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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-41947
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GROUP MAINTENANCE AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TEXAS 1711 76-0535259
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
RANDOLPH W. BRYANT
SENIOR VICE PRESIDENT, GENERAL COUNSEL
8 GREENWAY PLAZA, SUITE 1500 AND SECRETARY
HOUSTON, TEXAS 77046 8 GREENWAY PLAZA, SUITE 1500
(713) 860-0100 HOUSTON, TEXAS 77046
(ADDRESS, INCLUDING ZIP CODE, AND (713) 860-0100
TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S PRINCIPAL AND TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
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Copies to:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
711 LOUISIANA STREET, SUITE 2900
HOUSTON, TEXAS 77002-2781
(713) 223-2900
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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7,000,000 SHARES
[LOGO OF GROUP MAC APPEARS HERE]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
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Group Maintenance America Corp., a Texas corporation (collectively with its
subsidiaries, the "Company"), may offer and issue from time to time up to
7,000,000 shares of common stock, par value $0.001 per share ("Common Stock"),
covered by this Prospectus in connection with business combination
transactions (each, an "Acquisition") involving its acquisition, directly or
indirectly, of businesses, securities or assets of companies doing business in
the Company's industry. The price and other terms at which the Common Stock
will be offered shall be determined by negotiations between the Company and
the companies to be directly or indirectly acquired. The Company does not
expect to pay any underwriting discounts or commissions, but it may pay
finder's fees from time to time with respect to specific acquisitions. Any
person receiving such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"). The
Company will pay all expenses of this Offering.
As of June 30, 1998, 26,415,243 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 July 16, 1998, the last reported sales price of the
Common Stock on the New York Stock Exchange was $18 3/16 per share.
Persons receiving shares of the Common Stock offered hereby may be
contractually required to hold some portions of those shares for periods of up
to two years. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares by
affiliates of the businesses the Company acquires for a period of one year
from the date of acquisition of the shares of Common Stock (or such shorter
period as the Securities and Exchange Commission may prescribe).
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
July ., 1998
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<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.................................................................. 31
Management................................................................ 39
Related Party Transactions................................................ 50
Security Ownership of Certain Beneficial Owners and Management............ 51
Description of Capital Stock.............................................. 52
Description of Credit Agreement........................................... 54
Shares Eligible for Future Sale........................................... 56
Plan of Distribution...................................................... 58
Experts................................................................... 58
Available Information..................................................... 59
Index to Financial Statements............................................. F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUB-
SEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
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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 quarter ending March 31 of the relevant
year. Upon completion of the IPO on November 13, 1997, the Company's fiscal
year was changed to the calendar year.
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services to residential and commercial/industrial customers. Since inception,
the Company has acquired 48 platform companies and has one additional probable
platform acquisition which represent $669.9 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, and its
telephone number is (713) 860-0100.
RISK FACTORS
An investment in the shares of Common Stock involves significant risks that a
potential investor should consider carefully. See "Risk Factors" beginning on
page 4 for certain information that should be considered by prospective
investors of the Common Stock offered hereby.
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors in the Common Stock offered hereby should consider carefully the
following factors before deciding to invest in the Common Stock.
DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF OPERATING SYSTEMS AND POLICIES
As a rapidly growing provider of HVAC, plumbing and electrical services, the
Company is faced with the development, implementation and integration of
Company-wide policies and systems related to its operations. The Company plans
to implement and integrate certain information and operating systems and
procedures for its subsidiaries including, but not limited to, accounting
systems, employment and human resources policies, uniform purchasing programs
and certain centralized marketing programs. Its subsidiaries may need to
modify certain systems and policies they have utilized historically to
implement the Company's systems and policies. As a result of the Company's
decentralized operating strategy, there can be no assurance that the Company's
operating systems and policies will be successfully implemented at the
subsidiary level or that the Company will be successful in monitoring the
performance of the subsidiaries. Furthermore, much of the Company's management
group has been assembled only recently, and a significant number of the
Company's management group has not worked in the HVAC, plumbing and electrical
service industries prior to joining the Company. There can be no assurance
that the management group will be able to manage the combined entity or to
implement effectively the Company's operating strategy, internal growth
strategy and acquisition program. The Company may experience delays,
complications and expenses in implementing, integrating and operating such
systems and in managing its businesses, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring residential and
commercial contracting businesses that install or maintain, repair and replace
HVAC, plumbing, electrical and other systems and equipment in existing homes
and commercial buildings and in homes and commercial buildings under
construction in its existing and new markets. The Company's acquisition
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company's business, financial condition and results of
operations. These risks include the possibility of the adverse effect on
existing operations of the Company from the diversion of management attention
and resources to acquisitions, the possible loss of acquired customer bases
and key personnel, including service technicians and managers, possible
adverse effects on earnings resulting from amortization of goodwill created in
purchase transactions and the contingent and latent risks associated with the
past operations and other unanticipated problems arising in the acquired
businesses. The success of the Company's acquisition strategy will depend on
the extent to which it is able to acquire, successfully absorb and profitably
manage additional businesses, and no assurance can be given that the Company's
strategy will succeed. The increasing competition for suitable acquisition
targets could limit the Company's ability to locate suitable acquisition
targets and could increase the cost of purchasing such acquisition targets.
EXPOSURE TO DOWNTURNS IN HOUSING STARTS OR NEW COMMERCIAL CONSTRUCTION
A substantial portion of the Company's business involves installation of
HVAC and/or plumbing systems in newly constructed residences and commercial
buildings. The extent to which the Company is able to maintain or increase
revenues from new installation services in the residential market will depend
in part on the levels of housing starts from time to time in the geographic
markets in which it operates and likely will reflect the cyclical nature of
the housing industry. The housing industry is affected significantly by
changes in general and local economic conditions, such as employment and
income levels, the availability and cost of financing for home buyers
(including the continued deductibility of mortgage interest in determining
federal income tax), consumer confidence and housing demand. The level of new
commercial installation services is similarly affected by fluctuations in the
level of new construction of commercial buildings in the markets in which the
Company operates, due to local economic conditions, changes in interest rates
and other similar factors. Downturns in the
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levels of housing starts and/or new commercial construction could have a
material adverse effect on the Company's business, financial condition and
results of operations. See"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality and Cyclicality."
AVAILABILITY OF TECHNICIANS
The Company's ability to provide high-quality HVAC, plumbing and electrical
services on a timely basis requires an adequate supply of skilled technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified technicians, and there can be
no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor
expenses will not increase as a result of a shortage in the supply of skilled
technicians or that the Company will not have to curtail its planned internal
growth as a result of labor shortages. See"Business--Centralized Support
Services--Employee Screening, Training and Development."
WEATHER
The Company's service business tends to be adversely affected by moderate
weather patterns, with comparatively warm winters and cool summers generally
reducing the demand for the Company's maintenance, repair and replacement
services. Additionally, the Company's new installation business is adversely
affected by extremely cold weather and by the amount of precipitation that an
area receives during the construction season. Prolonged climate or weather
conditions may cause unpredictable fluctuations in operating results. The
Company's operations are also subject to seasonal variations. See"Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality and Cyclicality."
