuation allowance................................. -- (34,239)
-------- --------
Total deferred income tax asset................... 163,673 160,527
-------- --------
Deferred income tax liabilities:
Depreciation........................................ 19,284 19,283
Other............................................... 3,145 --
-------- --------
Total deferred income tax liability............... 22,429 19,283
-------- --------
Net deferred income tax asset..................... $141,244 $141,244
======== ========
</TABLE>
Management believes it is more likely than not the Company will realize the
benefits of the net deferred income tax asset.
8. LEASES
The Company is obligated under various capital leases, for service and other
vehicles, that expire at various dates through June 2000. At February 28, 1997
and May 31, 1997, the gross amount of property and equipment and related
accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ ---------
<S> <C> <C>
Service and other vehicles........................... $ 259,143 $ 290,530
Less accumulated depreciation........................ (127,548) (141,290)
--------- ---------
$ 131,595 $ 149,240
========= =========
</TABLE>
The Company also has several noncancelable operating leases, primarily for
service and other vehicles, that expire over the next three years. These
leases generally contain renewal options for periods ranging from three to
five years and require the Company to pay all executory costs such as
maintenance and insurance. Rental payments include minimum rentals plus
contingent rentals based on mileage. Rental expense for these operating leases
during the year ended February 28, 1997 and the three months ended May 31,
1997 was approximately $18,600 and $5,000, respectively.
F-124
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of February 28, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending February 28 or 29,
1998.................................................... $ 69,628 $11,789
1999.................................................... 35,699 59,928
2000.................................................... 19,034 --
-------- -------
Total minimum lease payments............................ 124,361 $71,717
=======
Less current obligations under capital leases............. 69,628
--------
Obligations under capital leases, net................... $ 54,733
========
</TABLE>
The Company leases its primary operations facility from a shareholder and
executive officer of the Company. The lease is for an initial one-year term
expiring in 1997 with an annual renewal thereafter and has been classified as
an operating lease and is included in the data presented above. Total rent
expense associated with this lease for the year ended February 28, 1997 and
the three months ended May 31, 1997 was approximately $96,000 and $24,000,
respectively.
9. EMPLOYEE BENEFIT PLAN
During January 1997, the Company established a contributory 401(k) plan
covering substantially all employees. Contributions to this plan, determined
annually, are at the discretion of the Board of Directors. Authorized
contributions for the year ended February 28, 1997 amounted to $830.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
marketable securities (carried at fair value), and short- and long-term debt.
The Company believes that the carrying value of these instruments on the
accompanying consolidated balance sheets approximates their fair value.
12. ACQUISITION OF JERRY ALBERT
The Company acquired all of the outstanding shares of Jerry Albert on May 1,
1996, in exchange for a $200,000 note payable to the former shareholder of
Jerry Albert. The acquisition was accounted for as a purchase and the
operations of Jerry Albert have been included in the accompanying financial
statements since the date of acquisition. Based upon the relative size of the
acquisition, the related pro forma data is not presented.
13. SUBSEQUENT EVENT
Effective June 1, 1997 Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash,
preferred stock and common stock of GroupMAC. All of the preferred shares
issued in connection with the acquisition of the business were redeemed for
cash concurrent with the consummation of the initial public offering of the
common stock of GroupMAC.
F-125
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Sibley Services, Incorporated:
We have audited the accompanying balance sheets of Sibley Services,
Incorporated (the Company) as of October 31, 1996 and June 30, 1997, and the
related statements of operations, shareholders' equity and cash flows for the
year ended October 31, 1996 and the eight months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sibley Services,
Incorporated as of October 31, 1996 and June 30, 1997, and the results of its
operations and its cash flows for the year ended October 31, 1996 and the
eight months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-126
<PAGE>
SIBLEY SERVICES, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 76,034 $ 40,710
Accounts receivable................................... 693,839 635,358
Inventories........................................... 89,649 126,146
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 160,092 55,464
Due from related parties and employees................ 11,170 12,900
Prepaid expenses and other current assets............. 242,851 243,957
---------- ----------
Total current assets................................. 1,273,635 1,114,535
PROPERTY AND EQUIPMENT, net............................ 89,422 86,854
---------- ----------
Total assets......................................... $1,363,057 $1,201,389
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt............................................ $ 222,591 $ 307,253
Accounts payable...................................... 337,452 226,854
Accrued expenses...................................... 127,036 57,137
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 3,731 73,479
Deferred service contract revenue..................... 5,463 --
Deferred income taxes................................. 31,474 32,197
---------- ----------
Total current liabilities............................ 727,747 696,920
LONG-TERM DEBT, net of current maturities.............. 82,177 69,115
DEFERRED INCOME TAXES.................................. 9,899 16,668
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value; 1,000 shares authorized;
534 shares issued
and outstanding...................................... 21,424 21,424
Retained earnings..................................... 626,728 502,180
Treasury stock, 138 shares at cost.................... (104,918) (104,918)
---------- ----------
Total shareholders' equity........................... 543,234 418,686
---------- ----------
Total liabilities and shareholders' equity......... $1,363,057 $1,201,389
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, ----------------------
1996 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................... $6,962,485 $4,945,490 $2,823,468
COST OF SERVICES........................... 5,334,694 3,792,960 2,111,619
---------- ---------- ----------
Gross profit............................. 1,627,791 1,152,530 711,849
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 1,497,773 955,427 846,902
---------- ---------- ----------
Income (loss) from operations............ 130,018 197,103 (135,053)
OTHER INCOME (EXPENSE):
Interest expense.......................... (31,160) (17,755) (15,182)
Other..................................... 15,516 13,547 4,404
---------- ---------- ----------
Income (loss) before income tax
provision............................... 114,374 192,895 (145,831)
INCOME TAX PROVISION....................... 42,030 70,885 (21,283)
---------- ---------- ----------
NET INCOME (LOSS).......................... $ 72,344 $ 122,010 $ (124,548)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1995........... $21,424 $ 554,384 $(104,918) $ 470,890
Net income........................ -- 72,344 -- 72,344
------- --------- --------- ---------
BALANCE, October 31, 1996........... 21,424 626,728 (104,918) 543,234
Net loss.......................... -- (124,548) -- (124,548)
------- --------- --------- ---------
BALANCE, June 30, 1997.............. $21,424 $ 502,180 $(104,918) $ 418,686
======= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, --------------------
1996 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 72,344 $ 122,010 $(124,548)
Adjustments to reconcile net income (loss)
to net cash
used in operating activities:
Depreciation and amortization............. 23,899 15,235 16,185
Gain on disposal of property and
equipment................................ (7,090) -- --
Deferred income taxes..................... 21,110 35,442 7,492
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable..................... (38,275) (618,597) 58,481
Inventories............................. (15,047) (54,979) (36,497)
Costs and estimated earnings in excess
of billings on uncompleted contracts... (82,416) (48,664) 104,628
Due from related parties and employees.. 7,551 (21,266) (1,730)
Unbilled job costs...................... 3,350 -- --
Prepaid expenses and other current
assets................................. (121,387) (52,617) (1,106)
Increase (decrease) in--
Accounts payable........................ 62,758 310,318 (110,598)
Accrued expenses........................ (18,964) (78,570) (69,899)
Billings in excess of costs and
estimated earnings on uncompleted
contracts.............................. (61,066) 83,948 69,748
Deferred service contract revenue....... (7,311) (22,771) (5,463)
Income taxes payable.................... (59,089) -- --
--------- --------- ---------
Net cash used in operating activities.. (219,633) (330,511) (93,307)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (20,802) (8,868) (13,617)
Proceeds from sales of property and
equipment.................................. 7,090 -- --
--------- --------- ---------
Net cash used in investing activities.. (13,712) (8,868) (13,617)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit............ 207,000 237,000 81,000
Payment on long-term note payable........... -- -- (9,400)
--------- --------- ---------
Net cash provided by financing
activities............................ 207,000 237,000 71,600
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.... (26,345) (102,379) (35,324)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 102,379 102,379 76,034
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period..... $ 76,034 $ -- $ 40,710
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Sibley Services, Incorporated (the Company) is primarily engaged in the
installation and servicing of heating and air conditioning systems for
commercial and industrial customers in Memphis, Tennessee and the surrounding
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the eight months ended June 30, 1996
are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $26,004 and
$130,791, respectively, for the year ended October 31, 1996. Cash payments for
interest and taxes were $10,589 and $9,500, respectively, for the eight months
ended June 30, 1997.
Inventories
Inventories consist primarily of purchased materials. The inventory is
valued at the lower of cost or market, with cost determined on a first-in,
first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
F-131
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective November 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Cash value of life insurance........................... $128,976 $144,012
Prepaid expenses....................................... 64,213 50,713
Refundable income taxes................................ 49,662 42,123
Other.................................................. -- 7,109
-------- --------
$242,851 $243,957
======== ========
</TABLE>
Cash value of life insurance represents the cash value of five life
insurance policies. The Company is the owner and beneficiary of one policy
with a cash value of $21,417 at June 30, 1997 and a face value of $200,000.
There are four split-dollar policies with a cash value totaling $122,595 at
June 30, 1997. The Company also has a contingent receivable of $58,855 on the
four split-dollar policies at June 30, 1997. The contingent receivable is the
difference between the total premiums paid to date and the cash value. Per the
split-dollar agreement the Company will be reimbursed for 100% of the premiums
paid upon the death of the insured.
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Accrued payroll and related expenses.................... $ 94,670 $14,026
Other accrued expenses.................................. 32,366 43,111
-------- -------
$127,036 $57,137
======== =======
</TABLE>
F-132
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs incurred........................................ $222,130 $475,756
Estimated earnings recognized......................... 90,036 124,870
-------- --------
312,166 600,626
Less billings on contracts............................ 155,805 618,641
-------- --------
$156,361 $(18,015)
======== ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $160,092 $ 55,464
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (3,731) (73,479)
-------- --------
$156,361 $(18,015)
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL OCTOBER 31, JUNE 30,
LIVES 1996 1997
---------- ----------- ---------
<S> <C> <C> <C>
Service and other vehicles................. 4-7 years $ 81,742 $ 85,047
Machinery and equipment.................... 5-10 years 123,864 126,105
Office equipment, furniture and fixtures... 3-10 years 211,773 216,554
Leasehold improvements..................... -- 121,312 124,602
--------- ---------
538,691 552,308
Less accumulated depreciation.............. (449,269) (465,454)
--------- ---------
Property and equipment, net.............. $ 89,422 $ 86,854
========= =========
</TABLE>
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Credit facility in the amount of $500,000 with a bank,
bearing interest at prime plus 1% (9.5% as of June
30, 1997),
secured by trade receivables and inventory........... $207,000 $288,000
Note payable to shareholder with original face amount
of $125,000,
noninterest-bearing, discounted at 4.81%, $481 due
weekly,
including interest................................... 97,768 88,368
-------- --------
Total short- and long-term debt..................... 304,768 376,368
Less short-term borrowings and current maturities..... (222,591) (307,253)
-------- --------
$ 82,177 $ 69,115
======== ========
</TABLE>
F-133
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has an available line of credit of $500,000 through July 31,
1997. Advances are due April 30, 1997 and accrue interest at prime plus 1%.
The line of credit is secured by accounts receivable and inventory and the
personal guarantees of certain shareholders. Outstanding on the line of credit
as of October 31, 1996 and as of June 30, 1997 was $207,000 and $288,000,
respectively. The line of credit was repaid in connection with the Company's
acquisition, see note 14.
The Company purchased 125 shares of its stock from a shareholder during the
fiscal year ending October 31, 1994. The purchase price was $125,000 payable
at $481 per week, beginning in 1997, for 260 weeks with no interest. The note
is unsecured and has been discounted using an interest rate of 4.81%. Interest
has been accrued through October 31, 1996, in the amount of $14,585.
