<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
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)
----------------
Copies to:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
711 LOUISIANA STREET, SUITE 2900
HOUSTON, TEXAS 77002-2781
PHONE: (713) 223-2900
TELECOPIER: (713) 221-1212
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: [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(1)
- --------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value... 7,000,000 shares $13.5625 $94,937,500 $28,007
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c), the offering price and registration fee with
respect to the Common Stock are computed on the basis of the average of
the high and low prices of the Common Stock on September 17, 1998, as
reported on The New York Stock Exchange, Inc. Composite Transactions
Reporting System.
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 21, 1998.
7,000,000 SHARES
[LOGO OF GROUP MAINTENANCE AMERICA APPEARS HERE]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
-----------
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 August 31, 1998, 27,975,585 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 September 17, 1998, the last reported sales price of the
Common Stock on the New York Stock Exchange was $13 7/16 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.
-----------
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.
The date of this Prospectus is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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.
2
<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 or period ending June 30 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/industrial customers. Since inception,
the Company has acquired 55 platform companies which represent $782.2 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/industrial 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, its telephone
number is (713) 860-0100, and its address on the world-wide web is
www.groupmac.com.
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.
3
<PAGE>
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
4
<PAGE>
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."
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's operations are subject to economic cycles and seasonal
variations. General and local economic conditions can cause fluctuations in
demand for the Company's services. Except in the Southeastern and Southwestern
United States, the demand for new installations of HVAC systems can be
substantially lower during the winter months. Demand for HVAC services,
especially in the residential sector, is generally higher in the second and
third calendar quarters. Commercial HVAC maintenance, repair and replacement
service is subject to seasonality as well. The Company expects that its
revenues and operating results generally will be lower in its first and fourth
calendar quarters. The HVAC, electrical and plumbing service industries are
also subject to fluctuations caused by periods of inclement weather. Prolonged
climate or weather conditions may cause unpredictable fluctuations in
operating results. 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."
5
<PAGE>
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 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 August 31, 1998, the executive officers, directors and 5% shareholders
of the Company will beneficially own in the aggregate approximately 21.9% 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 August 31, 1998, 27,975,585 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 6.9 million
shares in connection with the acquisitions subsequent to the IPO. 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
6
<PAGE>
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, 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 9.5
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 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 3.7 million shares of Common Stock, of which only warrants and
options to purchase approximately 1.5 million shares are exercisable within 60
days after the date of this Prospectus. The Company has registered the shares
subject to these options (but not the 514,000 shares subject to the warrants)
under the Securities Act for public resale.
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 its $125 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
7
<PAGE>
Company by means of a tender offer, business combination, proxy contest or
otherwise. These provisions include 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 substantially all of the accounts
receivable and inventory of the Company and its material subsidiaries and on
the capital stock of most 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.
8
<PAGE>
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:
<TABLE>
<CAPTION>
HIGH LOW
------- ---
<S> <C> <C>
1997:
Fourth Quarter (from November 7, 1997 through
December 31, 1997)..................................... 17 3/16 13
1998:
First Quarter........................................... 17 1/8 14
Second Quarter.......................................... 19 5/8 15 1/2
Third Quarter (from July 1, 1998 through September 17,
1998).................................................. 20 5/8 11 1/4
</TABLE>
On September 17, 1998, the closing price of the Common Stock on the New York
Stock Exchange was $13 7/16 and there were 414 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.
9
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 30, 1998 and (ii) the pro forma capitalization of the
Company as of June 30, 1998, giving effect to the acquisition of the Third
Quarter Post-IPO 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 JUNE 30,
1998
-------------------
ACTUAL PRO FORMA
-------- ---------
<S> <C> <C>
Short-Term Debt, Including Current Maturities.............. $ 3,934 $ 8,333
======== ========
Long-Term Debt, Net of Current Maturities.................. $ 64,033 $101,446
Subordinated Debt.......................................... 820 820
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;
26,415 shares issued and outstanding; 28,868 shares issued
and outstanding, pro forma(1)............................. 26 29
Additional Paid-In Capital................................. 239,553 274,256
Retained Deficit........................................... (24,143) (24,143)
-------- --------
Total Shareholders' Equity................................. 215,436 250,142
-------- --------
Total Capitalization....................................... $280,289 $352,408
======== ========
</TABLE>
- --------
(1) Excludes approximately 3.7 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 Credit Agreement restricts the payment of dividends. See
"Description of 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 June 30, 1997 and 1998 and 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 historical
financial data of the Company as of June 30, 1998 and for the six month
periods ended June 30, 1997 and 1998 are derived from the Company's unaudited
financial statements included elsewhere herein. In the opinion of the
Company's management, the financial statements for June 30, 1997 and 1998
include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth 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-IPO Companies") purchased during June and July 1997
and 13 additional companies (the "IPO Companies" and, together with Airtron
and the Pre-IPO Companies, the "Founding Companies") purchased concurrently
with the IPO, (ii) the effects of the acquisition of 15 companies in the first
quarter of 1998 (the "First Quarter Post-IPO Companies") and the effects of
the acquisition of 12 companies in the second quarter of 1998 (the "Second
Quarter Post-IPO Companies") and the effects of the acquisition of eight
companies in the third quarter of 1998 (the "Third Quarter Post-IPO
Companies", and together with the First Quarter Post-IPO Companies and the
Second Quarter Post-IPO Companies, the "Post-IPO Companies", and together with
the Founding Companies, the "GroupMAC Companies"), and (iii) the effects of
certain pro forma adjustments to the historical financial statements of the
GroupMAC 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 the assumed date, 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 AS
---------------------------------- HISTORICAL HISTORICAL ADJUSTED
FISCAL YEAR ENDED TEN MONTHS PRO FORMA SIX MONTHS ENDED SIX MONTHS
FEBRUARY 28 OR 29,(1) ENDED YEAR ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- DECEMBER 31, DECEMBER 31, ----------------- --------------------
1994 1995 1996 1997 1997(2) 1997(3) 1997 1998(2) 1997 1998(3)
------- ------- ------- ------- ------------ ------------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues............ $66,281 $72,226 $73,765 $81,880 $138,479 $782,188 $42,844 $266,277 $371,248 $395,828
Gross Profit........ 18,977 21,766 21,091 23,374 36,717 180,249 11,923 63,733 85,277 91,813
Selling, General and
Administrative
Expenses........... 15,760 20,282(4) 17,615 19,811 35,862(5) 122,344(6) 18,007(5) 45,707 57,232(6) 62,454(6)
Goodwill
Amortization(7).... -- -- -- -- 633 6,826 31 2,004 3,413 3,413
------- ------- ------- ------- -------- -------- ------- -------- -------- --------
Income from
Operations......... 3,217 1,484 3,476 3,563 222 51,079 (6,115) 16,022 24,632 25,946
Interest Income
(Expense), Net..... 127 76 68 89 (1,144) (7,881) (241) (1,085) (3,940) (3,940)
Other Income, Net... 33 140 246 256 112 1,000 228 149 630 232
------- ------- ------- ------- -------- -------- ------- -------- -------- --------
Income (Loss) Before
Income Tax
Provision.......... 3,377 1,700 3,790 3,908 (810) 44,198 (6,128) 15,086 21,322 22,238
Income Tax
Provision.......... 1,300 911 1,651 1,572 2,832 20,410 354 6,718 9,894 10,261
------- ------- ------- ------- -------- -------- ------- -------- -------- --------
Net Income (Loss)... $ 2,077 $ 789 $ 2,139 $ 2,336 $ (3,642) $ 23,788 $(6,482) $ 8,368 $ 11,428 $ 11,977
======= ======= ======= ======= ======== ======== ======= ======== ======== ========
Net Earnings (Loss)
Per Share:
Basic............. $ (0.34) $ 0.82 $ (0.76) $ 0.35 $ 0.40 $ 0.41
======== ======== ======= ======== ======== ========
Diluted........... $ (0.34) $ 0.82 $ (0.76) $ 0.34 $ 0.39 $ 0.41
======== ======== ======= ======== ======== ========
Weighted Average
Shares Outstanding:
Basic............. 10,800 28,868 8,492 24,198 28,868 28,868
======== ======== ======= ======== ======== ========
Diluted........... 10,800 29,093 8,492 24,595 29,093 29,289
======== ======== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
FEBRUARY 28 OR 29, -----------------
------------------------------- DECEMBER 31, PRO
1994 1995 1996 1997 1997 ACTUAL FORMA(3)
------- ------- ------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash
Equivalents............ $ 186 $ 650 $ 1,774 $ 4,339 $ 25,681 $ 5,434 $ --
Working Capital......... 3,473 4,561 3,285 6,337 40,478 38,109 43,925
Total Assets............ 15,221 23,528 28,282 27,153 192,687 394,799 497,980
Total Debt.............. -- -- -- 1,290 2,938 68,787 110,599
Shareholders' Equity.... 2,175 5,955 6,373 5,991 136,653 215,436 250,142
</TABLE>
- -------
(1) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31.
(2) The Company's acquisitions of the Founding Companies (other than Airtron),
the First Quarter Post-IPO Companies, the Second Quarter Post-IPO
Companies 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) Pro forma financial data give effect to the acquisitions of the GroupMac
Companies, 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 for the
Income Statement data or on June 30, 1998 for the Balance Sheet data.
(4) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(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 and the six months ended June 30, 1997.
(6) Reflects a decrease of $23.9 million, $8.5 million, and $1.3 million for
the pro forma reductions in salaries, bonuses and benefits to former
owners of the GroupMAC Companies to which they have agreed for the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998,
respectively, and includes $5.0 million of expenses for the formation and
build-up of corporate management and infrastructure for the year ended
December 31, 1997. 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.
(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 maintenance, repair and
replacement and new installation services for HVAC, electrical, plumbing and
other systems to residential and commercial customers. Approximately 44% of
the Company's combined 1997 revenues of $782.2 million were derived from new
installation services and 56% 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, electrical and plumbing) 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 32.4% 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 21.8% 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 21.0% for the combined twelve months ended December 31, 1997. The
companies primarily providing HVAC services in the residential new
installation market had an average gross margin of 27.6%, which was somewhat
offset by the companies providing primarily plumbing service to this market at
an average gross margin of 12.9%. 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 has 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 are 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.
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 $20.8 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
13
<PAGE>
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-IPO 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 IPO
Companies through a combination of cash and Common Stock of the Company.
During the first, second and third quarters of 1998 the Company acquired the
Post-IPO Companies through a combination of Common Stock, options to purchase
Common Stock and cash.
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TEN MONTHS
FEBRUARY 28 OR 29, ENDED SIX MONTHS ENDED JUNE 30,
---------------------------- DECEMBER 31, --------------------------------
1996 1997 1997 1997 1998
------------- ------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $73,765 100.0% $81,880 100.0% $138,479 100.0% $42,844 100.0% $266,277 100.0%
Cost of Services........ 52,674 71.4 58,506 71.5 101,762 73.5 30,921 72.2 202,544 76.1
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Gross profit............ 21,091 28.6 23,374 28.5 36,717 26.5 11,923 27.8 63,733 23.9
Selling, General and
Administrative
Expenses............... 17,615 23.9 19,811 24.1 36,495 26.3 18,038 42.1 47,711 17.9
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income (Loss) from
Operations............. 3,476 4.7 3,563 4.4 222 0.2 (6,115) (14.3) 16,022 6.0
Interest, Net........... 68 0.1 89 0.1 (1,144) (0.8) (241) (0.6) (1,085) (0.4)
Other................... 246 0.3 256 0.3 112 -- 228 0.6 149 0.1
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income (Loss) Before
Income Tax Provision... 3,790 5.1 3,908 4.8 (810) (0.6) (6,128) (14.3) 15,086 5.7
Income Tax Provision
(Benefit).............. 1,651 2.2 1,572 1.9 2,832 2.0 354 0.8 6,718 2.5
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Net Income (Loss)....... $ 2,139 2.9% $ 2,336 2.9% $ (3,642) (2.6)% $(6,482) (15.1)% $ 8,368 3.2%
======= ===== ======= ===== ======== ===== ======= ===== ======== =====
</TABLE>
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.
14
<PAGE>
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 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.
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-IPO Companies in June and July of 1997 and the
acquisitions of the IPO 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 profit was
primarily attributable to the acquisitions of the Pre-IPO Companies in June
and July of 1997, the acquisitions of the IPO 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 Founding
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-
IPO 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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Revenues increased $223.4 million to $266.3 million for the six
months ended June 30, 1998 from $42.8 million for the six months ended June
30, 1997. Such increase in revenues included $216.7 million attributable to
the acquisitions of the Pre-IPO Companies in June and July of 1997, the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the six months ended June 30, 1998. Also
contributing to the increase was a $6.7 million increase in revenues at
Airtron, which related to strong housing starts throughout the country,
particularly in the Midwestern and South Central United States.
15
<PAGE>
Gross Profit. Gross profit increased $51.8 million to $63.7 million for the
six months ended June 30, 1998 from $11.9 million for the six months ended
June 30, 1997. Such increase in gross profit included approximately $0.9
million in materials purchases savings and $49.3 million attributable to the
acquisitions of the Pre-IPO Companies in June and July of 1997, the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the six months ended June 30, 1998. Gross profit
at Airtron increased by $1.6 million between periods, with virtually all of
that increase occurring in the second quarter. This increase did not correlate
as favorably with Airtron's $6.7 million increase in revenues as a higher mix
of lower margin new installation work occurred in the first quarter as a
result of a reduction in maintenance, repair and replacement sales due to
adverse weather patterns, particularly in the Midwestern United States. Gross
profit margin decreased 3.9% to 23.9% for the six months ended June 30, 1998
compared to 27.8% for the six months ended June 30, 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 $29.7 million to $47.7 million for the six
months ended June 30, 1998 from $18.0 million for the six months ended June
30, 1997. Such increase included $31.2 million attributable to the
acquisitions of the Pre-IPO Companies in June and July of 1997, the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the six months ended June 30, 1998. Also
contributing to the increase was a $3.5 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 and
$2.0 million of goodwill amortization. Offsetting the increases was a $7.0
million reduction in compensation expense recognized in the prior year from
the reverse acquisition of Airtron. As a percentage of revenues, selling,
general and administrative expenses, excluding corporate expenses, goodwill
amortization and 1997 non-recurring compensation expense, decreased to 15.6%
for the six months ended June 30, 1998 from 24.3% for the six months ended
June 30, 1997, respectively, due primarily to the prospective reductions in
compensation to former owners of Airtron. When including corporate expenses
and goodwill amortization, but excluding the non-recurring compensation
expense of $7.0 million related to the reverse acquisition, selling, general
and administrative expenses as a percentage of revenue decreased to 17.9% for
the six months ended June 30, 1998 from 25.8% for the six months ended June
30, 1997.
Net Interest. Net interest increased $0.8 million during the six months
ended June 30, 1998 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $6.3 million to
$6.7 million for the six months ended June 30, 1998 from $0.4 million for the
six months ended June 30, 1997. This increase corresponds with the pretax
income increase of $14.2 million between periods after adding back the $7.0
million of compensation expense related to the reverse acquisition of Airtron.
The effective tax rate for the six months ended June 30, 1998 was 44.5%
compared to 41.6% for the six months ended June 30, 1997 after adding back the
$7.0 million of compensation expense related to the reverse acquisition of
Airtron. This increase results primarily from the non-deductible goodwill
amortization of $2.0 million in the six months ended June 30, 1998.
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.
16
<PAGE>
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $45,508 100.0% $66,059 100.0% $52,184 100.0% $54,560 100.0%
Cost of Services........ 36,927 81.1 56,373 85.3 45,192 86.6 46,400 85.0
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 8,581 18.9 9,686 14.7 6,992 13.4 8,160 15.0
Selling, General and
Administrative
Expenses............... 7,338 16.2 7,632 11.6 5,567 10.7 6,239 11.5
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,243 2.7 2,054 3.1 1,425 2.7 1,921 3.5
</TABLE>
For a discussion of periods subsequent to September 30, 1997, see "--Results
of Operations--GroupMac and Subsidiaries."
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.
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.
17
<PAGE>
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.
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>
FISCAL YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $35,160 100.0% $39,826 100.0% $29,088 100.0% $31,166 100.0%
Cost of Services........ 31,746 90.3 35,854 90.0 26,308 90.4 27,956 89.7
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 3,414 9.7 3,972 10.0 2,780 9.6 3,210 10.3
Selling, General and
Administrative
Expenses............... 2,373 6.7 2,484 6.3 1,739 6.0 2,015 6.5
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,041 3.0 1,488 3.7 1,041 3.6 1,195 3.8
</TABLE>
For a discussion of periods subsequent to September 30, 1997, see "--Results
of Operations--GroupMac and Subsidiaries."
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.
18
<PAGE>
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.
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
Administrative
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."
Six Months Ended June 30, 1997 Compared to 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.
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.
19
<PAGE>
Year Ended March 31, 1997 Compared to 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.
Year Ended March 31, 1996 Compared to 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-IPO 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 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 and Publications, Callahan/Roach and Associates and
their affiliates (collectively, "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
20
<PAGE>
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.
IPO 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 Kentucky areas.
Willis' revenues for fiscal 1996 were $6.8 million and income from operations
was $542,000. Willis is headquartered in Cincinnati, Ohio.
21
<PAGE>
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,
---------------------------- ----------------------------
1995 1996 1996 1997(2)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $43,216 100.0% $48,964 100.0% $23,255 100.0% $24,886 100.0%
Cost of Services ....... 27,537 63.7 30,628 62.6 14,762 63.5 14,799 59.5
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 15,679 36.3 18,336 37.4 8,493 36.5 10,087 40.5
Selling, General and
Administrative
Expenses............... 14,210 32.9 16,506 33.7 8,082 34.7 8,277 33.2
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 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."
Six Months Ended June 30, 1997 Compared to 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.
Fiscal 1996 Compared to 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.
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
22
<PAGE>
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.
OTHER COMMERCIAL SERVICE COMPANIES
Pre-IPO 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, L.C. ("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.
IPO 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.
23
<PAGE>
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,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $38,476 100.0% $46,499 100.0% $24,460 100.0% $23,870 100.0%
Cost of Services........ 27,613 71.8 33,845 72.8 17,575 71.9 17,177 72.0
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 10,863 28.2 12,654 27.2 6,885 28.1 6,693 28.0
Selling, General and
Administrative
Expenses............... 9,129 23.7 10,367 22.3 4,703 19.2 5,198 21.7
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 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.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Six Months Ended June 30, 1997 Compared to 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.
24
<PAGE>
Fiscal 1996 Compared to 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.
RESULTS OF OPERATIONS--PRO FORMA COMBINED
The following table sets forth certain combined financial data of the
GroupMAC Companies for the twelve month period ended December 31, 1997 and for
the six month periods ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS ENDED JUNE 30,
ENDED ------------------------------
DECEMBER 31, 1997 1997 1998
------------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 782,188 100.0% $371,248 100.0% $395,828 100.0%
Cost of Services............ 601,939 77.0 285,971 77.0 304,015 76.8
---------- ------- -------- ----- -------- -----
Gross Profit................ 180,249 23.0 85,277 23.0 91,813 23.2
========== ======= ======== ===== ======== =====
</TABLE>
DECEMBER 31, 1997:
The acquisition of the Post-IPO Companies added $453.2 million of revenues
for the twelve months ended December 31, 1997, bringing the total combined
revenues for the GroupMAC Companies to $782.2 million. This resulted in the
Company decreasing its dependence on new installation business from 55% of
total revenues with respect to the Founding Companies to 44%. The Post-IPO
Companies' revenue mix changed the revenue mix of the GroupMAC Companies as
follows:
<TABLE>
<CAPTION>
GROUPMAC
COMPANIES
---------
<S> <C>
Residential Services:
New Installation.................................................... 19%
Maintenance, Repair and Replacement................................. 13%
----
Total Residential................................................. 32%
Commercial Services:
New Installation.................................................... 25%
Maintenance, Repair and Replacement................................. 43%
----
Total Commercial.................................................. 68%
----
Total........................................................... 100%
====
</TABLE>
25
<PAGE>
JUNE 30, 1997 AND 1998:
Combined Six Months Ended June 30, 1998 Compared to Combined Six Months Ended
June 30, 1997
Revenues. Combined revenues increased $24.6 million, or 6.6%, to $395.8
million for the six months ended June 30, 1998 from $371.2 million for the six
months ended June 30, 1997. The increase in combined revenues was attributable
to (i) the companies that primarily provide residential new installation
services which experienced a 17.3% increase in revenues due to an increase in
new home starts in the markets they serve, (ii) the companies that primarily
provide residential maintenance, repair and replacement services which
experienced a 15.2% increase due to favorable weather patterns in the markets
they serve and (iii) a slight increase of 2.2% from the companies that
primarily provide commercial services.
Gross Profit. Combined gross profit increased $6.5 million, or 7.6%, to
$91.8 million for the six months ended June 30, 1998 from $85.3 million for
the six months ended June 30, 1997. The increase in gross profit was
attributable to the increase in combined revenues described above. Gross
profit margin increased to 23.2% for the six months ended June 30, 1998
compared to 23.0% for the six months ended June 30, 1997. The increase in
gross profit margin was a result of (i) a higher volume of new home starts in
the current year, allowing the Company to operate at full capacity and thus
increase margins, (ii) a greater mix of higher margin maintenance, repair and
replacement business in the residential sector, and (iii) purchasing synergies
experienced in the current year. Offsetting the increase from these items was
a slight decline in gross profit in the commercial sector.
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 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
Background. The Year 2000 issue refers to the inability of certain date-
sensitive computer chips, software and systems to recognize a two-digit date
field as belonging to the 21st century. Many computer software programs, as
well as certain hardware and equipment containing date sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which
could result in significant system and equipment failures. This is a
significant issue for most if not all companies, with far reaching
implications, some of which cannot be anticipated or predicted with any degree
of certainty. The Company recognizes that it must take action to ensure that
its operations will not be adversely impacted by Year 2000 software failures.
The Company's State of Readiness. An initial systems survey of the GroupMAC
Companies was completed in March of 1998 and revealed that several of the
Company's core business applications possess Year 2000 problems. The Company
retained an outside consulting firm to more thoroughly evaluate the extent of
the problem and to assist the Company in preparing an action plan to address
the issues in a timely manner. The evaluation project began in early July of
this year.
With the exception of the seven most recent acquisitions, the evaluation
project is substantially complete. The evaluation on the seven most recent
acquisitions is pending. The cost of bringing the evaluated systems into
compliance is estimated to be between $125,000 and $150,000, including all
software upgrade fees and implementation. These costs are independent of any
costs associated with the common information system discussed below. The
projected effort for the majority of the systems includes an upgrade to recent
vendor software releases that are fully Year 2000 compliant. Management is
working with the consultant to finalize implementation planning and to develop
tracking mechanisms to ensure upgrades are completed in a timely manner.
Additionally, the Company has engaged an outside consulting firm to evaluate
and estimate the impact of Year 2000 problems on potential future acquisitions
as part of the due diligence process.
Independent of its Year 2000 activities discussed in the previous paragraph,
the Company continues to develop information systems throughout the
organization for its overall information needs that will be free of any Year
2000 limitations. While the Company is not dependent on the implementation of
the common information system to remedy its Year 2000 problem, priority for
implementation of the common information
26
<PAGE>
systems will be given to those GroupMAC Companies where correction of the Year
2000 problem is an issue. The Company expects to commence user-acceptance
testing of the new information system before the second quarter of 1999 with
implementation to follow immediately thereafter.
The Company is completing a plan to evaluate the effect of the Year 2000
problem on the Company's most significant customers and suppliers, and thus
indirectly on the Company. This evaluation is expected to be complete by
December 31, 1998. At this time, the Company has not assessed the potential
adverse effect on the Company with respect to customers and suppliers.
Embedded Technology. The Company has focused its assessments to date on the
information technology systems. To date the Company's assessments indicate
that, due to the nature of the Company's operations, the non-information
technology systems (i.e. embedded technology such as microcontrollers) do not
represent a significant area of risk relative to Year 2000 readiness. The
Company's operations do not include capital intensive equipment with embedded
microcontrollers.
Contingency Plan. The Company has not, to date, implemented a Year 2000
contingency plan. As explained above, the Company has initiated action to
identify and resolve Year 2000 problems. The Company will develop and
implement a contingency plan in the event the Company's present course of
action to solve the Year 2000 problem should fall behind schedule.
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 years ended February 29, 1996 or February 28,
1997, the ten months ended December 31, 1997 or the six months ended June 30,
1998.
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-IPO Company and
the IPO Companies, $42.6 million to repay corporate indebtedness and debt
assumed in connection with the acquisition of the Founding Companies, $19.3
million to retire all of the then outstanding preferred stock and $11.9
million for general corporate purposes including working capital and final
consideration settlements related to the Founding Companies.
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.
On June 12, 1998, the Company amended and restated its revolving credit
facility (the "Credit Agreement") to increase its borrowing capacity from
$75.0 million to $125.0 million. Under this Credit Agreement, the Company is
required to maintain (i) a minimum fixed charge coverage ratio; (ii) a maximum
ratio of total indebtedness for borrowed money to capitalization (as defined
in the Credit Agreement); (iii) a maximum ratio of debt to historical earnings
before interest, taxes, depreciation and amortization; (iv) a maximum amount
of other indebtedness in relation to consolidated shareholders' equity and (v)
a minimum amount of consolidated net worth. The Company is presently in
compliance with those covenants. The Credit Agreement matures on December 11,
2000.