COMPETITION
The HVAC, plumbing and electrical service industries are highly fragmented
with low barriers to entry. Therefore, these industries are very competitive
and are served principally by small, owner-operated private companies. Certain
of these smaller competitors have lower overhead cost structures and may be
able to provide their services at lower rates than the Company. The Company
believes the HVAC, plumbing and electrical service industries are subject to
rapid consolidation on both a national and a regional scale. Several
companies, in addition to the Company, have completed initial public
offerings, have begun consolidation efforts and have entered into some of the
Company's markets. Other companies, including unregulated affiliates of
electric and gas public utilities and HVAC equipment manufacturers, have
entered the industry and others may do so in the future. These consolidators
and other entrants may have greater financial resources, name recognition, or
other competitive advantages than the Company and may be willing to pay higher
prices than the Company for the same opportunities. Consequently, the Company
may encounter significant competition in its efforts to achieve its growth
objectives. See"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and senior management personnel, and the Company will depend on the
senior management of significant businesses it acquires in the future. The
business of the Company could be affected adversely if any of these persons
does not continue in his or her management role with the Company and the
Company is unable to attract and retain qualified replacements.
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
The Company historically has financed capital expenditures and acquisitions
primarily through the issuance of equity securities, secured bank borrowings
and internally generated cash flow. The timing, size and success of
5
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the Company's acquisition efforts and the associated capital commitments
cannot be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for a significant portion of
the consideration to be paid. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to initiate and maintain its acquisition
program. There can be no assurance the Company will be able to raise
sufficient capital at reasonable rates, if at all. If the Company does not
have sufficient cash resources, its growth could be limited unless it is able
to obtain additional capital through debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
As of June 30, 1998, the executive officers, directors and certain founding
shareholders of the Company will beneficially own in the aggregate
approximately 23% 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 June 30, 1998, 26,415,243 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 5.8
million shares in connection with the acquisition of the Post Offering
Companies. The remaining shares outstanding may be resold publicly only
following their effective registration under the Securities Act or pursuant to
an available exemption (such as provided by Rule 144 following a holding
period for unregistered shares) from the registration requirements of the
Securities Act. The holders of approximately 3.6 million shares of Common
Stock have the right (subject to minimum participation requirements) to
require the Company to register such shares pursuant to the Securities Act for
the purpose of allowing them to effect a public offering of all or a portion
of such shares (a "Demand Registration"), and such holders and substantially
all of the other holders of unregistered shares of Common Stock also have the
right to require the Company to register their shares of Common Stock under
the Securities Act in connection with a public offering of Common Stock
contemplated by the Company (a "Piggyback Registration"). The number of Demand
Registrations that may be requested is limited, and the Company will not be
obligated to effect a Demand Registration within 60 days prior to the proposed
filing date of a registration statement relating to an offering by the Company
of its securities (with certain exceptions) or within 120 days after the
effective date of such a registration statement. Further, the Company may
delay a Demand Registration for up to 120 days if the Company determines that
such registration would be detrimental to the Company. In connection with a
Piggyback Registration involving an underwritten offering, the number of
shares to be registered by selling shareholders may be limited or eliminated
entirely if the managing underwriter determines marketing factors require a
limitation on the number of shares to be underwritten. See "Shares Eligible
for Future Sale." The holders of Demand Registration rights have agreed with
the Company and the underwriters of the Company's IPO (the "Underwriters") not
to exercise their respective demand rights for the two year period following
the IPO except for Gordon A. Cain who has agreed not to exercise his demand
rights for one year. In addition, such holders and the holders of Common Stock
issued in connection with the acquisition of businesses have agreed with the
Company that they generally will not sell,
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transfer or otherwise dispose of any of their shares for one year following
the date of acquisition of such shares and for one additional year will limit
sales to no more than 36% of their holdings. Sales made pursuant to Rule 144
must comply with its applicable volume limitations and other requirements. At
the date of this Prospectus, approximately 9.1 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 3.6 million shares of Common Stock, of which only warrants
and options to purchase approximately 0.8 million shares are exercisable
within 60 days after the date of this Prospectus. The Company intends to
register substantially all the shares subject to these options and warrants
under the Securities Act for public resale.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
RESTRICTIONS ON DIVIDENDS; DEPENDENCE ON SUBSIDIARIES
The Company will conduct its operations through subsidiaries, and is
therefore dependent upon the cash flow of and the transfer of funds by those
subsidiaries to the Company in the form of loans, dividends or otherwise to
meet its financial obligations. Each subsidiary of the Company will be a
distinct legal entity and will have no obligation, contingent or otherwise, to
transfer funds to the Company. The Company's ability to pay dividends on the
Common Stock is restricted by the terms of the $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 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
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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.
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PRICE RANGE OF COMMON STOCK
The Common Stock trades on the New York Stock Exchange under the symbol
"MAK." The following table sets forth the high and low sale prices for the
Common Stock (as reported by National Quotation Bureau, LLC) for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW
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<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 July
16, 1998).............. 18 1/4 17 1/2
</TABLE>
On July 16, 1998, the closing price of the Common Stock on the New York
Stock Exchange was $18 3/16 and there were 321 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar for the
Common Stock. The number of record holders does not bear any relationship to
the number of beneficial owners of the Common Stock. The Company has never
declared a dividend with respect to its Common Stock.
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CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of March 31, 1998 and (ii) the pro forma capitalization of the
Company as of March 31, 1998, giving effect to the acquisition of the Post-
Offering Companies (not included in the Company's historical Consolidated
Condensed Balance Sheet as of March 31, 1998) 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 MARCH 31, 1998
--------------------
ACTUAL PRO FORMA
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<S> <C> <C>
Short-Term Debt, Including Current Maturities.......... $ 1,466 $ 4,368
======== ========
Long-Term Debt, Net of Current Maturities.............. $ 21,313 $ 76,772
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; 23,309 shares issued and outstanding;
26,892 shares issued and outstanding, pro forma(1).... 23 27
Additional Paid-In Capital............................. 198,776 247,592
Retained Deficit....................................... (30,239) (30,239)
-------- --------
Total Shareholders' Equity............................. 168,560 217,380
-------- --------
Total Capitalization................................... $190,693 $294,972
======== ========
</TABLE>
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(1) Excludes approximately 3.6 million shares of Common Stock issuable upon
exercise of outstanding stock options and warrants. See "Management--
Option Grants" and "--Stock Awards Plan."
DIVIDEND POLICY
The Company has not paid a dividend on Common Stock since its incorporation
and does not anticipate paying any dividends on Common Stock in the
foreseeable future because it intends to retain earnings to finance the
expansion of its business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
relevant factors. The Bank Credit Agreement restricts the payment of
dividends. See "Description of Bank Credit Agreement."