The aggregate maturities of the short- and long-term debt as of October 31,
1996 are as follows:
<TABLE>
<S> <C>
1997................................................................ $222,591
1998................................................................ 19,552
1999................................................................ 20,513
2000................................................................ 21,521
2001................................................................ 20,591
--------
$304,768
========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED ENDED
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Federal
Current.............................................. $15,961 $(20,000)
Deferred............................................. 17,813 6,620
State
Current.............................................. 4,959 (8,775)
Deferred............................................. 3,297 872
------- --------
$42,030 $(21,283)
======= ========
</TABLE>
Total income tax expense (benefit) differs from the amount computed by
applying the U.S. federal statutory income tax rate of 34% to income (loss)
before income tax provision as a result of the following:
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED ENDED
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Tax provision (benefit) at statutory rate............. $ 38,887 $(49,583)
Increase (decrease) resulting from:
State income taxes, net of federal benefit.......... 5,449 (5,216)
Nondeductible expenses.............................. 7,897 4,798
Tax consequences of graduated rates................. (10,203) 28,718
-------- --------
$ 42,030 $(21,283)
======== ========
</TABLE>
F-134
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax liability are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Deferred income tax liabilities:
Uncompleted contracts.................................. $31,474 $32,197
Depreciation........................................... 9,899 16,668
------- -------
Total deferred income tax liability................... $41,373 $48,865
======= =======
</TABLE>
8. LEASES
Operating leases for certain facilities, service and other vehicles and
office equipment expire at various dates through 2000. Certain leases contain
renewal options. Approximate minimum future rental payments as of October 31,
1996 are as follows:
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
1997................................................................ $176,639
1998................................................................ 94,032
1999................................................................ 62,677
2000................................................................ 10,866
--------
$344,214
========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company leased a vehicle, computer equipment, its office and warehouse
from Sibley, Inc. (see note 8). The owner of Sibley, Inc., is related to a
shareholder of Sibley Services, Incorporated For the year ended October 31,
1996 and the eight months ended June 30, 1997 the Company paid $42,490 and
$22,816, respectively, related to these leases.
The Company leased twenty-five vehicles and twenty-two vehicles as of
October 31, 1996 and June 30, 1997, respectively and computer equipment from
JDT Leasing Company (see note 8) which is 100% owned by a shareholder. For the
year ended October 31, 1996 and the eight months ended June 30, 1997 the
Company paid $129,332 and $94,995, respectively, related to these leases.
The Company was owed $5,733 and $10,389 by a shareholder at October 31, 1996
and June 30, 1997, respectively. This receivable represents advances to the
shareholder and is unsecured.
The Company also has a note payable to a former shareholder (see note 6).
10. EMPLOYEE BENEFIT PLANS
The Company has a cafeteria plan for its eligible employees. Benefits under
the plan include medical and dental insurance.
In 1996, the Company established a 401(k) plan for its qualified employees.
Eligibility requires one year of service and age 21 or over. Employees may
elect to defer up to 10% of their compensation. The Company has agreed to
match the employee contribution 100% up to 5% of compensation. Contributions
made by the Company of $53,646 and $36,733 were charged to operations in the
year ended October 31, 1996 and the eight months ended June 30, 1997,
respectively.
F-135
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SALES TO SIGNIFICANT CUSTOMER
Contract revenue billed to one customer amounted to $1,302,289 or 19% of
total sales for the year ended October 31, 1996. At October 31, 1996, amounts
due from this customer included in accounts receivables were $156,885.
12. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
14. SUBSEQUENT EVENT
Effective July 1, 1997 Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash,
preferred stock and common stock of GroupMAC. All of the preferred shares
issued in connection with the acquisition of the business were redeemed for
cash concurrent with the consummation of the initial public offering of the
common stock of GroupMAC.
F-136
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southeast Mechanical Service, Inc.:
We have audited the accompanying balance sheets of Southeast Mechanical
Service, Inc. as of December 31, 1996 and June 30, 1997, and the related
statements of operations, shareholders' equity and cash flows for the year
ended December 31, 1996 and the six months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southeast Mechanical
Service, Inc. as of December 31, 1996 and June 30, 1997 and the results of its
operations and its cash flows for the year ended December 31, 1996 and the six
months ended June 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-137
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997
------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 45,852 $ 74,466 $ 5,202
Accounts receivable.................... 726,944 935,433 747,335
Inventories............................ 63,530 64,133 64,079
Costs and estimated earnings in excess
of billings on uncompleted contracts.. 1,910 1,229 1,230
Due from related parties and employees. 2,268 42,420 820
Prepaid expenses and other current
assets................................ 30,471 35,955 31,528
---------- ---------- ----------
Total current assets................. 870,975 1,153,636 850,194
PROPERTY AND EQUIPMENT, net.............. 498,762 430,188 403,040
---------- ---------- ----------
Total assets......................... $1,369,737 $1,583,824 $1,253,234
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt.......... $ 311,779 $ 135,254 $ 112,639
Accounts payable....................... 94,911 218,453 48,245
Accrued expenses....................... 23,585 136,127 32,403
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 24,531 125,317 40,692
Due to related parties................. -- 371,042 371,000
---------- ---------- ----------
Total current liabilities............ 454,806 986,193 604,979
LONG-TERM DEBT, net of current
maturities.............................. 273,403 220,726 194,378
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$1.00 par value; 1,500
shares authorized,
300 shares issued and outstanding..... 300 300 300
Additional paid-in capital............. 5,700 5,700 5,700
Retained earnings...................... 635,528 370,905 447,877
---------- ---------- ----------
Total shareholders' equity........... 641,528 376,905 453,877
---------- ---------- ----------
Total liabilities and shareholders'
equity.............................. $1,369,737 $1,583,824 $1,253,234
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
DECEMBER 31, ---------------------- ----------------------
1996 1996 1997 1996 1997
------------ ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $5,281,777 $2,847,310 $2,358,229 $4,092,310 $3,731,471
COST OF SERVICES........ 3,830,398 2,006,815 1,724,977 2,910,815 2,780,443
---------- ---------- ---------- ---------- ----------
Gross profit.......... 1,451,379 840,495 633,252 1,181,495 951,028
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 865,939 388,095 408,957 675,095 629,484
---------- ---------- ---------- ---------- ----------
Income from
operations........... 585,440 452,400 224,295 506,400 321,544
OTHER INCOME (EXPENSE):
Interest expense...... (54,682) (28,379) (42,905) (41,379) (63,099)
Other................. (15,360) (3,304) 29 (3,304) (55)
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 515,398 $ 420,717 $ 181,419 $ 461,717 $ 258,390
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $300 $5,700 $ 440,035 $ 446,035
Net income......................... -- -- 515,398 515,398
Distributions to shareholders...... -- -- (319,905) (319,905)
---- ------ --------- ---------
BALANCE, December 31, 1996........... 300 5,700 635,528 641,528
Net income......................... -- -- 181,419 181,419
Distributions to shareholders...... -- -- (446,042) (446,042)
---- ------ --------- ---------
BALANCE, June 30, 1997............... $300 $5,700 $ 370,905 $ 376,905
==== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
DECEMBER 31, --------------------- ------------------
1996 1996 1997 1996 1997
------------ ----------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 515,398 $ 420,717 $ 181,419 $461,717 $258,390
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........ 124,074 62,625 74,826 33,994 67,734
Loss on disposal of
property and
equipment.......... 15,426 1,681 -- -- --
Changes in operating
assets and
liabilities:
(Increase) decrease
in--
Accounts
receivable....... (89,322) (188,594) (208,489) (159,612) (20,391)
Inventories....... -- (1,290) (603) (1,944) (549)
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts........ 23,664 (12,705) 681 25,574 680
Due from related
parties and
employees........ 536 1,949 (40,152) (3,042) 372,448
Prepaid expenses
and other current
assets........... (11,937) (26,155) (5,484) (3,250) (1,057)
Increase (decrease)
in--
Accounts payable.. (51,579) 49,418 123,542 (2,386) (46,666)
Accrued expenses.. (8,360) 3,542 112,542 12,863 8,818
Billings in excess
of costs and
estimated
earnings on
uncompleted
contracts........ (11,874) 25,678 100,786 (36,405) 16,161
--------- --------- --------- -------- --------
Net cash provided
by operating
activities...... 506,026 336,866 339,068 327,509 655,568
--------- --------- --------- -------- --------
CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES:
Purchases of property
and equipment........ (185,972) (60,537) (6,252) (38,995) 27,988
--------- --------- --------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from short-
term borrowings and
long-term debt....... 163,552 120,863 -- 48,089 --
Payments of short-term
borrowings and long-
term debt............ (168,518) (68,110) (229,202) (84,005) (278,165)
Dividends paid........ (319,905) (319,905) (75,000) (294,020) (446,041)
--------- --------- --------- -------- --------
Net cash used in
financing
activities...... (324,871) (267,152) (304,202) (329,936) (724,206)
--------- --------- --------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (4,817) 9,177 28,614 (41,422) (40,650)
CASH AND CASH
EQUIVALENTS, beginning
of period............. 50,669 50,669 45,852 50,669 45,852
--------- --------- --------- -------- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 45,852 $ 59,846 $ 74,466 $ 9,247 $ 5,202
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Southeast Mechanical Service, Inc. (the Company) is primarily engaged in the
servicing of commercial heating and air conditioning systems in Southeast
Florida including Broward, Dade and Palm Beach Counties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1996 and
as of September 30, 1997 and for the nine months ended September 30, 1996 and
1997, are unaudited, and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $16,406 and $27,839 for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used in the service portion of the
Company's operation. The inventory is valued at the lower of cost or market,
with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-142
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Costs incurred...................................... $ 8,013 $ 76,854
Estimated earnings recognized....................... 3,578 56,343
-------- ---------
11,591 133,197
Less billings on contracts.......................... (34,212) (257,285)
-------- ---------
$(22,621) $(124,088)
======== =========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ 1,910 $ 1,229
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (24,531) (125,317)
-------- ---------
$(22,621) $(124,088)
======== =========
</TABLE>
F-143
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, JUNE 30,
LIVES 1996 1997
----------- ------------ ----------
<S> <C> <C> <C>
Land................................... -- $ 57,839 $ 57,839
Buildings and improvements............. 20-30 years 273,896 273,896
Service and other vehicles............. 4-7 years 594,809 594,809
Machinery and equipment................ 5-10 years 73,250 73,250
Office equipment, furniture and
fixtures.............................. 5-10 years 161,686 167,938
---------- ----------
1,161,480 1,167,732
Less accumulated depreciation.......... (662,718) (737,544)
---------- ----------
$ 498,762 $ 430,188
========== ==========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Note payable to a bank in connection with a working
capital credit line facility. Interest payable
monthly at the bank's prime rate plus .50% (8.75% at
December 31, 1996 and 8.5% at June 30, 1997),
principal amount due in April, 1997. The Company has
an unused portion of this credit line facility
available at December 31, 1996 of $113,000 and
$281,000 at June 30, 1997. This credit line facility
is collateralized by the Company's accounts
receivable, inventory, property and equipment, and
the personal guarantees of the shareholders and
certain spouses..................................... $187,000 $ 19,000
Installment contracts payable at $8,201 per month,
including interest at 7.75% to 9.50%, until October,
1998 and at lesser amounts thereafter until
November, 2000, collateralized by automotive
equipment with a net book value of approximately
$239,000. Balance net of deferred interest of
$32,935 (current portion $17,384)................... 243,810 204,482
Mortgage note payable in monthly installments of
$1,259 plus interest at .50% above the bank's prime
rate (8.75% at December 31, 1996 and 8.5% at June
30, 1997) until January, 2005. The mortgage note is
collateralized by a building and land with a net
book value of approximately $169,000................ 123,350 115,798
Note payable to a bank, payable at $2,387 per month
plus interest at .50% above the bank's prime rate
(8.75% at December 31, 1996 and 8.5% at June 30,
1997) through December, 1997. This note is
collateralized by the Company's accounts receivable,
inventory and certain property and equipment........ 31,022 16,700
-------- --------
Total short- and long-term debt.................. 585,182 355,980
Less short-term borrowings and current maturities.... 311,779 135,254
-------- --------
$273,403 $220,726
======== ========
</TABLE>
F-144
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the short- and long-term debt as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997................................................................ $311,779
1998................................................................ 101,137
1999................................................................ 68,009
2000................................................................ 41,326
2001................................................................ 15,104
Thereafter.......................................................... 47,827
--------
$585,182
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996 and the six months ended June 30,
1997, the Company paid consulting fees totaling $71,800 and $10,900,
respectively to various affiliated corporations which are owned by certain of
its shareholders.
Interest expense in connection with shareholder loans repaid during the year
ended December 31, 1996 and the six months ended June 30, 1997 amounted to
$3,680 and $15,066, respectively.
The Company rents storage space on a month-to-month basis from a partnership
owned by its shareholders. Rent expense related to this rental agreement
totaled $4,969 for the year ended December 31, 1996 and $2,461 for the six
months ended June 30, 1997.
The Company's policy is to distribute to the shareholders pass-through
"Chapter S" income in the first month following year end. Such distributions
are made in the form of notes payable which bear interest at 10% and are paid
during the succeeding year. In January 1997, notes totaling $446,042 were
issued to shareholders in accordance with this policy. At June 30, 1997, there
was $371,042 still outstanding on these notes.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
8. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
9. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS REPORT--ACQUISITION OF COMPANY
(UNAUDITED)
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC.
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the initial public offering of the common
stock of GroupMAC (acquisition to be effective October 31, 1997).