27
<PAGE>
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
and the six months ended June 30, 1998, capital expenditures aggregated $2.0
million and $4.6 million, respectively. 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 years ended February 29, 1996 and February 28, 1997, the ten months
ended December 31, 1997 and the six months ended June 30, 1998, the Company
generated $4.0 million, $3.7 million, $4.4 million and $6.2 million in cash
from operating activities, respectively. For the year 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 year 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 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 six months ended June
30, 1998, net income, depreciation, amortization and deferred taxes generated
$12.8 million, and changes in asset and liability accounts utilized a net of
$6.6 million.
The cash impact of investing activities for the years ended February 29,
1996 and February 28, 1997 was not significant. 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. For the
six months ended June 30, 1998, the Company used $76.6 million in investing
activities. The cash expended during the six months ended June 30, 1998
consisted of $71.5 million for acquisitions and $4.4 million for net capital
expenditures and $0.7 million for deferred acquisition costs.
The cash impact of financing activities for the years ended February 29,
1996 and February 28, 1997 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.
For the six months ended June 30, 1998, the Company generated $50.2 million in
cash from its financing activities. These activities principally consisted of
proceeds from the Credit Agreement of $74.4 million, less payments of long-
term debt of $24.2 million.
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 Founding 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 half of 1998, the Company completed the acquisition of the
First and Second Quarter Post-IPO Companies, which were accounted for as
purchases, for approximately $157.8 million, which includes cash payments of
$85.5 million, $0.8 million of subordinated convertible debt, 5.4 million
shares of Common Stock and options to purchase 0.1 million shares of Common
Stock. Of the total consideration, approximately $5.4 million of cash and 0.1
million shares of Common Stock is due to former shareholders at June 30, 1998.
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. The combined 1997 annual revenues of
these companies were $292.1 million.
From June 30, 1998 through August 31, 1998, the Company acquired eight
additional platform companies with combined annual revenues of 157.9 million.
Total consideration paid or to be paid was approximately $81.5 million
consisting of cash payments of $42.8 million, $4.0 million of notes payable,
2.4 million shares of Common
28
<PAGE>
Stock and options to purchase 0.2 million shares of Common Stock. These
acquisitions will be accounted for as purchases. The Company financed the cash
portion of the purchase price with borrowings under the Credit Agreement. As
of August 18, 1998, the funds available under the Credit Agreement totaled
$17.7 million, subject to the maintenance of financial ratios and covenants.
The Company intends to aggressively pursue acquisition opportunities.
Management believes that the Company has several viable financing alternatives
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 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/industrial 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 Founding 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 55
platform companies in 54 cities in 26 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 Founding
Companies, $42.6 million to repay corporate indebtedness and debt assumed in
connection with the acquisition of the Founding 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 Founding 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
30
<PAGE>
(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.
31
<PAGE>
The following table shows the approximate percentages of the combined
revenues of the GroupMAC 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............................... 12% 7% 0% 19%
Maintenance, Repair and Replacement............ 10% 2% 1% 13%
--- --- --- ---
Total Residential............................ 22% 9% 1% 32%
--- --- --- ---
Commercial Services:
New Installation............................... 15% 5% 5% 25%
Maintenance, Repair and Replacement............ 25% 8% 10% 43%
--- --- --- ---
Total Commercial............................. 40% 13% 15% 68%
--- --- --- ---
Total...................................... 62% 22% 16% 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
32
<PAGE>
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.
33
<PAGE>
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 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 approximately 80
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 is developing (initially for its
subsidiaries, but ultimately for delivery to the market through
34
<PAGE>
licensed affiliates developed by Callahan Roach and USA) 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.
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 June 30, 1998, the Company had approximately 5,600 full and part-time
employees, of whom approximately 4,000 are installation/service technicians.
In the course of performing installation work, the Company may utilize the
services of subcontractors. Approximately 760 employees (in eight of the
commercial subsidiaries) are members of unions and work under collective
bargaining agreements. The collective bargaining agreements have expiration
dates between March 1999 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
35
<PAGE>
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 six-month
period ended June 30, 1998 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..................... 52 Executive Vice President-Corporate
Development and Administration
Darren B. Miller..................... 38 Executive Vice President and Chief
Financial Officer
Randolph W. Bryant................... 47 Senior Vice President, General
Counsel and Secretary
Daniel W. Kipp....................... 38 Senior Vice President and Corporate
Controller
Robert C. Tyler...................... 48 Senior Vice President-Residential
Services
Ronald D. Bryant..................... 51 President of Masters; Director
David L. Henninger................... 54 President of Van's; Director
Timothy Johnston..................... 42 Senior Vice President and Chief
Financial Officer of Airtron;
Director
Andrew Jeffrey Kelly................. 44 Chief Executive Officer of K&N;
Director
Fredric J. Sigmund................... 57 Chief Executive Officer and
President of MacDonald-Miller;
Director
Thomas B. McDade..................... 75 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 Executive Vice President-Corporate Development and
Administration of the Company and has served in such capacity 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.
DARREN B. MILLER became Executive Vice President and Chief Financial Officer
of the Company in July 1998. From October 1996 to July 1998, he served as
Senior Vice President and Chief Financial Officer of the Company and its
predecessor. 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.
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.
DANIEL W. KIPP became Senior Vice President and Corporate Controller of the
Company in July 1998. From February 1997 to July 1998, he served as Vice
President and Corporate Controller of the Company. From February 1994 to
February 1997, he served as a Sales Executive with American Sterling
Corporation, a provider of insurance outsourcing services to the mortgage
banking industry. From July 1990 to February 1994, he served as Vice President
and Controller of Allwaste Recycling, Inc., a glass recycler and powdered
glass processor. Prior to 1990, he was employed in the audit practice of
Arthur Andersen LLP.
ROBERT C. TYLER became Senior Vice President-Residential Services in July
1998. From February 1994 to July 1998, Mr. Tyler was Vice President-Sales of
Amana Heating & Air Conditioning, an HVAC equipment manufacturer. From January
1990 to February 1994, he was National Sales Manager of Friedrich Air
Conditioning, an HVAC equipment manufacturer.
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>
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.
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 chief executive officer since that
time.
FREDRIC J. SIGMUND became a Director of the Company in November 1997. Since
1986, he has served as chief executive officer and president 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 13 members divided into
three classes of directors serving staggered three-year terms expiring at the
annual meetings of shareholders in 1999, 2000 and 2001, 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
40
<PAGE>
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.
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 Luke.
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.
LOGO
[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
47
<PAGE>
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.
48
<PAGE>
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.
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.
49
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 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 1.7%
David L. Henninger....................................... 112,202(3) *
Chester J. Jachimiec..................................... 161,726(4) *
James D. Jennings........................................ 734,122(5) 2.6%
Timothy Johnston......................................... 349,654(5) 1.2%
Andrew J. Kelly.......................................... 362,800 1.3%
Donald L. Luke........................................... 19,948 *
Thomas B. McDade......................................... 8,000 *
J. Patrick Millinor, Jr.................................. 254,938(6) *
Lucian A. Morrison....................................... 6,500 *
James P. Norris.......................................... 23,958 *
Richard S. Rouse......................................... 139,927 *
Fredric J. Sigmund....................................... 207,588(7) *
John M. Sullivan......................................... 109,050(8) *
James D. Weaver.......................................... 86,500 *
William M. Callahan...................................... 314,462(9) 1.1%
Alfred R. Roach.......................................... 314,462(9) 1.1%
Darren B. Miller......................................... 77,327 *
Randolph W. Bryant....................................... 20,991 *
Daniel W. Kipp........................................... 14,983 *
Robert C. Tyler.......................................... -- --
Gordon Cain.............................................. 2,417,950 8.6%
8 Greenway Plaza, Suite 705
Houston, Texas 77046
All executive officers and directors as a group.......... 3,785,944(10) 13.5%
</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 on the date of this Prospectus, or within 60 days thereafter,
for Messrs. Millinor, Jachimiec, Luke, Norris, Rouse, Callahan, Miller,
Roach, R. W. Bryant, Kipp, Jennings and Johnston to purchase 32,993,
30,126, 18,948, 23,458, 28,077, 13,325, 23,327, 13,325, 19,991, 13,983,
13,269 and 13,269 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 263,955 and 295,045 shares beneficially owned by Messrs. Jennings
and Johnston through Airtron, Inc. employee benefit plans.
50
<PAGE>
(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 244,091 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 August 31, 1998, the Company had outstanding
27,975,585 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
51
<PAGE>
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
52
<PAGE>
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 $125 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 certain Material
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 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.
53
<PAGE>
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 maximum ratio of total indebtedness for borrowed money to
Capitalization (as defined in the Credit Agreement); and (iii) a minimum
Consolidated Net Worth (as defined in the Credit Agreement).
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).
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of August 31, 1998, the Company had outstanding 27,975,585 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 9.5 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. Approximately 6.9 million of the shares issued or to be
issued in connection with the acquisition of the Post-IPO 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 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 9.5 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 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 3.7 million shares of Common Stock,
approximately 1.5 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 by the Company. 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, 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 Founding Companies and
certain 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;
55
<PAGE>
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 approximately 12.5 million 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.
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
56
<PAGE>
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, Mechanical Interiors, Inc., Premex, Inc.
and Subsidiary, Barr Electric Corp., Atlantic Industrial Constructors, Inc.,
Clark Converse Electric Service, Inc., HPS Plumbing Services, Inc., Ray &
Claude Goodwin, Inc., Reliable Mechanical, Inc. and Romanoff Electric Corp. 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.
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.
57
<PAGE>
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-5
Unaudited Pro Forma Combined Balance Sheet............................... F-7
Unaudited Pro Forma Combined Statements of Operations.................... F-8
Notes to Unaudited Pro Forma Combined Financial Statements............... F-11
HISTORICAL FINANCIAL STATEMENTS
GROUP MAINTENANCE AMERICA CORP. (GROUPMAC PARENT)
Report of Independent Public Accountants................................. F-17
Balance Sheets........................................................... F-18
Statements of Operations................................................. F-19
Statements of Shareholders' Equity....................................... F-20
Statements of Cash Flows................................................. F-21
Notes to Financial Statements............................................ F-22
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets.................................... F-27
Consolidated Condensed Statements of Operations.......................... F-28
Consolidated Condensed Statements of Cash Flows.......................... F-29
Notes to Consolidated Condensed Financial Statements..................... F-30
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-33
Consolidated Balance Sheets.............................................. F-34
Consolidated Statements of Operations.................................... F-35
Consolidated Statements of Shareholders' Equity.......................... F-36
Consolidated Statements of Cash Flows.................................... F-37
Notes to Consolidated Financial Statements............................... F-38
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-50
Consolidated Balance Sheets.............................................. F-51
Consolidated Statements of Income........................................ F-52
Consolidated Statements of Shareholders' Equity.......................... F-53
Consolidated Statements of Cash Flows.................................... F-54
Notes to Consolidated Financial Statements............................... F-55
MASTERS, INC.
Report of Independent Public Accountants................................. F-65
Balance Sheets........................................................... F-66
Statements of Operations................................................. F-67
Statements of Shareholder's Equity....................................... F-68
Statements of Cash Flows................................................. F-69
Notes to Financial Statements............................................ F-70
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. F-77
Balance Sheet............................................................ F-78
Statement of Operations.................................................. F-79
Statement of Shareholders' Equity........................................ F-80
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Cash Flows................................................. F-81
Notes to Financial Statements........................................... F-82
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................ F-87
Combined Balance Sheets................................................. F-88
Combined Statements of Operations....................................... F-89
Combined Statements of Shareholders' Equity............................. F-90
Combined Statements of Cash Flows....................................... F-91
Notes to Combined Financial Statements.................................. F-92
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................ F-97
Combined Balance Sheets................................................. F-98
Combined Statements of Operations....................................... F-99
Combined Statements of Shareholders' Equity............................. F-100
Combined Statements of Cash Flows....................................... F-101
Notes to Combined Financial Statements.................................. F-102
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................ F-108
Balance Sheets.......................................................... F-109
Statements of Operations................................................ F-110
Statements of Shareholders' Equity...................................... F-111
Statements of Cash Flows................................................ F-112
Notes to Financial Statements........................................... F-113
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................ F-116
Balance Sheets.......................................................... F-117
Statements of Operations................................................ F-118
Statements of Shareholders' Equity...................................... F-119
Statements of Cash Flows................................................ F-120
Notes to Financial Statements........................................... F-121
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-126
Consolidated Balance Sheets............................................. F-127
Consolidated Statements of Operations................................... F-128
Consolidated Statements of Shareholders' Equity......................... F-129
Consolidated Statements of Cash Flows................................... F-130
Notes to Consolidated Financial Statements.............................. F-131
SIBLEY SERVICES, INCORPORATED
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
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants................................ F-148
Balance Sheets.......................................................... F-149
Statements of Operations................................................ F-150
Statements of Shareholders' Equity...................................... F-151
Statements of Cash Flows................................................ F-152
Notes to Financial Statements........................................... F-153
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants................................ F-157
Balance Sheets.......................................................... F-158
Statements of Operations................................................ F-159
Statements of Shareholders' Equity...................................... F-160
Statements of Cash Flows................................................ F-161
Notes to Financial Statements........................................... F-162
YALE, INCORPORATED
Report of Independent Public Accountants................................ F-167
Balance Sheets.......................................................... F-168
Statements of Operations................................................ F-169
Statements of Shareholders' Equity...................................... F-170
Statements of Cash Flows................................................ F-171
Notes to Financial Statements........................................... F-172
HUNGERFORD MECHANICAL CORPORATION
Report of Independent Public Accountants................................ F-177
Balance Sheet........................................................... F-178
Statement of Operations................................................. F-179
Statement of Shareholder's Equity....................................... F-180
Statement of Cash Flows................................................. F-181
Notes to Financial Statements........................................... F-182
MECHANICAL INTERIORS, INC.
Report of Independent Public Accountants................................ F-186
Balance Sheet........................................................... F-187
Statement of Operations................................................. F-188
Statement of Shareholders' Equity....................................... F-189
Statement of Cash Flows................................................. F-190
Notes to Financial Statements........................................... F-191
PREMEX, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-195
Balance Sheet........................................................... F-196
Statement of Operations................................................. F-197
Statement of Shareholders' Equity....................................... F-198
Statement of Cash Flows................................................. F-199
Notes to Financial Statements........................................... F-200
BARR ELECTRIC CORPORATION
Report of Independent Public Accountants................................ F-206
Balance Sheets.......................................................... F-207
Statements of Operations................................................ F-208
Statements of Shareholders' Equity...................................... F-209
Statement of Cash Flows................................................. F-210
Notes to Financial Statements........................................... F-211
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ATLANTIC INDUSTRIAL CONSTRUCTORS INCORPORATED AND AFFILIATES
Report of Independent Public Accountants................................ F-215
Combined Balance Sheets................................................. F-216
Combined Statements of Operations....................................... F-217
Combined Statements of Shareholders' Equity............................. F-218
Combined Statements of Cash Flows....................................... F-219
Notes to Combined Financial Statements.................................. F-220
CLARK CONVERSE ELECTRIC SERVICE, INC.
Report of Independent Public Accountants................................ F-225
Balance Sheets.......................................................... F-226
Statements of Operations................................................ F-227
Statements of Shareholders' Equity...................................... F-228
Statements of Cash Flows................................................ F-229
Notes to Financial Statements........................................... F-230
HPS PLUMBING SERVICES, INC.
Report of Independent Public Accountants................................ F-234
Balance Sheets.......................................................... F-235
Statements of Operations................................................ F-236
Statements of Shareholders' Equity...................................... F-237
Statement of Cash Flows................................................. F-238
Notes to Financial Statements........................................... F-239
RAY & CLAUDE GOODWIN, INC.
Report of Independent Public Accountants................................ F-245
Balance Sheets.......................................................... F-246
Statements of Operations................................................ F-247
Statements of Shareholders' Equity...................................... F-248
Statements of Cash Flows................................................ F-249
Notes to Financial Statements........................................... F-250
RELIABLE MECHANICAL, INC.
Report of Independent Accountants....................................... F-255
Balance Sheet........................................................... F-256
Statement of Operations................................................. F-257
Statement of Shareholder's Equity....................................... F-258
Statement of Cash Flows................................................. F-259
Notes to Financial Statements........................................... F-260
ROMANOFF ELECTRIC CORP.
Report of Independent Public Accountants................................ F-264
Balance Sheet........................................................... F-265
Statement of Operations................................................. F-266
Statement of Shareholders' Equity....................................... F-267
Statement of Cash Flows................................................. F-268
Notes to Financial Statements........................................... F-269
</TABLE>
F-4
<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 (together with Airtron, the "Pre-
IPO Companies"), (ii) 13 companies acquired in connection with the IPO (the
"IPO Companies") and (iii) 15 companies in the first quarter of 1998 (the
"First Quarter Post-IPO Companies"), 12 companies in the second quarter of
1998 (the "Second Quarter Post-IPO Companies") and eight companies in the
third quarter of 1998 (the "Third Quarter Post-IPO Companies", and together
with the First Quarter Post-IPO Companies and the Second Quarter Post-IPO
Companies, the "Post-IPO Companies", and together with the Pre-IPO Companies
and the IPO Companies, the "GroupMAC Companies"). The Post-IPO 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 Service Co., 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
AA 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.................................................... 5/8/98
Premex, Inc. and Subsidiary (d/b/a "Commercial Air, Power & Cable,
Inc.")............................................................... 5/8/98
Vantage Mechanical Contractors, Inc................................... 5/12/98
Wade's Heating and Cooling............................................ 5/15/98
Gilbert Mechanical Contractors, Inc................................... 5/15/98
HPS Plumbing Services, Inc............................................ 5/15/98
Atlantic Industrial Constructors, Inc. ............................... 6/12/98
Colonial Air Conditioning, Inc........................................ 6/12/98
Laney's, Inc. ........................................................ 6/12/98
Noron, Inc. .......................................................... 6/12/98
Team Mechanical, Inc. ................................................ 6/12/98
Air Conditioning and Heating Service, Inc............................. 6/14/98
Phoenix Electric Company.............................................. 7/31/98
Merritt Island Air & Heat, Inc........................................ 7/31/98
The Farfield Company.................................................. 8/12/98
Reliable Mechanical, Inc.............................................. 8/14/98
Ferguson Electric Corporation......................................... 8/14/98
Clark Converse Electric Service, Inc.................................. 8/28/98
Romanoff Electric Corp................................................ 8/31/98
Central Air Conditioning Contractors, Inc............................. 8/31/98
</TABLE>
F-5
<PAGE>
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 Third
Quarter Post-IPO Companies, as if such acquisitions had occurred on June 30,
1998. The accompanying unaudited pro forma statements of operations of the
Company combines the historical statements of operations of the Company and
the statements of operations of the acquired entities as if such acquisitions
had occurred on January 1, 1997.
GroupMAC has 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 Companies have agreed prospectively to reductions in salary,
bonuses and benefits, these reductions have been reflected in the unaudited
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-6
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
THIRD QUARTER
GROUPMAC AND POST-IPO PRO FORMA PRO FORMA
SUBSIDIARIES ROMANOFF COMPANIES ADJUSTMENTS COMBINED
ASSETS ------------ -------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equiva-
lents.................. $ 5,434 $ 243 $ 3,673 $ (9,350) $ --
Accounts receivable:
Trade, net of allow-
ance................. 99,111 6,410 23,877 -- 129,398
Other................ -- 193 429 -- 622
Due from related par-
ties................... -- -- 619 (619) --
Inventories............ 14,932 204 1,196 -- 16,332
Costs and estimated
earnings in excess of
billings on uncom-
pleted contracts....... 15,938 1,943 7,401 -- 25,282
Deferred tax asset..... 3,439 -- -- 132 3,571
Prepaid expenses and
other current assets... 4,138 -- 525 -- 4,663
-------- ------- ------- -------- --------
Total current as-
sets................ 142,992 8,993 37,720 (9,837) 179,868
PROPERTY AND EQUIPMENT,
net..................... 25,603 1,852 5,132 -- 32,587
GOODWILL, net........... 215,024 -- 23 57,989 273,036
DEFERRED TAX ASSETS..... 4,822 -- -- (214) 4,608
DEFERRED FINANCING
COSTS................... 798 -- -- -- 798
REFUNDABLE INCOME TAXES. 3,478 -- -- -- 3,478
OTHER LONG-TERM ASSETS.. 2,082 1,302 838 (617) 3,605
-------- ------- ------- -------- --------
Total assets........ $394,799 $12,147 $43,713 $ 47,321 $497,980
======== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and
accrued expenses....... $ 65,076 $ 4,110 $14,295 $ -- $ 83,481
Short-term debt, in-
cluding current matu-
rities................. 3,934 -- 1,594 2,805 8,333
Billings in excess of
costs and estimated
earnings on uncom-
pleted contracts....... 15,265 824 6,835 -- 22,924
Liability for warranty
costs.................. -- -- 4 -- 4
Deferred service reve-
nue.................... 3,756 -- 434 -- 4,190
Income taxes payable... 6,141 34 113 -- 6,288
Deferred tax liabili-
ties................... -- -- 69 (69) --
Other current liabili-
ties................... 5,110 -- 12 -- 5,122
Due to related par-
ties................... 5,601 -- 86 (86) 5,601
-------- ------- ------- -------- --------
Total current lia-
bilities............ 104,883 4,968 23,442 2,650 135,943
SENIOR DEBT, net of cur-
rent maturities......... 64,033 -- 1,372 36,041 101,446
SUBORDINATED DEBT....... 820 -- -- -- 820
LEASE OBLIGATIONS....... -- -- -- -- --
DEFERRED TAX LIABILI-
TIES.................... -- -- -- -- --
DEFERRED COMPENSATION... -- -- 296 (296) --
DUE TO RELATED PARTIES.. 8,577 -- -- -- 8,577
OTHER LONG-TERM LIABILI-
TIES.................... 1,050 -- 1,254 (1,252) 1,052
SHAREHOLDERS' EQUITY:
Common stock........... 26 279 1,079 (1,355) 29
Additional paid-in
capital................ 239,553 268 2,589 31,846 274,256
Retained earnings
(deficit).............. (24,143) 6,632 14,933 (21,565) (24,143)
Common stock, subject
to put................. -- -- (1,252) 1,252 --
-------- ------- ------- -------- --------
Total shareholders'
equity.............. 215,436 7,179 17,349 10,178 250,142
-------- ------- ------- -------- --------
Total liabilities
and shareholders'
equity.............. $394,799 $12,147 $43,713 $ 47,321 $497,980
======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-7
<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>
SUPPLEMENTAL
GROUPMAC AND COMMERCIAL BARR ATLANTIC PRO FORMA SUPPLEMENTAL
SUBSIDIARIES HUNGERFORD MIINC AIR ELECTRIC INDUSTRIAL ROMANOFF ADJUSTMENTS PRO FORMA
------------ ---------- ------- ---------- -------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........... $138,479 $32,850 $42,283 $20,750 $7,717 $37,035 $33,008 $ -- $312,122
COST OF SERVICES... 101,762 24,602 35,909 13,855 5,148 28,625 25,430 -- 235,331
-------- ------- ------- ------- ------ ------- ------- ------- --------
Gross profit...... 36,717 8,248 6,374 6,895 2,569 8,410 7,578 -- 76,791
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES........... 35,862 5,591 5,360 5,649 1,496 1,936 4,930 (3,265)(a) 57,559
GOODWILL
AMORTIZATION....... 633 -- -- -- -- -- -- 2,270 (b) 2,903
-------- ------- ------- ------- ------ ------- ------- ------- --------
Income from
operations........ 222 2,657 1,014 1,246 1,073 6,474 2,648 995 16,329
OTHER INCOME
(EXPENSE):
Interest expense.. (1,542) (121) (73) (152) -- (24) (30) (2,411)(c) (4,353)
Interest income... 398 89 21 10 42 91 29 -- 680
Other............. 112 42 -- 69 (4) 27 (3) -- 243
-------- ------- ------- ------- ------ ------- ------- ------- --------
INCOME (LOSS)
BEFORE INCOME
TAX PROVISION... (810) 2,667 962 1,173 1,111 6,568 2,644 (1,416) 12,899
INCOME TAX
PROVISION.......... 2,832 -- 409 493 -- 11 26 5,453 (e) 9,224
-------- ------- ------- ------- ------ ------- ------- ------- --------
NET INCOME (LOSS).. $ (3,642) $ 2,667 $ 553 $ 680 $1,111 $ 6,557 $ 2,618 $(6,869) $ 3,675
======== ======= ======= ======= ====== ======= ======= ======= ========
BASIC EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ (0.34)
========
WEIGHTED AVERAGE
SHARES............ 10,800
========
DILUTED EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ (0.34)
========
WEIGHTED AVERAGE
SHARES............ 10,800
========
<CAPTION>
OTHER
PRE-IPO,
IPO AND COMBINED
POST-IPO PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
---------- ------------- ------------
<S> <C> <C> <C>
REVENUES........... $470,066 $ -- $782,188
COST OF SERVICES... 366,608 -- 601,939
---------- ------------- ------------
Gross profit...... 103,458 -- 180,249
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES........... 92,403 (27,618)(a) 122,344
GOODWILL
AMORTIZATION....... -- 3,923 (b) 6,826
---------- ------------- ------------
Income from
operations........ 11,055 23,695 51,079
OTHER INCOME
(EXPENSE):
Interest expense.. (2,231) (1,297)(c) (7,881)
Interest income... 678 (1,358)(d) --
Other............. 757 -- 1,000
---------- ------------- ------------
INCOME (LOSS)
BEFORE INCOME
TAX PROVISION... 10,259 21,040 44,198
INCOME TAX
PROVISION.......... 2,276 8,910 (e) 20,410
---------- ------------- ------------
NET INCOME (LOSS).. $ 7,983 $12,130 $ 23,788
========== ============= ============
BASIC EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.82
============
WEIGHTED AVERAGE
SHARES............ 28,868(f)
============
DILUTED EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.82
============
WEIGHTED AVERAGE
SHARES............ 29,093(f)
============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-8
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
PRE-IPO,
IPO AND
GROUPMAC AND COMMERCIAL BARR ATLANTIC POST-IPO PRO FORMA
SUBSIDIARIES HUNGERFORD MIINC AIR ELECTRIC INDUSTRIAL ROMANOFF COMPANIES ADJUSTMENTS
------------ ---------- ------- ---------- -------- ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........... $42,844 $15,162 $19,549 $9,296 $3,607 $18,806 $16,647 $245,337 $ --
COST OF SERVICES... 30,921 11,280 16,042 7,554 2,494 14,544 12,700 190,436 --
------- ------- ------- ------ ------ ------- ------- -------- -------
Gross profit...... 11,923 3,882 3,507 1,742 1,113 4,262 3,947 54,901 --
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES........... 18,007 2,625 2,690 1,516 566 765 2,343 44,246 (15,526)(a)
GOODWILL AMORTIZA-
TION............... 31 -- -- -- -- -- -- -- 3,382 (b)
------- ------- ------- ------ ------ ------- ------- -------- -------
Income (Loss)
from operations... (6,115) 1,257 817 226 547 3,497 1,604 10,655 12,144
OTHER INCOME (EX-
PENSE):
Interest expense.. (395) (47) (10) (37) -- (7) (5) (1,194) (2,245)(c)
Interest income... 154 49 11 -- 15 29 15 296 (569)(d)
Other............. 228 33 -- 46 (4) 14 (12) 325 --
------- ------- ------- ------ ------ ------- ------- -------- -------
INCOME (LOSS)
BEFORE INCOME
TAX
PROVISION (BENE-
FIT)............ (6,128) 1,292 818 235 558 3,533 1,602 10,082 9,330
INCOME TAX PROVI-
SION (BENEFIT)..... 354 -- 556 (380) -- 82 16 1,788 7,478 (e)
------- ------- ------- ------ ------ ------- ------- -------- -------
NET INCOME (LOSS).. $(6,482) $ 1,292 $ 262 $ 615 $ 558 $ 3,451 $ 1,586 $ 8,294 $ 1,852
======= ======= ======= ====== ====== ======= ======= ======== =======
BASIC EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ (0.76)
=======
WEIGHTED AVERAGE
SHARES............ 8,492
=======
DILUTED EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ (0.76)
=======
WEIGHTED AVERAGE
SHARES............ 8,492
=======
<CAPTION>
PRO FORMA
COMBINED
------------
<S> <C>
REVENUES........... $371,248
COST OF SERVICES... 285,971
------------
Gross profit...... 85,277
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES........... 57,232
GOODWILL AMORTIZA-
TION............... 3,413
------------
Income (Loss)
from operations... 24,632
OTHER INCOME (EX-
PENSE):
Interest expense.. (3,940)
Interest income... --
Other............. 630
------------
INCOME (LOSS)
BEFORE INCOME
TAX
PROVISION (BENE-
FIT)............ 21,322
INCOME TAX PROVI-
SION (BENEFIT)..... 9,894
------------
NET INCOME (LOSS).. $ 11,428
============
BASIC EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.40
============
WEIGHTED AVERAGE
SHARES............ 28,868(f)
============
DILUTED EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.39
============
WEIGHTED AVERAGE
SHARES............ 29,093(f)
============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-9
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
GROUPMAC AND COMMERCIAL BARR ATLANTIC POST-IPO PRO FORMA PRO FORMA
SUBSIDIARIES AIR ELECTRIC INDUSTRIAL ROMANOFF COMPANIES ADJUSTMENTS COMBINED
------------ ---------- -------- ---------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $266,277 $5,003 $950 $8,853 $18,800 $95,945 $ -- $395,828
COST OF SERVICES........ 202,544 3,921 712 6,918 13,880 76,040 -- 304,015
-------- ------ ---- ------ ------- ------- ------- --------
Gross profit.......... 63,733 1,082 238 1,935 4,920 19,905 -- 91,813
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES. 45,707 918 206 576 2,903 13,417 (1,273)(a) 62,454
GOODWILL AMORTIZATION... 2,004 -- -- -- -- -- 1,409 (b) 3,413
-------- ------ ---- ------ ------- ------- ------- --------
Income (Loss) from
operations............ 16,022 164 32 1,359 2,017 6,488 (136) 25,946
OTHER INCOME (EXPENSE):
Interest expense...... (1,314) (41) -- (4) (2) (326) (2,253)(c) (3,940)
Interest income....... 229 -- 10 67 9 66 (381)(d) --
Other................. 149 25 -- 18 42 (2) -- 232
-------- ------ ---- ------ ------- ------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION. 15,086 148 42 1,440 2,066 6,226 (2,770) 22,238
INCOME TAX PROVISION.... 6,718 394 -- 13 50 64 3,022 (e) 10,261
-------- ------ ---- ------ ------- ------- ------- --------
NET INCOME (LOSS)....... $ 8,368 $ (246) $ 42 $1,427 $ 2,016 $ 6,162 $(5,792) $ 11,977
======== ====== ==== ====== ======= ======= ======= ========
BASIC EARNINGS PER
SHARE:
EARNINGS PER SHARE.... $ 0.35 $ 0.41
======== ========
WEIGHTED AVERAGE
SHARES................ 24,198 28,868 (f)
======== ========
DILUTED EARNINGS PER
SHARE:
EARNINGS PER SHARE.... $ 0.34 $ 0.41
======== ========
WEIGHTED AVERAGE
SHARES................ 24,595 29,289 (f)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-10
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
The respective results of operations for the Pre-IPO and IPO Companies from
January 1, 1997 to the dates of the acquisitions were combined with the
Company and the Post-IPO 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.