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<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 March 31, 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 March 31, 1998 and for the three month
period then ended are derived from the Company's unaudited financial
statements included elsewhere herein. In the opinion of the Company's
management, the financial statements for March 31, 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-Offering Companies") purchased during June and July
1997 and 13 additional companies (the "Offering Acquisition Companies" and,
together with Airtron and the Pre-Offering Companies, the "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-Offering Companies") and the effects of the acquisition of 12 companies
in the second quarter of 1998 and one probable future acquisition (the "Second
Quarter Post-Offering Companies", and together with the First Quarter Post-
Offering Companies, the "Post-Offering 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 HISTORICAL
THREE MONTHS THREE MONTHS PRO FORMA TEN MONTHS FISCAL YEAR ENDED FEBRUARY 28 OR 29,(3)
ENDED ENDED YEAR ENDED ENDED ------------------------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998(1) 1998(2) 1997(1) 1997(2) 1997 1996 1995 1994
------------ ------------ ------------ ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $152,809 $107,092 $669,912 $138,479 $81,880 $73,765 $72,226 $66,281
Gross Profit............ 33,794 24,386 156,226 36,717 23,374 21,091 21,766 18,977
Selling, General and
Administrative
Expenses............... 25,855(4) 18,994 106,921(4) 35,862(5) 19,811 17,615 20,282(6) 15,760
Goodwill
Amortization(7)........ 1,391 821 5,562 633 -- -- -- --
-------- -------- -------- -------- --------- --------- --------- ---------
Income from Operations.. 6,548 4,571 43,743 222 3,563 3,476 1,484 3,217
Interest Income
(Expense), Net......... (1,366) (229) (5,465) (1,144) 89 68 76 127
Other Income, Net....... 43 (5) 633 112 256 246 140 33
-------- -------- -------- -------- --------- --------- --------- ---------
Income (Loss) Before
Income Tax Provision... 5,225 4,337 38,911 (810) 3,908 3,790 1,700 3,377
Income Tax Provision.... 2,648 2,065 17,789 2,832 1,572 1,651 911 1,300
-------- -------- -------- -------- --------- --------- --------- ---------
Net Income (Loss)....... $ 2,577 $ 2,272 $ 21,122 $ (3,642) $ 2,336 $ 2,139 $ 789 $ 2,077
======== ======== ======== ======== ========= ========= ========= =========
Net Earnings (Loss) Per
Share:
Basic................. $ 0.10 $ 0.10 $ 0.79 $ (0.34)
======== ======== ======== ========
Diluted............... $ 0.09 $ 0.10 $ 0.77 $ (0.34)
======== ======== ======== ========
Weighted Average Shares
Outstanding:
Basic................. 26,892 23,141 26,892 10,800
======== ======== ======== ========
Diluted............... 27,283 23,495 27,283 10,800
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FEBRUARY 28 OR 29,
MARCH 31, MARCH 31, DECEMBER 31, -------------------------------
1998 1998 1997 1997 1996 1995 1994
--------- --------- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash
Equivalents............ $ -- $ 5,715 $ 25,681 $ 4,339 $ 1,774 $ 650 $ 186
Working Capital......... 43,418 32,723 40,478 6,337 3,285 4,561 3,473
Total Assets............ 393,065 267,143 192,687 27,153 28,282 23,528 15,221
Total Debt.............. 81,960 23,599 2,938 1,290 -- -- --
Shareholders' Equity.... 217,380 168,560 136,653 5,991 6,373 5,955 2,175
</TABLE>
- -------
(1) Pro forma financial data give effect to the acquisitions that are
described in the notes to consolidated financial statements, as if they
had all occurred at January 1, 1997. Such results are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred on January 1, 1997.
(2) The Company's acquisitions of the Founding Companies (other than Airtron),
the First Quarter Post-Offering 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) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31.
(4) Reflects a decrease of $117,000 and $21.5 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 three months ended
March 31, 1998 and the year ended December 31, 1997, 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.
(5) Includes $7.0 million of non-recurring, non-cash compensation expenses
related to the reverse acquisition of GroupMAC during the ten months ended
December 31, 1997.
(6) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(7) Consists of amortization recorded or to be recorded, as a result of the
acquisition of the GroupMAC Companies, over a 40-year period and computed
on the basis described in the notes to consolidated financial statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company's revenues are derived from providing new installation services
and maintenance, repair and replacement services for HVAC, plumbing,
electrical and other systems to residential and commercial customers.
Approximately 48% of the Company's combined 1997 revenues of $669.9 million
were derived from new installation services and 52% were attributable to
maintenance, repair and replacement services. Maintenance, repair and
replacement revenues are recognized as the services are performed, except for
service contract revenue, which is recognized ratably over the life of the
contract. Revenues from fixed price installation and retrofit contracts are
generally accounted for on a percentage-of-completion basis, using the cost-
to-cost method.
The Company intends to make additional acquisitions across the three main
technical disciplines (HVAC, plumbing and electrical) within the residential
and commercial markets. The Company's long-term objective is to develop
maintenance, repair and replacement capabilities (both residential and
commercial) in the top 100 markets within the United States, while offering
new installation services across a more limited range of markets where new
construction in the residential and/or commercial sectors is expected to out-
pace the national average over the long term. Over time, this objective is
expected to shift revenues of the Company to an increased percentage of
service revenue.
Cost of services consists primarily of components, parts and supplies
related to the Company's new installation and maintenance, repair and
replacement services, salaries and benefits of service and installation
technicians, subcontracted services, depreciation, fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for prior owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
The Company's diversified business mix is reflected to varying degrees in
its gross margins. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
gross margins, averaging 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 21.9% 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 $20.4 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
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-Offering Companies through a combination of cash, preferred stock, Common
Stock and warrants to purchase shares of Common Stock of GroupMAC. During the
fourth quarter of 1997, the Company acquired, concurrently with the IPO, the
Offering Acquisition Companies through a combination of cash and Common Stock
of the Company. During the first and second quarters of 1998 the Company
acquired the Post-Offering 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>
TEN MONTHS FISCAL YEAR ENDED
THREE MONTHS ENDED MARCH 31, ENDED FEBRUARY 28 OR 29,
------------------------------- DECEMBER 31, ----------------------------
1998 1997 1997 1997 1996
--------------- -------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $107,092 100.0% $17,425 100.0% $138,479 100.0% $81,880 100.0% $73,765 100.0%
Cost of Services........ 82,706 77.2 12,385 71.1 101,762 73.5 58,506 71.5 52,674 71.4
-------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Gross profit............ 24,386 22.8 5,040 28.9 36,717 26.5 23,374 28.5 21,091 28.6
Selling, General and
Administrative
Expenses............... 19,815 18.5 6,100 35.0 36,495 26.3 19,811 24.1 17,615 23.9
-------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Income (Loss) from
Operations............. 4,571 4.3 (1,060) (6.1) 222 0.2 3,563 4.4 3,476 4.7
Interest, Net........... (229) (0.2) 21 0.1 (1,144) (0.8) 89 0.1 68 0.1
Other................... (5) (0.1) 230 1.4 112 -- 256 0.3 246 0.3
-------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Income (Loss) Before
Income Tax Provision... 4,337 4.0 (809) (4.6) (810) (0.6) 3,908 4.8 3,790 5.1
Income Tax Provision
(Benefit).............. 2,065 1.9 (325) (1.8) 2,832 2.0 1,572 1.9 1,651 2.2
-------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Net Income (Loss)....... $ 2,272 2.1% $ (484) (2.8)% $ (3,642) (2.6)% $ 2,336 2.9% $ 2,139 2.9%
======== ===== ======= ===== ======== ===== ======= ===== ======= =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31,1997
Revenues. Revenues increased $89.7 million to $107.1 million for the three
months ended March 31, 1998 from $17.4 million for the three months ended
March 31, 1997. Such increase in revenues included $86.7 million attributable
to the acquisitions of the Pre-Offering Companies in June and July of 1997,
the acquisitions of the Offering Acquisition Companies during November 1997
and the acquisitions of the First Quarter Post-Offering Companies during the
three months ended March 31, 1998. Also contributing to the increase was a
$3.0 million increase in revenues at Airtron. Such increase related to new
installation business, partially offset by a reduction in maintenance, repair
and replacement sales due to adverse weather patterns, particularly in the
Midwestern United States.