F-145
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Willis Refrigeration, Air Conditioning & Heating, Inc.:
We have audited the accompanying balance sheets of Willis Refrigeration, Air
Conditioning & Heating, Inc. (the Company) as of March 31, 1997 and June 30,
1997, and the related statements of operations, shareholders' equity and cash
flows for the year ended March 31, 1997 and the three months ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Willis Refrigeration, Air
Conditioning & Heating, Inc. as of March 31, 1997 and June 30, 1997, and the
results of its operations and its cash flows for the year ended March 31, 1997
and the three months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-146
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 774,445 $ 788,191 $1,469,984
Accounts receivable, net of allowance for
doubtful accounts
of $564,648 and $539,673, respectively... 1,288,442 1,390,882 1,012,741
Inventories............................... 190,276 194,272 170,018
Deferred income taxes..................... 240,441 229,950 37,000
Prepaid expenses.......................... 12,377 8,873 22,177
---------- ---------- ----------
Total current assets..................... 2,505,981 2,612,168 2,711,920
PROPERTY AND EQUIPMENT, net................ 513,888 512,485 169,909
MARKETABLE SECURITIES...................... 263,175 278,850 --
OTHER NONCURRENT ASSETS.................... 80,585 81,538 --
---------- ---------- ----------
Total assets............................. $3,363,629 $3,485,041 $2,881,829
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................... $ 222,828 $ 220,731 $ --
Accounts payable.......................... 409,302 270,115 249,698
Accrued expenses.......................... 86,843 111,099 92,421
Deferred service contract revenue......... 199,194 229,235 267,872
Income taxes payable...................... 230,913 283,747 195,662
---------- ---------- ----------
Total current liabilities................ 1,149,080 1,114,927 805,653
DEFERRED INCOME TAXES...................... 142,005 147,072 28,202
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated value
of $10 per share;
500 shares authorized; 405 shares issued
and outstanding.......................... 4,050 4,050 4,050
Retained earnings......................... 1,918,330 2,059,767 2,043,924
Net unrealized gain on marketable
securities............................... 150,164 159,225 --
---------- ---------- ----------
Total shareholders' equity............... 2,072,544 2,223,042 2,047,974
---------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $3,363,629 $3,485,041 $2,881,829
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
MARCH 31, ---------------------- ----------------------
1997 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $6,780,747 $1,643,275 $1,743,102 $3,482,275 $3,415,947
COST OF SERVICES........ 5,033,377 1,318,762 1,257,766 2,584,762 2,649,505
---------- ---------- ---------- ---------- ----------
Gross profit.......... 1,747,370 324,513 485,336 897,513 766,442
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,205,393 369,048 275,694 761,048 995,828
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations........... 541,977 (44,535) 209,642 136,465 (229,386)
OTHER INCOME (EXPENSE):
Interest expense....... (25,379) (7,343) (4,864) (5,343) (5,990)
Interest income........ 7,926 3,257 10,449 2,257 7,553
Other.................. 48,464 9,655 6,353 17,655 439,042
---------- ---------- ---------- ---------- ----------
Income (loss) before
income tax provision. 572,988 (38,966) 221,580 151,034 211,219
INCOME TAX PROVISION.... 237,962 -- 80,143 79,000 84,500
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)....... $ 335,026 $ (38,966) $ 141,437 $ 72,034 $ 126,719
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
COMMON RETAINED MARKETABLE SHAREHOLDERS'
STOCK EARNINGS SECURITIES EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1996............. $4,050 $1,583,304 $ 77,400 $1,664,754
Net income......................... -- 335,026 -- 335,026
Net unrealized gain on marketable
securities........................ -- -- 72,764 72,764
------ ---------- -------- ----------
BALANCE, March 31, 1997............. 4,050 1,918,330 150,164 2,072,544
Net income......................... -- 141,437 -- 141,437
Net unrealized gain on marketable
securities........................ -- -- 9,061 9,061
------ ---------- -------- ----------
BALANCE, June 30, 1997.............. $4,050 $2,059,767 $159,225 $2,223,042
====== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
MARCH 31, -------------------- ---------------------
1997 1996 1997 1996 1997
---------- --------- --------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 335,026 $ (38,966) $ 141,437 $ 72,034 $ 126,719
Adjustments to
reconcile net income
(loss) to net
cash provided by
(used in) operating
activities:
Depreciation and
amortization....... 82,328 22,419 22,591 35,986 45,182
Gain from sale of
marketable
securities......... -- -- -- -- (150,164)
Gain from sale of
property and
equipment.......... -- -- -- -- (226,493)
Warrant
compensation....... -- -- -- -- (1,125)
Deferred income
taxes.............. 80,900 -- 8,944 5,162 89,638
Changes in operating
assets and
liabilities:
(Increase) decrease
in--
Accounts
receivable....... (39,157) (332,559) (102,440) (191,161) 276,408
Inventories....... 21,111 -- (3,996) -- 20,258
Prepaid expenses.. 41,737 (22,000) 3,504 (51,077) (9,800)
Increase (decrease)
in--
Accounts payable.. (125,073) 111,473 (139,187) (18,169) (159,604)
Accrued expenses.. (74,603) (48,077) 24,256 (23,719) 5,578
Deferred service
contract revenue. 16,154 25,242 30,041 47,392 68,678
Income taxes
payable.......... 46,885 -- 52,834 -- (35,251)
--------- --------- --------- --------- ----------
Net cash provided
by (used in)
operating
activities...... 385,308 (282,468) 37,984 (123,552) 50,024
--------- --------- --------- --------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (34,821) (2,099) (21,188) -- --
Proceeds from sale of
property and
equipment............ -- -- -- -- 525,290
Proceeds from sale of
marketable
securities........... -- -- -- (56,799) 263,175
Increase in cash
surrender value of
life insurance
policy............... (10,943) -- (953) 52,642 79,878
--------- --------- --------- --------- ----------
Net cash used in
investing
activities...... (45,764) (2,099) (22,141) (4,157) 868,343
--------- --------- --------- --------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments of short-term
borrowings........... (84,942) -- (2,097) -- (222,828)
--------- --------- --------- --------- ----------
Net cash used in
financing
activities...... (84,942) -- (2,097) -- (222,828)
--------- --------- --------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 254,602 (284,567) 13,746 (127,709) 695,539
CASH AND CASH
EQUIVALENTS, beginning
of period............. 519,843 519,843 774,445 693,606 774,445
--------- --------- --------- --------- ----------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 774,445 $ 235,276 $ 788,191 $ 565,897 $1,469,984
========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-150
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Willis Refrigeration, Air Conditioning & Heating, Inc. (the Company) is
primarily engaged in the installation and servicing of heating and air
conditioning systems for residential customers in Ohio and northern Kentucky.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the three months ended June 30, 1996
and the six months ended September 30, 1997 and September 30, 1996, are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows
with respect to the interim financial statements, have been included. The
results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
Management uses estimates and assumptions in preparing the financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from new construction sales are recognized on the
percentage of completion basis with seventy percent of the revenue recognized
at initial installation of new units and thirty percent recognized at the
final stage of installation when the residential building is nearing
completion. Material, equipment and labor costs are estimated for each job and
are recognized on the same percentage method.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $25,379 and $2,131 for
the year ended March 31, 1997 and the three months ended June 30, 1997.
Inventories
Inventories consist primarily of parts and supplies used in both the service
and construction portions of the Company's operation. Inventory is stated at
the lower of cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-151
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Marketable Securities
The Company accounts for marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. All of
the Company's marketable securities (all of which are equity securities) have
been classified as available for sale with unrealized gains or losses recorded
as a separate component of shareholders' equity. As of March 31, 1997 and June
30, 1997 the amortized cost of the marketable securities was $12,900.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or services.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
F-152
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31, JUNE 30,
USEFUL LIVES 1997 1997
------------ ---------- ----------
<S> <C> <C> <C>
Service and other vehicles............. 3-5 years $ 505,103 $ 505,103
Office equipment, furniture and
fixtures.............................. 3-10 years 223,379 244,567
Buildings and improvements............. 18-31 years 453,267 453,267
Land................................... -- 106,500 106,500
---------- ----------
1,288,249 1,309,437
Less accumulated depreciation........ (774,361) (796,952)
---------- ----------
$ 513,888 $ 512,485
========== ==========
</TABLE>
4. OTHER NONCURRENT ASSETS
Other noncurrent assets includes the cash surrender value of a life
insurance policy for the vice president of the Company. The cash surrender
value of the policy is as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Cash surrender value.................................... $ 82,267 $ 83,220
Outstanding loan........................................ (18,682) (18,682)
-------- --------
Net cash surrender value.............................. $ 63,585 $ 64,538
======== ========
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings consists of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Revolving line of credit of up to $700,000 payable to a
financial institution, bearing interest at 8.5%, due
upon demand, but in any event without
demand or notice on February 28, 1998................... $100,000 $100,000
Notes payable to the president of the Company, bearing
interest at 9%,
no scheduled repayment.................................. 122,828 120,731
-------- --------
Total short-term borrowings............................ $222,828 $220,731
======== ========
</TABLE>
6. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Current.............................................. $157,062 $71,199
Deferred............................................. 80,900 8,944
-------- -------
Income tax provision............................... $237,962 $80,143
======== =======
</TABLE>
F-153
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Total income tax expense differed from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Expense at the statutory rate........................ $194,816 $75,337
Increase (reduction) resulting from:
State income taxes................................. 45,839 12,289
Other.............................................. (2,693) (7,483)
-------- -------
$237,962 $80,143
======== =======
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts......................... $226,249 $215,758
Warranty reserves....................................... 11,252 11,252
Vacation accrual........................................ 2,940 2,940
-------- --------
Total deferred income tax asset....................... 240,441 229,950
-------- --------
Deferred income tax liabilities:
Net unrealized gain on securities available for sale.... 105,115 111,729
Depreciation............................................ 36,890 35,343
-------- --------
Total deferred income tax liability................... 142,005 147,072
-------- --------
Net deferred income tax asset......................... $ 98,436 $ 82,878
======== ========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the net deferred income tax asset recorded at March
31, 1997 and June 30, 1997.
7. EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan (the Plan) covering its qualified
employees. The Company may make a contribution amount at any time to the Plan
to the extent authorized by the Board of Directors. Total expense related to
this Plan for the year ended March 31, 1997 and the three months ended June
30, 1997, was approximately $54,200 and $3,700, respectively.
8. SALES TO SIGNIFICANT CUSTOMER
During the year ended March 31, 1997 and the three months ended June 30,
1997 sales to one customer accounted for approximately 14% and 13% of the
Company's revenues.
9. EMPLOYMENT AGREEMENT
On January 13, 1992, the Company entered into an employment agreement with
the Company's Chairman of the Board of Directors whereby an annual salary
would be paid to the Chairman through December 31, 2011 and would continue to
be paid in the event of death, disability, or termination of employment. An
annual salary
F-154
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of $26,000 will be paid through August 31, 2006; $15,600 per annum will be
paid thereafter through December 31, 2011. The employment agreement will be
terminated upon the consummation of the proposed merger of the Company (see
note 11).
10. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
marketable securities (carried at fair value) and short-term borrowings. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
11. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS REPORT ACQUISITION OF COMPANY
(UNAUDITED)
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC.
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the initial public offering of the common
stock of GroupMAC (acquisition to be effective October 31, 1997).