The respective results of operations for the Pre-IPO Companies, IPO
Companies and the Post-IPO Companies from January 1, 1997 to the dates of the
acquisitions, or June 30, 1997 for acquisitions consummated subsequent to June
30, 1997, were combined with actual results of the Company for the six months
ended June 30, 1997 to determine the pro forma results of operations for the
six months ended June 30, 1997. The respective results of operations for the
Post-IPO Companies from January 1, 1998 to the dates of the acquisitions, or
June 30, 1998 for acquisitions consummated subsequent to June 30, 1998, were
combined with actual results of the Company for the six months ended June 30,
1998 to determine the pro forma results of operations for the six months ended
June 30, 1998.
2. ACQUISITIONS:
The acquisitions of the Pre-IPO 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 June 30, 1998 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 IPO
Companies and the Post-IPO Companies was provided by proceeds from the IPO and
borrowings under a credit agreement dated June 12, 1998 (the "Credit
Agreement") and an earlier agreement dated December 11, 1997. The Credit
Agreement is more fully described in the section "Description of Credit
Agreement" on page 53.
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-IPO Companies and (d) shares of
Common Stock to the shareholders of the Pre-IPO, IPO and Post-IPO 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 Third Quarter Post-IPO Companies, the value of the Common
Stock is determined using an estimated weighted average fair value of $13.84
per share, which represents a discount rate of 19.6% from the weighted average
stock price of $17.23 at the respective dates of acquisition due primarily to
restrictions on the sale and transferability of such shares. The restrictions
are created by a 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.
F-11
<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-IPO 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 Third Quarter Post-IPO
Companies (representing $23.5 million) will approximate fair value. This
results in an allocation to goodwill of approximately $58.0 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
DEBT AND
NOTES SHARES OF SHARES OF TOTAL
CASH PAYABLE PREFERRED STOCK(1) COMMON STOCK(3) CONSIDERATION(2)
-------- ------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Airtron................. $ 20,849 $ -- 14,873 4,652 $ 58,192
-------- ------ ------ ------ --------
Pre-IPO Companies
(excluding Airtron).... 12,504 -- 4,405 1,437 32,033
IPO Companies........... 30,585 -- -- 3,007 64,851
First Quarter Post-IPO
Companies.............. 36,666 820 -- 2,506 68,228
Second Quarter Post-IPO
Companies.............. 48,811 -- -- 2,906 89,549
Third Quarter Post-IPO
Companies.............. 42,761 4,000 -- 2,383 81,467
-------- ------ ------ ------ --------
Total Acquisitions.... 171,327 4,820 4,405 12,239 336,128
-------- ------ ------ ------ --------
Totals................ $192,176 $4,820 19,278 16,891 $394,320
======== ====== ====== ====== ========
</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 $10.7 million representing substantially all of the previously
taxed undistributed earnings of such acquired companies from the acquired
companies that are S corporations.
(3) Excludes 0.3 million of options and 0.5 million of warrants to purchase
common stock.
F-12
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Records S Corporation distributions of $2.6 million on certain Third
Quarter Post-IPO Companies to be satisfied with cash and 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 Third
Quarter Post-IPO Companies that are specifically excluded as part of the
purchase transaction.
d) Records the elimination of the historical equity accounts of the Third
Quarter Post-IPO Companies.
e) Records the purchase of the Third Quarter Post-IPO Companies, including
the cash, issuance of notes payable, options to purchase Common Stock and
Common Stock consideration due to these companies.
f) Records the refinancing of debt assumed in connection with the
acquisition of the Third Quarter Post-IPO Companies with the Credit Agreement.
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............ $(1,568) $533 $-- $-- $(8,315) $ -- $(9,350)
Due from related
parties................ -- (619) -- -- -- -- (619)
Deferred tax assets..... 132 -- -- -- -- -- 132
Goodwill................ 13 -- (296) (23,195) 81,467 -- 57,989
Deferred tax assets
(noncurrent)........... (214) -- -- -- -- -- (214)
Other noncurrent assets. (617) -- -- -- -- -- (617)
Short-term debt,
including current
maturities............. (399) -- -- -- (4,000) 1,594 (2,805)
Deferred tax
liabilities............ 69 -- -- -- -- -- 69
Due to related parties.. -- 86 -- -- -- -- 86
Senior debt, net of
current maturities..... -- -- -- -- (34,447) (1,594) (36,041)
Deferred compensation... -- -- 296 -- -- -- 296
Other long-term
liabilities............ -- -- -- 1,252 -- -- 1,252
Common stock............ -- -- -- 1,357 (2) -- 1,355
Additional paid-in
capital................ -- -- -- 2,857 (34,703) -- (31,846)
Retained earnings....... 2,584 -- -- 18,981 -- -- 21,565
Common stock, subject to
put.................... -- -- -- (1,252) -- -- (1,252)
------- ---- ---- ------- ------- ------ -------
Total................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ==== ==== ======= ======= ====== =======
</TABLE>
F-13
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the GroupMAC Companies 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 amounted to $33.4 million, $11.8 million and
$3.1 million for the year ended December 31, 1997 and the six month periods
ended June 30, 1997 and 1998, respectively. The contractually agreed upon
compensation and benefits for these same businesses, on a going forward basis,
amount to $9.5 million, $3.3 million and $1.8 million for the year ended
December 31, 1997 and the six month periods ended June 30, 1997 and 1998,
respectively. The difference between these respective amounts equates to $23.9
million, $8.5 million and $1.3 million and are reflected as pro forma
adjustments.
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.
F-14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
c) Represents the adjustment necessary to reflect 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-IPO Companies,
and interest related to the subordinated debt and notes issued to fund the S
Corporation distributions discussed in Note 3a. A summary of the historical
and pro forma debt outstanding and a summary of the pro forma interest expense
(including amounts recognized in the historical financial statements) assuming
the acquisitions occurred on January 1, 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997 AND 1998
------------------------------- -------------------------------
SIX
INTEREST ANNUAL INTEREST MONTH
BALANCE RATE INTEREST BALANCE RATE INTEREST
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Debt:
Historical June 30,
1998 short-term
debt................ $ 332 7.1875%(i) $ 24 $ 332 7.1875%(i) $ 12
Historical June 30,
1998 S Corporation
Notes............... 3,602 6.0000%(ii) 216 3,602 6.0000%(ii) 108
-------- ------ -------- ------
3,934 240 3,934 120
Third Quarter Post-
IPO Companies S
Corporation Notes... 399 6.0000%(ii) 24 399 6.0000%(ii) 12
Third Quarter Post-
IPO Companies note
payable............. 4,000 6.5000%(iv) 260 4,000 6.5000%(iv) 130
-------- ------ -------- ------
Total pro forma
short-term
debt/interest
expense........... $ 8,333 $ 524 $ 8,333 $ 262
======== ====== ======== ======
Long-Term Debt:
Historical June 30,
1998 long-term debt. $ 64,033 7.1875%(i) $4,602 $ 64,033 7.1875%(i) $2,301
Historical June 30,
1998 subordinated
debt................ 820 8.0000%(iii) 66 820 8.0000%(iii) 33
-------- ------ -------- ------
64,853 4,668 64,853 2,334
Third Quarter Post-
IPO Companies
assumed debt
refinanced.......... 2,966 7.1875%(i) 213 2,966 7.1875%(i) 106
Third Quarter Post-
IPO Companies
borrowings to fund
cash portion of
purchase prices..... 34,447 7.1875%(i) 2,476 34,447 7.1875%(i) 1,238
-------- ------ -------- ------
Total pro forma
long-term
debt/interest
expense........... $102,266 $7,357 $102,266 $3,678
======== ====== ======== ======
Total pro forma
debt/interest
expense........... $110,599 $7,881 $110,599 $3,940
======== ====== ======== ======
</TABLE>
- --------
(i) Represents current borrowing rates under the Credit Agreement.
(ii) Represents the contractual interest rate for the S Corporation Notes
discussed in Note 3a.
(iii) Represents the contractual interest rates for the subordinated debt
outstanding on the Company's historical balance sheet at June 30, 1998.
(iv) Represents the contractual interest rate for this note payable.
d) Reflects the reduction to historical interest income earned on acquired
cash and the remaining IPO proceeds, all of which is assumed to be used for
the acquisition of the GroupMAC 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-15
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
f) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Shares issued in Initial Public Offering........ 8,340 8,340 8,340
Shares issued under Subscription Agreement dated
October 24, 1996............................... 2,600 2,600 2,600
Shares issued to Pre-IPO Companies.............. 6,089 6,089 6,089
Shares issued to IPO Companies.................. 3,007 3,007 3,007
Shares issued to First Quarter Post-IPO
Companies...................................... 2,506 2,506 2,506
Shares issued to Second Quarter Post-IPO
Companies...................................... 2,906 2,906 2,906
Shares issued to Third Quarter Post-IPO
Companies...................................... 2,383 2,383 2,383
Shares issued to Founding Management and
Directors...................................... 1,037 1,037 1,037
------ ------ ------
Weighted average shares outstanding--basic...... 28,868 28,868 28,868
Incremental effect of options and warrants on
shares outstanding............................. 225 225 421
------ ------ ------
Weighted average shares outstanding--diluted.... 29,093 29,093 29,289
====== ====== ======
</TABLE>
F-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 5,434 $ 25,681
Accounts receivable, net............................ 99,111 45,516
Inventories......................................... 14,932 8,834
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 15,938 3,116
Prepaid expenses and other current assets........... 4,138 1,013
Deferred tax assets................................. 3,439 1,647
-------- --------
Total current assets.............................. 142,992 85,807
PROPERTY AND EQUIPMENT, net........................... 25,603 11,312
GOODWILL, net......................................... 215,024 84,533
DEFERRED TAX ASSETS................................... 4,822 4,739
REFUNDABLE INCOME TAXES............................... 3,478 4,529
OTHER LONG-TERM ASSETS................................ 2,880 1,767
-------- --------
Total assets...................................... $394,799 $192,687
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 3,934 $ 2,769
Accounts payable and accrued expenses............... 65,076 28,519
Due to related parties.............................. 5,601 3,358
Billings in excess of cost and estimated earnings on
uncompleted contracts.............................. 15,265 4,737
Deferred service contract revenue................... 3,756 3,305
Income taxes payable................................ 6,141 31
Other current liabilities........................... 5,110 2,610
-------- --------
Total current liabilities......................... 104,883 45,329
LONG-TERM DEBT, net of current maturities............. 64,853 169
DUE TO RELATED PARTIES................................ 8,577 9,745
OTHER LONG-TERM LIABILITIES........................... 1,050 791
COMMITMENTS AND CONTINGENCIES
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; 26,415 and 20,629 shares issued and
outstanding, respectively.......................... 26 21
Additional paid-in capital.......................... 239,553 169,143
Retained deficit.................................... (24,143) (32,511)
-------- --------
Total shareholders' equity........................ 215,436 136,653
-------- --------
Total liabilities and shareholders' equity........ $394,799 $192,687
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-27
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES................................. $159,185 $25,419 $266,277 $42,844
COST OF SERVICES......................... 119,838 18,536 202,544 30,921
-------- ------- -------- -------
Gross profit........................... 39,347 6,883 63,733 11,923
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 26,712 4,929 45,707 11,029
AMORTIZATION OF GOODWILL................. 1,183 31 2,004 31
COMPENSATION EXPENSE FROM REVERSE
ACQUISITION............................. -- 6,978 -- 6,978
-------- ------- -------- -------
Income (loss) from operations........ 11,452 (5,055) 16,022 (6,115)
OTHER INCOME (EXPENSE):
Interest expense....................... (841) (344) (1,314) (395)
Interest income........................ 44 82 229 154
Other.................................. 93 (2) 149 228
-------- ------- -------- -------
Income (loss) before income tax
provision........................... 10,748 (5,319) 15,086 (6,128)
INCOME TAX PROVISION..................... 4,653 679 6,718 354
-------- ------- -------- -------
NET INCOME (LOSS)........................ $ 6,095 $(5,998) $ 8,368 $(6,482)
======== ======= ======== =======
BASIC EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE.............. $ 0.24 $ (0.70) $ 0.35 $ (0.76)
======== ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING.... 25,229 8,565 24,198 8,492
======== ======= ======== =======
DILUTED EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE.............. $ 0.24 $ (0.70) $ 0.34 $ (0.76)
======== ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING.... 25,667 8,565 24,595 8,492
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-28
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 8,368 $ (6,482)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 4,875 231
Gain from sale of property and equipment........ (26) (219)
Deferred income taxes........................... (369) (1,711)
Non-cash compensation expense................... -- 6,978
Changes in operating assets and liabilities, net
of effect of acquisitions accounted for as
purchases:
(Increase) decrease in--
Accounts receivable........................... (8,372) (534)
Inventories................................... (1,048) (2,481)
Costs and estimated earnings in excess of
billings on uncompleted contracts............ (5,691) (1,939)
Prepaid expenses and other current assets..... (2,286) 8,594
Refundable income taxes....................... 1,043 431
Other long-term assets........................ 672 5
Increase (decrease) in--
Accounts payable.............................. 4,488 (6,695)
Accrued expenses.............................. 1,305 (2,963)
Due to related parties........................ (5,434) 148
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 3,891 (10)
Deferred service contract revenue............. (510) 311
Income taxes payable.......................... 4,633 496
Other current liabilities..................... 770 611
Compensation and benefits payable............. -- 3,967
Other long-term liabilities................... (74) 917
------------ ------------
Net cash provided by (used in) operating
activities................................ 6,235 (345)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired
of $8,567 and $2,011............................. (71,480) (5,343)
Deferred acquisition costs........................ (726) (546)
Purchase of property and equipment................ (4,574) (458)
Proceeds from sale of property and equipment...... 138 285
------------ ------------
Net cash used in investing activities...... (76,642) (6,062)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt................................ 74,400 29,600
Payments of debt.................................. (24,240) (2,976)
Deferred offering costs........................... -- (32)
Exercise of stock options......................... -- 31
Proceeds from issuance of common stock............ -- 4,099
Distributions to shareholders prior to initial
public offering.................................. -- (20,367)
------------ ------------
Net cash provided by financing activities.. 50,160 10,355
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (20,247) 3,948
CASH AND CASH EQUIVALENTS, beginning of period..... 25,681 1,927
------------ ------------
CASH AND CASH EQUIVALENTS, end of period........... $ 5,434 $ 5,875
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................... $ 629 $ --
Income taxes paid................................. $ 1,361 $ 1,039
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-29
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of the Company and management's discussion and analysis of financial
condition and results of operations included in the Transition Report on Form
10-K for the ten-month period ended December 31, 1997.
2. 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 have been calculated by dividing net income by the weighted
average number of common shares outstanding plus potentially dilutive common
shares.
The following table summarizes weighted average shares outstanding for each
of the historical periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------
1998 1997 1998 1997
--------- ----------------- --------
<S> <C> <C> <C> <C>
Shares issued in the acquisition of
Airtron................................... 4,652 4,652 4,652 4,652
Shares issued, excluding acquisitions and
the IPO................................... 3,637 3,627 3,637 3,627
Shares issued for the acquisition of the
Pre-IPO Companies......................... 1,437 286 1,437 213
Shares issued for the acquisition of the
IPO Companies............................. 3,007 -- 3,002 --
Shares issued pursuant to the IPO.......... 8,340 -- 8,340 --
Shares issued for the acquisition of the
Post-IPO Companies........................ 4,156 -- 3,130 --
--------- -------- -------- -------
Weighted average shares outstanding--Basic. 25,229 8,565 24,198 8,492
Incremental effect of options and warrants
outstanding............................... 438 -- 397 --
--------- -------- -------- -------
Weighted average shares outstanding--
Diluted................................... 25,667 8,565 24,595 8,492
========= ======== ======== =======
</TABLE>
Because the Company reported a net loss for the three and six month periods
ended June 30, 1997, the potentially dilutive common shares (including
warrants and stock options) had an anti-dilutive effect on earnings per share.
Accordingly, diluted earnings per share is the same as basic earnings per
share for these periods.
3. During the first half of 1998, the Company completed the acquisition of
the Post-IPO Companies for approximately $157.8 million, which includes cash
payments of $85.5 million, $0.8 million of subordinated convertible debt, 5.4
million shares of common stock and options to purchase 0.1 million shares of
Common Stock. Of the total consideration, approximately $5.4 million of cash
and 0.1 million shares of common stock is due to former shareholders at June
30, 1998. All such acquisitions were accounted for as purchases. In connection
with these acquisitions, the Company assumed approximately $15.7 million of
debt. The combined annual revenues of the Post-IPO Companies were
approximately $292.1 million.
F-30
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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
THREE MONTHS PRO FORMA DATA
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................... $172,619 $157,782 $315,184 $293,788
Net income.................................. $ 6,245 $ 5,971 $ 8,898 $ 9,068
Net income per share:
Basic..................................... $ 0.24 $ 0.23 $ 0.34 $ 0.34
Diluted................................... $ 0.23 $ 0.22 $ 0.33 $ 0.34
</TABLE>
Pro forma adjustments included in the amounts above consist of compensation
differentials, elimination of a non-recurring, non-cash compensation charge of
$7.0 million in 1997 related to the reverse acquisition of Airtron, 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 or otherwise retired, additional interest expense on funds borrowed for
acquisitions of certain Post-IPO Companies, 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 from
the beginning of the periods presented. The pro forma amounts above also
include actual corporate overhead costs. These costs increased $1.4 million
and $2.6 million during the three and six month periods ended June 30, 1998
compared to the three and six month periods ended June 30, 1997, respectively
due to the formation of the corporate management team and infrastructure
necessary to execute the Company's operating and acquisition strategies. This
increase amounts to approximately $0.03 and $0.06 per basic and diluted share
in the three and six month periods ended June 30, 1998, respectively.
From June 30, 1998 through August 13, 1998, the Company acquired three
additional platform companies with combined annual revenues of $58.6 million.
Total consideration paid was approximately $19.6 million that included cash
payments of $9.7 million, 0.6 million shares of common stock and options to
purchase 0.2 million shares of common stock. These acquisitions will be
accounted for as purchases.
4. The acquisitions of the Post-IPO Companies included in the accompanying
financial statements were accounted for under the purchase method of
accounting. Purchase price consideration is subject to final adjustment. The
allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of
fair values 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 June 30, 1998.
5. 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. Accordingly, these programs may not be able to properly recognize dates
in the year 2000 and later, which 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.
F-31
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
An initial systems survey of the GroupMAC Companies was completed in March
of 1998 and revealed that several of the Company's business applications
possess Year 2000 problems. The Company has engaged a consulting firm to
assist the Company in assessing exposure related to core business applications
software and developing an action plan to address these issues in a timely
manner. This project commenced in early July and is expected to be completed
in early September. The cost of this assessment is estimated at $80,000. The
major deliverables of the project are as follows:
. Confirming and tracking Year 2000 compliance with software vendors
currently utilized by the Company.
. Assessing risk and determining an estimated range of costs to remediate
those applications that are not Year 2000 compliant.
. Developing an action plan for correcting non-compliant applications
before January 1, 2000.
Once this project is complete, management will have better information
available to assess the impact of the Year 2000 problem and determine the
appropriate corrective actions and the costs thereof.
Additionally, the Company is 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 that are not
expected to be corrected by other means. The Company expects to commence user-
acceptance testing of the new data processing system before the second quarter
of 1999 with implementation to follow immediately thereafter. 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.