Gross Profit. Gross profit increased $19.4 million to $24.4 million for the
three months ended March 31, 1998 from $5.0 million for the three months ended
March 31, 1997. Such increase in gross profit included $19.3
14
<PAGE>
million attributable to the acquisitions of the Pre-Offering Companies in June
and July of 1997, the acquisitions of the Offering Acquisition Companies
during November 1997 and the acquisitions of the First Quarter Post-Offering
Companies during the three months ended March 31, 1998. Gross profit at
Airtron increased by $0.1 million between periods. This increase did not
correlate with the $3.0 million revenue increase as a higher mix of lower
margin new installation work occurred in the current period at the expense of
higher margin replacement revenues. Gross profit margin decreased to 22.8% for
the three months ended March 31, 1998 compared to 28.9% for the three months
ended March 31, 1997 because certain of the GroupMAC Companies' gross profit
margins were considerably lower than those achieved at Airtron.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.7 million to $19.8 million for the three
months ended March 31, 1998 from $6.1 million for the three months ended March
31, 1997. Such increase included $14.1 million attributable to the
acquisitions of the Pre-Offering Companies in June and July of 1997, the
acquisitions of the Offering Acquisition Companies during November 1997 and
the acquisitions of the First Quarter Post-Offering Companies during the three
months ended March 31, 1998. Also contributing to the increase was a $1.8
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 $0.8 million of goodwill
amortization. Offsetting the increases was a $3.0 million reduction due
primarily to prospective reductions in compensation to former owners. As a
percentage of revenues, selling, general and administrative expenses,
excluding corporate expenses and goodwill amortization, decreased to 16.1% for
the three months ended March 31, 1998 from 35.0% for the three months ended
March 31, 1997, respectively, due primarily to the prospective reductions in
compensation to former owners, discussed above.
Net Interest. Net interest increased $0.3 million during the three months
ended March 31, 1998 compared to the same period of the prior year. Interest
charges increased due to borrowings under the Company's credit facility to
fund the cash portion of the acquisition of the Post-Offering Companies. See
"Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $2.4 million to
$2.1 million for the three months ended March 31, 1998 from an income tax
benefit of $0.3 million for the three months ended March 31, 1997. This
increase corresponds with the pretax income increase of $5.1 million between
periods. The effective tax rate for the three months ended March 31, 1998 was
47.6% compared to 40.2% for the three months ended March 31, 1997, resulting
primarily from the non-deductible goodwill amortization of $0.8 million in the
three months ended March 31, 1998.
Ten Months Ended December 31, 1997 Compared to Twelve Months Ended February
28, 1997
Revenues. Revenues increased $56.6 million, or 69.1%, to $138.5 million for
the ten months ended December 31, 1997 from $81.9 million for the twelve
months ended February 28, 1997. The increase in revenues was attributable to
the acquisitions of the Pre-Offering Companies in June and July of 1997 and
the acquisitions of the Offering Acquisition Companies during November 1997.
The increase in revenues was partially offset as the period ended December 31,
1997 included ten months while the period ended February 28, 1997 included
twelve months.
Gross Profit. Gross profit increased $13.3 million, or 56.8%, to $36.7
million for the ten months ended December 31, 1997 from $23.4 million for the
twelve months ended February 28, 1997. The increase in gross profit was
primarily attributable to the acquisitions of the Pre-Offering Companies in
June and July of 1997, the acquisitions of the Offering Acquisition Companies
during November 1997 and lower material costs at Airtron. The increase in
gross profit was partially offset as the period ended December 31, 1997
included ten months while the period ended February 28, 1997 included twelve
months. Gross profit margin decreased 2.0% for the ten months ended December
31, 1997 compared to the twelve months ended December 31, 1997 because certain
of the 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,
15
<PAGE>
non-cash compensation charge related to the issuance of management shares and
options, (iii) the aforementioned acquisitions and (iv) a $4.1 million
increase in corporate expenses representing the formation of the corporate
management team and infrastructure necessary to execute the Company's
operating and acquisition strategies. As a percentage of revenues, selling,
general and administrative expenses, excluding the aforementioned items,
decreased to 17.5% for the ten months ended December 31, 1997 from 24.1% for
the twelve months ended February 28, 1997, respectively, due primarily to
prospective reductions in compensation to former owners, to which they agreed.
These reductions in salaries are in accordance with the terms of their
employment agreements.
Net Interest. Net interest was an expense of $1.1 million for the ten months
ended December 31, 1997. For the twelve months ended February 28, 1997, net
interest income was $0.1 million. Interest charges increased during the ten
months ended December 31, 1997 due to borrowings under the Company's credit
facilities to fund the cash portion of the acquisition of Airtron and the Pre-
Offering Companies. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $1.2 million, or
75.0%, to $2.8 million for the ten months ended December 31, 1997 from $1.6
million for the twelve months ended February 28, 1997 while pre-tax income
decreased $4.7 million. Excluding the effect of the $7.2 million non-
deductible compensation charge discussed above, the effective tax rate for the
ten months ended December 31, 1997 was 44.2% compared to 40.2% for the twelve
months ended February 28, 1997, resulting primarily from the non-deductible
goodwill amortization of $0.6 million in the ten months ended December 31,
1997.
Twelve Months Ended February 28, 1997 Compared to Twelve Months Ended
February 29, 1996
Revenues. Revenues increased $8.1 million, or 11.0%, to $81.9 million for
the twelve months ended February 28, 1997 from $73.8 million for the twelve
months ended February 29, 1996. The increase in revenues was attributable to
increased market penetration in new residential construction in the
Indianapolis, Indiana and Dallas, Texas markets, resulting in a larger volume
of new home starts.
Gross Profit. Gross profit increased $2.3 million, or 10.9%, to $23.4
million for the twelve months ended February 28, 1997 from $21.1 million for
the twelve months ended February 29, 1996. Gross profit margin remained
relatively constant at 28.5% and 28.6% for the twelve months ended February
28, 1997 and February 29, 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.2 million, or 12.5%, to $19.8 million for
the twelve months ended February 28, 1997 from $17.6 million for the same
period ended February 29, 1996. Such increase was primarily attributable to an
increase in compensation, vehicle leases and professional fees of the Company.
As a percentage of revenues, selling, general and administrative expenses
remained relatively constant at 24.1% and 23.9% for the twelve months ended
February 28, 1997 and February 29, 1996, respectively.