F-155
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Yale Incorporated
We have audited the accompanying balance sheets of Yale, Inc. as of
September 30, 1996 and June 30, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year ended September
30, 1996 and the nine months ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yale Incorporated as of
September 30, 1996 and June 30, 1997, and the results of its operations and
its cash flows for the year ended September 30, 1996 and the nine months ended
June 30, 1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-156
<PAGE>
YALE INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 112,091 $ 93,872
Accounts receivable, net of allowance for doubtful
accounts of $5,000................................. 1,355,712 1,553,593
Inventories......................................... 80,563 89,466
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 127,177 295,298
Prepaid expenses.................................... 54,324 44,545
---------- ----------
Total current assets.............................. 1,729,867 2,076,774
PROPERTY AND EQUIPMENT, net........................... 438,665 694,157
---------- ----------
Total assets...................................... $2,168,532 $2,770,931
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 120,233 $ 244,998
Accounts payable.................................... 529,545 763,695
Accrued expenses.................................... 217,847 219,303
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 93,306 19,401
---------- ----------
Total current liabilities......................... 960,931 1,247,397
LONG-TERM DEBT, net of current maturities............. 101,732 175,047
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated value of $1 per
share; 20,000 shares authorized; 1,000 shares
issued and outstanding............................. 1,000 1,000
Additional paid-in capital.......................... 100,767 100,767
Retained earnings................................... 1,004,102 1,246,720
---------- ----------
Total shareholders' equity........................ 1,105,869 1,348,487
---------- ----------
Total liabilities and shareholders' equity........ $2,168,532 $2,770,931
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE>
YALE INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, ----------------------
1996 1996 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................. $10,065,130 $7,228,688 $7,362,875
COST OF SERVICES......................... 7,930,984 5,553,931 5,414,265
----------- ---------- ----------
Gross profit........................... 2,134,146 1,674,757 1,948,610
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 1,729,405 1,292,928 1,522,284
----------- ---------- ----------
Income from operations................. 404,741 381,829 426,326
OTHER INCOME (EXPENSE):
Interest expense....................... (29,578) (23,824) (24,350)
Other.................................. (49,791) (21,383) (9,358)
----------- ---------- ----------
NET INCOME............................... $ 325,372 $ 336,622 $ 392,618
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE>
YALE INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1995......... $1,000 $100,767 $ 803,730 $ 905,497
Net income........................ -- -- 325,372 325,372
Distributions to shareholders..... -- -- (125,000) (125,000)
------ -------- ---------- ----------
BALANCE, September 30, 1996......... 1,000 100,767 1,004,102 1,105,869
Net income........................ -- -- 392,618 392,618
Distributions to shareholders..... -- -- (150,000) (150,000)
------ -------- ---------- ----------
BALANCE, June 30, 1997.............. $1,000 $100,767 $1,246,720 $1,348,487
====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-159
<PAGE>
YALE INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, ---------------------
1996 1996 1997
------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 325,372 $ 336,622 $ 392,618
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation........................... 127,448 92,059 141,438
Gain on sale of property and equipment. (660) (660) (11,159)
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable.................. 59,098 (149,234) (197,881)
Inventories.......................... 410 (178,651) (8,903)
Costs and estimated earnings in
excess of
billings on uncompleted contracts... (93,145) (51,801) (168,121)
Prepaid expenses..................... (25,136) (26,821) 9,779
Increase (decrease) in--
Accounts payable..................... 7,505 456,337 234,150
Accrued expenses..................... 58,688 (52,607) 1,456
Billings in excess of costs and
estimated
earnings on uncompleted contracts... 54,294 38,574 (73,905)
--------- --------- ---------
Net cash provided by operating
activities......................... 513,874 463,818 319,472
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (315,074) (315,074) (403,831)
Proceeds from sales of property and
equipment............................... 41,945 41,945 18,060
--------- --------- ---------
Net cash used in investing
activities......................... (273,129) (273,129) (385,771)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 233,400 233,400 319,000
Payments of long-term debt............... (253,784) (221,810) (120,920)
Distributions to shareholders............ (125,000) (125,000) (150,000)
--------- --------- ---------
Net cash provided by (used in)
financing activities........... (145,384) (113,410) 48,080
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 95,361 77,279 (18,219)
CASH AND CASH EQUIVALENTS, beginning of
period................................... 16,730 16,730 112,091
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.. $ 112,091 $ 94,009 $ 93,872
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-160
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Yale Incorporated (the Company) is primarily engaged in the installation and
servicing of heating and air conditioning systems for commercial and
industrial customers in the state of Minnesota.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the nine months ended June 30, 1996 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows
with respect to the interim financial statements, have been included. The
results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $37,791 and $24,350 for the
year ended September 30, 1996 and the nine months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used in both the service and the
construction portions of the Company's operation. The inventory is valued at
the lower of cost or market, with cost determined on a first-in, first-out
(FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-161
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal and
Minnesota tax purposes as an S Corporation whereby the shareholders'
respective equitable shares in the taxable income of the Company are
reportable on their individual tax returns. The Company has made distributions
to the shareholders each year at least in amounts necessary to pay personal
income taxes payable on the Company's taxable income.
New Accounting Pronouncement
Effective October 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Accrued payroll costs and benefits.................... $209,324 $161,306
Other accrued expenses................................ 8,523 57,997
-------- --------
$217,847 $219,303
======== ========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Costs incurred........................................ $1,162,529 $811,487
Estimated earnings recognized......................... 60,763 108,605
---------- --------
1,223,292 920,092
Less billings on contracts............................ 1,189,421 644,195
---------- --------
$ 33,871 $275,897
========== ========
</TABLE>
F-162
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $127,177 $295,298
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (93,306) (19,401)
-------- --------
$ 33,871 $275,897
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL SEPTEMBER 30, JUNE 30,
LIVES 1996 1997
---------- ------------- ----------
<S> <C> <C> <C>
Service and other vehicles............. 4-7 years $ 675,544 $ 845,186
Machinery and equipment................ 5-10 years 141,367 153,019
Office equipment, furniture and
fixtures.............................. 5-10 years 101,171 124,444
Leasehold improvements................. -- 52,386
--------- ----------
918,082 1,175,035
Less accumulated depreciation.......... (479,417) (480,878)
--------- ----------
$ 438,665 $ 694,157
========= ==========
</TABLE>
6. SHORT- AND LONG-TERM DEBT
The Company has an available line of credit of $450,000 that matures on
April 30, 1998. Advances issued are due on demand and accrue interest at 0.5%
above the prime rate. Also, the Company has an agreement to borrow up to
$350,000 of term debt secured by service and other vehicles and equipment. The
line of credit and equipment notes are secured by substantially all of the
Company's assets and the personal guarantees of certain shareholders. At June
30, 1997, the Company had $100,000 of outstanding borrowings on the line of
credit, and had approximately $320,000 of outstanding borrowings on the term
debt.
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Borrowings under line of credit agreement............. $ -- $100,000
Note payable to bank, due in monthly installments of
$1,230, plus interest at 0.5% over prime, through May
1997, secured by service and other vehicles.......... 9,735 --
Note payable to bank, due in monthly installments of
$2,944, plus interest at 0.5% over prime, through
August 1997, secured by service and other
vehicles............................................. 32,695 6,195
Note payable to bank, due in monthly installments of
$1,805, plus interest at 0.5% over prime, through
November 1998, secured by service and other vehicles. 46,948 30,703
Note payable to bank, due in monthly installments of
$1,014, plus interest at 0.5% over prime, through
October 1998, secured by service and other vehicles.. 25,346 16,220
Note payable to bank, due in monthly installments of
$1,584, plus interest at 0.5% over prime, through
December 1998, secured by service and other vehicles. 42,744 28,488
</TABLE>
F-163
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ---------
<S> <C> <C>
Note payable to bank, due in monthly installments of
$2,081, plus interest at 0.5% over prime, through
April 1999, secured by service and other vehicles.. 64,497 45,772
Note payable to bank, due in monthly installments of
$2,083, plus interest at 0.5% over prime, through
February 2000, secured by service and other
vehicles........................................... -- 66,667
Note payable to bank, due in monthly installments of
$3,000, plus interest at 0.5% over prime, through
December 2000, secured by service and other
vehicles........................................... -- 126,000
--------- ---------
Total short- and long-term debt................... 221,965 420,045
Less short-term borrowings and current maturities... (120,233) (244,998)
--------- ---------
$ 101,732 $ 175,047
========= =========
</TABLE>
The line of credit and the equipment notes contain certain restrictive
covenants relating to, among other items, minimum net income, minimum tangible
net worth, and debt to tangible net worth.
The aggregate maturities of the short- and long-term debt as of September
30, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................................. $120,233
1998................................................................. 77,837
1999................................................................. 23,895
--------
$221,965
========
</TABLE>
7. LEASES
The Company operates out of facilities leased from a related entity under a
monthly operating lease requiring payments of $10,710 per month. The Company
sublets part of the building under an operating lease through February 1998.
Total rent expenses before sublease income for the year ended September 30,
1996 and the nine months ended June 30, 1997, were approximately $128,500 and
$96,400, respectively. Sublease income was approximately $39,000 and $29,250
for the year ended September 30, 1996 and the nine months ended June 30, 1997,
respectively. The Company has guaranteed the underlying mortgage
(approximately $405,000 as of September 30, 1996) for the facility.
8. RELATED PARTY TRANSACTIONS
During the year ended September 30, 1996 and the nine months ended June 30,
1997, the Company paid management fees to related parties totaling
approximately $110,100 and $60,075, respectively. In addition, as discussed in
note 7, the Company leases its operating facilities from a related entity.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering all employees not covered by a
collective bargaining agreement. Eligible employees may contribute from 2 to
20% of their qualifying compensation to the plan, with the Company required to
match 50% of the employee's first 6% of contributions. The Company may make
additional contributions to the plan to the extent authorized by the Board of
Directors. Total expense related to this plan for the year ended September 30,
1996 and the nine months ended June 30, 1997, was approximately $30,100 and
$20,778, respectively.
F-164
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company makes contributions to union-administered benefit funds which
cover the majority of the Company's employees. For the year ended September
30, 1996 and the nine months ended June 30, 1997, the participation costs
charged to operations were approximately $592,400 and $511,720, respectively.
Governmental regulations impose certain requirements relative to multi-
employer plans. In the event of plan termination or employer withdrawal, an
employer may be liable for a portion of the plan's unfunded vested benefits,
if any. The Company has not received information from the plans'
administrators to determine its share of any unfunded vested benefits. The
Company does not anticipate withdrawal from the plans, nor is the Company
aware of any expected plan terminations.
10. SALES TO SIGNIFICANT CUSTOMER
During the year ended September 30, 1996 and the nine months ended June 30,
1997, sales to one customer accounted for approximately 18% and 26%,
respectively, of the Company's revenues.
11. COMMITMENTS AND CONTINGENCIES
Claims
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Stock Transfer Agreement
The Company has a stock transfer agreement with the shareholders
(participants) covering all shares of common stock whereby the Company is
required to repurchase the shares of a participant in certain circumstances.
Additionally, the Company has an option to repurchase the common shares of a
participant in certain circumstances.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
13. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS REPORT--ACQUISITION OF COMPANY
(UNAUDITED)
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC.
GroupMAC's acquisition of the Company was completed on November 13, 1997
simultaneous with the closing of the initial public offering of the common
stock of GroupMAC (acquisition to be effective October 31, 1997).
The Company made distributions in respect to the Company's estimated S
Corporation accumulated adjustment account of approximately $1.1 million at
the time of closing of the initial public offering of the common stock of
GroupMAC.
F-165
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hungerford Mechanical Corporation:
We have audited the accompanying balance sheet of Hungerford Mechanical
Corporation (the Company) as of December 31, 1997 and the related statements
of operations, shareholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hungerford Mechanical
Corporation as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 2, 1998
F-166
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash............................................................. $ 1,123,210
Accounts receivable.............................................. 6,885,008
Inventories...................................................... 67,916
Costs and estimated earnings in excess of billings on uncompleted
contracts (note 3).............................................. 410,944
Due from--related parties........................................ 1,195,503
Cash value of life insurance (net of loans of $58,229)........... 341,746
Prepaid expenses and other current assets........................ 142,291
-----------
Total current assets........................................... 10,166,618
PROPERTY AND EQUIPMENT, net........................................ 1,053,123
-----------
Total assets................................................... $11,219,741
===========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings............................................ $ 820,790
Notes payable.................................................... 475,165
Accounts payable................................................. 1,702,699
Accrued expenses................................................. 490,347
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... 2,343,210
-----------
Total current liabilities...................................... 5,832,211
DEFERRED COMPENSATION LIABILITY.................................... 254,461
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock--$10 par value; 20,000 shares authorized, 10,000
shares issued and outstanding................................... 100,000
Additional paid-in capital....................................... 692,597
Retained earnings................................................ 4,340,472
-----------
Total shareholder's equity..................................... 5,133,069
-----------
Total liabilities and shareholder's equity..................... $11,219,741
===========
</TABLE>
See accompanying notes to the financial statements.
F-167
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES........................................................... $32,849,988
COST OF SERVICES................................................... 24,602,502
-----------
Gross profit..................................................... 8,247,486
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,591,040
-----------
Income from operations......................................... 2,656,446
OTHER INCOME (EXPENSE):
Interest expense................................................. (120,846)
Interest income.................................................. 89,210
Other, net....................................................... 41,710
-----------
NET INCOME......................................................... $ 2,666,520
===========
</TABLE>
See accompanying notes to the financial statements.