F-32
<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-33
<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-34
<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-35
<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
treasury stock........ (996) (1) (53) (1,948) 2,002 -- --
Contributions to
benefit 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
treasury stock........ (1,040) (1) (55) (2,056) 2,112 -- --
Distributions to
shareholders.......... -- -- -- (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
management shares and
stock options......... 5 -- 241 -- -- -- 241
Preferred stock issued
to Airtron
shareholders in
reverse
acquisition........... -- -- -- (14,873) -- -- (14,873)
Distribution to Airtron
shareholders in
reverse acquisition... -- -- -- (17,336) -- -- (17,336)
Shares issued under
subscription
agreement............. 2,000 2 -- -- -- 6,153 6,155
Exercise of stock
options............... 20 -- 61 -- -- -- 61
Common stock to be
issued 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-36
<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-37
<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-IPO 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 "IPO Companies" and,
together with Airtron and the Pre-IPO 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-38
<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-39
<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-IPO Companies...................... 763 -- --
Shares issued for the acquisition of the
IPO 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-40
<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-IPO 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 IPO 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-41
<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-42
<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-IPO 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 IPO 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-43
<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-44
<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-IPO 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-45
<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-IPO Company and
the IPO 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
F-46
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-47
<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-48
<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-IPO Companies"). The
combined annual revenues of the Post-IPO 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-49
<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-50
<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-51
<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
ADMINISTRATIVE
EXPENSES............... 6,088,076 7,338,381 7,631,851 3,705,694 3,787,822 5,566,694 6,239,243
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from
operations.......... 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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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
ADMINISTRATIVE
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-67
<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-68
<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
OPERATING
ACTIVITIES:
Net income............. $ 558,044 $ 938,404 $ 1,353,095 $572,227 $ 599,276 $ 940,435 $ 1,104,714
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
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
liabilities:
(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
uncompleted
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
uncompleted
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
sharing and bonus... 143,148 256,752 189,431 (43,433) (162,176) 86,425 (150,903)
Accrued vacation
benefits............ 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
liabilities......... 238,406 80,814 (86,259) (52,484) 75,371 (29,779) (1,774)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............. 1,595,666 358,838 552,734 (108,137) 1,738,152 431,336 1,677,926
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM
INVESTING
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
investing activities.. (266,118) (1,045,353) (295,198) (169,080) (124,030) (226,027) (182,519)
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM
FINANCING
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
EQUIVALENTS............ 32,526 83,269 135,521 48,675 (33,446) 171,270 (35,580)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 419,460 451,986 535,255 535,255 670,776 535,255 670,776
----------- ----------- ----------- -------- ----------- --------- -----------
CASH AND CASH
EQUIVALENTS, 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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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
OPERATING 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
amortization........ 109,624 65,735 89,354 100,008 114,932
Gain on sale of
property and
equipment........... -- -- -- -- (5,627)
Changes in operating
assets and
liabilities:
(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
uncompleted
contracts.......... (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
assets............. (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
estimated earnings
on uncompleted
contracts.......... 23,641 (71,807) (17,836) (89,241) (82,258)
Due to related
parties............ (41,609) (41,609) 35,150 (41,609) 98,780
Other long-term
liabilities........ -- -- -- (55,000) --
--------- --------- --------- -------- --------
Net cash provided
by operating
activities....... 369,447 241,951 80,329 305,827 278,168
--------- --------- --------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (237,113) (130,895) (86,563) (31,898) (95,525)
Proceeds from sales of
property and
equipment............ 15,000 -- -- -- 12,000
--------- --------- --------- -------- --------
Net cash used in
investing
activities....... (222,113) (130,895) (86,563) (31,898) (83,525)
--------- --------- --------- -------- --------
CASH FLOWS FROM
FINANCING 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
EQUIVALENTS, beginning
of period............. 44,130 44,130 124,687 44,130 124,687
--------- --------- --------- -------- --------
CASH AND CASH
EQUIVALENTS, 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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<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-182
<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-183
<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-184
<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-185
<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-186
<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-187
<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-188
<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-189
<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-190
<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-191
<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-192
<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-193
<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-194
<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-195
<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-196
<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-197
<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-198
<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-199
<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-200
<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-201
<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-202
<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-203
<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-204
<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-205
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Barr Electric Corporation:
We have audited the accompanying balance sheet of Barr Electric Corporation
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 Barr Electric 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
July 9, 1998
F-206
<PAGE>
BARR ELECTRIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $1,418,516 $1,126,581
Accounts receivable--trade, net of allowance for
doubtful accounts of $15,000....................... 779,693 432,456
Accounts receivable, Other.......................... 12,307 12,007
Inventories......................................... 113,790 104,882
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 59,749 23,661
Prepaid expenses and other current assets........... 28,920 19,691
---------- ----------
Total current assets.............................. 2,412,975 1,719,278
MACHINERY AND EQUIPMENT, NET.......................... 126,131 122,221
CASH SURRENDER VALUE OF LIFE INSURANCE POLICY......... 226,856 226,856
---------- ----------
Total assets...................................... $2,765,962 $2,068,355
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................... $ 158,924 $ 41,188
Accrued expenses.................................... 210,841 119,335
---------- ----------
Total current liabilities......................... 369,765 160,523
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$1.00 par value; 100,000 shares
authorized, 50,000 issued and outstanding.......... 50,000 50,000
Treasury Stock...................................... (248,791) (248,791)
Retained earnings................................... 2,594,988 2,106,623
---------- ----------
Total shareholders' equity........................ 2,396,197 1,907,832
---------- ----------
Total liabilities and shareholders' equity........ $2,765,962 $2,068,355
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-207
<PAGE>
BARR ELECTRIC CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1997 1997 1998
------------ ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES..................................... $7,716,731 $1,291,112 $949,913
COST OF SERVICES............................. 5,148,132 1,056,797 712,139
---------- ---------- --------
Gross profit............................. 2,568,599 234,315 237,774
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 1,495,834 165,598 206,047
---------- ---------- --------
Income from operations................... 1,072,765 68,717 31,727
OTHER INCOME (EXPENSE):
Interest income............................ 41,679 8,265 9,908
Other, net................................. (3,564) (3,564) --
---------- ---------- --------
NET INCOME................................... $1,110,880 $ 73,418 $ 41,635
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-208
<PAGE>
BARR ELECTRIC CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON TREASURY RETAINED SHAREHOLDERS'
STOCK STOCK EARNINGS EQUITY
------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996......... $50,000 $(248,791) $2,424,108 $2,225,317
Net income....................... -- -- 1,110,880 1,110,880
Distributions.................... -- -- (940,000) (940,000)
------- --------- ---------- ----------
Balance, December 31, 1997......... $50,000 $(248,791) $2,594,988 $2,396,197
======= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-209
<PAGE>
BARR ELECTRIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1997 1997 1998
------------ -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $1,110,880 $ 73,418 $ 41,635
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 34,374 4,801 3,910
Loss on sale of machinery and equipment... 3,564 3,564 --
Change in operating assets and
liabilities:
(Increase) decrease in -
Accounts receivable--Trade.............. 325,916 41,068 347,237
Accounts receivable--Other.............. 1,800 1,566 300
Inventories............................. (19,213) (5,579) 8,908
Costs and estimated earnings in excess
of billings on uncompleted contracts... 13,048 -- 36,088
Prepaid expenses and other current
assets................................. (13,830) (8,756) 9,229
Increase (decrease) in -
Accounts payable........................ 97,662 28,804 (117,736)
Accrued expenses........................ 28,325 (53,366) (91,506)
---------- -------- ----------
Net cash provided by operating
activities............................ 1,582,526 85,520 238,065
---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment....... (60,508) (45,811) --
Proceeds from sale of equipment............ 1,000 1,000 --
Other...................................... (5,500) -- --
---------- -------- ----------
Net cash used in investing activities.. (65,008) (44,811) --
---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders.............. (940,000) (340,000) (530,000)
---------- -------- ----------
Net cash used in financing activities.. (940,000) (340,000) (530,000)
---------- -------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..... 577,518 (299,291) (291,935)
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 840,998 840,998 1,418,516
---------- -------- ----------
CASH AND CASH EQUIVALENTS, end of period.... $1,418,516 $541,707 $1,126,581
========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-210
<PAGE>
BARR ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Barr Electric Corp. (the Company), an Illinois corporation, is a provider of
electrical contracting services consisting of installation, service and
maintenance of electrical systems primarily in the Chicago, Illinois area.
This work is performed under fixed price contracts subject to modifications
based on approved change orders or under time and material contracts.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements for the three months ended March 31, 1997
and 1998 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 fixed price 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, including work for approved change orders. Revenue from time and
material contracts is recognized at the completion of the job.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor, payroll taxes, tools,
equipment rental, permits, union welfare payments, truck expense 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.
The Company's largest three customers accounted for 86% of total revenues
for the year ended December 31, 1997.
Cash and cash equivalents
The Company considers investments in money market accounts and certificates
of deposits purchased with an original maturity of three months or less to be
cash equivalents.
Inventories
Inventories consist of parts and supplies used in the Company's operations.
The inventory is valued at the lower of cost or market, with cost determined
using the weighted average method of valuation.
F-211
<PAGE>
BARR ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Machinery and Equipment
Machinery and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. Expenditures for repairs and
maintenance are charged to expense when incurred. Upon retirement or
disposition of property and 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 has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
corporate income taxes on its taxable income. Instead, the shareholders are
liable for individual income taxes on their respective shares of the Company's
net operating income in their individual income tax returns. Therefore, no
income tax expense appears on these financial statements.
3. PROFIT SHARING PLAN
The Company has a Profit-Sharing Plan for eligible non-union employees. All
contributions to the plan are 100% vested in the employees' accounts and are
made at the discretion of management. The Company's contribution to the plan
was $91,711 in 1997.
4. LEASES
The Company operates from a leased facility under an operating lease that
expires March 14, 2000. The annual rental amount under the current lease
agreement is $55,000.
Net future minimum rental payments required under operating leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................ $ 55,000
1999............................................................ 56,742
2000............................................................ 11,917
--------
$123,659
--------
</TABLE>
In addition to these minimum rentals, the Company agrees to pay their
percentage of any increases in the real estate taxes and operating expenses
over the base year period of January 1, 1995 to December 31, 1995.
F-212
<PAGE>
BARR ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred................................................ $ 748,015
Estimated earnings recognized................................. 266,388
----------
1,014,403
Less billings on contracts.................................... 954,654
----------
$ 59,749
==========
</TABLE>
The costs and estimated earnings on uncompleted contracts in excess of
amounts billed are included in the accompanying balance sheet under the
caption "Costs and estimated earnings in excess of billings on uncompleted
contracts".
6. MACHINERY AND EQUIPMENT
The principal categories of machinery and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Machinery and equipment......................................... $ 43,191
Vehicles........................................................ 156,940
Office equipment and furniture.................................. 198,831
Leasehold improvements.......................................... 27,247
--------
426,209
Less: Accumulated depreciation.................................. 300,078
--------
$126,131
========
</TABLE>
Fixed assets generally are depreciated over useful lives of 5-7 years.
7. EMPLOYEE BENEFIT PLANS
The Company makes contributions to a union-administered benefit fund which
covers a majority of the Company's employees. For the year ended December 31,
1997, the participant costs charged to operations were approximately $0.9
million. Governmental regulations impose certain requirements relative to
multi-employer plans. In the event of a plan's termination or employer
withdrawal, the Company may be liable for a portion of the plans' 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.
8. 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.
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 has assessed its current software programs and
determined that the Company's software programs will need to
F-213
<PAGE>
BARR ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
be replaced. It is the Company's intentions to replace affected software
before the year 2000. Assessments and cost estimates are being conducted
currently by Group Maintenance America Corp. which acquired the Company as
discussed in note 9.
9. SUBSEQUENT EVENT
In March 1998, the Company entered into an agreement whereby Group
Maintenance America Corp. (GroupMAC) has acquired all of the outstanding
shares of the Company for a combination of cash and common stock of GroupMAC.
F-214
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Atlantic Industrial Constructors, Inc.
We have audited the accompanying combined balance sheets of Atlantic
Industrial Constructors, Inc. and Affiliates (the Company) as of December 31,
1996 and 1997, and the related combined statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic
Industrial Constructors, Inc. and Affiliates as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 10, 1998
F-215
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC.
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.............. $1,674,468 $ 2,900,923 $1,750,271
Accounts receivable--trade............. 2,472,581 6,149,318 3,446,982
Accounts receivable, Other............. 12,762 16,921 3,700
Costs and estimated earnings in excess
of billings on uncompleted contracts.. 1,705,599 2,265,760 1,153,021
Prepaid expenses and other current
assets................................ 47,274 42,289 58,854
---------- ----------- ----------
Total current assets................. 5,912,684 11,375,211 6,412,828
PROPERTY AND EQUIPMENT, net.............. 995,903 1,065,535 1,004,783
CASH SURRENDER VALUE OF LIFE INSURANCE
POLICY.................................. 108,515 141,521 141,521
---------- ----------- ----------
Total assets......................... $7,017,102 $12,582,267 $7,559,132
========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable....................... $1,042,348 $ 1,353,729 $ 706,921
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 7,125 1,136,398 178,077
Notes payable to shareholders.......... 75,000 205,000 205,000
Accrued expenses....................... 1,564,937 1,420,716 733,167
---------- ----------- ----------
Total current liabilities............ 2,689,410 4,115,843 1,823,165
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock........................... 2,400 2,400 2,400
Additional Paid in Capital............. 375,600 375,600 375,600
Retained earnings...................... 3,949,692 8,088,424 5,357,967
---------- ----------- ----------
Total shareholders' equity........... 4,327,692 8,466,424 5,735,967
---------- ----------- ----------
Total liabilities and shareholders'
equity.............................. $7,017,102 $12,582,267 $7,559,132
========== =========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-216
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC.
AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $20,136,334 $26,319,707 $37,035,214 $8,318,502 $5,428,035
COST OF SERVICES........ 14,864,441 21,787,589 28,625,488 6,406,347 4,397,037
----------- ----------- ----------- ---------- ----------
Gross profit........ 5,271,893 4,532,118 8,409,726 1,912,155 1,030,998
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,602,825 1,955,892 1,936,122 372,986 403,255
----------- ----------- ----------- ---------- ----------
Income from
operations......... 3,669,068 2,576,226 6,473,604 1,539,169 627,743
OTHER INCOME (EXPENSE):
Interest income....... 120,037 127,713 90,971 8,751 30,934
Interest expense...... (12,403) (13,435) (23,690) (3,553) (4,064)
Other, net............ 64,236 62,592 27,479 (32,365) 12,924
----------- ----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAX
PROVISION.............. 3,840,938 2,753,096 6,568,364 1,512,002 667,537
Income Tax
Provision.......... 2,278 1,445 11,127 -- 7,992
----------- ----------- ----------- ---------- ----------
NET INCOME.............. $ 3,838,660 $ 2,751,651 $ 6,557,237 $1,512,002 $ 659,545
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-217
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND CONSOLIDATED AFFILIATES
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, 1994......... $2,000 $ 58,000 $ 2,840,620 $ 2,900,620
Contributed Capital--AILC........ 200 267,800 -- 268,000
Net income....................... -- -- 3,838,660 3,838,660
Distributions.................... -- -- (1,739,541) (1,739,541)
------ -------- ----------- -----------
Balance, December 31, 1995......... 2,200 325,800 4,939,739 5,267,739
Contributed Capital--AIM......... 200 49,800 -- 50,000
Net income....................... -- -- 2,751,651 2,751,651
Distributions.................... -- -- (3,741,698) (3,741,698)
------ -------- ----------- -----------
Balance, December 31, 1996......... 2,400 375,600 3,949,692 4,327,692
Net income....................... -- -- 6,557,237 6,557,237
Distributions.................... -- -- (2,418,505) (2,418,505)
------ -------- ----------- -----------
Balance, December 31, 1997......... $2,400 $375,600 $ 8,088,424 $ 8,466,424
====== ======== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-218
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC.
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 3,838,660 $ 2,751,651 $ 6,557,237 $ 1,512,002 $ 659,545
Adjustments to
reconcile net income
to net cash provided
by (used in)
operating activities:
Depreciation and
amortization....... 120,577 240,891 304,071 76,018 78,258
(Gain) Loss on sale
of property and
equipment.......... (10,142) 13,580 16,299 -- --
Increase in cash
surrender value of
life insurance
policy............. -- (108,515) (33,006) -- --
Change in operating
assets and
liabilities:
(Increase)
decrease in--
Accounts
receivable..... (1,045,498) 723,135 (3,680,896) (1,007,923) 2,715,557
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts...... (1,411,190) (263,485) 569,112 286,066 154,418
Prepaid expenses
and other
current assets. 19,726 (42,646) 4,985 (1,993) (16,565)
Increase
(decrease) in--
Accounts
payable........ 1,138,278 (409,566) 311,381 (528,785) (646,808)
Accrued
expenses....... 290,966 765,995 (144,221) (562,112) (687,549)
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
operating
activities....... 2,941,377 3,671,040 3,904,962 (226,727) 2,256,856
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (434,713) (583,738) (390,002) (197,078) (17,506)
Proceeds from sale of
property and
equipment............ 10,500 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities....... (424,213) (583,738) (390,002) (197,078) (17,506)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Capital contributions. 268,000 50,000 -- -- --
Increase (decrease) in
notes payable to
shareholders......... (120,000) 75,000 130,000 240,000 --
Distributions to
shareholders......... (1,739,541) (3,741,698) (2,418,505) (606,201) (3,390,002)
----------- ----------- ----------- ----------- -----------
Net cash used in
financing
activities....... (1,591,541) (3,616,698) (2,288,505) (366,201) (3,390,002)
----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH AND
CASH EQUIVALENTS....... 925,623 (529,396) 1,226,455 (790,006) (1,150,652)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 1,278,241 2,203,864 1,674,468 1,674,468 2,900,923
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 2,203,864 $ 1,674,468 $22,900,923 $ 884,462 $ 1,750,271
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
DISCLOSURE:
Cash paid for
interest............. $ 12,445 $ 13,336 $ 26,517 $ -- $ --
Cash paid for income
taxes................ 2,278 1,445 11,127 -- 7,992
</TABLE>
See accompanying notes to combined financial statements.
F-219
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The combined financial statements included herein provide the financial
position, results of operations and cash flows, after elimination of material
inter-company balances, for Atlantic Industrial Constructors, Inc. (AIC),
Atlantic Industrial Maintenance, Inc. (AIM) and Atlantic Industrial Leasing
Corporation (AILC), (collectively, the Company). Historically, AIC, AIM and
AILC have been under common ownership and management and AIM and AILC have
been operated essentially as subsidiaries of AIC. The Company provides
contract services including the process pipe fabrication, structural steel
fabrication and erection, engineered heavy lift and transportation, mechanical
heavy lift and transportation, jetway refurbishing and mechanical equipment
installation to large industrial customers primarily in the Virginia and North
Carolina areas. This work is performed under fixed price contracts subject to
modifications based on approved change orders or under time and material
contracts. The Company also engages in industrial plant maintenance through
its service division under time and material and fixed price contracts.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements for the three months ended March 31, 1997
and 1998 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 fixed price 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, including work for approved change orders. Revenue from time and
material contracts is accrued at the end of each month based on chargeable
costs incurred through month end.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor, payroll taxes, tools,
equipment rental, permits, union welfare payments, truck expense 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.
F-220
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of percentages of total revenues for significant
customers for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
CUSTOMER 1995 1996 1997
-------- ------- ------- -------
<S> <C> <C> <C>
A........................................... 33% 33% 30%
B........................................... 14% 20% 11%
C........................................... 12% 21% 8%
</TABLE>
Cash and cash equivalents
The Company considers investments in money market accounts and certificates
of deposits purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable
Accounts receivable consists of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accounts receivable--billed........................ $2,192,920 $4,906,181
Unbilled retainage................................. 279,661 1,250,114
Allowance for doubtful accounts.................... -- (6,977)
---------- ----------
$2,472,581 $6,149,318
========== ==========
</TABLE>
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are 5 to 7 years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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
AIC and AIM have elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, AIC and AIM do not pay
corporate income taxes on their taxable income. Instead, the stockholders are
liable for individual income taxes on their respective shares of AIC's and
AIM's net operating income in their individual income tax returns. Therefore,
no income tax provision or liability appears on these financial statements
with respect to the earnings of AIC and AIM. AILC is taxed under the
provisions of Subchapter C of the Internal Revenue Code but due to the
relatively small size of this entity the related income taxes are not material
to the combined financial statements.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted
contracts.
F-221
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company maintains its cash balances in one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company generally has funds deposited in excess of $100,000.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Eastern United States. Credit is extended to customers
after an evaluation for credit worthiness; however, the Company does not
require collateral or other security from customers.
3. RETIREMENT PLANS
The Company has a profit-sharing retirement plan and a money purchase
pension plan. The plans cover substantially all full-time employees who have
completed at least one year of service and are not covered under separate
collective bargaining agreements. For the profit sharing plan, there is no
specific contribution formula, and the Board of Directors sets the Company's
contributions annually, subject to limitations imposed by the Internal Revenue
Code. For the money purchase plan, the Company contributes 5% of participants'
eligible compensation. For the years ended December 31, 1995, 1996 and 1997,
the Company's contributions aggregated $215,469, $287,147 and $349,701,
respectively.
The Company makes contributions to a union-administered benefit fund which
covers the majority of the Company's employees. For the years ended December
31, 1995, 1996 and 1997, the participant costs charged to operations were
approximately $0.8 million, $1.0 million and $1.7 million, respectively.
Governmental regulations impose certain requirements relative to multi-
employer plans. In the event of a plan's termination or employer withdrawal,
the Company may be liable for a portion of the plans' 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.
4. LEASES
The Company leases its office and shop facility, on a month-to-month basis,
from Atlantic Leasing Associates, a partnership whose partners are the
Company's shareholders. Under provisions of the lease, the Company is
responsible for taxes, insurance and utilities. Rent expense under this lease
was $58,243, $106,292 and $186,323 for the years ended December 31, 1995, 1996
and 1997, respectively.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred................................. $4,366,201 $ 9,472,923
Estimated earnings recognized.................. 1,054,026 3,764,951
---------- -----------
5,420,227 13,237,874
Less billings on contracts..................... 3,721,753 12,108,512
---------- -----------
$1,698,474 $ 1,129,362
========== ===========
Costs and estimated earnings in excess of
billings...................................... 1,705,599 2,265,760
Billings in excess of costs and estimated
earnings...................................... (7,125) (1,136,398)
---------- -----------
$1,698,474 $ 1,129,362
========== ===========
</TABLE>
F-222
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Machinery and equipment......................... $ 766,742 $ 974,023
Vehicles........................................ 707,569 850,854
Office equipment and furniture.................. 15,265 15,265
Computer software costs......................... 35,417 35,417
--------- ----------
1,524,993 1,875,559
Less: Accumulated depreciation.................. 529,090 810,024
--------- ----------
Total Property and Equipment, net............. $ 995,903 $1,065,535
========= ==========
</TABLE>
7. NOTES PAYABLE
The notes incur interest at 5 3/5% with interest payable annually at
December 31. The notes are due based upon the Company's ability to pay.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
9. SHAREHOLDERS' EQUITY
Common stock par value and shares authorized, issued and outstanding for
AIC, AIM and AILC, respectively, are as follows:
<TABLE>
<CAPTION>
AIC AIM AILC
------ ----- -----
<S> <C> <C> <C>
Par Value ($ per share)............................... $10.00 $1.00 $1.00
Shares authorized..................................... 10,000 5,000 5,000
Shares issued and outstanding......................... 200 200 200
</TABLE>
By written agreement, AIC is obligated to purchase the common stock of any
shareholder upon his death or termination of employment with the Company. The
price is determined by formula in the agreement. The Company is a party to
life insurance contracts with combined death benefits of $3.0 million to fund
these obligations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Methods and assumptions used to estimate the fair value of each class of
financial instruments are as follows:
(a) Cash and cash equivalents, trade accounts receivable, and payables--
The carrying amounts approximate fair value because of the short maturity
of these instruments.
(b) Notes payable to shareholders--The carrying amount approximates fair
value because the interest rate approximates the market rate.
F-223
<PAGE>
ATLANTIC INDUSTRIAL CONSTRUCTORS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(c) Cash surrender value of life insurance policy is stated at its cash
value as determined by the insurance carrier, which approximates fair
value.