Income Tax Provision. The income tax provision decreased $0.1 million, or
5.9%, to $1.6 million for the twelve months ended February 28, 1997 from $1.7
million for the same period ended February 29, 1996. The effective tax 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.
16
<PAGE>
MACDONALD-MILLER
MacDonald-Miller was founded in 1965 and provides a full range of HVAC
services to commercial and industrial customers in the Northwestern United
States including design and engineering; fabrication and installation of sheet
metal, piping, plumbing and controls; and HVAC service and maintenance.
MacDonald-Miller's revenues for fiscal 1996 were $66.1 million and income from
operations was $2.1 million. MacDonald- Miller derived 59% of its 1996
revenues from maintenance, repair and replacement services and 41% from new
installation services. MacDonald-Miller is headquartered in Seattle,
Washington and has facilities in Seattle and Portland, Oregon.
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $39,534 100.0% $45,508 100.0% $66,059 100.0% $52,184 100.0% $54,560 100.0%
Cost of Services........ 32,256 81.6 36,927 81.1 56,373 85.3 45,192 86.6 46,400 85.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 7,278 18.4 8,581 18.9 9,686 14.7 6,992 13.4 8,160 15.0
Selling, General and
Administrative
Expenses............... 6,088 15.4 7,338 16.2 7,632 11.6 5,567 10.7 6,239 11.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,190 3.0 1,243 2.7 2,054 3.1 1,425 2.7 1,921 3.5
</TABLE>
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
17
<PAGE>
market presence in the Seattle, Washington and Portland, Oregon metropolitan
areas, fueled by continued strength of commercial activity in the Northwest.
Gross Profit. Gross profit increased $1.1 million, or 12.8%, from $8.6
million for the year ended December 31, 1995 to $9.7 million for the year
ended December 31, 1996. Gross margin decreased from 18.9% to 14.7% due to the
acceptance of certain lower margin projects and increased direct costs related
to the rapid revenue growth experienced in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 4.1%, from $7.3 million for
the year ended December 31, 1995 to $7.6 million for the year ended December
31, 1996. The increase in these expenses was directly attributable to
incremental costs incurred to implement a job cost and accounting software
conversion and other management information systems processes and
infrastructure. As a percentage of revenues, selling, general and
administrative expenses decreased from 16.2% to 11.6% due to the increased
revenue levels.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $6.0 million, or 15.2%, from $39.5 million for
the year ended December 31, 1994 to $45.5 million for the year ended December
31, 1995. The increase in revenues was attributable to a $1.2 million, or
10.5%, increase in revenues from Service and Maintenance operations, a $1.9
million, or 27.8%, increase in revenues from the company's Special Projects
and Tenant Improvement operations, and a $2.9 million, or 12.6%, increase in
revenues from installation operations, including design and build projects,
retrofits and remodeling. The broad-based increase in revenues was primarily
volume driven and attributable to generally increasing activity in the Seattle
area, the Company's principal market, and continued efforts to increase the
underlying base of service and maintenance business.
Gross Profit. Gross profit increased $1.3 million, or 17.8%, from $7.3
million for the year ended December 31, 1994 to $8.6 million for the year
ended December 31, 1995. Gross margin increased from 18.4% to 18.9% for the
years ending December 31, 1994 and 1995, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 19.7%, from $6.1 million
for the year ended December 31, 1994 to $7.3 million for the year ended
December 31, 1995. The increase was attributable generally to the higher level
of revenues and an approximate $200,000 increase relating to the initial
stages of the aforementioned job cost and accounting software conversion and
other management information system processes and infrastructure that
continued into 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 15.4% to 16.2% for the years ending
1994 and 1995, respectively.
MASTERS
Masters, Inc. ("Masters") was founded in 1986 and provides HVAC and plumbing
services in the Washington, D.C. area. Masters' revenues for fiscal 1996 were
$39.8 million and income from operations for fiscal 1996 was $1.5 million.
Masters derived 100% of its 1996 revenues from new installation services.
Masters is headquartered in Gaithersburg, Maryland and has its facilities in
Gaithersburg and Chantilly, Virginia.
RESULTS OF OPERATIONS--MASTERS
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $30,327 100.0% $35,160 100.0% $39,826 100.0% $29,088 100.0% $31,166 100.0%
Cost of Services........ 28,018 92.4 31,746 90.3 35,854 90.0 26,308 90.4 27,956 89.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,309 7.6 3,414 9.7 3,972 10.0 2,780 9.6 3,210 10.3
Selling, General and
Administrative
Expenses............... 1,664 5.5 2,373 6.7 2,484 6.3 1,739 6.0 2,015 6.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 645 2.1 1,041 3.0 1,488 3.7 1,041 3.6 1,195 3.8
</TABLE>
For a discussion of periods subsequent to September 30, 1997, see "--Results
of Operations--GroupMac and Subsidiaries."
18
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues. Revenues increased $2.1 million, or 7.2%, from $29.1 million for
the nine months ended September 30, 1996 to $31.2 million for the nine months
ended September 30, 1997. The increase in revenues was primarily attributable
to an additional volume of housing starts generated from existing customers.
Gross Profit. Gross profit increased $0.4 million, or 14.3%, from $2.8
million for the nine months ended September 30, 1996 to $3.2 million for the
nine months ended September 30, 1997. Gross margin increased from 9.6% for the
nine months ended September 30, 1996 to 10.3% for the nine months ended
September 30, 1997. The increase was primarily attributable to a higher mix of
fire sprinkler installations that typically produce higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 17.6%, from $1.7 million
for the nine months ended September 30, 1996 to $2.0 million for the nine
months ended September 30, 1997. The increase in selling, general and
administrative expenses was primarily due to staff additions to keep pace with
the growth of the company, increased bad debts and an increase in professional
fees. As a percentage of revenues, selling, general and administrative
expenses increased from 6.0% to 6.5% over the respective periods.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $4.6 million, or 13.1%, from $35.2 million for
the year ended December 31, 1995 to $39.8 million for the year ended December
31, 1996. The increase was attributable to an additional volume of housing
starts generated from existing customers and increased market penetration.
Gross Profit. Gross profit increased $558,000, or 16.4%, from $3.4 million
for the year ended December 31, 1995 to $4.0 million for the year ended
December 31, 1996. Gross margins increased slightly from 9.7% to 10.0% for the
years ending 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $111,000, or 4.6%, from $2.4 million for the
year ended December 31, 1995 to $2.5 million for the year ended December 31,
1996. As a percentage of revenues, selling, general and administrative
expenses decreased from 6.7% to 6.3% over the same period. This decrease was
primarily attributable to the net increase in revenue and the relatively fixed
nature of these expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $4.9 million, or 16.2%, from $30.3 million for
the year ended December 31, 1994 to $35.2 million for the year ended December
31, 1995. The increase was attributable to an additional volume of housing
starts generated from existing customers, increased market penetration and a
greater volume of HVAC new installations resulting from management efforts to
further expand this service line.