F-168
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996....... $100,000 $692,597 $ 2,867,149 $ 3,659,746
Net income..................... -- -- 2,666,520 2,666,520
Distributions to shareholder... -- -- (1,193,197) (1,193,197)
-------- -------- ----------- -----------
BALANCE, December 31, 1997....... $100,000 $692,597 $ 4,340,472 $ 5,133,069
======== ======== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-169
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 2,666,520
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 387,102
Gain on sale of property and equipment.......................... (8,367)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable............................................ (1,550,250)
Inventories.................................................... (17,509)
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... 486,600
Cash value of life insurance................................... (18,317)
Prepaid expenses and other current assets...................... (84,587)
Increase (decrease) in--
Accounts payable............................................... (938,546)
Accrued expenses............................................... 144,564
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 1,541,726
Deferred compensation liability................................ 94,446
-----------
Net cash provided by operating activities..................... 2,703,382
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (728,675)
Increase in due from related parties............................. (344,244)
Proceeds from sales of property and equipment.................... 8,367
-----------
Net cash used in investing activities......................... (1,064,552)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net................................ 170,790
Proceeds from notes payable...................................... 377,239
Payments of notes payable........................................ (151,763)
Distributions to shareholder..................................... (1,193,197)
-----------
Net cash used in financing activities......................... (796,931)
-----------
NET INCREASE IN CASH.............................................. 841,899
CASH, beginning of period......................................... 281,311
-----------
CASH, end of period............................................... $ 1,123,210
===========
</TABLE>
See accompanying notes to the financial statements.
F-170
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Hungerford Mechanical Corporation (the Company) operates as a mechanical
contractor specializing in the installation and servicing of plumbing,
sprinkler, heating and air conditioning systems. The Company markets its
services within the Richmond, Virginia metropolitan area. Revenues are
generated primarily from individual contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage of completion method. The completed
percentage is measured by the percentage of cost incurred to date as compared
to the estimated total cost for each contract.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as labor, supplies,
tools, repairs and depreciation. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined.
INVENTORIES
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
CASH VALUE OF LIFE INSURANCE
Cash value of life insurance represents the cash value of life insurance
policies for key employees of the Company net of loans taken against the
policies.
F-171
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The shareholder of the Company has elected to be taxed for federal and
Virginia tax purposes as an S Corporation whereby the taxable income of the
Company is reportable on the shareholder's individual tax returns. In
connection with the Company's election to be taxed as an S Corporation, the
Company is potentially subject to tax on certain "built-in gains" as defined
by the Internal Revenue Code.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $120,846 for the year ended December 31,
1997.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<S> <C>
Costs incurred.................................................... $37,676,902
Estimated earnings recognized..................................... 7,540,003
-----------
45,216,905
Less billings on contracts........................................ 47,149,171
-----------
$(1,932,266)
===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ $ 410,944
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ (2,343,210)
-----------
$(1,932,266)
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1997
----------- -----------
<S> <C> <C>
Service and other vehicles............................. 3-7 years $ 1,201,530
Machinery and tools.................................... 3-10 years 820,329
Office equipment, furniture and fixtures............... 5-10 years 669,317
Leasehold improvements................................. 10-39 years 197,318
----------- -----------
2,888,494
Less accumulated depreciation.......................... (1,835,371)
-----------
$ 1,053,123
===========
</TABLE>
5. SHORT-TERM BORROWINGS
The Company has a line of credit with up to $2,000,000 available through May
31, 1999, subject to renewal. Interest accrues at LIBOR plus 2.50%, which was
8.19% at December 31, 1997. The balance outstanding on the line is
collateralized by a lien on corporate assets, by a life insurance policy on
the shareholder and by a personal guarantee by the shareholder.
F-172
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE
Notes payable consist of various payables to banks, secured by automobiles
and trucks of the Company, due in various monthly payments including interest
at rates varying from 7.25% to 9.07% and have stated maturity dates through
November 2000. All such notes payable were repaid concurrent with the
acquisition of the Company (note 10).
7. RELATED PARTY TRANSACTIONS
The assets and stock of the Company are pledged as collateral for a loan of
the shareholder. Provisions of the debt instrument restrict dividends which
may be paid by the Company and also restrict salary which may be paid to the
Company's president. This loan was repaid by the shareholder concurrent with
the acquisition of the Company (note 10).
The sole shareholder is a general partner in a partnership that transacts
business with the Company. The Company has receivables and advances of $26,931
outstanding at December 31, 1997 for advances made to the partnership. There
were no partnership billings in 1997.
The sole shareholder is a 100% member in each of two limited liability
companies which were formed during 1995. Advances and receivables from these
limited liability companies was $1,168,572 at December 31, 1997. In addition,
the Company had accrued interest receivable on these receivables totaling
approximately $58,000, which is included in prepaid expenses and other current
assets in the accompanying balance sheet at December 31, 1997. These amounts
were repaid concurrent with the acquisition of the Company (note 10).
The Company leases operating facilities from interests controlled by an
affiliated entity. Rent expense was $50,880 for the year ended December 31,
1997 and included in selling, general and administrative expenses in the
accompanying statement of income. The Company is also required to pay
insurance, maintenance and taxes on the facilities. The lease is renewable
annually.
The Company pays for management services provided by another company owned
by its sole shareholder. Service fees paid under this agreement were $150,000
in 1997 and is included in selling, general and administrative expenses in the
accompanying statement of income.
8. BENEFIT PLANS
The Company has a deferred compensation agreement with an officer of the
Company. Under the terms of the agreement, accumulated benefits will be based
upon the current year-end book value of the Company's stock in excess of the
initial predetermined value. The officer, or his beneficiary, will be entitled
to these benefits should involuntary termination of employment occur and
benefits will become immediately payable upon such termination. Benefits will
be paid in twenty equal quarterly installments beginning approximately ninety
days after termination of employment. The amount due under this agreement was
$254,461 at December 31, 1997.
The Company maintains a discretionary 401(k) and profit sharing plan (the
Plan) covering its qualified employees. Employees are eligible to participate
after completing 1 year of service and after attaining the age of 21.
Employees may choose to defer up to 10% of their compensation during the Plan
year, not to exceed Internal Revenue Service limitations, by contributing to
the Plan. The Company matches 100% of each employee's contributions. The
Company may also elect to make additional profit sharing contributions.
Contributions made by the Company of $20,402 were charged to operations in the
year ended December 31, 1997.
F-173
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
10. SUBSEQUENT EVENT
Effective January 1, 1998 Group Maintenance America Corp. ("GroupMAC")
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
F-174
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mechanical Interiors, Inc.:
We have audited the accompanying balance sheet of Mechanical Interiors, Inc.
(the Company) as of December 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mechanical Interiors, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
February 27, 1998
F-175
<PAGE>
MECHANICAL INTERIORS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 253,149
Accounts receivable, net of allowance of $73,533................. 8,516,098
Inventories...................................................... 107,898
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... 851,591
Deferred income taxes............................................ 70,789
Prepaid expenses and other current assets........................ 84,536
-----------
Total current assets........................................... 9,884,061
PROPERTY AND EQUIPMENT, net........................................ 1,711,020
OTHER NONCURRENT ASSETS............................................ 52,135
-----------
Total assets................................................... $11,647,216
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 197,449
Current obligations under capital leases......................... 395,424
Accounts payable................................................. 4,423,315
Accrued expenses................................................. 1,100,576
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... 1,675,548
Income taxes payable............................................. 422,298
-----------
Total current liabilities...................................... 8,214,610
LONG-TERM DEBT, net of current maturities.......................... 363,474
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$0.001 par value; 10,000,000 shares authorized,
1,111,000 shares issued and outstanding......................... 1,111
Additional paid-in capital....................................... 200,250
Retained earnings................................................ 2,867,771
-----------
Total shareholders' equity..................................... 3,069,132
-----------
Total liabilities and shareholders' equity..................... $11,647,216
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-176
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES........................................................... $42,283,071
COST OF SERVICES................................................... 35,908,553
-----------
Gross profit................................................... 6,374,518
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,360,113
-----------
Income from operations......................................... 1,014,405
OTHER INCOME (EXPENSE):
Interest expense................................................. (73,067)
Interest income.................................................. 21,013
-----------
Income before income tax provision............................. 962,351
INCOME TAX PROVISION............................................... 409,128
-----------
NET INCOME......................................................... $ 553,223
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-177
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996........... $1,111 $200,250 $2,314,548 $2,515,909
Net income........................... -- -- 553,223 553,223
------ -------- ---------- ----------
BALANCE, December 31, 1997........... $1,111 $200,250 $2,867,771 $3,069,132
====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-178
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 553,223
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 280,026
Deferred tax expense........................................... 27,745
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.......................................... (2,944,841)
Inventories.................................................. 48,138
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... (432,464)
Notes receivable............................................. 200,361
Prepaid expenses and other current assets.................... (4,266)
Other noncurrent assets...................................... (38,141)
Increase (decrease) in:
Accounts payable............................................. 1,276,404
Accrued expenses............................................. (43,127)
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 1,181,386
Income taxes payable......................................... 158,743
----------
Net cast provided by operating activities.................. 263,187
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (1,149,411)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt.......................... 430,000
Payments of short- and long-term debt............................ (61,893)
Payments of obligations under capital leases..................... (119,740)
----------
Net cash provided by financing activities.................. 248,367
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................... (637,857)
CASH AND CASH EQUIVALENTS, beginning of year....................... 891,006
----------
CASH AND CASH EQUIVALENTS, end of year............................. $ 253,149
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-179
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
Mechanical Interiors, Inc. (the Company) is primarily engaged in the
installation and servicing of heating and air conditioning systems for
commercial customers in the areas in and around Dallas and Austin, Texas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents. Cash payments for interest and income taxes were
$73,067 and $222,640, respectively, for the year ended December 31, 1997.
Inventories
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
The Company reviews the carrying value of its property and equipment for
impairment. Accordingly, in the event that facts and circumstances indicate
that property and equipment may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary. The
Company recorded no impairment of its property and equipment during the year
ended December 31, 1997.
F-180
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(3) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<S> <C>
Accrued payroll costs and benefits............................... $ 271,717
Accrued bonus and profit sharing................................. 404,171
Warranty reserve................................................. 264,132
Other accrued expenses........................................... 160,556
----------
$1,100,576
==========
</TABLE>
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<S> <C>
Costs incurred................................................. $22,766,565
Estimated earnings recognized.................................. 2,793,209
-----------
25,559,774
Less billings on contracts..................................... 26,383,731
-----------
$ (823,957)
===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ $ 851,591
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ (1,675,548)
-----------
$ (823,957)
===========
</TABLE>
(5) PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1997
---------- ----------
<S> <C> <C>
Service and other vehicles............................... 4-7 years $ 776,728
Machinery and equipment.................................. 5-10 years 765,723
Office equipment, fixtures and fixtures.................. 5-10 years 286,109
Leasehold improvements................................... 5-15 years 781,427
---------- ----------
2,609,987
Less accumulated depreciation............................ (898,967)
----------
$1,711,020
==========
</TABLE>
F-181
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to bank, due in monthly installments of $10,000, plus
interest of 8.50% per annum and secured by property and equipment;
due July 2001...................................................... $ 430,000
Note payable to bank, due in monthly installments of $6,624,
including interest at 8.75%; matures in 1999; secured by property
and equipment...................................................... 130,923
---------
Total long-term debt.............................................. 560,923
Less current maturities............................................. (197,449)
---------
$ 363,474
=========
</TABLE>
(7) INCOME TAXES
Income tax expense for the year ended December 31, 1997 consists of:
<TABLE>
<S> <C>
Current................................................................ $381,383
Deferred............................................................... 27,745
--------
Income tax provision................................................... $409,128
========
</TABLE>
Total income tax for the year ended December 31, 1997 differed from the
amount computed by applying the U.S. federal statutory income tax rate of 34%
to income before income tax provision as a result of the following:
<TABLE>
<S> <C>
Expense at the statutory rate......................................... $327,199
Increase (reduction) resulting from:
State income taxes.................................................. 33,174
Disallowed meals and entertainment.................................. 54,664
Tax-exempt interest................................................. (5,909)
--------
$409,128
========
</TABLE>
The components of the deferred income tax assets and liabilities as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Allowance for doubtful accounts...................................... $30,093
Warranty reserves.................................................... 46,646
-------
Total deferred income tax asset.................................... 76,739
Deferred income tax liability:
Depreciation......................................................... (5,950)
-------
Net deferred income tax asset........................................ $70,789
=======
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the net deferred income tax asset recorded at December
31, 1997.
(8) LEASES
The Company is obligated under various capital leases, for service and other
vehicles, that expire at various dates through September 2002. At December 31,
1997, the gross amount of property and equipment and related
F-182
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
accumulated depreciation recorded under capital leases were as follows:
<TABLE>
<S> <C>
Service and other vehicles........................................ $ 704,750
Less accumulated depreciation..................................... (323,862)
---------
$ 380,888
=========
</TABLE>
All the capital lease obligations were repaid concurrent with the
acquisition of the Company (note 12).