11. SUBSEQUENT EVENT
On June 12, 1998, the Company entered into agreements whereby 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-224
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Clark Converse Electric Service, Inc.:
We have audited the accompanying balance sheet of Clark Converse Electric
Service, Inc. 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 out 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 Clark Converse Electric
Service, 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
August 28, 1998
F-225
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................... $1,073,380 $ 914,971
Accounts receivable-trade........................... 982,973 1,217,181
Other current assets................................ 145,957 145,754
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 5,920 96,375
---------- ----------
Total current assets.............................. 2,208,230 2,374,281
PROPERTY AND EQUIPMENT, NET........................... 303,883 286,120
OTHER LONG-TERM ASSETS................................ 5,385 5,385
---------- ----------
Total assets...................................... $2,517,498 $2,665,786
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.................................... $ 261,542 $ 252,280
Accrued expenses.................................... 174,865 166,992
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 125,461 52,858
---------- ----------
Total current liabilities......................... 561,868 472,130
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock--no par value; 1,000 shares authorized,
100 issued and outstanding......................... 2,300 2,300
Retained earnings................................... 1,953,330 2,191,356
---------- ----------
Total shareholder's equity........................ 1,955,630 2,193,656
---------- ----------
Total liabilities and shareholder's equity........ $2,517,498 $2,665,786
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-226
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $7,291,852 $3,692,532 $3,524,432
COST OF SERVICES............................ 5,263,570 2,728,362 2,379,052
---------- ---------- ----------
Gross profit............................ 2,028,282 964,170 1,145,380
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 840,431 458,410 454,104
---------- ---------- ----------
Income from operations.................. 1,187,851 505,760 691,276
OTHER INCOME:
Interest income........................... 36,106 14,060 21,321
Other, net................................ 1,847 -- 11,474
---------- ---------- ----------
Income before income tax provision...... 1,225,804 519,820 724,071
INCOME TAX PROVISION........................ 26,000 5,000 8,778
---------- ---------- ----------
NET INCOME.................................. $1,199,804 $ 514,820 $ 715,293
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-227
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996..................... $2,300 $1,673,609 $1,675,909
Net income................................... -- 1,199,804 1,199,804
Distributions to shareholder................. -- (920,083) (920,083)
------ ---------- ----------
Balance, December 31, 1997..................... 2,300 1,953,330 1,955,630
Net income (unaudited)....................... -- 715,293 715,293
Distributions to shareholder (unaudited)..... -- (477,267) (477,267)
------ ---------- ----------
Balance, June 30, 1998 (unaudited)............. $2,300 $2,191,356 $2,193,656
====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-228
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1998
------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $1,199,804 $ 514,820 $ 715,293
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation................................ 84,947 31,900 41,556
Loss on sale of property and equipment...... 133 133 --
Change in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable....................... 2,610 (224,711) (234,208)
Other..................................... (24,726) (3,781) 203
Costs and estimated earnings in excess of
billings on uncompleted
contracts................................ 98,207 214,857 (163,058)
Increase (decrease) in -
Accounts payable.......................... (51,949) (47,519) (9,262)
Accrued expenses.......................... (39,036) (3,384) (7,873)
---------- --------- ----------
Net cash provided by operating activities 1,269,990 482,315 342,651
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (138,210) (125,147) (23,793)
Other........................................ 2,115 2,115 --
---------- --------- ----------
Net cash used in investing activities.... (136,095) (123,032) (23,793)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholder................. (920,083) (364,117) (477,267)
---------- --------- ----------
Net cash used in financing activities.... (920,083) (364,117) (477,267)
---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 213,812 (4,834) (158,409)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 859,568 859,568 1,073,380
---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period...... $1,073,380 $ 854,734 $ 914,971
========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-229
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO THE INTERIM PERIODS ENDED JUNE 30, 1997 AND
1998 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
Clark Converse Electric Service, Inc. (the "Company") is an electrical
contractor involved in the construction and renovation on projects primarily
for general contractors and other companies in northwest Ohio and southeast
Michigan. The work is typically performed under fixed-price and cost-plus
contracts, or time-and-material purchase requisitions. The length of the
Company's contracts vary, but is typically less than one year.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1997 and
1998 and as of June 30, 1998 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 fixed price 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, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man-hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
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, including those arising from contract
penalty provisions, and final contract settlements 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
investments in money market accounts and certificate of deposits purchased
with an original maturity of three months or less to be cash equivalents. Cash
payments for taxes were $19,881, $10,600 and $19,606 for the year ended
December 31, 1997 and six months ended June 30, 1997 and 1998, respectively.
F-230
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable-trade consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed...................................... $877,374
Retainage receivables............................................ 105,599
--------
$982,973
========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Income Taxes
The shareholder of the Company has elected to be taxed for federal and state
tax purposes as an S Corporation whereby the shareholder's respective
equitable share in the taxable income of the Company is reportable on his
individual tax return. The Company has made distributions to the shareholder
each year at least in the amounts necessary to pay personal income taxes
payable on the Company's taxable income. The Company is subject to local
income taxes. As of December 31, 1997, deferred income taxes are
insignificant.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted
contracts.
The Company maintains its cash balances in one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company generally has funds deposited in excess of $100,000.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in northwest Ohio and southeast
Michigan. Credit is extended to customers after an evaluation for credit
worthiness; however, the Company does not require collateral or other security
from customers.
The Company's three largest customers accounted for 22%, 19% and 13%,
respectively, of total revenues for the year ended December 31, 1997.
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets by class are as follows:
<TABLE>
<S> <C>
Machinery and equipment........................................ 5-10 years
Vehicles....................................................... 5 years
Office equipment............................................... 5-7 years
Leasehold improvements......................................... 10 years
</TABLE>
F-231
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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.
3. EMPLOYEE BENEFIT PLANS
The Company maintains a salary reduction 401(k) plan covering all employees
meeting certain age and service requirements. Annual contributions are
committed to an independent trustee to be held for the exclusive benefit of
the employees. Annual contributions to the plan by the Company include a
matching contribution, up to 4%, for eligible compensation of participants
electing voluntary salary reduction deferrals and a discretionary amount
determined each year by the Board of Directors of the Company. The Company's
contribution expense amounted to $10,399 for the year ended December 31, 1997.
4. LEASES
The Company leases its offices and warehouse space from an affiliated
partnership consisting of its shareholder and another tenant. The Company's
lease is for a one-year term and management intends and has the ability to
annually renew the lease. The current lease requires a monthly rental of
$5,658 and rent expense was $66,816 for the year ended December 31, 1997.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred................................................ $ 344,519
Estimated earnings recognized................................. 44,219
---------
388,738
Less billings on contracts.................................... 508,279
---------
$(119,541)
=========
These cost 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............ 5,920
Billings in excess of costs and estimated earnings............ (125,461)
---------
$(119,541)
=========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Machinery and Equipment.......................................... $233,113
Vehicles......................................................... 214,576
Office Equipment................................................. 99,728
Leasehold Improvements........................................... 54,549
--------
601,966
Less: Accumulated depreciation................................... 298,083
--------
Total Property and Equipment, net.............................. $303,883
========
</TABLE>
F-232
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. CONTINGENCIES
In the normal course of business the Company experiences various claims and
lawsuits from third parties. During 1997, the Company was named a defendant in
a claim from a former employee on a Workers' Compensation dispute. The Company
received a favorable ruling from the Ohio Bureau of Workers' Compensation and
does not believe the ultimate resolution of this matter will have a material
adverse effect on results of operations, financial condition or liquidity.
8. BANK LINE OF CREDIT
The Company has a revolving line of credit with a bank in the amount of
$1,000,000 with no amount outstanding at December 31, 1997. The credit
agreement provided for revolving credit through March 1998 and is secured by
accounts receivable and the guarantee of the sole stockholder/president of the
Company. Interest is computed at the bank's prime rate (8.5% at December 31,
1997).
9. SUBSEQUENT EVENT
Effective August 28, 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-233
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HPS Plumbing Services, Inc.:
We have audited the accompanying balance sheet of HPS Plumbing Services,
Inc. as of March 31, 1998, and the related statements of operations,
shareholders' equity and cash flows for the nine months 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 out 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 HPS Plumbing Services,
Inc. as of March 31, 1998, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 14, 1998
F-234
<PAGE>
HPS PLUMBING SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
ASSETS 1998
------ ----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ --
Accounts receivable, net of allowance for doubtful accounts of
$56,269.......................................................... 3,221,450
Accounts receivable, other........................................ 14,511
Due from related parties and employees............................ 339,813
Inventories....................................................... 154,912
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ 700,095
Prepaid expenses and other current assets......................... 25,560
----------
Total current assets............................................ 4,456,341
PROPERTY AND EQUIPMENT, net....................................... 1,628,808
OTHER LONG-TERM ASSETS............................................ 72,242
----------
Total assets.................................................... $6,157,391
==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt.... $ 656,920
Accounts payable.................................................. 1,479,575
Accrued expenses.................................................. 172,425
Income taxes payable.............................................. 223,793
Deferred tax liability............................................ 396,321
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ 406,297
----------
Total current liabilities....................................... 3,335,331
LONG-TERM DEBT, net of current maturities........................... 259,336
DEFERRED TAX LIABILITY.............................................. 8,787
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated par value of $10 per share;
50,000 shares authorized, 2,000 issued and outstanding........... 20,000
Retained earnings................................................. 2,533,937
----------
Total shareholders' equity...................................... 2,553,937
----------
Total liabilities and shareholders' equity...................... $6,157,391
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-235
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1998
---------------
<S> <C>
REVENUES........................................................ $14,160,255
COST OF SERVICES................................................ 11,444,202
-----------
Gross profit................................................ 2,716,053
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 2,005,857
-----------
Income from operations...................................... 710,196
OTHER INCOME (EXPENSE):
Interest income............................................... 31,549
Interest expense.............................................. (49,740)
Other, net.................................................... (73,344)
-----------
Income before income tax provision.......................... 618,661
INCOME TAX PROVISION............................................ 268,346
-----------
NET INCOME...................................................... $ 350,315
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-236
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
BALANCE, June 30, 1997......................... $20,000 $2,183,622 $2,203,622
Net income................................... -- 350,315 350,315
------- ---------- ----------
BALANCE, March 31, 1998........................ $20,000 $2,533,937 $2,553,937
======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-237
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1998
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 350,315
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 215,944
Loss on sale of property and equipment..................... 45,568
Deferred income taxes...................................... (188,104)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable.................................... 74,246
Accounts receivable, other............................. (2,892)
Inventories............................................ (23,732)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (200,586)
Prepaid expenses and other current assets.............. (20,928)
Other long-term assets................................. (54,579)
Increase (decrease) in--
Accounts payable....................................... 233,163
Income taxes payable................................... (62,385)
Accrued expenses....................................... (14,115)
-----------
Net cash provided by operating activities............ 351,915
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (1,051,701)
Proceeds from sale of property and equipment................. 4,284
Increase in due from related parties and employees........... (323,727)
-----------
Net cash used in investing activities................ (1,371,144)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net............................ 408,474
Proceeds from long-term debt................................. 85,276
Principal payments on long-term debt......................... (186,515)
-----------
Net cash provided by financing activities............ 307,235
-----------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ (711,994)
CASH AND CASH EQUIVALENTS, beginning of period................. 711,994
-----------
CASH AND CASH EQUIVALENTS, end of period....................... $ --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-238
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
HPS Plumbing Services, Inc. (the "Company") provides plumbing and piping
services in California and Nevada, primarily for governmental entities and
general contractors. This work is performed under fixed price contracts
subject to modification based on approved change orders, cost-plus-fee
contracts and time and material contracts. The Company grants credit on terms
it establishes for individual customers in these areas.
2. SUMMARY OF SIGNIFICANT 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 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, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
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, including those arising from contract
penalty provisions, and final contract settlements 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 investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $38,800 and
$518,835, respectively, for the nine months ended March 31, 1998.
Accounts Receivable
Accounts receivable consists of the following at March 31, 1998:
<TABLE>
<S> <C>
Accounts receivable--billed................................... $2,174,227
Retainage receivable.......................................... 1,103,492
Allowance for doubtful accounts............................... (56,269)
----------
$3,221,450
==========
</TABLE>
Inventories
Inventories consist of parts and supplies for general use and items for
specific jobs. Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
F-239
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Service and other vehicles.......................................... 3-5
Machinery and equipment............................................. 5-7
Furniture and fixtures.............................................. 5-7
Computer equipment.................................................. 3-5
Leasehold improvements.............................................. 5-10
</TABLE>
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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.
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............................................... $14,095,474
Estimated earnings recognized................................ 1,273,663
-----------
15,369,137
Less billings on contracts................................... 15,075,339
-----------
$ 293,798
===========
</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.............. 700,095
Billings in excess of costs and estimated earnings.............. (406,297)
--------
$293,798
========
</TABLE>
F-240
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of March 31, 1998 are
as follows:
<TABLE>
<S> <C>
Service and other vehicles.................................... $1,297,302
Machinery and equipment....................................... 584,845
Furniture and fixtures........................................ 62,136
Computer equipment............................................ 162,410
Leasehold improvements........................................ 848,717
----------
2,955,410
Less accumulated depreciation................................. (1,326,602)
----------
$1,628,808
==========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
The Company has a $1,300,000 revolving credit agreement with a bank. The
credit agreement provides for revolving credit through November 5, 1998 and is
secured by accounts receivable and equipment, and guaranteed by the majority
stockholder. As of March 31, 1998, $408,474 was drawn under the agreement.
Borrowings under the revolving credit agreement bear interest at the bank's
prime rate (8.5% as of March 31, 1998).
Short- and long-term debt consists of the following as of March 31, 1998:
<TABLE>
<S> <C>
Borrowings under revolving credit agreement...................... $408,474
Home Savings of America, secured by equipment, payable in monthly
installments ranging from $330 to $1,459 including interest
ranging from 8.5% to 10.5%, due dates ranging from November 1998
to October 2000................................................. 206,037
GMAC, secured by equipment, payable in monthly installments
ranging from $289 to $563 including interest ranging from 4.8%
to 7.9%, due dates ranging from June 2000 to October 2002....... 131,828
Caterpillar Financial Service Corporation, secured by equipment,
payable in monthly installments ranging from $184 to $3,058
including interest ranging from 6.9% to 9.1%, due dates ranging
from August 1998 to January 2002; includes obligations due under
capital leases.................................................. 169,917
--------
Total short- and long-term debt.............................. 916,256
Less short-term borrowings and current maturities................ (656,920)
--------
$259,336
========
</TABLE>
The aggregate maturities of the short- and long-term debt as of March 31,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $656,920
2000............................................................. 149,868
2001............................................................. 66,123
2002............................................................. 34,688
2003............................................................. 8,657
--------
$916,256
========
</TABLE>
F-241
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES
The Company leases its building space and office equipment from its
president. The Company moved into this building in November 1997. The building
rental agreement provides that the Company pay all property taxes, insurance
and maintenance. The building agreement has an annual rental of $120,000 and
the equipment agreement has an annual rental of $25,800. Rent expense for the
lease of office and warehouse space during the nine months ended March 31,
1998 was $58,520. The primary term of the building lease is 5 years with 5
options to extend of one year each. The equipment lease agreement is on a
monthly basis.
The building lease agreement provides that an adjacent tenant may move into
the Company's space during a period beginning on October 1, 2001 and ending on
October 1, 2003. If this option is exercised, the Company would be forced to
move and would be reimbursed for its costs by the lessor in the amount of
$350,928. This amount decreases by $14,622 per month, beginning November 1,
2001.
In addition, the Company leases various trucks, trailers and office
equipment with lease terms expiring through 2002. The rental expense recorded
under operating leases for equipment for the nine months ended March 31, 1998
was $94,259.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
1999........................................................... $159,824
2000........................................................... 151,439
2001........................................................... 146,023
2002........................................................... 140,708
2003........................................................... 50,000
--------
$647,994
========
</TABLE>
The Company is obligated under three capital leases, for service and other
vehicles, which expire at various dates through February 2002. At March 31,
1998 the gross amount of property and equipment and related accumulated
amortization recorded under capital leases were as follows:
<TABLE>
<S> <C>
Service and other vehicles...................................... $239,787
Less accumulated amortization................................... (138,569)
--------
$101,218
========
</TABLE>
Future minimum rental payments due under capital leases, classified as long-
term debt, as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
1999.......................................................... $ 56,496
2000.......................................................... 35,090
2001.......................................................... 27,718
2002.......................................................... 15,948
--------
Total minimum lease payments.................................. 135,252
Less current obligations under capital leases................... (17,103)
--------
Obligations under capital leases, net......................... $118,149
========
</TABLE>
F-242
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
As of March 31, 1998, the Company has unsecured, non-interest bearing
advances to its president totaling $320,634 and an unsecured demand note
receivable from its president in the amount of $15,380, which bears interest
at 9.25%. These amounts are included in the amounts due from related parties
and employees in the accompanying balance sheet and were repaid subsequent to
March 31, 1998. Also see note 6.
8. INCOME TAXES
The components of the income tax provision for the nine months ended March
31, 1998 are as follows:
<TABLE>
<S> <C>
Current Expense:
Federal...................................................... $ 360,914
State........................................................ 95,536
---------
456,450
---------
Deferred Benefit:
Federal...................................................... (148,733)
State........................................................ (39,371)
---------
(188,104)
---------
$ 268,346
=========
</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>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31, 1998
--------------
<S> <C>
Tax provision at statutory rate............................ $210,345
Increase resulting from:
State income taxes....................................... 37,069
Other.................................................... 20,932
--------
$268,346
========
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
Deferred income tax assets:
Allowance for doubtful accounts............................... $ 24,196
Vacation accrual.............................................. 21,825
Legal reserve................................................. 10,750
Other......................................................... 22,067
--------
Total deferred income tax asset............................. 78,838
Deferred income tax liabilities:
Net retention receivable...................................... 415,027
Depreciation.................................................. 68,919
--------
Total deferred income tax liability......................... 483,946
--------
Net deferred income tax liability........................... $405,108
========
</TABLE>
F-243
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These deferred income tax assets and liabilities are included in the
accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Deferred tax liability--current................................. $396,321
Deferred tax liability--long-term............................... 8,787
--------
$405,108
========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the deferred income tax assets recorded at March 31,
1998.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan covering employees
who meet eligibility requirements set forth in the plan. Contributions to the
plan are based on specific project rates, contributed for the benefit of
individual employees for work performed on public works projects. Employees
are vested 100% in the Company's contributions. Contributions to the plan for
the nine months ended March 31, 1998 were $286,959.
10. SALES TO SIGNIFICANT CUSTOMERS
During the nine months ended March 31, 1998, sales to three customers
accounted for 15%, 13% and 12%, respectively, of the Company's revenues.
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 financial position, results of operations or liquidity.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments include 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. Additionally, amounts due from related parties and employees represent
financial instruments, the fair value of which it is impracticable to
estimate.
13. SUBSEQUENT EVENT
Effective April 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-244
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ray & Claude Goodwin,Inc.
We have audited the accompanying balance sheet of Ray & Claude Goodwin,Inc.
as of December 31, 1997, and the related statements of operations,
stockholders' 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 out 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 Ray & Claude Goodwin,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
August 14,1998
F-245
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents....................................... $1,367,241
Accounts receivable-trade....................................... 2,782,678
Accounts receivable, Other...................................... 28,436
Inventories..................................................... 81,793
Costs and estimated earnings in excess of billings on uncom-
pleted contracts............................................... 1,356,823
Deferred tax assets............................................. 98,280
Prepaid expenses and other current assets....................... 22,315
----------
Total current assets.......................................... 5,737,566
PROPERTY AND EQUIPMENT, net....................................... 1,008,849
OTHER LONG-TERM ASSETS............................................ 170,333
----------
Total assets.................................................. $6,916,748
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................ $ 748,993
Accrued expenses................................................ 615,124
Current maturities of long term debt............................ 123,213
Billings in excess of costs and estimated earnings on uncom-
pleted contracts............................................... 680,341
Income taxes payable............................................ 263,093
----------
Total current liabilities..................................... 2,430,764
LONG-TERM DEBT, net of current maturities......................... 163,404
DEFERRED TAX LIABILITY............................................ 68,413
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--$10 par value; 1,000 shares authorized, 500 issued
and outstanding................................................ 5,000
Additional Paid In Capital...................................... 23,266
Retained earnings............................................... 4,225,901
----------
Total stockholders' equity.................................... 4,254,167
----------
Total liabilities and stockholders' equity.................... $6,916,748
==========
</TABLE>
See accompanying notes to financial statements.
F-246
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
REVENUES.......................................................... $15,402,775
COST OF SERVICES.................................................. 10,585,169
-----------
Gross profit.................................................. 4,817,606
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 3,976,371
-----------
Income from operations........................................ 841,235
OTHER INCOME (EXPENSE):
Interest income................................................. 68,411
Interest expense................................................ (30,411)
Other, net...................................................... 25,257
-----------
Income before income tax provision............................ 904,492
INCOME TAX EXPENSE................................................ 352,467
-----------
NET INCOME........................................................ $ 552,025
===========
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 .......... $5,000 $23,266 $3,673,876 $3,702,142
Net income......................... -- -- 552,025 552,025
------ ------- ---------- ----------
Balance, December 31, 1997........... $5,000 $23,266 $4,225,901 $4,254,167
====== ======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-248
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 552,025
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Depreciation.................................................. 272,127
Loss on sale of machinery and equipment....................... (27,321)
Deferred tax expense (benefit)................................ (48,479)
Increase in cash surrender value of life insurance policy..... (41,804)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable--Trade.................................. (568,270)
Accounts receivable--Other.................................. 1,800
Inventories................................................. 8,587
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... (668,513)
Prepaid expenses and other current assets................... 3,867
Increase in--
Accounts payable............................................ 537,109
Accrued expenses............................................ 156,375
Income Taxes Payable........................................ 115,151
Other....................................................... 29,273
----------
Net cash provided by operating activities................. 321,927
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment............................ (393,581)
Proceeds from sale of equipment................................. 39,921
----------
Net cash used in investing activities..................... (353,660)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings.................................................. 32,525
----------
Net cash provided by financing activities................. 32,525
----------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................... 792
CASH AND CASH EQUIVALENTS, beginning of year...................... 1,366,449
----------
CASH AND CASH EQUIVALENTS, end of year............................ $1,367,241
==========
</TABLE>
See accompanying notes to financial statements.
F-249
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Ray and Claude Goodwin, Inc., doing business as Ray's Plumbing Contractors,
Inc., (the "Company") provides plumbing and piping services in the
Jacksonville, Florida area, primarily for governmental entities and general
contractors. This work is performed under fixed price contracts subject to
modification based on approved change orders and time and material contracts.
The Company grants credit on terms it establishes for individual customers in
these areas.
2. SUMMARY OF SIGNIFICANT 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 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, including work for approved change orders. Revenue from time and
material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
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, including those arising from contract
penalty provisions, and final contract settlements 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 investments in money market accounts and certificates
of deposits purchased with an original maturity of three months or less to be
cash equivalents. Cash payments for interest and taxes were $30,411 and
$283,216, respectively, for the year ended December 31, 1997.
Accounts Receivable
Accounts receivable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed................................... $2,175,051
Retainage receivable.......................................... 607,627
----------
$2,782,678
==========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
F-250
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist of parts and supplies for general use and items for
specific jobs. Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Service vehicles and shop and field equipment....................... 5-7
Office equipment.................................................... 5-7
Leasehold improvements.............................................. 10
Other............................................................... 19
</TABLE>
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted
contracts.
The Company maintains its cash balances in one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company generally has funds deposited in excess of $100,000.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in Jacksonville, Florida. Credit is
extended to customers after an evaluation for credit worthiness; however, the
Company does not require collateral or other security from customers.
The Company's three largest customers accounted for 14%, 8% and 5%,
respectively, of total revenues for the year ended December 31, 1997.
F-251
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. EMPLOYEE BENEFIT PLANS
The Company has a qualified noncontributory defined contribution plan
covering employees who have had one year of continuous service and meet
certain other eligibility requirements set forth in the plan. Contributions to
the plan are at the discretion of management. There were no contributions to
the plan for the year ended December 31, 1997.
4. LEASES
The Company leases its building space on a verbal, month-to-month lease from
the shareholders at $4,700 per month. Management intends and has the ability
to continue to renew its lease with related parties. The Company pays all
property taxes, insurance and maintenance. Rent expense for the lease of
building space during the year ended December 31, 1997 was $42,000.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred................................................ $8,080,025
Estimated earnings recognized................................. 643,352
----------
8,723,377
Less billings on contracts.................................... 8,046,895
----------
$ 676,482
==========
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings............ 1,356,823
Billings in excess of costs and estimated earnings............ (680,341)
----------
$ 676,482
==========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Land.......................................................... $ 52,913
Vehicles and shop and field equipment......................... 1,881,345
Office equipment.............................................. 79,439
Leasehold Improvements........................................ 293,904
Other......................................................... 158,448
----------
2,466,049
Less: Accumulated depreciation................................ 1,457,200
----------
Total Property and Equipment, net........................... $1,008,849
==========
</TABLE>
7. 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-252
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt as of December 31, 1997 includes 23 notes payable to a local
bank of 36 months in duration with maturities ranging from February 1998
through December 2000 and with interest rates ranging from 6.5% to 10.44%
(weighted average of 9.3%). These notes are secured by specific vehicles and
heavy equipment. The balance of these notes at December 31, 1997 is $257,318
including current maturities of $115,707. The remaining debt consists of a
note payable to a local bank secured by real property of the Company the
balance payable of which is $29,299 at December 31, 1997 including current
maturities of $7,506. The interest rate on this note is 9.0% at December 31,
1997.
Aggregate maturities of long-term debt as of December 31, 1997 are due in
future years as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998........................................................... $123,213
1999........................................................... 112,631
2000........................................................... 43,892
2001........................................................... 6,881
--------
$286,617
========
</TABLE>
9. INCOME TAXES
The components of the income tax provision for the year ended December 31,
1997 are as follows:
<TABLE>
<S> <C>
Current Expenses:
Federal....................................................... $344,416
State......................................................... 56,530
--------
400,946
--------
Deferred Expense (Benefit):
Federal....................................................... (42,264)
State......................................................... (6,215)
--------
(48,479)
--------
$352,467
========
</TABLE>
The income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Tax Provision at statutory rate......................... $307,527
Increase resulting from:
State income taxes, net of federal benefit............ 33,207
Nondeductible expenses................................ 11,733
--------
$352,467
========
</TABLE>
F-253
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Deferred income tax assets:
Vacation accrual............................................ $11,700
Warranty reserve............................................ 28,080
Accrued Bonus............................................... 58,500
--------
Total deferred income tax asset........................... $ 98,280
========
Deferred income tax liabilities:
Other....................................................... $ (8,764)
Depreciation................................................ (59,649)
--------
Total deferred income tax liability....................... $(68,413)
========
</TABLE>
These deferred tax assets and liabilities are included in the accompanying
balance sheet under the following captions:
<TABLE>
<S> <C>
Deferred tax asset--current................................................. $ 98,280
Deferred tax liability--noncurrent.......................................... (68,413)
--------
$ 29,867
========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the deferred income tax assets recorded at December
31, 1997.
10. 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 balance sheet approximate their fair value.