Gross Profit. Gross profit increased $1.1 million, or 47.8%, from $2.3
million for the year ended December 31, 1994 to $3.4 million for the year
ended December 31, 1995. Gross margin increased from 7.6% to 9.7% due to a
greater volume of higher margin HVAC new installations coupled with margin
expansion in plumbing new installations from more efficient production.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $709,000, or 41.7%, from $1.7 million for
the year ended December 31, 1994 to $2.4 million for the year ended December
31, 1995. As a percentage of revenues, selling, general and administrative
expenses increased from 5.5% to 6.7% due to an increase in bad debt expense,
an increase in personnel necessary to effectively manage the Company's rapid
growth and the addition of an executive incentive program.
19
<PAGE>
K&N
K&N Plumbing, Heating and Air Conditioning, Inc. ("K&N") was founded in 1978
and provides plumbing services to the residential new construction market in
the Dallas, Fort Worth and Austin, Texas and Las Vegas, Nevada markets. K&N
also designs, sells, installs and services HVAC systems in Dallas and Fort
Worth. K&N's revenues for fiscal 1996 were $24.3 million and income from
operations was $936,000. K&N derived 89% of its 1996 revenues from new
installation services and 11% from maintenance, repair and replacement
services. K&N is headquartered in Arlington, Texas and has facilities in
Arlington and Austin, Texas and Las Vegas, Nevada.
RESULTS OF OPERATIONS--K&N
The following table sets forth certain unaudited financial data for the
periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1995 1996 1997 1996 1997(1)
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $21,458 100.0% $22,709 100.0% $24,279 100.0% $11,893 100.0% $12,355 100.0%
Cost of Services........ 18,843 87.8 20,350 89.6 20,705 85.3 10,433 87.7 10,662 86.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,615 12.2 2,359 10.4 3,574 14.7 1,460 12.3 1,693 13.7
Selling, General and Ad-
ministrative
Expenses............... 2,275 10.6 2,478 10.9 2,638 10.8 1,349 11.4 1,605 13.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 340 1.6 (119) (0.5) 936 3.9 111 0.9 88 0.7
</TABLE>
- --------
(1) The operating results of K&N represent six months of activity, even though
K&N was acquired, for accounting purposes, by Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
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.
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
20
<PAGE>
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-Offering Companies
A-ABC Appliance, Inc. and A-1 Appliance and Air Conditioning, Inc.
(collectively, "A-ABC"), founded in 1976 and 1994, respectively, provide
maintenance, repair and replacement services for HVAC equipment, as well as
home appliances, to residential customers in the Dallas and Garland, Texas
areas. A-ABC also offers plumbing repair and replacement services. Combined
revenues for fiscal 1996 totaled $8.5 million and combined income from
operations totaled $333,000. A-ABC is headquartered in Dallas, Texas.
Callahan Roach Products & Publications, Inc. ("Callahan Roach") and its
affiliates provide marketing products and pricing programs nationally to over
1,300 independent service companies, manufacturers and associations. Callahan
Roach's revenues for fiscal 1996 were $1.9 million and income from operations
for fiscal 1996 was $8,257. Callahan Roach, founded in 1989, is headquartered
in Englewood, Colorado and has facilities in Dublin, Ohio and Englewood,
Colorado.
Costner Brothers, Inc. ("Costner") was founded in 1985 and provides HVAC
maintenance, repair and replacement services to residential customers in the
Rock Hill, South Carolina and Charlotte, North Carolina areas. Costner's
revenues for fiscal 1996 were $3.0 million, and income from operations was
$7,487. Costner is headquartered in Rock Hill, South Carolina.
Hallmark Air Conditioning, Inc. ("Hallmark") was founded in 1951 and
provides HVAC maintenance, repair and replacement services to residential
customers in the Houston, Texas area. Hallmark's revenues for fiscal 1996 were
$6.5 million, and income from operations was $8,749. Hallmark is headquartered
in Houston, Texas and has facilities in Houston and San Antonio, Texas.
21
<PAGE>
AA JARL, Inc. (d/b/a Jarrell Plumbing) ("Jarrell") was founded in 1959 and
provides plumbing repair services to residential customers in the Houston,
Texas area. Jarrell's revenues for the fiscal year ended February 28, 1997
were $1.2 million and it had income from operations of $34,547 during that
year. Jarrell is headquartered in Houston, Texas.
Way Residential (the residential service business formerly owned by Way
Service, Inc.) was founded in 1977 and provides HVAC services to residential
customers in Houston, Texas. Way Residential's revenues for fiscal 1996 were
$659,000 and income from operations was $123,000. Way Residential's operations
have been combined with Hallmark's operations.
Offering Acquisition Companies
Central Carolina Air Conditioning Company ("Central Carolina") was founded
in 1967 and provides HVAC maintenance, repair and replacement services to
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas. Central Carolina's revenues for fiscal 1996 were $8.2
million and income from operations was $381,000. In addition, Central Carolina
has deferred $967,000 of service contract revenues due to five-year extended
service contracts. Other GroupMAC Companies typically do not have extended
service contracts in excess of one year. Central Carolina is headquartered in
Greensboro, North Carolina.
Evans Services, Inc. ("Evans") was founded in 1901 and provides plumbing and
HVAC services to residential customers in the Birmingham, Alabama area. Evans'
revenues for fiscal 1996 were $2.3 million and income from operations was
$86,000. Evans is headquartered in Birmingham, Alabama.
Paul E. Smith Co., Inc. ("Paul E. Smith") was founded in 1967 and installs
and maintains, repairs and replaces plumbing systems in new and existing
residences in the Indianapolis, Indiana area. Paul E. Smith's revenues for
fiscal 1996 were $5.6 million and income from operations was $297,000. Paul E.
Smith is headquartered in Indianapolis, Indiana.
Van's Comfortemp Air Conditioning, Inc. ("Van's") was founded in 1965 and
provides HVAC services to residential and light commercial customers in the
Palm Beach-Ft. Lauderdale, Florida area. Van's revenues for fiscal 1996 were
$4.3 million and income from operations was $7,000. Van's is headquartered in
Delray Beach, Florida.
Willis Refrigeration, Air Conditioning & Heating, Inc. ("Willis") was
founded in 1954 and installs, maintains and repairs HVAC systems in new and
existing residences in the greater Cincinnati and northern Kentucky areas.
Willis' revenues for fiscal 1996 were $6.8 million and income from operations
was $542,000. Willis is headquartered in Cincinnati, Ohio.
22
<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,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997(2)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $38,481 100.0% $43,216 100.0% $48,964 100.0% $23,255 100.0% $24,886 100.0%
Cost of Services ....... 25,397 66.0 27,537 63.7 30,628 62.6 14,762 63.5 14,799 59.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 13,084 34.0 15,679 36.3 18,336 37.4 8,493 36.5 10,087 40.5
Selling, General and Ad-
ministrative
Expenses................ 11,432 29.7 14,210 32.9 16,506 33.7 8,082 34.7 8,277 33.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,652 4.3 1,469 3.4 1,830 3.7 411 1.8 1,810 7.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
(2) The operating results of the Other Residential Service Companies,
including Hallmark and A-ABC, represent six months of activity, even
though Hallmark and A-ABC were acquired, for accounting purposes, by
Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
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
23
<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.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased $4.7 million, or 12.2%, from $38.5 million in
fiscal 1994 to $43.2 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to incremental revenues from an
acquisition made by A-ABC in late 1994, the expansion of the customer base at
Central Carolina to include the commercial sector and an increased emphasis on
the selling of service agreements and a higher level of replacement revenues
at Van's.