The Company also leases its office building and warehouse under a non-
cancelable operating lease expiring in August 2007. For the year ended
December 31, 1997 the Company recorded rent expense of $191,685.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.............................. $ 221,422
1999.............................. 274,096
2000.............................. 274,096
2001.............................. 274,096
2002.............................. 274,096
Thereafter........................ 1,279,113
----------
$2,596,919
==========
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company obtains contract labor services from an affiliated company,
which is substantially owned by the Company's shareholders. During the year
ended December 31, 1997, the Company incurred expenses of $1,920,259 related
to these services. The Company owes $722,233 to this affiliated company as of
December 31, 1997, which are included in accounts payable in the accompanying
balance sheet. This arrangement was terminated concurrent with the acquisition
of the Company (note 13).
(10) EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) plan (the Plan) covering its
qualified employees. Employees may choose to defer up to 10% of their
compensation during the Plan year, not to exceed Internal Revenue Service
limitations, by contributing to the Plan. The Company makes voluntary
contributions equal to 0.50% of total revenues. Contributions made by the
Company of $212,384 were charged to operations in the year ended December 31,
1997.
(11) COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(12) SUBSEQUENT EVENTS
Effective January 1, 1998 Group Maintenance America Corp. ("GroupMAC")
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
F-183
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Premex, Inc.
We have audited the accompanying consolidated balance sheet of Premex, Inc.
and Subsidiary (the Company) as of March 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Premex,
Inc. and Subsidiary as of March 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
April 27, 1998
F-184
<PAGE>
PREMEX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash.............................................................. $ 18,131
Accounts receivable, net of allowance for doubtful accounts of
$141,632......................................................... 3,560,052
Inventories....................................................... 475,234
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ 452,111
Due from related party............................................ 66,207
Deferred taxes--current........................................... 157,937
Prepaid expenses and other current assets......................... 34,019
----------
Total current assets............................................ 4,763,691
PROPERTY AND EQUIPMENT, net......................................... 1,271,010
DEFERRED TAX ASSETS................................................. 334,095
OTHER LONG-TERM ASSETS.............................................. 278,578
----------
Total assets.................................................... $6,647,374
==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt.... $ 427,520
Current obligations under capital leases.......................... 221,094
Accounts payable.................................................. 1,737,908
Accounts payable--related party................................... 95,757
Accrued expenses.................................................. 450,382
Deferred service contract revenue................................. 82,681
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ 456,614
Accrued income taxes.............................................. 101,623
----------
Total current liabilities....................................... 3,573,579
LONG-TERM DEBT, net of current maturities........................... 580,085
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities......... 401,814
DEFERRED COMPENSATION LIABILITY..................................... 678,018
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$0.01 par value; 100,000 shares authorized, issued
and outstanding.................................................. 1,000
Additional paid-in capital........................................ 1,000
Retained earnings................................................. 1,411,878
----------
Total shareholders' equity...................................... 1,413,878
----------
Total liabilities and shareholders' equity...................... $6,647,374
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-185
<PAGE>
PREMEX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
REVENUES........................................................... $20,749,665
COST OF SERVICES................................................... 13,854,759
-----------
Gross profit................................................... 6,894,906
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,648,875
-----------
Income from operations......................................... 1,246,031
OTHER INCOME (EXPENSE):
Interest expense................................................. (152,297)
Interest income.................................................. 10,511
Other, net....................................................... 69,200
-----------
Income before income tax provision............................. 1,173,445
INCOME TAX PROVISION............................................... 492,782
-----------
NET INCOME......................................................... $ 680,663
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-186
<PAGE>
PREMEX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1997.............. $1,000 $1,000 $ 731,215 $ 733,215
Net income......................... -- -- 680,663 680,663
------ ------ ---------- ----------
BALANCE, March 31, 1998.............. $1,000 $1,000 $1,411,878 $1,413,878
====== ====== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-187
<PAGE>
PREMEX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $680,663
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization................................................... 37,572
Depreciation................................................... 324,296
Deferred taxes................................................. 280,608
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable.......................................... (586,288)
Inventories.................................................. (188,807)
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... (235,281)
Other current assets......................................... (26,067)
Other noncurrent assets...................................... (26,358)
Increase (decrease) in--
Accounts payable............................................. (340,906)
Accrued expenses............................................. (39,822)
Deferred service contract revenue............................ 1,842
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... (4,638)
Deferred compensation liability.............................. 174,521
--------
Net cash provided by operating activities.................. 51,335
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (458,488)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net............................... 281,000
Proceeds from notes payable..................................... 799,003
Payments of notes payable....................................... (665,007)
Payments of obligations under capital lease..................... (203,436)
--------
Net cash provided by financing activities.................. 211,560
--------
NET DECREASE IN CASH............................................. (195,593)
CASH, beginning of period........................................ 213,724
--------
CASH, end of period.............................................. $ 18,131
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-188
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Premex, Inc. is the holding company of Commercial Air, Power and Cable, Inc.
(Commercial Air), a wholly-owned subsidiary, (collectively referred to herein
as the Company). Commercial Air provides retrofit renovations, replacement
equipment installations, service and maintenance for building automation
systems, electrical distribution systems, distributed data processing systems,
communication networks and complex building mechanical systems. All this work
is either performed under a fixed price, modified fixed price, cost-plus-fee,
or a time and material contract. Commercial Air's market area is the
metropolitan Baltimore/Washington, D.C. area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the financial statements of
Premex, Inc. and its wholly owned subsidiary Commercial Air. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed-price and modified fixed-price and cost-plus-fee
construction contracts are recognized on the percentage of completion method.
The completed percentage is measured by the percentage of cost incurred to
date as compared to the estimated total cost for each contract. Revenues from
service contracts are recognized ratably over the term of the service
contract. Revenue from time and material service projects are recognized at
the completion of the project.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as labor, supplies,
tools, repairs and depreciation. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined.
Revenues for one customer amounted to 12.6% of revenues during the year
ended March 31, 1998.
Inventories
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined using the weighted average method of valuation.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
F-189
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases vehicles used in its operations under leases which have
been capitalized. The vehicles are being depreciated using the straight-line
method over their estimated useful lives, which is approximately 5 years.
Leases not meeting the criteria for capital leases are classified as operating
leases and are charged to rent equipment expense as incurred.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Supplemental Disclosure of Cash Flow Information
Cash payments for interest and income taxes were $152,297 and $138,967,
respectively, for the year ended March 31, 1998. During the year ended March
31, 1998, the Company acquired vehicles and computer equipment under capital
leases amounting to $336,885.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of March 31, 1998 is as
follows:
<TABLE>
<S> <C>
Costs incurred..................................................... $2,067,996
Estimated earnings recognized...................................... 545,482
----------
2,613,478
Less billings on contracts......................................... 2,617,981
----------
$ (4,503)
==========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts.......................................................... $ 452,111
Billings in excess of costs and estimated earnings on uncompleted
contracts.......................................................... (456,614)
---------
$ (4,503)
=========
</TABLE>
F-190
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
-----------
<S> <C> <C>
Service and other vehicles............................. 3-7 years $ 1,205,276
Machinery and tools.................................... 3-10 years 226,963
Office equipment, furniture and fixtures............... 5-10 years 350,486
Leasehold improvements................................. 10-30 years 382,892
Software............................................... 3-5 years 99,765
----------- -----------
$ 2,265,382
Less accumulated depreciation...................................... (994,372)
-----------
$ 1,271,010
===========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
The Company has a line of credit with up to $1,000,000 available through May
28, 2002, subject to renewal. Advances under the line are due on demand and
interest accrues at LIBOR plus 3.0%, which was 8.68% at March 31, 1998. The
balance outstanding on the line at March 31, 1998 was $281,000. The line of
credit and the following notes are collateralized by a lien on corporate
assets and by a personal guarantee of a shareholder.
Short- and long-term debt as of March 31, 1998 consists of the following:
<TABLE>
<S> <C>
Borrowings under line of credit agreement........................... $ 281,000
Note payable to bank, due in monthly installments of $6,250, plus
interest at LIBOR plus 2.75% (8.43% as of March 31, 1998).......... 286,205
Note payable to bank, due in 24 monthly installments of $5,960
followed by 35 monthly installments of $9,920, plus interest at
LIBOR plus 3% (8.68% as of March 31, 1998)......................... 440,400
----------
Total short- and long-term debt................................. $1,007,605
Less short-term borrowings and current maturities................... 427,520
----------
$ 580,085
==========
</TABLE>
The aggregate maturities of the short- and long-term debt as of March 31,
1998 are as follows:
<TABLE>
<S> <C>
1999................................................ 427,520
2000................................................ 186,120
2001................................................ 194,040
2002................................................ 180,245
2003................................................ 19,680
</TABLE>
6. LEASES
Commercial Air leases vehicles under agreements which are being accounted
for as capital leases. These leases expire at various dates through April,
2002. The interest rates included in these leases range from 7.9% to 15.9%.
Total cost and accumulated depreciation related to vehicles under capital
leases as of March 31, 1998 was $997,903 and $337,649, respectively.
F-191
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Commercial Air leases its operating facility jointly with an affiliated
entity, Chesapeake Tower Systems, Inc. (CTS), under an agreement accounted for
as an operating lease. This lease expires in May, 2006.
Additionally, Commercial Air leases vehicles and equipment which are being
accounted for as operating leases. These leases expire at various dates
through December, 2001. Total facility and equipment rent expense for the year
ended March 31, 1998 was $314,492.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
Year ending March 31,
1999................................................... $278,306 $ 217,243
2000................................................... 241,781 218,900
2001................................................... 161,984 197,217
2002................................................... 45,007 200,192
2003................................................... -- 201,843
Thereafter............................................. -- 622,065
-------- ----------
Total minimum lease payments........................... 727,078 $1,657,460
==========
Less amount representing interest.................... 104,170
--------
Present value of net minimum lease payments............ 622,908
Less current maturities.............................. 221,094
--------
Long-term maturities................................... $401,814
========
</TABLE>
7. RELATED PARTIES
The Company is affiliated with two separate companies through common
ownership and management. The two affiliated companies are CTS and Automotive
Technology, Inc. (ATI). On a contract by contract basis, the Company sells
certain equipment to CTS and purchases certain equipment from CTS. ATI
provides vehicle maintenance services to the Company.
Transactions with affiliated companies included in the accompanying
statement of operations for the year ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
CTS ATI
-------- -------
<S> <C> <C>
Revenues.................................. $109,004 $ --
Cost of services.......................... 453,589 121,004
Management fee income..................... 75,000 --
</TABLE>
Included in the accompanying balance sheet as of March 31, 1998 are the
following balances associated with affiliated companies:
<TABLE>
<CAPTION>
CTS ATI
------- ---
<S> <C> <C>
Accounts receivable............................ $66,207 --
Accounts payable............................... 95,757 --
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which provides benefits to employees.
Substantially all employees who meet certain eligibility requirements are
eligible to participate. Participants may elect to defer up to 15% of
compensation, subject to the total limit on deferrals for each calendar year
in accordance with Section 401(k) of
F-192
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Internal Revenue Code. The Company makes matching contributions of 10% of
the first 6% of compensation deferred by each participant. The plan does not
have any vesting requirements regarding Company contributions. Total Company
contributions to the plan for the year ended March 31, 1998 were $35,410.
The Company has an Employee Equity Plan which provides for the award of
hypothetical shares of Common Stock ("Units") to certain officers and key
employees. The value of each Unit on the award date is equal to the current
book value of a share of Common Stock. Benefits will be paid in cash upon
termination of employment over a five year period. As of March 31, 1998, Units
were held by 17 employees. The Company recognized compensation expense under
the Employee Equity Plan of $150,521 in the year ended March 31, 1998.
9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<S> <C>
Federal:
Current............................................................. $ 180,348
Deferred............................................................ 238,720
State:
Current............................................................. 31,826
Deferred............................................................ 41,888
---------
$ 492,782
=========
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision for the year ended March 31, 1998 as a result of the following:
<TABLE>
<S> <C>
Expense at statutory rate............................................ $ 398,971
Increase resulting from:
State income taxes, net of federal benefit......................... 48,651
Nondeductible expenses............................................. 18,572
Other.............................................................. 26,588
---------
$ 492,782
=========
</TABLE>
The components of the deferred income tax assets and liabilities as of March
31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carryforward..................................... $393,408
Allowance for doubtful accounts..................................... 56,653
Accrued vacation and other.......................................... 57,572
Valuation allowance................................................. --
--------
Total deferred income tax asset................................... 507,633
Deferred income tax liabilities--depreciation......................... 15,601
--------
Net deferred tax asset............................................ $492,032
========
</TABLE>
The Company's net operating loss carryforwards expire from 2007 to 2008, and
are limited on amounts that can be utilized in any one year. Management
believes it is more likely than not the Company will realize the benefits of
the net deferred income tax asset.