11. SUBSEQUENT EVENT
Effective March 13, 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-254
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reliable Mechanical, Inc.:
We have audited the accompanying balance sheet of Reliable Mechanical, Inc.
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 out 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 Reliable Mechanical, 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
August 21, 1998
F-255
<PAGE>
RELIABLE MECHANICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 2,204,174 $ 792,694
Short-term Investments............................. 988,805 695,890
Accounts receivable--trade......................... 6,786,939 6,231,711
Accounts receivable, other......................... 13,164 --
Due from related parties........................... 336,912 603,508
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 502,847 5,214,092
Prepaid expenses................................... -- 21,132
----------- -----------
Total current assets............................. 10,832,841 13,559,027
PROPERTY AND EQUIPMENT, NET.......................... 430,955 369,026
NOTES RECEIVABLE--EMPLOYEES.......................... 143,778 168,430
MARKETABLE SECURITIES................................ 635,728 617,191
OTHER LONG-TERM ASSETS............................... 24,158 18,577
----------- -----------
Total assets..................................... $12,067,460 $14,732,251
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 2,858,341 $ 6,520,821
Accrued expenses................................... 786,294 599,052
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 3,278,744 1,626,390
----------- -----------
Total current liabilities........................ 6,923,379 8,746,263
DEFERRED COMPENSATION LIABILITY...................... 385,383 295,882
COMMON STOCK, SUBJECT TO PUT......................... 1,047,122 1,252,072
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value; 1,000 shares autho-
rized, 841.56 issued and outstanding.............. 310,439 310,439
Retained earnings.................................. 4,235,352 5,235,297
Net unrealized gain on marketable securities....... 212,907 144,370
Common stock, subject to put....................... (1,047,122) (1,252,072)
----------- -----------
Total shareholders' equity....................... 3,711,576 4,438,034
----------- -----------
Total liabilities and shareholders' equity....... $12,067,460 $14,732,251
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-256
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $37,282,292 $18,874,521 $16,218,582
COST OF SERVICES.......................... 33,850,553 16,198,374 14,174,126
----------- ----------- -----------
Gross profit.......................... 3,431,739 2,676,147 2,044,456
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 2,071,457 1,436,831 552,353
----------- ----------- -----------
Income from operations................ 1,360,282 1,239,316 1,492,103
OTHER INCOME (EXPENSE):
Interest income......................... 204,045 82,909 76,124
Other, net.............................. 10,624 2,914 9,488
----------- ----------- -----------
Income before income tax provision.... 1,574,951 1,325,139 1,577,715
INCOME TAX PROVISION...................... 48,060 36,980 12,840
----------- ----------- -----------
NET INCOME................................ $ 1,526,891 $ 1,288,159 $ 1,564,875
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-257
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON COMMON TOTAL
COMMON RETAINED MARKETABLE STOCK, SUBJECT SHAREHOLDERS'
STOCK EARNINGS SECURITIES TO PUT EQUITY
-------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996 $227,496 $5,265,239 $ 68,853 $(1,165,284) $ 4,396,304
Net income............ -- 1,526,891 -- -- 1,526,891
Issuance of 11.20
shares of common
stock................ 82,943 -- -- (82,943) --
Net unrealized gain on
marketable
securities........... -- -- 144,054 -- 144,054
Change in value of
common stock subject
to put............... 201,105 201,105
Distributions to
shareholders......... -- (2,556,778) -- -- (2,556,778)
-------- ---------- -------- ----------- -----------
BALANCE, December 31,
1997................... 310,439 4,235,352 212,907 (1,047,122) 3,711,576
-------- ---------- -------- ----------- -----------
Net income
(unaudited).......... -- 1,564,875 -- -- 1,564,875
Net unrealized loss on
marketable securities
(unaudited).......... -- -- (68,537) -- (68,537)
Change in value of
common stock subject
to put (unaudited)... -- -- -- (204,950) (204,950)
Distributions to
shareholders
(unaudited).......... -- (564,930) -- -- (564,930)
-------- ---------- -------- ----------- -----------
BALANCE, June 30, 1998
(unaudited)............ $310,439 $5,235,297 $144,370 $(1,252,072) $ 4,438,034
======== ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-258
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,526,891 $ 1,288,159 $ 1,564,875
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................ 134,013 67,007 61,929
Gain on sale of property and
equipment.......................... (11,273) -- (10,144)
Change in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable--trade...... (690,218) 4,384,950 555,228
Accounts receivable--other...... (13,164) -- 13,164
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 2,736,339 (3,524,546) (6,363,599)
Prepaid expenses................ -- (27,500) (21,132)
Other assets.................... 2,114 (284,905) 5,581
Increase (decrease) in--
Accounts payable................ (2,955,859) (3,069,555) 3,662,480
Accrued expenses................ 442,861 211,610 (276,743)
----------- ----------- -----------
Net cash provided by (used in)
operating activities....... 1,171,704 (954,780) (808,361)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases of) proceeds from short-
term investments, net................ (166,836) (151,057) 292,915
Purchases of marketable securities.... (75,000) -- (50,000)
(Increase) decrease in due from
related parties...................... (16,657) 176,477 (266,596)
Decrease (increase) in notes
receivable--employees................ 86,395 (398,239) (24,652)
Purchases of property and equipment... (266,199) (129,127) --
Proceeds from sale of property and
equipment............................ 21,600 -- 10,144
----------- ----------- -----------
Net cash used in investing
activities................. (416,697) (501,946) (38,189)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders......... (2,556,778) (1,360,405) (564,930)
Proceeds from issuance of common
stock................................ 82,943 -- --
----------- ----------- -----------
Net cash used in financing
activities................. (2,473,835) (1,360,405) (564,930)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS. (1,718,828) (2,817,131) (1,411,480)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 3,923,002 3,923,002 2,204,174
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 2,204,174 $ 1,105,871 $ 792,694
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-259
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(All information with respect to the interim periods ended June 30, 1997 and
1998 is unaudited)
1. BUSINESS AND ORGANIZATION
Reliable Mechanical, Inc. (the "Company") is a construction contractor
involved in the construction and renovation of mechanical systems on projects
throughout the central and eastern United States and in Puerto Rico. The
Company performs certain construction contracts as a prime contractor and also
acts as a subcontractor on other projects. The work is typically performed
under fixed-price and cost-plus contracts, or time-and-material purchase
requisitions. The length of the Company's contracts vary, but is typically one
to one and a half years in duration.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
Interim financial statements as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998, 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 fixed price 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, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
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, including those arising from contract
penalty provisions, and final contract settlements 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 investments with original maturities of three months of less to
be cash equivalents. Cash payments for taxes were $108,558 for the year ended
December 31, 1997 and $36,980 and $12,840 for the six months ended June 30,
1997 and 1998, respectively.
F-260
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable--trade consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed.................................... $6,266,885
Retainage receivable........................................... 520,054
----------
$6,786,939
==========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Notes Receivable
The notes receivable, including amounts due from related parties, consist of
loans to certain employees and stockholders. Management considers the balances
due from stockholders as current due to the ability of the stockholders to
repay the loans on demand. Interest is accrued on an annual basis at 7%. Non-
stockholder notes receivable are payable in monthly installments and accrue
interest at rates ranging from 7% to 9%.
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are 5 years for all classes of assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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.
Short-term Investments and Marketable Securities
Short-term investments are carried at cost, which approximates fair value.
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 and
investments in mutual funds) have been classified as available for sale with
unrealized gains or losses recorded as a separate component of shareholders'
equity. As of December 31, 1997 the cost of the marketable securities was
$422,821 and unrealized gains were $212,907, with no unrealized losses.
Income Taxes
The shareholders of the Company 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 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.
Due to its operations in Puerto Rico, the Company is required to pay
corporate income taxes in Puerto Rico. These amounts are recorded as income
tax expense. The total tax expense for the year ended December 31, 1997 was
$48,060. As of December 31, 1997, deferred income taxes are insignificant.
New Accounting Pronouncement
In June 1997, SFAS No. 130, Reporting Comprehensive Income was issued. This
statement establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is
F-261
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
displayed with the same prominence as other financial statements.
Reclassification of the financial statements for
earlier periods, provided for comparative purposes, is required. The statement
also requires the accumulated balance of other comprehensive income to be
displayed separately in the equity section of the balance sheet. This
statement is effective for fiscal years beginning after December 15, 1997.
Total comprehensive income for the six months ended June 30, 1997 and 1998 was
$1,379,095 and $1,496,338, respectively.
3. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing and a 401(k) plan covering all employees
meeting certain age and service requirements. The contribution to the plans,
which is determined at the discretion of management and is charged to expense
and funded on a current basis, was $99,086 for the year ended December 31,
1997.
The Company has a deferred compensation arrangement covering certain key
employees. The contribution to the plan, which is determined at the discretion
of management and is charged to expense was $73,750 for the year ended
December 31, 1997. These amounts are included on the balance sheets as
deferred compensation. At the end of a specified period of service (10 years),
if still employed by the Company, the employee is entitled to the vested
amount. Vesting under the plan occurs beginning in the tenth year of
employment at which time the employee is vested in contributions of the first
year of service. In each successive year, the employee vests in the
contributions of the next succeeding year.
4. LEASES
The Company leases its offices and sheet metal shop from certain
shareholders under an operating lease that expires December 31, 1998. The
lease requires monthly rent of $4,000 and rent expense of $48,000 was recorded
for the year ended December 31, 1997.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred............................................. $119,795,513
Estimated earnings recognized.............................. 9,324,859
------------
129,120,372
Less billings on contracts................................. 131,896,269
------------
$ (2,775,897)
============
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......... $ 502,847
Billings in excess of costs and estimated earnings......... (3,278,744)
------------
$ (2,775,897)
============
</TABLE>
F-262
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Vehicles....................................................... $ 887,882
Office equipment............................................... 258,726
Machinery and equipment........................................ 17,702
---------
1,164,310
Less accumulated depreciation.................................. 733,355
---------
$ 430,955
=========
</TABLE>
7. CONTINGENCIES
In the normal course of business the Company experiences various claims and
lawsuits from third parties. During 1997, the Company was a named defendant in
a claim from a subcontractor alleging non-performance under a contract.
Management believes that adequate provision has been made in the accompanying
financial statements to cover any potential exposure related to this lawsuit.
8. BANK LINE OF CREDIT
The Company has a revolving line of credit with a bank in the amount of
$2,000,000 with no amount outstanding at December 31, 1997. The credit
agreement provides for revolving credit through September 1, 1998 and is
secured by all business assets. Interest is computed at the bank's prime rate
(8.5% at December 31, 1997).
9. STOCK PURCHASE AGREEMENT
The Company is obligated to purchase up to 185.18 shares of common stock of
the Company from certain shareholders upon written request by the
shareholders. The purchase price is to be based on the book value of the
Company, which was $5,655 per share at December 31, 1997. These shares of the
Company's common stock are classified outside of shareholders' equity because
of this put feature. Such shares are valued based on the book value of the
shares at the balance sheet date. Changes in book value are recorded directly
to shareholders' equity.
10. CONCENTRATIONS OF RISK
During the year ended December 31, 1997, 17% of the Company's revenues were
derived from work performed in Puerto Rico. In addition, the Company's largest
customer, the U. S. government, accounted for 84% of total revenues for the
year ended December 31, 1997 and 92% of the balance of accounts receivable-
trade at December 31, 1997.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, notes receivable (including due from related parties)
and marketable securities (carried at fair value). The Company believes the
carrying value of these instruments on the accompanying balance sheet at
December 31, 1997 approximates their fair value.
12. SUBSEQUENT EVENT
Effective August 14, 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-263
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Romanoff Electric Corp.:
We have audited the accompanying balance sheet of Romanoff Electric Corp. 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 out 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 Romanoff Electric Corp. 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
August 26, 1998
F-264
<PAGE>
ROMANOFF ELECTRIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
ASSETS ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 61,043 $ 242,807
Accounts receivable--trade, net of allowance for
doubtful accounts of $104,631 at December 31, 1997
and June 30, 1998.................................. 7,109,958 6,410,565
Accounts receivable, other.......................... 31,383 193,091
Inventories......................................... 228,950 203,760
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 1,260,337 1,942,862
Prepaid expenses and other current assets........... 2,953 234
----------- -----------
Total current assets.............................. 8,694,624 8,993,319
PROPERTY AND EQUIPMENT, NET........................... 1,783,677 1,851,589
CASH SURRENDER VALUE OF LIFE INSURANCE................ 1,244,950 1,290,550
OTHER LONG-TERM ASSETS................................ 11,500 11,500
----------- -----------
Total assets...................................... $11,734,751 $12,146,958
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................... $ 2,388,988 $ 1,682,106
Accrued expenses.................................... 2,010,168 2,427,815
Accrued income taxes payable........................ 11,631 34,338
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 1,154,329 824,370
Current maturities of long term debt................ 100,000 --
----------- -----------
Total current liabilities......................... 5,665,116 4,968,629
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A common stock--no par value; stated value
$200 per share; 1,095 and 1,120 shares issued and
outstanding, respectively.......................... 219,000 224,000
Class B common stock--no par value; stated value
$200 per share; 229 and 274 shares issued and out-
standing, respectively............................. 45,800 54,800
Paid-in capital..................................... 31,950 267,650
Retained earnings................................... 5,772,885 6,631,879
----------- -----------
Total shareholders' equity........................ 6,069,635 7,178,329
----------- -----------
Total liabilities and shareholders' equity........ $11,734,751 $12,146,958
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-265
<PAGE>
ROMANOFF ELECTRIC CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER ------------------------
31, 1997 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $33,008,426 $16,646,981 $18,799,888
COST OF SERVICES........................ 25,430,111 12,699,405 13,880,072
----------- ----------- -----------
Gross profit........................ 7,578,315 3,947,576 4,919,816
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 4,930,455 2,343,373 2,902,550
----------- ----------- -----------
Income from operations.............. 2,647,860 1,604,203 2,017,266
OTHER INCOME (EXPENSE):
Interest income....................... 29,470 14,735 8,622
Interest expense...................... (29,775) (5,456) (2,459)
Other, net............................ (3,490) (12,190) 41,577
----------- ----------- -----------
Income before income tax provision.. 2,644,065 1,601,292 2,065,006
INCOME TAX PROVISION.................... 25,600 15,503 50,000
----------- ----------- -----------
NET INCOME.............................. $ 2,618,465 $ 1,585,789 $ 2,015,006
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-266
<PAGE>
ROMANOFF ELECTRIC CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996. 1,314 $262,800 $ 3,950 $ 5,391,980 $ 5,658,730
Issuance of stock........ 10 2,000 28,000 -- 30,000
Net income............... -- -- -- 2,618,465 2,618,465
Distribution to
shareholders............ -- -- -- (2,237,560) (2,237,560)
----- -------- -------- ----------- -----------
Balance, December 31, 1997. 1,324 264,800 31,950 5,772,885 6,069,635
Issuance of stock
(unaudited)............. 70 14,000 235,700 -- 249,700
Net income (unaudited)... -- -- -- 2,015,006 2,015,006
Distributions to
shareholders
(unaudited)............. -- -- -- (1,156,012) (1,156,012)
----- -------- -------- ----------- -----------
Balance, June 30, 1998
(unaudited)............... 1,394 $278,800 $267,650 $ 6,631,879 $ 7,178,329
===== ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-267
<PAGE>
ROMANOFF ELECTRIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 2,618,465 $ 1,585,789 $ 2,015,006
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 435,609 181,676 231,660
Loss on sale of property and
equipment.......................... 3,490 -- --
Increase in cash surrender value of
life insurance..................... (100,949) (45,600) (45,600)
Change in operating assets and
liabilities:.......................
(Increase) decrease in--
Accounts receivable--Trade........ (101,613) 612,963 699,393
Accounts receivable--Other........ 11,848 (28,781) (161,708)
Inventories....................... (16,167) (41,283) 25,190
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ 703,820 962,696 (1,012,484)
Prepaid expenses and other current
assets........................... (1,669) 1,050 2,719
Increase (decrease) in--
Accounts payable.................. 60,844 (902,532) (706,882)
Income taxes payable.............. (26,333) 20,696 22,706
Accrued expenses.................. (7,829) 36,857 417,648
----------- ----------- -----------
Net cash provided by operating
activities..................... 3,579,516 2,383,531 1,487,648
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment... (575,038) (188,978) (299,572)
Proceeds from sale of equipment....... 127 -- --
----------- ----------- -----------
Net cash used in investing
activities..................... (574,911) (188,978) (299,572)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.............. 50,000 -- --
Repayment of debt..................... (963,054) (847,372) (100,000)
Proceeds from issuance of stock....... 30,000 -- 249,700
Distributions to shareholders......... (2,237,560) (897,107) (1,156,012)
----------- ----------- -----------
Net cash used in financing
activities..................... (3,120,614) (1,744,479) (1,006,312)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS. (116,009) 450,074 181,764
CASH AND CASH EQUIVALENTS, beginning of
period................................. 177,052 177,052 61,043
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 61,043 $ 627,126 $ 242,807
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-268
<PAGE>
ROMANOFF ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO THE INTERIM PERIODS ENDED JUNE 30, 1997 AND
1998 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
Romanoff Electric Corp. ("the Company") is a full-service unionized
electrical contractor serving principally northwest Ohio and southeast
Michigan. The Company performs work under cost-plus-fee contracts, fixed price
contracts, and time and material contracts. The length of individual contracts
varies, but typically is less than one year.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1997 and
1998 and as of June 30, 1998 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 fixed price 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, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
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, including those arising from contract
penalty provisions, and final contract settlements 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
investments in money market accounts and certificates of deposits purchased
with an original maturity of three months or less to be cash equivalents. Cash
payments for interest were $29,774, $5,456 and $2,459 for the year ended
December 31, 1997 and the six months ended June 30, 1997 and 1998,
respectively. Cash payments for taxes were $47,955, $5,193 and $27,293 for the
year ended December 31, 1997 and six months ended June 30, 1997 and 1998,
respectively.
F-269
<PAGE>
ROMANOFF ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed................................... $6,243,975
Retainage receivable.......................................... 970,614
Allowance for doubtful accounts............................... (104,631)
----------
$7,109,958
==========
</TABLE>
Inventories
Inventories consist of parts and supplies for general use and items for
specific jobs. Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
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. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Autos and trucks.................................................... 5
Machinery equipment................................................. 5-7
Furniture and fixtures.............................................. 5-7
Leasehold Improvements.............................................. 10
</TABLE>
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and 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.
Cash Surrender Value of Life Insurance
Cash surrender value of life insurance is recorded at cash value as stated
by the insurance carrier.
Income Taxes
The shareholders of the Company have elected to be taxed for federal and
state 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 the amounts necessary to pay personal income taxes
payable on the Company's taxable income. The Company is subject to local
taxes. As of December 31, 1997, deferred income taxes are insignificant.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts
receivable, cash surrender value of life insurance and costs and estimated
earnings in excess of billings on uncompleted contracts.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in northwest Ohio and
F-270
<PAGE>
ROMANOFF ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
southeast Michigan. Credit is extended to customers after an evaluation for
credit worthiness; however, the Company does not require collateral or other
security from customers.
The Company's three largest customers accounted for 9.8%, 7.7%, and 5.4%,
respectively, of total revenues for the year ended December 31, 1997.
3. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing/defined contribution plan for the
benefit of its full-time employees who qualify under its terms and conditions.
Eligibility in the plan is limited to personnel over 20 1/2 years old, with 6
months or more of service, who are exempt employees not covered by any other
qualified plan. Total annual contributions to the plan range, at the
discretion of the Company, from 5% to 15% of annual compensation of covered
participants. Contributions for the year ended December 31, 1997 were
$224,068. The Company also offers a 401(k) plan under which eligible employees
contribute up to 10% of their salary.
The Company contributes to several union-administered pension plans covering
all of its union employees. Pension contributions charged to operations was
$1,129,149 for the year ended December 31, 1997. Governmental regulations
impose certain requirements relative to multi-employer plans. In the event of
a plan's termination or employer withdrawal, the Company may be liable for a
portion of the plan's unfunded vested benefits, if any. There were no unfunded
vested pension liabilities under these plans at December 31, 1997.
4. LEASES
The Company leases its facilities from a related partnership, pursuant to
leases which expire in 2002 and which provide for payments of taxes,
maintenance, and insurance by the Company. Management intends and has the
ability to continue to renew its lease with related parties. Rental expense
recorded under these leases for the year ended December 31, 1997, was
$140,193. As of December 31, 1997, the total minimum rental commitments for
operating leases which are due in future years is as follows:
<TABLE>
<S> <C>
Year ending December 31, 1998.................................. $ 140,193
Year ending December 31, 1999.................................. 145,800
Year ending December 31, 2000.................................. 151,632
Year ending December 31, 2001.................................. 157,680
Year ending December 31, 2002.................................. 163,980
---------
$ 759,285
=========
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred............................................... $10,341,573
Estimated earnings recognized................................ 1,622,110
-----------
11,963,683
Less billings on contracts................................... 11,857,675
-----------
$ 106,008
===========
</TABLE>
F-271
<PAGE>
ROMANOFF ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and earnings in excess of billings...................... 1,260,337
Billings in excess of costs and earnings...................... (1,154,329)
----------
$ 106,008
==========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Machinery and equipment....................................... $2,228,955
Furniture and Fixtures........................................ 1,287,812
Automobiles and Trucks........................................ 215,127
Leasehold Improvements........................................ 407,178
----------
4,139,072
Less: Accumulated depreciation................................ 2,355,395
----------
Total Property and Equipment, net........................... $1,783,677
==========
</TABLE>
7. 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. TRANSACTIONS WITH RELATED PARTIES
The Company rents certain office equipment on a monthly basis from
Mishpocheh Leasing Company ("Mishpocheh") a related partnership. Rent expense
pursuant to this lease charged to operations for the year ended December 31,
1997, was $76,991. See also Note 4.
The Company provided certain administrative services to Romanoff
Electric/Columbus, Inc. ("REC"), a former division of the Company that was
spun off in 1995. Such amounts are included as a reduction of operating
expenses and totaled $60,000 for the year ended December 31, 1997. Subsequent
to year end, REC has been acquired by EMCOR, the agreement pursuant to which
such services has been provided was terminated effective June 30, 1998, and
the Company has received payment in full for all amounts receivable from REC.
Accounts receivable from affiliates, included in the caption "Accounts
Receivable, Other" in the accompanying balance sheets, consist of the
following at December 31, 1997:
<TABLE>
<S> <C>
REC............................................................... $28,783
Mishpocheh........................................................ 2,150
-------
$30,933
=======
</TABLE>
There were no accounts payable to related parties at December 31, 1997.
F-272
<PAGE>
ROMANOFF ELECTRIC CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. BORROWINGS UNDER BANK LINES OF CREDIT
The Company has a total of $5,000,000 in revolving credit agreements and
lines of credits with banks, as follows:
<TABLE>
<CAPTION>
AMOUNT DRAWN AT
DECEMBER 31, 1997
-----------------
<S> <C>
Fifth Third Bank of Toledo, N.A., $1,000,000 credit
agreement providing for revolving credit through June 2000,
unsecured, bearing interest at a rate of one-half percent
below the bank's prime rate (prime rate of 8.5% at December
31, 1997), commitment fee of 0.25% on average daily
unadvanced balance, paid quarterly......................... $100,000
Fifth Third Bank of Toledo, N.A., $1,000,000 line of credit
through June 2000, unsecured, bearing interest at a rate of
one-half percent below the bank's prime rate (prime rate of
8.5% at December 31, 1997)................................. --
Key Bank, $2,000,000 line of credit through June 2000,
unsecured, bearing interest at a rate of either the bank's
prime rate (8.5% at December 31, 1997), or LIBOR plus
2.25%, at the option of the Company........................ --
Capital Bank, $1,000,000 line of credit through June 2000,
unsecured, bearing interest at the bank's prime rate (8.5%
at December 31, 1997)...................................... --
--------
$100,000
========
</TABLE>
10. COMMON STOCK
Classes A and B common stock are identical in participation and ownership
rights. Different restrictions apply to the ability to transfer shares. Class
A shareholders are not required to be employees of the Company and may
transfer shares to other Class A shareholders or linear descendants. Class B
shareholders are required to be employees of the Company and may not transfer
or sell any shares without the consent of all shareholders. If employment of
the Class B shareholder is terminated for any reason, then the Company is
obligated to purchase the stock from the shareholder based upon its book
value. The total shares authorized for Class A and B are 3,000 shares.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
cash surrender value of life insurance, and borrowings under bank lines of
credit. The Company believes the carrying value of these instruments on the
accompanying balance sheet at December 31, 1997 approximates their fair value.
12. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT--ACQUISITION OF COMPANY
(UNAUDITED)
Effective August 31, 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-273
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS
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 SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLIC-
ITATION 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 SOLICITA-
TION 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 AUTHO-
RIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLIC-
ITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPEC-
TUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,000,000 SHARES
[LOGO OF GROUP MAINTENANCE AMERICA CORP. APPEARS HERE]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
----------------
PROSPECTUS
----------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 Chester J. Jachimiec.
10.34*** Form of Employment Agreement by and between Group Maintenance America
Corp. and Richard S. Rouse.
10.35* Airtron, Inc. 1997 Corporate Staff Bonus Plan.
10.36** Form of Amended and Restated Credit Agreement by and among Group
Maintenance America Corp., the Subsidiaries listed as guarantors,
Chase Bank of Texas, National Association, and the signatory banks,
dated as of June 12, 1998.
10.37* Form of Group Maintenance America Corp. 1997 Stock Option Plan.