Gross Profit. Gross profit increased $2.6 million, or 19.8%, from $13.1
million in fiscal 1994 to $15.7 million in fiscal 1995. The increase in gross
profits was primarily attributable to the expanded revenue volumes. Gross
margin increased from 34.0% to 36.3% for fiscal years 1994 and 1995,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 24.6%, from $11.4 million
in fiscal 1994 to $14.2 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 29.7% to 32.9% due
to incremental overhead at the company acquired in late 1994 by A-ABC,
incremental owners' compensation of $378,000 across the residential service
companies and an overall increase in infrastructure to keep pace with the
internal growth at each company within the group.
OTHER COMMERCIAL SERVICE COMPANIES
Pre-Offering Companies
Charlie Crawford, Inc. (d/b/a Charlie's Plumbing) ("Charlies") was founded
in 1979 and provides plumbing maintenance, repair and replacement services to
commercial and residential customers in the Houston, Texas area and
specializes in the high-rise condominium market in Houston. Charlie's revenues
for fiscal 1996 were $3.1 million, and income from operations was $65,000.
Charlie's is headquartered in South Houston, Texas.
Sibley Services, Incorporated ("Sibley") was founded in 1974 and provides
HVAC and refrigeration maintenance, repair and replacement services to
commercial and industrial customers in the greater Memphis, Tennessee area
which includes northern Mississippi and northeast Arkansas. Sibley also offers
design and build services, including facility automation. Sibley's revenues
for fiscal 1996 were $7.0 million and income from operations was $130,018.
Sibley is headquartered in Memphis, Tennessee.
United Service Alliance ("USA") was founded in 1988 and provides marketing
products and training materials to over 100 member companies across the
country. USA's revenues for fiscal 1996 were $763,000 and income from
operations was $33,000. USA is headquartered in Englewood, Colorado.
Offering Acquisition Companies
All Service Electric, Inc. ("All Service") was founded in 1990 and provides
electrical contracting services (including new installation and repair
services) primarily to commercial customers in the Jacksonville, Florida
24
<PAGE>
area. All Service's revenues for fiscal 1996 were $2.8 million and income from
operations was $687,000. All Service is headquartered in Jacksonville,
Florida.
Arkansas Mechanical Services, Inc. ("Arkansas Mechanical") was founded in
1988 and provides HVAC maintenance, repair and replacement services to
commercial and industrial customers in the greater Little Rock and
Fayetteville, Arkansas areas. Arkansas Mechanical also provides engineering
services for retrofit upgrades and replacements. Arkansas Mechanical's
revenues were $3.3 million and income from operations was $325,000. Arkansas
Mechanical is headquartered in North Little Rock, Arkansas and has facilities
in the North Little Rock and Fayetteville, Arkansas areas.
Linford Service Company ("Linford") was founded in 1960 and provides HVAC
maintenance, repair and replacement services to commercial customers
throughout California. Linford's revenues for fiscal 1996 were $11.3 million
and the loss from operations was $267. Linford is headquartered in Oakland,
California and has facilities in Oakland, Ontario, Sacramento, San Diego and
San Jose, California.
Mechanical Services, Inc. ("Mechanical") was founded in 1993 and provides
design and build, engineering and installation services in the mechanical
trades industry in the Little Rock and Fayetteville, Arkansas areas.
Mechanical Services' revenues for fiscal 1996 were $2.9 million and income
from operations was $56,000. Mechanical Services is headquartered in North
Little Rock, Arkansas and has facilities in North Little Rock and
Fayetteville, Arkansas.
Southeast Mechanical Service, Inc. ("Southeast Mechanical") was founded in
1979 and provides HVAC maintenance, repair and replacement services in the
Miami and Fort Lauderdale, Florida areas. Southeast Mechanical's revenues for
fiscal 1996 were $5.3 million and income from operations was $585,000.
Southeast Mechanical is headquartered in Hollywood, Florida.
Yale Incorporated ("Yale") was founded in 1939 and provides HVAC services to
commercial customers throughout Minnesota. Yale's revenues for fiscal 1996
were $10.1 million and income from operations was $405,000. Yale is
headquartered in Minneapolis, Minnesota.
RESULTS OF OPERATIONS--OTHER COMMERCIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Commercial Services Companies
derive a majority of their revenues from commercial new installation and
maintenance, repair and replacement services. In the aggregate, these nine
companies derive 96% of their revenue from commercial services and 4% of their
revenues from residential services. The following table sets forth certain
unaudited financial data for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $33,208 100.0% $38,476 100.0% $46,499 100.0% $24,460 100.0% $23,870 100.0%
Cost of Services........ 23,774 71.6 27,613 71.8 33,845 72.8 17,575 71.9 17,177 72.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 9,434 28.4 10,863 28.2 12,654 27.2 6,885 28.1 6,693 28.0
Selling, General and
Administrative
Expenses............... 7,669 23.1 9,129 23.7 10,367 22.3 4,703 19.2 5,198 21.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,765 5.3 1,734 4.5 2,287 4.9 2,182 8.9 1,495 6.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
25
<PAGE>
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.
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.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased $5.3 million, or 16.0%, from $33.2 million in
fiscal 1994 to $38.5 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to an increase in design and build
jobs at Yale and Mechanical and an increase in service agreement volumes at
Linford.
Gross Profit. Gross profit increased $1.5 million, or 16.0%, from $9.4
million in fiscal 1994 to $10.9 million in fiscal 1995. The increase in gross
profit was primarily attributable to a $2.0 million increase in revenues at
Linford at slightly higher margins, volume increases at Yale and Mechanical
and gross margin expansion at Charlie's and Arkansas Mechanical. As a
percentage of revenues, gross margin declined slightly from 28.4% in fiscal
1994 to 28.2% in fiscal 1995.
26
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 18.2%, from $7.7 million in
fiscal 1994 to $9.1 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 23.1% to 23.7% due
primarily to an increase in owners' compensation of $503,000 and personnel
additions necessary to adequately manage the revenue growth at Linford.