F-193
<PAGE>
PREMEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
11. SUBSEQUENT EVENT
The Company has entered into an agreement whereby Group Maintenance America
Corp. (GroupMAC) will acquire all of the outstanding shares of the Company for
a combination of cash and common stock of GroupMAC.
F-194
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma financial statements are
prepared in accordance with Article 11 of Regulation S-X as promulgated by the
Securities and Exchange Commission, and accordingly, give effect to the
acquisition of Hungerford Mechanical Corporation ("Hungerford") and Mechanical
Interiors, Inc. ("MIINC") in January 1998 and the pending acquisition of
Premex, Inc. ("Commercial Air"). Hungerford, MIINC and Commercial Air are
included in the unaudited supplemental pro forma financial information as they
are considered significant business acquisitions. This supplemental pro forma
financial information gives no consideration to the pro forma effect of the
Company's acquisition of the other GroupMAC Companies during 1997 and 1998.
See "Unaudited Pro Forma Combined Financial Statements," included elsewhere
herein.
The above acquisitions of the acquisitions were accounted for under the
purchase method of accounting. This unaudited supplemental pro forma financial
information is based on the historical financial statements of the acquired
businesses and estimates and assumptions set forth below and in the notes to
the unaudited supplemental pro forma financial information.
The unaudited supplemental pro forma balance sheet combines the historical
consolidated balance sheet of the Company and the balance sheets of
Hungerford, MIINC and Commercial Air, as if these acquisitions had occurred on
December 31, 1997. The accompanying unaudited supplemental pro forma statement
of operations combines the historical statement of operations of the Company
and the statements of operations of Hungerford, MIINC and Commercial Air as if
such acquisitions had occurred on January 1, 1997.
GroupMAC has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and certain benefits to the owners. To the extent
the owners of Hungerford, MIINC and Commercial Air have agreed prospectively
to reductions in salary, bonuses and benefits, these reductions have been
reflected in the unaudited supplemental pro forma statement of operations.
With respect to other potential cost savings, GroupMAC cannot fully quantify
these savings at this time. It is anticipated that these savings will be
partially offset by costs related to GroupMAC's corporate management and by
the costs associated with being a public company. However, because these
savings and costs cannot be accurately quantified at this time, they have not
been included in the pro forma financial information of GroupMAC.
The pro forma adjustments are based on available information and certain
assumptions that management deems appropriate and may be revised as additional
information becomes available. The pro forma financial data do not purport to
represent what GroupMAC's financial position or results of operations would
actually have been if such transactions had in fact occurred on those dates
and are not necessarily representative of GroupMAC's financial position or
results of operations for any future period. Since the acquisitions have not
historically been under common control or management, historical pro forma
results may not be indicative of or comparable to future performance. The
unaudited supplemental pro forma financial information should be read in
conjunction with other financial statements and notes thereto included
elsewhere in this prospectus. See "Risk Factors" included elsewhere herein.
F-195
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED SUPPLEMENTAL PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROUPMAC
AND COMMERCIAL PRO FORMA
SUBSIDIARIES HUNGERFORD MIINC AIR ADJUSTMENTS PRO FORMA
------------ ---------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 25,681 $ 1,123 $ 253 $ 18 $(25,004) $ 2,071
Accounts receivable... 45,516 6,885 8,516 3,560 -- 64,477
Due from related
parties.............. -- 1,196 -- 66 (1,262) --
Inventories........... 8,834 68 108 475 -- 9,485
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............ 3,116 411 852 452 -- 4,831
Deferred tax assets... 1,647 -- 71 158 155 2,031
Prepaid expenses and
other current assets. 1,013 484 84 34 (342) 1,273
-------- ------- ------- ------ -------- --------
Total current
assets............. 85,807 10,167 9,884 4,763 (26,453) 84,168
PROPERTY AND EQUIPMENT,
net.................... 11,312 1,053 1,711 1,271 -- 15,347
GOODWILL, net........... 84,533 -- -- -- 31,161 115,694
DEFERRED TAX ASSETS..... 4,739 -- -- 334 -- 5,073
OTHER LONG-TERM ASSETS.. 6,296 -- 52 279 (114) 6,513
-------- ------- ------- ------ -------- --------
Total assets........ $192,687 $11,220 $11,647 $6,647 $ 4,594 $226,795
======== ======= ======= ====== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses....... $ 27,222 $ 2,194 $ 5,524 $2,186 $ -- $ 37,126
Short-term debt, includ-
ing current maturities. 2,769 1,296 593 649 (2,537) 2,770
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. 4,737 2,343 1,676 457 -- 9,213
Liability for warranty
costs.................. 1,297 -- -- -- -- 1,297
Deferred service
revenue................ 3,305 -- -- 83 -- 3,388
Income taxes payable.... 31 -- 422 -- -- 453
Deferred tax
liabilities............ -- -- -- 102 -- 102
Other current
liabilities............ 2,610 -- -- -- -- 2,610
Due to related parties.. 3,358 -- -- 96 -- 3,454
-------- ------- ------- ------ -------- --------
Total current
liabilities........ 45,329 5,833 8,215 3,573 (2,537) 60,413
LONG-TERM DEBT, net of
current maturities..... 169 -- 363 580 (943) 169
LEASE OBLIGATIONS....... -- -- -- 402 (402) --
DEFERRED COMPENSATION... -- 254 -- 678 (678) 254
DUE TO RELATED PARTIES.. 9,745 -- -- -- -- 9,745
OTHER LONG-TERM
LIABILITES............. 791 -- -- -- -- 791
SHAREHOLDERS' EQUITY:
Common stock.......... 21 100 1 1 (100) 23
Additional paid-in
capital.............. 169,143 693 200 1 17,874 187,911
Retained earnings
(deficit)............ (32,511) 4,340 2,868 1,412 (8,620) (32,511)
-------- ------- ------- ------ -------- --------
Total shareholders'
equity............. 136,653 5,133 3,069 1,414 9,154 155,423
-------- ------- ------- ------ -------- --------
Total liabilities
and shareholders'
equity............. $192,687 $11,220 $11,647 $6,647 $ 4,594 $226,795
======== ======= ======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited supplemental pro
forma information.
F-196
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
UNAUDITED SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXPECT PER-SHARE DATA)
<TABLE>
<CAPTION>
GROUPMAC
AND COMMERCIAL PRO FORMA
SUBSIDIARIES HUNGERFORD MIINC AIR ADJUSTMENTS PRO FORMA
------------ ---------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $138,479 $32,850 $42,283 $20,750 $ -- $234,362
COST OF SERVICES........ 101,762 24,603 35,909 13,855 -- 176,129
-------- ------- ------- ------- ------- --------
Gross profit.......... 36,717 8,247 6,374 6,895 -- 58,233
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 35,862 5,591 5,360 5,649 (923)(a) 51,539
AMORTIZATION OF GOOD-
WILL................... 633 -- -- -- 779 (b) 1,412
-------- ------- ------- ------- ------- --------
Income from
operations......... 222 2,656 1,014 1,246 144 5,282
OTHER INCOME (EXPENSE):
Interest expense...... (1,542) (121) (73) (152) 346 (c) (1,542)
Interest income....... 398 89 21 11 -- 519
Other................. 112 42 -- 69 -- 223
-------- ------- ------- ------- ------- --------
Income (loss) before
income tax
provision.......... (810) 2,666 962 1,174 490 4,482
INCOME TAX PROVISION.... 2,832 -- 409 493 1,526 (d) 5,260
-------- ------- ------- ------- ------- --------
NET INCOME (LOSS)....... $ (3,642) $ 2,666 $ 553 $ 681 $(1,036) $ (778)
======== ======= ======= ======= ======= ========
BASIC LOSS PER SHARE:
LOSS PER SHARE........ $ (0.34) $ (0.06)
======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING... 10,800 13,800 (e)
======== ========
DILUTED LOSS PER SHARE:
EARNINGS LOSS PER
SHARE................ $ (0.34) $ (0.06)
======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING... 10,800 13,800 (e)
======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited supplemental pro
forma information.
F-197
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION
1. BACKGROUND:
The historical results of operations for the Company were combined with the
results of operations of Hungerford and MIINC for the twelve months ended
December 31, 1997 and Commercial Air for the twelve months ended March 31,
1998 to determine the pro forma supplemental results of operations for the
twelve months ended December 31, 1997.
2. ACQUISTIONS:
The total estimated purchase price of $41.2 million for Hungerford, MIINC
and Commercial Air is comprised of (a) cash of $22.4 million and Common Stock
of $18.8 million. In computing the estimated purchase price for accounting
purposes for Hungerford, MIINC and Commercial Air, the value of the common
stock is determined using an estimated weighted average fair value of $11.98
per share, which represents a discount rate of 20% from the weighted average
stock price of $14.97 at the respective dates of acquisition due primarily to
restrictions on the sale and transferability of such shares. The restrictions
are created by the limitations on future sales caused by existing securities
laws, and an additional contractual restriction imposed on the shares issued
in connection with the acquisition of Hungerford, MIINC and Commercial Air.
This contractual provision prohibits the shareholders from selling,
transferring or otherwise disposing of any shares for one year following the
date of acquisition of such shares and limiting dispositions for one
additional year to no more than 36% of their holdings.
The estimated purchase price and related allocations of the excess purchase
price for Hungerford, MIINC and Commercial Air are based upon management's
preliminary estimates and analysis. It is anticipated that the historical
carrying value of the assets and liabilities of Hungerford, MIINC and
Commercial Air (representing $10.0 million) will approximate fair value. This
results in an allocation to goodwill of approximately $31.2 million.
Management has not identified any other material tangible or identifiable
intangible assets to which a portion of the purchase price could reasonably by
allocated.
3. UNAUDITED SUPPLEMENTAL PRO FORMA BALANCE SHEET ADJUSTMENTS:
a) Records the deferred income tax amounts associated with converting
Hungerford from a corporation taxed under Subchapter S of the Internal Revenue
Code (the Code) to a corporation taxed under Subchapter C of the Code.
b) Records the settlement of all shareholder receivables and payables with
cash at closing.
c) Records the elimination of all assets and liabilities of Hungerford,
MIINC and Commercial Air that are specifically excluded as part of the
purchase transaction.
d) Records the elimination of the historical equity accounts of Hungerford,
MIINC and Commercial Air.
e) Records the purchase of Hungerford, MIINC and Commercial Air, including
the cash and common stock consideration paid to these companies.
f) Records the retirement of debt assumed in connection with the acquisition
of Hungerford, MIINC and Commercial Air.
F-198
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
The following table summarizes unaudited supplemental pro forma balance
sheet adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----- ------- ----- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ -- 1,262 -- -- (22,384) (3,882) (25,004)
Due from related
parties................ -- (1,262) -- -- -- -- (1,262)
Deferred tax assets..... 155 -- -- -- -- -- 155
Prepaid expenses and
other current assets... -- -- (342) -- -- -- (342)
Goodwill................ (155) -- (222) (9,616) 41,154 -- 31,161
Other long-term assets.. -- -- (114) -- -- -- (114)
Short-term debt,
including current
maturities............. -- -- -- -- -- 2,537 2,537
Long-term debt.......... -- -- -- -- -- 943 943
Lease obligations....... -- -- -- -- -- 402 402
Deferred compensation
liability.............. -- -- 678 -- -- -- 678
Common stock............ -- -- -- 102 (2) -- 100
Additional paid-in
capital................ -- -- -- 894 (18,768) -- (17,874)
Retained earnings....... -- -- -- 8,620 -- -- 8,620
----- ------- ----- ------- -------- ------- --------
Total............... $ -- $ -- $ -- $ -- $ -- $ -- $ --
===== ======= ===== ======= ======== ======= ========
</TABLE>
4. UNAUDITED SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the Hungerford, MIINC and Commercial Air to which they agreed.
These reductions in salaries, bonuses and benefits are in accordance with the
terms of the employment agreements. Such employment agreements are primarily
for three years, contain restrictions related to competition and provide
severance for termination of employment in certain circumstances.
The salaries, bonuses, benefits and other compensation items recorded in the
individual financial statements of each of Hungerford, MIINC and Commercial
Air amounted to $1.7 million for the periods presented. The contractually
agreed upon compensation and benefits for these same businesses, on a going
forward basis, amount to $0.8 million. The difference between these amounts
equates to $0.9 million and is reflected as a pro forma adjustment.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
c) Reflects the reduction of interest expense related to the assumption and
payoff of debt related to Hungerford, MIINC and Commercial Air.
d) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
e) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<S> <C>
Historical weighed average shares outstanding........................ 10,800
Initial public offering shares--proceeds used to fund cash portion of
purchase price...................................................... 1,433
Shares issued to Hungerford.......................................... 586
Shares issued to MIINC............................................... 556
Shares issued to Commercial Air...................................... 425
------
Weighted average shares outstanding (basic and diluted).............. 13,800
======
</TABLE>
F-199
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02A of the TBCA provides, in relevant part, as follows:
Subject to the provisions of Sections B and C of this Article, each
corporation shall have power:
(16) to indemnify directors, officers, employees, and agents of the
corporation and to purchase and maintain liability insurance for those
persons.