10.38 Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Barr Acquisition Corp., Barr Electric Corp. and the
shareholders of Barr Electric Corp. dated as of March 27, 1998
(Exhibit 2.1 to Current Report on Form 8-K filed May 22, 1998).
10.39 Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Commercial Air Acquisition Corp., Premex, Inc.,
Commercial Air, Power and Cable, Inc. and the shareholders of Premex,
Inc. dated as of March 31, 1998 (Exhibit 2.2 to Current Report on
Form 8-K filed May 22, 1998).
10.40 Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Atlantic Acquisition Corp., Atlantic Industrial
Constructors, Inc. and the shareholders of Atlantic Industrial
Constructors, Inc. dated as of June 11, 1998 (Exhibit 2.1 to Current
Report on Form 8-K filed June 26, 1998).
10.41 Agreement and Plan of Merger dated as of August 31, 1998 among Group
Maintenance America Corp., Romanoff Electric Acquisition Corp.,
Romanoff Electric Corp. and the shareholders of Romanoff Electric
Corp. (Exhibit 2.1 to Current Report on Form 8-K filed September 15,
1998).
21*** Subsidiaries of the Company.
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 AS AN EXHIBIT TO THE COMPANY'S FORM S-4 (REGISTRATION NO. 333-41947)
UNDER AN EXHIBIT NUMBER IDENTICAL TO THAT DESCRIBED HEREIN AND INCORPORATED
HEREIN BY THIS REFERENCE.
*** FILED HEREWITH.
**** FILED AS AN EXHIBIT TO THE COMPANY'S FORM 10-Q DATED AUGUST 14, 1998
UNDER EXHIBIT NUMBER 27 AND INCORPORATED BY THIS REFERENCE.
(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 September 21,
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 SEPTEMBER 21, 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 Executive Vice President--Chief
------------------------------------- Financial Officer (principal
Darren B. Miller financial officer)
/s/ Daniel W. Kipp Senior Vice President and
------------------------------------- Corporate Controller
Daniel W. Kipp (principal 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
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
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 5
September 21, 1998
Group Maintenance America Corp.
Eight Greenway Plaza, Suite 1500
Houston, Texas 77046
Ladies and Gentlemen:
We have acted as counsel to Group Maintenance America Corp., a Texas corporation
(the "Company"), in connection with the preparation of its Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company under
the Securities Act of 1933, as amended (the "Securities Act"). The Registration
Statement relates to the offering and sale by the Company of up to 7,000,000
shares of its common stock, par value $.001 per share (the "Common Stock"),
which the Company will issue and sell from time to time in connection with
business combinations.
We have examined originals or copies of: (i) the Articles of Incorporation of
the Company, as amended, (ii) the Bylaws of the Company, as amended; (iii)
certain resolutions of the Board of Directors of the Company; and (iv) such
other documents and records as we have deemed necessary and relevant for the
purposes hereof. We have relied upon certificates of public officials and
officers of the Company as to certain matters of fact relating to this opinion
and have made such investigations of law as we have deemed necessary and
relevant as a basis hereof. We have not independently verified any factual
matter relating to this opinion. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents, certificates
and records submitted to us as copies, and the conformity to original documents,
certificates and records of all documents, certificates and records submitted to
us as copies. We have also assumed that (i) the Registration Statement, and any
amendments thereto (including post-effective amendments), will have become
effective; (ii) all Common Stock will be issued and sold in compliance with
applicable federal and state securities laws and in the manner stated in the
Registration Statement and any appropriate prospectus supplement.
<PAGE>
Group Maintenance America Corp.
September 21, 1998
Page 2
Based upon the foregoing, and subject to the limitations and assumptions set
forth herein, and having due regard for such legal considerations as we deem
relevant, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Texas.
2. The Common Stock is duly authorized, and when issued and delivered by
the Company against payment therefor as described in the Registration Statement
pursuant to Board authorization of the transactions contemplated by such
Registration Statement, such shares will be duly and validly issued, fully paid
and nonassessable.
The foregoing opinion is based on and is limited to the laws of the State of
Texas that pertain specifically to for-profit corporations, and we render no
opinion with respect to any other law.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 5 of the Registration Statement. By giving such consent,
we do not admit that we are included within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations issued thereunder.
Very truly yours,
Bracewell & Patterson, L.L.P.
<PAGE>
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of October 24, 1996, by
and between MAINTENANCE SPECIALISTS OF AMERICA, INC., a Texas corporation (the
"Company"), and CHESTER J. JACHIMIEC, an individual with an address of c/o
Maintenance Specialists of America, Inc., 1225 North Loop West, Suite 324,
Houston, Texas 77008 (the "Employee").
1. Employment. The Company hereby agrees to employ the Employee and the
Employee hereby agrees to work for the Company upon the terms and conditions set
forth herein.
2. Term of Employment. This Agreement shall continue in effect for an
initial term of three (3) years from the date of this Agreement, unless
terminated in accordance with Section 7, and shall be extended from year to year
thereafter, unless terminated effective as of the end of the initial term or any
one-year extension thereafter by written notice from the Company to Employee, or
by written notice of Employee to the Company, delivered not less than ninety
(90) days prior to the end of the initial term, or the anniversary of such one-
year extension, as applicable.
3. Scope of Duties; Representations and Warranties.
(a) The Employee shall be initially employed by the Company as its
Executive Vice President - Acquisitions and Finance. At all times, the Employee
shall serve under the direction of the Board of Directors of the Company and
shall perform such services as the Board of Directors, in its sole discretion,
shall deem appropriate.
(b) So long as he is employed by the Company, the Employee shall
devote his skill, energy and best efforts to the faithful discharge of his
duties as an employee of the Company. The Employee agrees that in the provision
of all services to the Company, he will comply with and follow all directives,
policies, standards and regulations from time to time established by the Board
of Directors of the Company.
(c) The Employee represents and warrants that he is under no
contractual or other restrictions or obligations which will significantly limit
his activities on behalf of the Company or which will prohibit or limit the
disclosure or use of by the Employee of any information which directly or
indirectly relates to the nature of the Company or the services to be rendered
by the Employee under this Agreement.
(d) To the extent they relate to, or result from, directly or
indirectly, the actual or anticipated operations of the Company, the Employee
hereby agrees that all patents, trademarks, copyrights, trade secrets, and other
intellectual property rights, all inventions, whether or not patentable and any
product, drawing, design, recording, writing, literary work or other author's
work, in any other tangible form developed in whole or in part by Employee
during the term of this Agreement, or otherwise developed, purchased or acquired
by Employer, shall be the exclusive
1
<PAGE>
property of the Employer ("Intellectual Property"), and unless otherwise agreed
by Employer, all right, title and interest therein shall remain in Employer.
(e) The Employee will hold all Intellectual Property and Confidential
Information (defined below) in trust for the Company and will deliver all
Intellectual Property and Confidential Information in his possession or control
to the Company upon request and, in any event, at the end of his employment with
the Company. The Employee will promptly disclose to the Company all
Confidential Information, as well as any business opportunity which comes to his
attention during the term of his employment with the Company. The Employee will
not take advantage of or divert any business opportunity for the benefit of
himself or any other party without the prior written consent of the Company.
(f) The Employee shall assign and does hereby assign to the Company
all property rights that he may now or hereafter have in the Intellectual
Property and Confidential Information. The Employee shall take such action,
including, but not limited to, the execution, acknowledgment, delivery and
assistance in preparation of documents, and the giving of testimony, as may be
requested by the Company to evidence, transfer, vest or confirm the Company's
right, title and interest in the Intellectual Property.
(g) The Employee will not contest the validity of any invention, any
copyright, any trademark or any mask work registration owned by or vesting in
the Company under this Agreement.
(h) The terms and conditions of Sections 3(d), (e), (f), and (g) will
survive the termination of this Agreement for any reason whatsoever.
4. Compensation.
(a) During the first year, the Company shall pay the Employee a base
salary, payable semi-monthly, in equal installments at a rate equal to $140,000
per year. In each subsequent year of this Agreement, the Company shall pay to
the Employee a salary equal to the greater of (i) his salary for the immediately
preceding year or (ii) if determined otherwise by the Board of Directors, a
salary determined by the Board of Directors following its annual salary and
performance review.
(b) Employee shall receive an annual cash performance bonus of from
zero-percent (0%) to one hundred percent (100%) of Employee's annual base salary
for the calendar year during the term of this Agreement to be determined
according to the following procedure. The Board of Directors of the Company, or
the Compensation Committee of the Board of Directors, if so authorized, shall
establish specific annual performance goals for the Company and for Employee
with respect to each calendar year during the term of this Agreement commencing
on January 1, 1997. Such goals shall be communicated to Employee not later than
the end of the first quarter of the applicable calendar year. At the end of
each calendar year during the term of this Agreement, or within a reasonable
time thereafter, the Board of Directors of the Company, or the Compensation
Committee of the Board of Directors, if so authorized, shall review the actual
performance of the Company and Employee, giving due consideration to market and
other developments outside of the control or influence of Employee and the
Company, and based upon the extent to which the
2
<PAGE>
applicable annual performance goals have been achieved, shall determine in its
sole and absolute discretion, the amount of performance bonus payable to
Employee with respect to such year.
(c) All payments of salary and other compensation to the Employee
shall be made after deduction of any taxes which are required to be withheld
with respect thereto under applicable federal and state laws.
5. Senior Management Stock Options.
(a) Employee is hereby granted options (the "1996 Senior Management
Options") to purchase 115,000 shares of the common stock of the Company as
presently constituted, at an exercise price of $1.231 per share. The 1996
Senior Management Options shall vest ratably as of the earlier of (i) the end of
the three calendar years, 1997, 1998, 1999, or (ii) when and as the Designated
Value of the Company's common stock has achieved the milestones of $7.00, $9.00,
and $11.00 per share, respectively. The 1996 Senior Management Options may be
exercised in whole or in part, from time to time, at any time after vesting
through December 31, 2006 by the payment of cash or the tender of shares of the
Company's common stock (including shares of common stock otherwise receivable as
a result of the exercise of said options or any other options) having a
Designated Value equal to the exercise price of the 1996 Senior Management
Options being exercised. To the extent that certain Shareholders Agreement of
even date herewith among the Corporation and the shareholders of the Company,
including Employee (the "Shareholders Agreement") is in effect at the time
Employee exercises any of the Senior Management Options, such shares of the
Company's common stock issued to Employee shall be subject to the provisions of
the Shareholders Agreement.
(b) Commencing with the Company's initial public offering of Common
Stock and for each partial or full calendar year thereafter during the term
hereof, provided Employee is then serving as an employee of the Company, the
Company shall grant to Employee options (together with the 1996 Senior
Management Options, collectively referred to as the "Senior Management Options")
to purchase such number of additional shares as the Board of Directors of the
Company may determine, on such terms and conditions as shall be established at
such time.
(c) For purposes hereof, "Designated Value" of the shares on a
specified date shall mean (i) the average of the closing prices of the common
stock on the principal market or registered exchange on which the Company's
common stock is traded (or the average of the closing bid and ask prices, if a
single closing price is not reported for such market) on the ten (10)
consecutive trading days next preceding the date for the determination of such
value, provided that the stock is then traded on the over the counter market or
on the NASDAQ System or any registered securities exchange, or (ii) if not
publicly traded, the book value per share of the Company as of the end of the
calendar quarter next preceding the date of determination of such value.
(d) From time to time the Company agrees to register under the
Securities Act of 1933 and all applicable state securities laws and regulations
the shares of common stock issuable upon the exercise of the foregoing Senior
Management Options in the same manner as shares issuable under any other stock
options or stock purchase plans of the Company. Further, the Company agrees to
grant to the Employee "demand" or "piggyback" registration rights with respect
to all such Senior
3
<PAGE>
Management Option shares (to the extent same have not been registered), and all
other shares of common stock owned directly or indirectly by the Employee or
Employee's immediate family, equivalent to the "demand" or "piggyback"
registration rights granted under that certain Registration Rights Agreement
dated October 24, 1996, by and among the Company, Gordon Cain and other holders
of common stock of the Company.
6. Fringe Benefits; Expenses.
(a) So long as the Employee is employed by the Company, the Employee
shall participate in all employee benefit plans sponsored by the Company for its
executive employees, including but not limited to vacation policy, sick leave
and disability leave, health insurance, dental insurance and pension and/or
profit sharing plans; provided, however, that except as provided below, the
nature, amount and limitations of such plans shall be determined from time to
time by the Board of Directors of the Company.
(b) The Company will reimburse the Employee for all reasonable
business expenses incurred by the Employee in the scope of his employment.
(c) Employees shall be entitled to participate in any other stock
bonus, stock purchase or stock option plan instituted by the Company for its
managers or employees generally in the same manner as any other senior executive
officer of the Company, with proper regard and weight given in the issuance of
shares or the grant of options for the Employee's position (and without
consideration of the above Senior Management Options or any shares of the
Company otherwise owned by Employee directly or indirectly).
(d) The Company shall make reasonable efforts to provide life
insurance payable to Employee's designated beneficiary in an amount at least
three times Employee's annual base salary.
(e) The Company shall make a reasonable effort to maintain disability
insurance on behalf of Employee which, as a goal, shall provide for salary
continuation in the event of permanent disability in an amount not less than 60%
of the Employee's regular base salary.
(f) The Employee shall be entitled to a minimum of three weeks paid
vacation, increasing to four weeks at January 1, 1999.
(g) The Company will pay all license fees, occupation taxes and
reasonable educational costs and expenses necessary to maintain Employee's good
standing under any professional licenses.
7. Termination.
(a) Employee agrees that this Agreement may be terminated by the
Company with or without "Cause" at any time, subject to the terms of this
Section 7. Such termination shall be effective upon delivery of written notice
to Employee of the Company's election to terminate this Agreement under this
Section 7. "Cause" when used in connection with the termination of
4
<PAGE>
employment with the Company, shall mean the termination of the Employee's
employment by the Company by reason of (i) the conviction of the Employee of a
crime involving moral turpitude by a court of competent jurisdiction as to which
no further appeal can be taken; (ii) the proven commission by the Employee of an
act of fraud upon the Company; (iii) the willful and proven misappropriation of
any funds or property of the Company by the Employee; (iv) the willful,
continued and unreasonable failure by the Employee to perform material duties
assigned to him and agreed to by him after reasonable notice and opportunity to
cure such performance; (v) the knowing engagement by the Employee in any direct,
material conflict of interest with the Company without compliance with the
Company's conflict of interest policy, if any, then in effect; (vi) the knowing
engagement by the Employee, without the written approval of the Board of
Directors of the Company, in any activity which competes with the business of
the Company or which would result in a material injury to the Company; or (vii)
the knowing engagement in any activity which would constitute a material
violation of the provisions of the Company's Insider Trading Policy or Business
Ethics Policy, if any, then in effect.
If the Employee's employment terminates, unless the Company terminates
the Employee's employment under this Agreement for Cause or the Employee
resigns, the Company shall, subject to the terms of Section 7(c) below, and only
if and as long as Employee is not in breach of his obligations under this
Agreement, pay to the Employee an amount equal to twelve (12) months
compensation at his then current salary, payable semimonthly, and shall continue
to provide benefits in the kind and amounts provided up to the date of
termination for said twelve (12) month period including, without limitation,
continuation of any Company-paid benefits as described in Section 6 for the
Employee and his family; provided, however, that in the event that Gordon A.
Cain elects to cease payments of outstanding installments in compliance with the
Subscription Agreement dated October 24, 1996 with the Company, and the Company
elects to terminate Employee under this Section 7, or Employee resigns within 60
days of such termination, then if Employee is not in breach of his obligations
under this Agreement, the Company shall pay to the Employee, in lieu of the
severance payments described above, three (3) months compensation under this
Agreement, payable semi-monthly, and the Company shall continue to provide
benefits in the kind and amount provided up to the date of termination for said
three (3) month period. Notwithstanding anything in this Agreement to the
contrary, in the event the Employee's employment terminates within six months
after (A) a sale of all or substantially all of the assets of the Company, or
(B) a merger, consolidation, liquidation or reorganization of the Company, in
which the purchaser or the surviving entity, as applicable, adopts the
Company's obligations under this Agreement, the Company shall pay to the
Employee, an amount equal to two times Employee's severance benefits otherwise
available to Employee under this Agreement.
In the event that this Agreement is terminated by Company without Cause,
Employee agrees to accept, in full settlement of any and all claims, losses,
damages and other demands which Employee may have arising out of such
termination as liquidated damages and not as a penalty, the applicable amount
which is set out above. Employee hereby waives any and all rights he may have
to bring any cause of action or proceeding contesting any termination without
Cause, provided, however, that such waiver shall not be deemed to affect
Employee's rights to enforce any other obligations of the Company. Under no
circumstances shall Employee be entitled to any compensation or confirmation
5
<PAGE>
of any benefits under this Agreement for any period of time following his date
of termination if his termination is for Cause.
(b) If at any time during the term of this Agreement, Employee is
unable due to physical or mental disability, to perform effectively his duties
hereunder, the Company shall continue payment of compensation as provided in
Section 4 during the first twelve (12) month period of such disability to the
extent not covered by the Company's disability insurance policies. Upon the
expiration of such twelve (12) month period, the Company, at its sole option,
may continue payment of Employee's salary for such additional periods as the
Company elects, or may terminate this Agreement without any further obligations
hereunder. If Employee should die during the term of this Agreement, Employee's
employment and the Company's obligations hereunder shall terminate as of the end
of the month in which Employee's death occurs and there will be no salary and
benefit continuation period pursuant to Section 7(a).
(c) So long as Employee receives a severance as provided in Section
7(a) or (b) above, Employee agrees that he will sign any lock-up letters,
standstill agreements, or other similar documentation required by an underwriter
in connection with a public offering of securities by the Company or take other
actions reasonably related thereto as requested by the Board of Directors of the
Company. Failure to take any such action shall cause Employee to forfeit any
further rights to the salary continuation payments in Section 7(a) or (b). In
addition, Employee agrees that in such event the Company can seek and obtain
specific performance of such covenant, including any injunction requiring
execution thereof, and the Employee hereby appoints the then current president
of the Company to sign any such documents on his behalf so long as such
documents are prepared on the same basis as other shareholders generally or as
all management shareholders.
8. Covenant Not to Compete.
(a) During the term of this Agreement, Employee will not compete with
the Company or its affiliates, directly or indirectly, either for himself or as
a member of a partnership or as a stockholder (except as a stockholder of less
than one percent (1 %) of the issued and outstanding stock of a publicly-held
company whose gross assets exceed one hundred million dollars), investor, owner,
officer or director of a company or other entity, or as an employee, agent,
associate or consultant of any person, partnership, corporation or other entity,
in any business in competition with that carried on by the Company or any of its
affiliates.
(b) Employee further agrees that, for a period of six (6) months from
and after the date of termination of Employee's employment under this Agreement,
regardless of the reason for such termination, he will neither represent the
Company nor engage in or carry on, directly or indirectly, either for himself or
as a member of a partnership or as a stockholder (other than as a stockholder of
less than one percent (1 %) of the issued and outstanding stock of a publicly-
held company whose gross assets exceed one hundred million dollars), investor,
owner, officer or director of a company or other entity, or as an employee,
agent, associate or consultant of any person, partnership, corporation or other
entity, any business in any State of the United States or in any other part of
the world which directly competes with any services or products produced, sold,
conducted, developed, or in the process of development by the Company or its
affiliates on the date of
6
<PAGE>
termination of Employee's employment. Notwithstanding the foregoing, nothing
herein shall prevent Employee from working in the indoor air quality, heating,
ventilation and air conditioning or plumbing maintenance services industry,
provided that such activities are in areas not in direct competition with any
services or products produced, sold, conducted, developed, or in the process of
development by the Company or its affiliates on the date of termination of
Employee's employment.
(c) Employee agrees that the limitations set forth herein on his
rights to compete with the Company and its affiliates are reasonable and
necessary for the protection of the Company and its affiliates. In this regard,
Employee specifically agrees that the limitations as to period of time and
geographic area, as well as all other restrictions on his activities specified
herein, are reasonable and necessary for the protection of the Company and its
affiliates. In particular, Employee acknowledges that the parties anticipate
that the Employee will be actively seeking markets for the Company's products
throughout the United States during his employment with the Company.
(d) Employee agrees that the remedy at law for any breach by him of
this Section 8 will be inadequate and that the Company shall also be entitled to
injunctive relief.
9. Confidential Information and Results of Services. Employee agrees
that during the term of this Agreement, and for five (5) years after his
termination of employment, he will not make use of or disclose, without the
prior consent of the Company, Confidential Information (as hereinafter defined)
relating to the Company, or any of its affiliates, and further agrees, that he
will return to the Company all written materials in his possession embodying
such Confidential Information. For purposes of this Agreement, "Confidential
Information" includes information conveyed or assigned to the Company by
Employee or conceived, compiled, created, developed, discovered or obtained by
Employee from and during his employment relationship with the Company, whether
solely by the Employee or jointly with others, which concerns the affairs of the
Company or its affiliates and which the Company could reasonably be expected to
desire be held in confidence, or the disclosure of which would likely be
embarrassing, detrimental or disadvantageous to the Company or its affiliates
and without limiting the generality of the foregoing includes information
relating to inventions, and the trade secrets, technologies, algorithms,
products, services, finances, business plans, marketing plans, legal affairs,
supplier lists, client lists, potential clients, business prospects, business
opportunities, personnel assignments, contracts and assets of the Company and
information made available to the Company by other parties under a confidential
relationship. Confidential Information, however, shall not include information
(a) which is, at the time in question, in the public domain through no wrongful
act of Employee, (b) which is later disclosed to Employee by one not under
obligations of confidentiality to the Company or Employee, (c) which is required
by court or governmental order, law or regulation to be disclosed, or (d) which
the Company has expressly given Employee the right to disclose pursuant to
written agreement. Employee agrees that the remedy at law for any breach by him
of this Section 9 will be inadequate and that the Company shall also be entitled
to injunctive relief.
10. Notice. All notices, requests, demands and other communications
required by or permitted under this Agreement shall be in writing and shall be
sufficiently delivered if delivered by hand, by courier service, or sent by
registered or certified mail, postage prepaid, to the parties at their
respective addresses listed below:
7
<PAGE>
(a) If to the Employee, to the address set out in the beginning of
this Agreement;
(b) If to the Company:
Maintenance Specialists of America, Inc.
1225 North Loop West, Suite 324
Houston, Texas 77008
Either party may change such party's address by such notice to the
other parties.
11. Assignment. This Agreement is personal to the Employee, and he shall
not assign any of his rights or delegate any of his duties hereunder without the
prior written consent of the Company. Neither the employee nor his spouse will
have the right to commute, encumber, or otherwise dispose of any payments under
this Agreement. The Company shall have the right to assign this Agreement to a
successor in interest in connection with a merger, sale of substantially all
assets, or the like; provided however, that an assignment of this Agreement to
an entity with operations, products or services outside of the industries in
which the Company is then active shall not be deemed to expand the scope of
Employee's covenant not to compete with such operations, products or services
without Employee's written consent.
12. Survival. The provisions of this Agreement shall survive the
termination of the Employee's employment hereunder in accordance with their
terms.
13. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of Texas.
14. Binding Upon Successors. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Employee with respect to the terms of employment of
the Employee by the Company and supersedes all prior agreements and
understandings, whether written or oral, between them concerning such terms of
employment.
16. Waiver and Amendments; Cumulative Rights and Remedies.
(a) This Agreement may be amended, modified or supplemented, and any
obligation hereunder may be waived, only by a written instrument executed by the
parties hereto. The waiver by either party of a breach of any provision of this
Agreement shall not operate as a waiver of any subsequent breach.
(b) No failure on the part of any party to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver hereof, nor
shall any single or partial exercise of any such right or remedy by such party
preclude any other or further exercise thereof or the exercise
8
<PAGE>
of any other right or remedy. All rights and remedies hereunder are cumulative
and are in addition to all other rights and remedies provided by law, agreement
or otherwise.
(c) The Employee's obligations to the Company and the Company's rights
and remedies hereunder are in addition to all other obligations of the Employee
and rights and remedies of the Company created pursuant to any other agreement.
17. Construction. Each party to this Agreement has had the opportunity to
review this Agreement with legal counsel. This Agreement shall not be construed
or interpreted against any party on the basis that such party drafted or
authored a particular provision, parts of or the entirety of this Agreement.
18. Severability. In the event that any provision or provisions of this
Agreement is held to be invalid, illegal or unenforceable by any court of law or
otherwise, the remaining provisions of this Agreement shall nevertheless
continue to be valid, legal and enforceable as though the invalid or
unenforceable parts had not been included therein. In addition, in such event
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible with respect
to those provisions which were held to be invalid, illegal or unenforceable.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement under seal on the date first above written.
MAINTENANCE SPECIALISTS OF AMERICA
INC., A TEXAS CORPORATION
By: /s/ J. Patrick Millinor, Jr.
-----------------------------------
J. Patrick Millinor, Jr., President
EMPLOYEE:
/s/ Chester J. Jachimiec
---------------------------
Chester J. Jachimiec
9
<PAGE>
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of October 24, 1996, by
and between MAINTENANCE SPECIALISTS OF AMERICA, INC., a Texas corporation (the
"Company"), and RICHARD S. ROUSE, an individual with an address of c/o
Maintenance Specialists of America, Inc., 1225 North Loop West, Suite 324,
Houston, Texas 77008 (the "Employee").
1. Employment. The Company hereby agrees to employ the Employee and the
Employee hereby agrees to work for the Company upon the terms and conditions set
forth herein.
2. Term of Employment. This Agreement shall continue in effect for an
initial term of three (3) years from the date of this Agreement, unless
terminated in accordance with Section 7, and shall be extended from year to year
thereafter, unless terminated effective as of the end of the initial term or any
one-year extension thereafter by written notice from the Company to Employee, or
by written notice of Employee to the Company, delivered not less than ninety
(90) days prior to the end of the initial term, or the anniversary of such one-
year extension, as applicable.
3. Scope of Duties; Representations and Warranties.
(a) The Employee shall be initially employed by the Company as its
Executive Vice President - Corporate Development and Administration. At all
times, the Employee shall serve under the direction of the Board of Directors of
the Company and shall perform such services as the Board of Directors, in its
sole discretion, shall deem appropriate.
(b) So long as he is employed by the Company, the Employee shall
devote his skill, energy and best efforts to the faithful discharge of his
duties as an employee of the Company. The Employee agrees that in the provision
of all services to the Company, he will comply with and follow all directives,
policies, standards and regulations from time to time established by the Board
of Directors of the Company.
(c) The Employee represents and warrants that he is under no
contractual or other restrictions or obligations which will significantly limit
his activities on behalf of the Company or which will prohibit or limit the
disclosure or use of by the Employee of any information which directly or
indirectly relates to the nature of the Company or the services to be rendered
by the Employee under this Agreement.
(d) To the extent they relate to, or result from, directly or
indirectly, the actual or anticipated operations of the Company, the Employee
hereby agrees that all patents, trademarks, copyrights, trade secrets, and other
intellectual property rights, all inventions, whether or not patentable and any
product, drawing, design, recording, writing, literary work or other author's
work, in any other tangible form developed in whole or in part by Employee
during the term of this Agreement, or otherwise developed, purchased or acquired
by Employer, shall be the exclusive
1
<PAGE>
property of the Employer ("Intellectual Property"), and unless otherwise agreed
by Employer, all right, title and interest therein shall remain in Employer.
(e) The Employee will hold all Intellectual Property and Confidential
Information (defined below) in trust for the Company and will deliver all
Intellectual Property and Confidential Information in his possession or control
to the Company upon request and, in any event, at the end of his employment with
the Company. The Employee will promptly disclose to the Company all
Confidential Information, as well as any business opportunity which comes to his
attention during the term of his employment with the Company. The Employee will
not take advantage of or divert any business opportunity for the benefit of
himself or any other party without the prior written consent of the Company.
(f) The Employee shall assign and does hereby assign to the Company
all property rights that he may now or hereafter have in the Intellectual
Property and Confidential Information. The Employee shall take such action,
including, but not limited to, the execution, acknowledgment, delivery and
assistance in preparation of documents, and the giving of testimony, as may be
requested by the Company to evidence, transfer, vest or confirm the Company's
right, title and interest in the Intellectual Property.
(g) The Employee will not contest the validity of any invention, any
copyright, any trademark or any mask work registration owned by or vesting in
the Company under this Agreement.
(h) The terms and conditions of Sections 3(d), (e), (f), and (g) will
survive the termination of this Agreement for any reason whatsoever.
4. Compensation.
(a) During the first year, the Company shall pay the Employee a base
salary, payable semi-monthly, in equal installments at a rate equal to $140,000
per year. In each subsequent year of this Agreement, the Company shall pay to
the Employee a salary equal to the greater of (i) his salary for the immediately
preceding year or (ii) if determined otherwise by the Board of Directors, a
salary determined by the Board of Directors following its annual salary and
performance review.
(b) Employee shall receive an annual cash performance bonus of from
zero-percent (0%) to one hundred percent (100%) of Employee's annual base salary
for the calendar year during the term of this Agreement to be determined
according to the following procedure. The Board of Directors of the Company, or
the Compensation Committee of the Board of Directors, if so authorized, shall
establish specific annual performance goals for the Company and for Employee
with respect to each calendar year during the term of this Agreement commencing
on January 1, 1997. Such goals shall be communicated to Employee not later than
the end of the first quarter of the applicable calendar year. At the end of
each calendar year during the term of this Agreement, or within a reasonable
time thereafter, the Board of Directors of the Company, or the Compensation
Committee of the Board of Directors, if so authorized, shall review the actual
performance of the Company and Employee, giving due consideration to market and
other developments outside of the control or influence of Employee and the
Company, and based upon the extent to which the
2
<PAGE>
applicable annual performance goals have been achieved, shall determine in its
sole and absolute discretion, the amount of performance bonus payable to
Employee with respect to such year.
(c) All payments of salary and other compensation to the Employee
shall be made after deduction of any taxes which are required to be withheld
with respect thereto under applicable federal and state laws.
5. Senior Management Stock Options.
(a) Employee is hereby granted options (the "1996 Senior Management
Options") to purchase 100,000 shares of the common stock of the Company as
presently constituted, at an exercise price of $1.231 per share. The 1996
Senior Management Options shall vest ratably as of the earlier of (i) the end of
the three calendar years, 1997, 1998, 1999, or (ii) when and as the Designated
Value of the Company's common stock has achieved the milestones of $7.00, $9.00,
and $11.00 per share, respectively. The 1996 Senior Management Options may be
exercised in whole or in part, from time to time, at any time after vesting
through December 31, 2006 by the payment of cash or the tender of shares of the
Company's common stock (including shares of common stock otherwise receivable as
a result of the exercise of said options or any other options) having a
Designated Value equal to the exercise price of the 1996 Senior Management
Options being exercised. To the extent that certain Shareholders Agreement of
even date herewith among the Corporation and the shareholders of the Company,
including Employee (the "Shareholders Agreement") is in effect at the time
Employee exercises any of the Senior Management Options, such shares of the
Company's common stock issued to Employee shall be subject to the provisions of
the Shareholders Agreement.
(b) Commencing with the Company's initial public offering of Common
Stock and for each partial or full calendar year thereafter during the term
hereof, provided Employee is then serving as an employee of the Company, the
Company shall grant to Employee options (together with the 1996 Senior
Management Options, collectively referred to as the "Senior Management Options")
to purchase such number of additional shares as the Board of Directors of the
Company may determine, on such terms and conditions as shall be established at
such time.
(c) For purposes hereof, "Designated Value" of the shares on a
specified date shall mean (i) the average of the closing prices of the common
stock on the principal market or registered exchange on which the Company's
common stock is traded (or the average of the closing bid and ask prices, if a
single closing price is not reported for such market) on the ten (10)
consecutive trading days next preceding the date for the determination of such
value, provided that the stock is then traded on the over the counter market or
on the NASDAQ System or any registered securities exchange, or (ii) if not
publicly traded, the book value per share of the Company as of the end of the
calendar quarter next preceding the date of determination of such value.
(d) From time to time the Company agrees to register under the
Securities Act of 1933 and all applicable state securities laws and regulations
the shares of common stock issuable upon the exercise of the foregoing Senior
Management Options in the same manner as shares issuable under any other stock
options or stock purchase plans of the Company. Further, the Company agrees to
grant to the Employee "demand" or "piggyback" registration rights with respect
to all such Senior
3
<PAGE>
Management Option shares (to the extent same have not been registered), and all
other shares of common stock owned directly or indirectly by the Employee or
Employee's immediate family, equivalent to the "demand" or "piggyback"
registration rights granted under that certain Registration Rights Agreement
dated October 24, 1996, by and among the Company, Gordon Cain and other holders
of common stock of the Company.
6. Fringe Benefits; Expenses.
(a) So long as the Employee is employed by the Company, the Employee
shall participate in all employee benefit plans sponsored by the Company for its
executive employees, including but not limited to vacation policy, sick leave
and disability leave, health insurance, dental insurance and pension and/or
profit sharing plans; provided, however, that except as provided below, the
nature, amount and limitations of such plans shall be determined from time to
time by the Board of Directors of the Company.
(b) The Company will reimburse the Employee for all reasonable
business expenses incurred by the Employee in the scope of his employment.
(c) Employees shall be entitled to participate in any other stock
bonus, stock purchase or stock option plan instituted by the Company for its
managers or employees generally in the same manner as any other senior executive
officer of the Company, with proper regard and weight given in the issuance of
shares or the grant of options for the Employee's position (and without
consideration of the above Senior Management Options or any shares of the
Company otherwise owned by Employee directly or indirectly).
(d) The Company shall make reasonable efforts to provide life
insurance payable to Employee's designated beneficiary in an amount at least
three times Employee's annual base salary.
(e) The Company shall make a reasonable effort to maintain disability
insurance on behalf of Employee which, as a goal, shall provide for salary
continuation in the event of permanent disability in an amount not less than 60%
of the Employee's regular base salary.
(f) The Employee shall be entitled to a minimum of three weeks paid
vacation, increasing to four weeks at January 1, 1999.
(g) The Company will pay all license fees, occupation taxes and
reasonable educational costs and expenses necessary to maintain Employee's good
standing under any professional licenses.
7. Termination.
(a) Employee agrees that this Agreement may be terminated by the
Company with or without "Cause" at any time, subject to the terms of this
Section 7. Such termination shall be effective upon delivery of written notice
to Employee of the Company's election to terminate this Agreement under this
Section 7. "Cause" when used in connection with the termination of
4
<PAGE>
employment with the Company, shall mean the termination of the Employee's
employment by the Company by reason of (i) the conviction of the Employee of a
crime involving moral turpitude by a court of competent jurisdiction as to which
no further appeal can be taken; (ii) the proven commission by the Employee of an
act of fraud upon the Company; (iii) the willful and proven misappropriation of
any funds or property of the Company by the Employee; (iv) the willful,
continued and unreasonable failure by the Employee to perform material duties
assigned to him and agreed to by him after reasonable notice and opportunity to
cure such performance; (v) the knowing engagement by the Employee in any direct,
material conflict of interest with the Company without compliance with the
Company's conflict of interest policy, if any, then in effect; (vi) the knowing
engagement by the Employee, without the written approval of the Board of
Directors of the Company, in any activity which competes with the business of
the Company or which would result in a material injury to the Company; or (vii)
the knowing engagement in any activity which would constitute a material
violation of the provisions of the Company's Insider Trading Policy or Business
Ethics Policy, if any, then in effect.
If the Employee's employment terminates, unless the Company terminates
the Employee's employment under this Agreement for Cause or the Employee
resigns, the Company shall, subject to the terms of Section 7(c) below, and only
if and as long as Employee is not in breach of his obligations under this
Agreement, pay to the Employee an amount equal to twelve (12) months
compensation at his then current salary, payable semimonthly, and shall continue
to provide benefits in the kind and amounts provided up to the date of
termination for said twelve (12) month period including, without limitation,
continuation of any Company-paid benefits as described in Section 6 for the
Employee and his family; provided, however, that in the event that Gordon A.
Cain elects to cease payments of outstanding installments in compliance with the
Subscription Agreement dated October 24, 1996 with the Company, and the Company
elects to terminate Employee under this Section 7, or Employee resigns within 60
days of such termination, then if Employee is not in breach of his obligations
under this Agreement, the Company shall pay to the Employee, in lieu of the
severance payments described above, three (3) months compensation under this
Agreement, payable semi-monthly, and the Company shall continue to provide
benefits in the kind and amount provided up to the date of termination for said
three (3) month period. Notwithstanding anything in this Agreement to the
contrary, in the event the Employee's employment terminates within six months
after (A) a sale of all or substantially all of the assets of the Company, or
(B) a merger, consolidation, liquidation or reorganization of the Company, in
which the purchaser or the surviving entity, as applicable, adopts the
Company's obligations under this Agreement, the Company shall pay to the
Employee, an amount equal to two times Employee's severance benefits otherwise
available to Employee under this Agreement.
In the event that this Agreement is terminated by Company without Cause,
Employee agrees to accept, in full settlement of any and all claims, losses,
damages and other demands which Employee may have arising out of such
termination as liquidated damages and not as a penalty, the applicable amount
which is set out above. Employee hereby waives any and all rights he may have
to bring any cause of action or proceeding contesting any termination without
Cause, provided, however, that such waiver shall not be deemed to affect
Employee's rights to enforce any other obligations of the Company. Under no
circumstances shall Employee be entitled to any compensation or confirmation
5
<PAGE>
of any benefits under this Agreement for any period of time following his date
of termination if his termination is for Cause.
(b) If at any time during the term of this Agreement, Employee is
unable due to physical or mental disability, to perform effectively his duties
hereunder, the Company shall continue payment of compensation as provided in
Section 4 during the first twelve (12) month period of such disability to the
extent not covered by the Company's disability insurance policies. Upon the
expiration of such twelve (12) month period, the Company, at its sole option,
may continue payment of Employee's salary for such additional periods as the
Company elects, or may terminate this Agreement without any further obligations
hereunder. If Employee should die during the term of this Agreement, Employee's
employment and the Company's obligations hereunder shall terminate as of the end
of the month in which Employee's death occurs and there will be no salary and
benefit continuation period pursuant to Section 7(a).
(c) So long as Employee receives a severance as provided in Section
7(a) or (b) above, Employee agrees that he will sign any lock-up letters,
standstill agreements, or other similar documentation required by an underwriter
in connection with a public offering of securities by the Company or take other
actions reasonably related thereto as requested by the Board of Directors of the
Company. Failure to take any such action shall cause Employee to forfeit any
further rights to the salary continuation payments in Section 7(a) or (b). In
addition, Employee agrees that in such event the Company can seek and obtain
specific performance of such covenant, including any injunction requiring
execution thereof, and the Employee hereby appoints the then current president
of the Company to sign any such documents on his behalf so long as such
documents are prepared on the same basis as other shareholders generally or as
all management shareholders.
8. Covenant Not to Compete.
(a) During the term of this Agreement, Employee will not compete with
the Company or its affiliates, directly or indirectly, either for himself or as
a member of a partnership or as a stockholder (except as a stockholder of less
than one percent (1 %) of the issued and outstanding stock of a publicly-held
company whose gross assets exceed one hundred million dollars), investor, owner,
officer or director of a company or other entity, or as an employee, agent,
associate or consultant of any person, partnership, corporation or other entity,
in any business in competition with that carried on by the Company or any of its
affiliates.
(b) Employee further agrees that, for a period of six (6) months from
and after the date of termination of Employee's employment under this Agreement,
regardless of the reason for such termination, he will neither represent the
Company nor engage in or carry on, directly or indirectly, either for himself or
as a member of a partnership or as a stockholder (other than as a stockholder of
less than one percent (1 %) of the issued and outstanding stock of a publicly-
held company whose gross assets exceed one hundred million dollars), investor,
owner, officer or director of a company or other entity, or as an employee,
agent, associate or consultant of any person, partnership, corporation or other
entity, any business in any State of the United States or in any other part of
the world which directly competes with any services or products produced, sold,
conducted, developed, or in the process of development by the Company or its
affiliates on the date of
6
<PAGE>
termination of Employee's employment. Notwithstanding the foregoing, nothing
herein shall prevent Employee from working in the indoor air quality, heating,
ventilation and air conditioning or plumbing maintenance services industry,
provided that such activities are in areas not in direct competition with any
services or products produced, sold, conducted, developed, or in the process of
development by the Company or its affiliates on the date of termination of
Employee's employment.
(c) Employee agrees that the limitations set forth herein on his
rights to compete with the Company and its affiliates are reasonable and
necessary for the protection of the Company and its affiliates. In this regard,
Employee specifically agrees that the limitations as to period of time and
geographic area, as well as all other restrictions on his activities specified
herein, are reasonable and necessary for the protection of the Company and its
affiliates. In particular, Employee acknowledges that the parties anticipate
that the Employee will be actively seeking markets for the Company's products
throughout the United States during his employment with the Company.
(d) Employee agrees that the remedy at law for any breach by him of
this Section 8 will be inadequate and that the Company shall also be entitled to
injunctive relief.
9. Confidential Information and Results of Services. Employee agrees
that during the term of this Agreement, and for five (5) years after his
termination of employment, he will not make use of or disclose, without the
prior consent of the Company, Confidential Information (as hereinafter defined)
relating to the Company, or any of its affiliates, and further agrees, that he
will return to the Company all written materials in his possession embodying
such Confidential Information. For purposes of this Agreement, "Confidential
Information" includes information conveyed or assigned to the Company by
Employee or conceived, compiled, created, developed, discovered or obtained by
Employee from and during his employment relationship with the Company, whether
solely by the Employee or jointly with others, which concerns the affairs of the
Company or its affiliates and which the Company could reasonably be expected to
desire be held in confidence, or the disclosure of which would likely be
embarrassing, detrimental or disadvantageous to the Company or its affiliates
and without limiting the generality of the foregoing includes information
relating to inventions, and the trade secrets, technologies, algorithms,
products, services, finances, business plans, marketing plans, legal affairs,
supplier lists, client lists, potential clients, business prospects, business
opportunities, personnel assignments, contracts and assets of the Company and
information made available to the Company by other parties under a confidential
relationship. Confidential Information, however, shall not include information
(a) which is, at the time in question, in the public domain through no wrongful
act of Employee, (b) which is later disclosed to Employee by one not under
obligations of confidentiality to the Company or Employee, (c) which is required
by court or governmental order, law or regulation to be disclosed, or (d) which
the Company has expressly given Employee the right to disclose pursuant to
written agreement. Employee agrees that the remedy at law for any breach by him
of this Section 9 will be inadequate and that the Company shall also be entitled
to injunctive relief.
10. Notice. All notices, requests, demands and other communications
required by or permitted under this Agreement shall be in writing and shall be
sufficiently delivered if delivered by hand, by courier service, or sent by
registered or certified mail, postage prepaid, to the parties at their
respective addresses listed below:
7
<PAGE>
(a) If to the Employee, to the address set out in the beginning of
this Agreement;
(b) If to the Company:
Maintenance Specialists of America, Inc.
1225 North Loop West, Suite 324
Houston, Texas 77008
Either party may change such party's address by such notice to the
other parties.
11. Assignment. This Agreement is personal to the Employee, and he shall
not assign any of his rights or delegate any of his duties hereunder without the
prior written consent of the Company. Neither the employee nor his spouse will
have the right to commute, encumber, or otherwise dispose of any payments under
this Agreement. The Company shall have the right to assign this Agreement to a
successor in interest in connection with a merger, sale of substantially all
assets, or the like; provided however, that an assignment of this Agreement to
an entity with operations, products or services outside of the industries in
which the Company is then active shall not be deemed to expand the scope of
Employee's covenant not to compete with such operations, products or services
without Employee's written consent.
12. Survival. The provisions of this Agreement shall survive the
termination of the Employee's employment hereunder in accordance with their
terms.
13. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of Texas.
14. Binding Upon Successors. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Employee with respect to the terms of employment of
the Employee by the Company and supersedes all prior agreements and
understandings, whether written or oral, between them concerning such terms of
employment.
16. Waiver and Amendments; Cumulative Rights and Remedies.
(a) This Agreement may be amended, modified or supplemented, and any
obligation hereunder may be waived, only by a written instrument executed by the
parties hereto. The waiver by either party of a breach of any provision of this
Agreement shall not operate as a waiver of any subsequent breach.
(b) No failure on the part of any party to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver hereof, nor
shall any single or partial exercise of any such right or remedy by such party
preclude any other or further exercise thereof or the exercise
8
<PAGE>
of any other right or remedy. All rights and remedies hereunder are cumulative
and are in addition to all other rights and remedies provided by law, agreement
or otherwise.
(c) The Employee's obligations to the Company and the Company's rights
and remedies hereunder are in addition to all other obligations of the Employee
and rights and remedies of the Company created pursuant to any other agreement.
17. Construction. Each party to this Agreement has had the opportunity to
review this Agreement with legal counsel. This Agreement shall not be construed
or interpreted against any party on the basis that such party drafted or
authored a particular provision, parts of or the entirety of this Agreement.
18. Severability. In the event that any provision or provisions of this
Agreement is held to be invalid, illegal or unenforceable by any court of law or
otherwise, the remaining provisions of this Agreement shall nevertheless
continue to be valid, legal and enforceable as though the invalid or
unenforceable parts had not been included therein. In addition, in such event
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible with respect
to those provisions which were held to be invalid, illegal or unenforceable.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement under seal on the date first above written.
MAINTENANCE SPECIALISTS OF AMERICA
INC., A TEXAS CORPORATION
By: /s/ J. Patrick Millinor, Jr.
-------------------------------
J. Patrick Millinor, Jr., President
EMPLOYEE:
/s/ Richard S. Rouse
--------------------------
Richard S. Rouse
9
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF
GROUP MAINTENANCE AMERICA CORP.
AS OF AUGUST 31, 1998
A-ABC Appliance, Inc. (Texas)
A-1 Appliance & Air Conditioning, Inc. (Texas)
A-1 Mechanical of Lansing, Inc. (Michigan)
AA Advance Air, Inc. (Florida)
AA JARL, Inc. (Texas) (dba Jarrell Plumbing)
Air Conditioning and Heating Service, Inc. (Colorado)
Air Conditioning Engineers, Inc. (Michigan)
Air Conditioning, Plumbing and Heating Service Co., Inc. (Colorado)
Aircon Energy Incorporated (California)
Airtron, Inc. (Delaware)
Airtron of Central Florida, Inc. (Florida)
All Service Electric, Inc. (Florida)
Arkansas Mechanical Services, Inc. (Arkansas)
Atlantic Industrial Constructors, Inc. (Virginia)
Barr Electric Corp. (Illinois)
Callahan Roach Products & Publications, Inc. (Colorado)
Central Air Conditioning Contractors, Inc. (Delaware)
Central Carolina Air Conditioning Company (North Carolina)
Charlie Crawford, Inc. (Texas)
Clark Converse Electric Service, Inc. (Ohio)
Colonial Air Conditioning, Inc. (Connecticut)
Commercial Air Holding Corp. (Maryland)
Commercial Air, Power and Cable, Inc. (Maryland)
Costner Brothers, Inc. (South Carolina)
Divco, Inc. (Washington)
Dynamic Software Corporation (Maryland)
Evans Services, Inc. (Alabama)
The Fairfield Company (Delaware)
Ferguson Electric Corporation (Delaware)
Gilbert Mechanical Contractors, Inc. (Minnesota)
GroupMAC Holding Corp. (Delaware)
GroupMAC Management Co. (Delaware)
HPS Plumbing Services, Inc. (California)
Hallmark Air Conditioning, Inc. (Texas)
Hungerford Mechanical Corporation (Virginia)
J. D. Steward Air Conditioning, Inc. (Colorado)
Jerry Albert Air Conditioning, Inc. (Texas)
K & N Plumbing, Heating and Air Conditioning, Inc. (Texas)
<PAGE>
Laney's, Inc. (Delaware)
Linford Service Co. (California)
MacDonald-Miller Co., Inc. (Washington)
MacDonald-Miller Industries, Inc. (Washington)
MacDonald-Miller Service, Inc. (Washington)
Masters, Inc. (Maryland)
Mechanical Interiors, Inc. (Texas)
Merritt Island Heat & Air, Inc. (Delaware)
New Construction Air Conditioning, Inc. (Michigan)
Noron, Inc. (Ohio)
Paul E. Smith Co., Inc. (Indiana)
Phoenix Electric Company (Delaware)
Ray and Claude Goodwin, Inc. (Florida)
Reliable Mechanical, Inc. (Delaware)
Romanoff Electric Corp. (Delaware)
Sibley Services, Incorporated (Tennessee)
Southeast Mechanical Service, Inc. (Florida)
Sterling Air Conditioning, Inc. (Texas)
Sun Plumbing, Inc. (Florida)
Team Mechanical, Inc. (Utah)
United Acquisition Corp. (Iowa) (dba United Service Alliance)
Valley Wide Plumbing and Heating, Inc. (Colorado)
Van's Comfortemp Air Conditioning, Inc. (Florida)
Vantage Mechanical Contractors, Inc. (Maryland)
Wade's Heating and Cooling, Inc. (Florida)
Wiegold & Sons, Inc. (Florida)
Willis Refrigeration, Air Conditioning & Heating, Inc. (Ohio)
Yale Incorporated (Minnesota)
2
<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
September 21, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Group Maintenance
America Corp. on Form S-4 of our report on the financial statements of Masters,
Inc. dated July 24, 1997 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.
September 18, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus constituting part 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
September 21, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ RONALD D. BRYANT
_________________________________________
Ronald D. Bryant
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ DAVID L. HENNINGER
_________________________________________
David L. Henninger
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ CHESTER J. JACHIMIEC
_________________________________________
Chester J. Jachimiec
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ TIMOTHY JOHNSTON
_________________________________________
Timothy Johnston
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ ANDREW JEFFREY KELLY
_________________________________________
Andrew Jeffrey Kelly
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ DONALD L. LUKE
_________________________________________
Donald L. Luke
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ THOMAS B. McDADE
_________________________________________
Thomas B. McDade
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ LUCIAN L. MORRISON
_________________________________________
Lucian L. Morrison
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ JAMES P. NORRIS
_________________________________________
James P. Norris
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ FREDRIC J. SIGMUND
_________________________________________
Fredric J. Sigmund
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ JOHN M. SULLIVAN
_________________________________________
John M. Sullivan
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration by Group Maintenance America Corp., a Texas corporation (the
"Company"), of up to 7,000,000 shares of its Common Stock, $0.001 par value, to
be issued by the Company in connection with proposed acquisitions, the
undersigned officer or director of the Company hereby constitutes and appoints
Randolph W. Bryant and Darren B. Miller, and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, for the undersigned and on the undersigned's behalf and in the
undersigned's name, place and stead, in any and all capacities, to sign, execute
and file a registration statement relating to such securities to be filed with
the Securities and Exchange Commission on such Form as, in the opinion of
counsel for the Company, is appropriate, together with all amendments thereto,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming all the
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 21st day of September, 1998.
/s/ JAMES D. WEAVER
_________________________________________
James D. Weaver