Article IX of the Articles of Incorporation of the Company (therein referred
to as the "Corporation") provides as follows:
1. Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such
action, suit or proceeding, and any inquiry or investigation that would
lead to such action, suit or proceeding (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director or
officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to any employee benefit
plan (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any
other capacity while serving as a director or officer, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by
the TBCA, as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all judgments, fines, penalties (including excise tax and
similar taxes), settlements, and reasonable expenses actually incurred by
such indemnitee in connection therewith. The right to indemnification
conferred in this Article shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the TBCA requires, an advancement
of expenses incurred by an indemnitee shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such indemnitee, to
repay all amounts so advanced if it shall ultimately be determined that
such indemnitee is not entitled to be indemnified for such expenses under
this Article or otherwise.
2. Insurance. The Corporation may purchase and maintain insurance, at its
expense, on behalf of any indemnitee against any liability asserted against
him and incurred by him in such a capacity or arising out of his status as
a representative of the Corporation, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or
loss under the TBCA.
3. Indemnity of Employees and Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the board of directors,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the
provisions of this Article or as otherwise permitted under the TBCA with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
The Company has entered into indemnity agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
TBCA as described above.
The Company has purchased liability insurance policies covering the
directors and officers of the Company, including, to provide protection where
the Company cannot legally indemnify a director or officer and where a claim
arises under the Employee Retirement Income Security Act of 1974 against a
director or officer based on an alleged breach of fiduciary duty or other
wrongful act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1* Articles of Incorporation of the Company, as amended.
3.2* Bylaws of the Company, as amended.
4.1* Form of Certificate representing the Common Stock, par value $0.001
per share, of the Company.
5 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
Common Stock being offered.
10.1* Form of Stock Awards Plan.
10.2* Form Option Agreement of Stock Awards Plan.
10.3* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of a Majority of the Outstanding Common Stock of
Airtron, Inc., dated April 30, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.4* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of K & N
Plumbing, Heating and Air Conditioning, Inc., dated
June 20, 1997. (Confidential information has been omitted from this
document and has been filed separately with the Commission.)
10.5* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Costner
Brothers, Inc., dated June 21, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.6* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Hallmark Air
Conditioning, Inc., dated June 24, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.7* Agreement and Plan of Merger among Group Maintenance America Corp.,
JARL Acquisition Corp., AA JARL, Inc., and James Wilburn, dated March
17, 1997.
10.8* Asset Purchase Agreement among Hallmark Air Conditioning, Inc., and
Way Service, Inc., dated
June 24, 1997. (Confidential information has been omitted from this
document and has been filed separately with the Commission.)
10.9* Agreement and Plan Exchange by and among Group Maintenance America
Corp, and the Holders of the Outstanding Capital Stock Charlie
Crawford, Inc., dated June 25, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.10* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of A-ABC
Appliance, Inc. and A-1 Appliance & Air Conditioning, Inc., dated July
3, 1997. (Confidential information has been omitted from this document
and has been filed separately with the Commission.)
10.11* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Sibley
Services, Inc., dated July 15, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.12* Agreement and Plan of Merger by and among Group Maintenance America
Corp., CRP Acquisition Corp., Callahan Roach Products & Publications,
Inc. and the Holders of the Outstanding Capital Stock of Callahan
Roach Products & Publications, Inc., dated July 16, 1997.
10.13* Agreement and Plan of Merger by and among Group Maintenance America
Corp, CRP Acquisition Corp, Callahan Roach & Associates and all of the
Partners of Callahan Roach & Associates, dated
July 16, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14* Asset Purchase Agreement among United Acquisition Corp, Group
Maintenance America Corp, United Service Alliance, L.C. and the
Members of United Service Alliance, L.C., Inc., dated July 1, 1997.
(Confidential information has been omitted from this document and has
been filed separately with the Commission.)
10.15* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., All Service Acquisition Corp., All Service Electric,
Inc. and the Holder of the Outstanding Capital Stock of All Service
Electric, Inc., dated as of August 18, 1997.
10.16* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Arkansas Mechanical Services,
Inc. and the Holders of the Outstanding Capital Stock of Arkansas
Mechanical Services, Inc., dated as of August 18, 1997.
10.17* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Central Carolina Acquisition Corp., Central Carolina
Air Conditioning Company and the Holders of the Outstanding Capital
Stock of Central Carolina Air Conditioning Company, dated as of August
18, 1997.
10.18* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Evans Acquisition Corp, Evans Services, Inc., the Holder
of the Outstanding Capital Stock of Evans Services, Inc., dated as of
August 18, 1997.
10.19* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Linford Acquisition Corp., Linford Service Company and
the Holders of the Outstanding Common Stock of Linford Service
Company, dated as of August 18, 1997.
10.20* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., MacDonald-Miller Acquisition Corp., MacDonald-Miller
Industries, Inc., the Principal Holders of the Outstanding Capital
Stock of MacDonald-Miller Industries, Inc. and the Trustee of the
MacDonald-Miller Stock Ownership Plan and Trust, dated as of August
18, 1997.
10.21* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Masters Accusation Corp., Masters, Inc. and the Holder
of the Outstanding Capital Stock of Masters, Inc., dated as of August
18, 1997.
10.22* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Mechanical Services, Inc. and
the Holders of the Outstanding Capital Stock of Mechanical Services,
Inc., dated as of August 18, 1997.
10.23* Form of Agreement and Plan of Exchange by and among Group Maintenance
America Corp., Paul E. Smith Co., Inc. and the Holders of the
Outstanding Capital Stock of Paul E. Smith Co., Inc., dated as of
August 18, 1997.
10.24* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Southeast Mechanical Service, Inc. and the Holders of
the Outstanding Capital Stock of Southeast Mechanical Service, Inc.,
dated as of August 18, 1997.
10.25* Form of Agreement and Plan of Merger by and among Group Maintenance
Corp, Van's Acquisition Corp., Van's Comfortemp Air Conditioning, Inc.
and the Holders of the Outstanding Capital Stock of Van's Comfortemp
Air Conditioning, Inc., dated as of August 18, 1997.
10.26* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Willis Acquisition Corp., Willis Refrigeration, Heating
& Air Conditioning, Inc. and the Holders of the Outstanding Capital
Stock of Willis Refrigeration, Heating & Air Conditioning, Inc., dated
as of
August 18, 1997.
10.27* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Yale Acquisition Corp., Yale Incorporated and the
Holders of the Outstanding Capital Stock of Yale Incorporated, dated
as of August 18, 1997.
10.28* Form of Employment Agreement by and between Group Maintenance America
Corp. and James P. Norris.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.29* Form of Employment Agreement by and between Group Maintenance America
Corp. and J. Patrick Millinor, Jr.
10.30* Form of Employment Agreement by and between Group Maintenance America
Corp. and Donald L. Luke.
10.31* Form of Employment Agreement by and between Group Maintenance America
Corp. and James D. Jennings.
10.32* Form of Employment Agreement by and between Group Maintenance America
Corp. and Timothy Johnston.
10.33* Form of Employment Agreement by and between Group Maintenance America
Corp. and William Michael Callahan.
10.34* Form of Employment Agreement by and between Group Maintenance America
Corp. and Alfred R. Roach, Jr.
10.35 Airtron, Inc. 1997 Corporate Staff Bonus Plan (filed as Exhibit 10.36
to the Company's Form S-1 (Registration No. 33-34067)).
10.36 Form of Credit Agreement by and among Group Maintenance America Corp.,
the Subsidiaries listed as guarantors, Texas Commerce Bank National
Association and the signatory banks, dated as of
December 9, 1997.
10.37 Form of Group Maintenance America Corp. 1997 Stock Option Plan (filed
as Exhibit 10.38 to the Company's Form S-1 (Registration No. 33-
34067)).
21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's
Transition Report on Form 10-K for the ten month period ended December
31, 1997).
23.1 Consent of Bracewell & Patterson, L.L.P. (included in its opinion
filed as Exhibit 5 hereto).
23.2** Consent of KPMG Peat Marwick LLP.
23.3** Consent of Deloitte & Touche LLP.
23.4** Consent of Moss Adams LLP.
24 Powers of attorney.
27* Financial Data Schedule.
</TABLE>
- --------
* FILED AS AN EXHIBIT TO THE COMPANY'S FORM S-1 (REGISTRATION NO. 333-34067)
UNDER AN EXHIBIT NUMBER IDENTICAL TO THAT DESCRIBED HEREIN AND INCORPORATED
HEREIN BY THIS REFERENCE.
** FILED HEREWITH.
(b) Financial Statement Schedules
No financial statement schedules are included herein. All other schedules
for which provision is made in the applicable accounting regulations of the
Commission are not required under the related instructions, are inapplicable,
or the information is included in the consolidated financial statements, and
have therefore been omitted.
(c) Reports, Opinions, and Appraisals
The following reports, opinions and appraisals are included herein.
None.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) Regulation S-K, Item 512 Undertakings
(1) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(iii) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(2) Registration on Form S-4 of Securities Offered for Resale.
(i) The undersigned hereby undertakes as follows: That prior to any
public reoffering of the securities registered hereunder through the
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by person who may be
deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(ii) The registrant undertakes that every prospectus (a) that is
filed pursuant to the paragraph immediately preceding, or (b) that
purports to meet the requirements of section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of new securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Company
of expenses incurred or paid by a director, officer or controlling person
of the Company in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities
II-5
<PAGE>
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4 of this Form, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(c) The undersigned hereby undertakes to supply by means of a supplement or
a post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in
the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Group
Maintenance America Corp. has duly caused this Registration Statement or
amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on April 30, 1998.
GROUP MAINTENANCE AMERICA CORP.
By: /s/ J. Patrick Millinor, Jr.
----------------------------------
J. Patrick Millinor, Jr.
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON APRIL 30, 1998.
<TABLE>
<S> <C>
SIGNATURE TITLE
James P. Norris* Chairman of the Board; Director
-------------------------------------
James P. Norris
/s/ J. Patrick Millinor, Jr. Director and Chief Executive
------------------------------------- Officer (principal executive
J. Patrick Millinor, Jr. officer)
/s/ Darren B. Miller Senior Vice President--Chief
------------------------------------- Financial Officer (principal
Darren B. Miller financial officer)
/s/ Daniel W. Kipp Vice President and Corporate
------------------------------------- Controller (principal
Daniel W. Kipp accounting officer)
Donald L. Luke* Director, President and Chief
------------------------------------- Operating Officer
Donald L. Luke
Ronald D. Bryant* Director
-------------------------------------
Ronald D. Bryant
David L. Henninger* Director
-------------------------------------
David L. Henninger
Chester J. Jachimiec* Director
-------------------------------------
Chester J. Jachimiec
James D. Jennings* Director
-------------------------------------
James D. Jennings
Timothy Johnston* Director
-------------------------------------
Timothy Johnston
Andrew Jeffrey Kelly* Director
-------------------------------------
Andrew Jeffrey Kelly
Thomas B. McDade* Director
-------------------------------------
Thomas B. McDade
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE
Lucian Morrison* Director
-------------------------------------
Lucian Morrison
Richard S. Rouse* Director
-------------------------------------
Richard S. Rouse
Fredric Sigmund* Director
-------------------------------------
Fredric Sigmund
John M. Sullivan* Director
-------------------------------------
John M. Sullivan
James D. Weaver* Director
-------------------------------------
James D. Weaver
</TABLE>
/s/ Randolph W. Bryant
*By: ________________________________
Randolph W. Bryant
(Attorney-in-fact for persons
indicated)
II-8
<PAGE>
EXHIBIT 23.2
The Board of Directors
Group Maintenance America Corp.:
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Historical and Pro Forma Financial Data"
and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
April 30, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 333-41947 of Group Maintenance America Corp. of our report dated
July 24, 1997 (relating to the financial statements of Masters, Inc.)
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Washington, D.C.
April 27, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus constituting part of Post
Effective Amendment No. 2 (Registration No. 333-41947) of this Registration
Statement of Group Maintenance America Corp., on Form S-4 of our report dated
August 7, 1997, except for Notes 2 and 11, as to which the date is August 18,
1997, relating to the financial statements of MacDonald-Miller Industries,
Inc., which appear in such Prospectus. We also consent to the reference to our
Firm under the heading "Experts" in this Prospectus.
Moss Adams L.L.P.
Seattle, Washington
April 29, 1998