RESULTS OF OPERATIONS--PRO FORMA
The following table sets forth certain unaudited pro forma financial data of
the Founding Companies and the GroupMAC Companies for the three month period
ended March 31, 1998 and the twelve month period ended December 31, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 TWELVE MONTHS ENDED DECEMBER 31, 1997
-------------------------------------- ----------------------------------------
FOUNDING FOUNDING GROUPMAC
COMPANIES GROUPMAC COMPANIES COMPANIES COMPANIES
------------------ ------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 77,631 100.0% $ 152,809 100.0% $329,038 100.0% $669,912 100.0%
Cost of Services........ 60,088 77.4 119,015 77.9 251,362 76.4 513,686 76.7
--------- ------- ---------- ------- ---------- ------- ---------- -------
Gross Profit............ 17,543 22.6 33,794 22.1 77,676 23.6 156,226 23.3
</TABLE>
The acquisition of the Post-Offering Companies added $75.2 million and
$340.9 million of revenues for the three months ended March 31, 1998 and the
twelve months ended December 31, 1997, respectively, bringing the total pro
forma revenues for the GroupMAC Companies to $152.8 million and $669.9 million
for the three months ended March 31, 1998 and the twelve months ended December
31, 1997, respectively. This resulted in the Company decreasing its dependence
on new installation business from 55% of total revenues to 48%. The Post-
Offering Companies' revenue mix changed the revenue mix of the GroupMAC
Companies as follows:
<TABLE>
<CAPTION>
FOUNDING GROUPMAC
COMPANIES COMPANIES
--------- ---------
<S> <C> <C>
Residential Services:
New Installation.......................................... 42% 22%
Maintenance, Repair and Replacement....................... 17% 14%
---- ----
Total Residential....................................... 59% 36%
Commercial Services:
New Installation.......................................... 13% 26%
Maintenance, Repair and Replacement....................... 28% 38%
---- ----
Total Commercial........................................ 41% 64%
---- ----
Total................................................. 100% 100%
==== ====
</TABLE>
The Company's diversified business mix is reflected to varying degrees in
its gross margin. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
margins than businesses providing similar services to the commercial markets.
The addition of the Post-Offering Companies decreased the Company's pro forma
gross profit margin from 22.6% to 22.1% and 23.6% to 23.3% for the three
months ended March 31, 1998 and the twelve months ended December 31, 1997,
respectively. For the three months ended March 31, 1998, the decrease was
primarily attributable to the addition of three commercial companies with a
gross profit margin of 17.9%. These decreases were partially offset by the
acquisition of two commercial companies with a gross profit margin of 25.8%.
For the twelve months ended December 31, 1997, the decrease was primarily
attributable to the addition of two commercial companies with a gross profit
margin of 16.8%. These decreases were partially offset by the acquisition of
three commercial companies with a gross profit margin of 27.1%.
27
<PAGE>
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
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.
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. As a result, management sent requests for proposal
to four consulting firms with experience addressing Year 2000 constraints. One
such firm was chosen 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 was kicked-off in early July and
is expected to take eight weeks to complete. The major deliverables of the
project are as follows:
. Confirming and tracking Year 2000 compliance with software vendors
currently utilized by GroupMAC Companies.
. 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.
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 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.
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.
28
<PAGE>
INFLATION
Inflation did not have a significant effect on the results of operations of
the GroupMAC Companies for the three months ended March 31, 1998, the ten
months ended December 31, 1997 or the years ended February 28, 1997 or
February 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of Common Stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of one Pre-Offering Company
and the Offering Acquisition Companies, $42.6 million to repay corporate
indebtedness and debt assumed in connection with the acquisition of the
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.
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 three months ended March 31, 1998
and the ten months ended December 31, 1997, capital expenditures aggregated
$2.2 million and $2.0 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 three months ended March 31, 1998, the ten months ended December 31,
1997 and the years ended February 28, 1997 and February 29, 1996, the Company
generated $2.4 million, $4.4 million $3.7 million and $4.0 million in cash
from operating activities, respectively. For the three months ended March 31,
1998, net income, depreciation, amortization and deferred taxes generated $3.7
million, and changes in asset and liability accounts utilized a net of $1.3
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 twelve months ended February 28, 1997, net income, depreciation,
amortization and deferred taxes generated $4.9 million, and changes in asset
and liability accounts utilized a net $1.2 million. For the twelve months
ended February 29, 1996, net income, depreciation, amortization and deferred
taxes generated $1.0 million, and changes in asset and liability accounts
generated a net $3.0 million.
For the three months ended March 31, 1998, the Company used $38.0 million in
investing activities. The cash expended during the three months ended March
31, 1998 consisted of $35.5 million for acquisitions and $2.2 million for
capital expenditures and $0.3 million for deferred acquisition costs. For the
ten months ended December 31, 1997, the Company used $37.9 million in
investing activities. The cash expended during the ten months ended December
31, 1997 consisted of $35.8 million for acquisitions and $2.0 million for
capital expenditures. The cash impact of investing activities for the twelve
months ended February 28, 1997 and February 29, 1996 was not significant.
29
<PAGE>
For the three months ended March 31, 1998, the Company generated $15.6
million in cash from its financing activities. These activities principally
consisted of proceeds from the Credit Agreement of $21.3 million, less
payments of long-term debt of $5.7 million. For the ten months ended December
31, 1997, the Company generated $54.9 million in cash from its financing
activities. These activities principally consisted of issuance of Common Stock
for $109.7 million and proceeds from long-term debt of $32.5 million less
distributions to shareholders of $20.4 million, payments of long-term debt of
$47.7 million and retirement of preferred stock of $19.3 million. The cash
impact of financing activities for the twelve months ended February 28, 1997
and February 29, 1996 was not significant.
During the fourth quarter of 1997, the Company registered seven million
shares of Common Stock under the Securities Act of 1933, as amended, for its
use in connection with future acquisitions. After their issuance, those
registered shares generally are freely tradable by persons not affiliated with
the Company unless the Company contractually restricts the resale.
Substantially all of the shares of Common Stock issued in connection with the
acquisition of the 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 and second quarters of 1998, the Company completed the
acquisition of 27 platform companies that will be accounted for as purchases.
The combined 1997 annual revenues of these companies were $292.1 million.
Total consideration paid was $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. The Company financed the cash portion of the purchase price using (i)
remaining funds from the IPO, (ii) cash borrowed under the Credit Agreement
and (iii) internally generated funds. As of July 17, 1998, the funds available
through the Credit Agreement totaled $59.7 million, subject to the maintenance
of financial ratios and covenants.
The Company has one probable platform acquisition with combined annual
revenues of $48.8 million. Total consideration to be paid is approximately
$15.5 million which includes cash payments of $7.4 million, 0.4 million shares
of Common Stock and options to purchase 0.1 million shares of Common Stock.
Both acquisitions will be accounted for as purchases.
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 Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, Reporting Comprehensive Income, which the Company is required to
adopt for annual periods beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. It is
expected that this statement will not significantly affect the Company's
financial statements, as the Company does not have significant transactions
and other events from non-owner sources that affect equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which the Company is required to adopt for
annual periods beginning after December 15, 1997 and interim periods beginning
in fiscal year 1999. SFAS No. 131 establishes standards for the way that
public companies report information about operating segments in annual
financial statements and requires that those companies report information
about segments in interim financial reports issued to shareholders. The
Company has not yet completed its analysis of this statement and the impact on
its financial statements.
30
<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 48
platform companies in 53 cities in 25 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
31
<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.
32
<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............................... 14% 8% 0% 22%
Maintenance, Repair and Replacement............ 12% 1% 1% 14%
--- --- --- ---
Total Residential............................ 26% 9% 1% 36%
--- --- --- ---
Commerical Services:
New Installation............................... 18% 6% 2% 26%
Maintenance, Repair and Replacement............ 25% 7% 6% 38%
--- --- --- ---
Total Commercial............................. 43% 13% 8% 64%
--- --- --- ---
Total...................................... 69% 22% 9% 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
33
<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.
34
<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 random drug testing. Once hired, employees of the Company are
required to complete a progressive training program to advance their technical
competencies and to ensure that they understand and follow the Company's
safety practices and other internal policies. Both technical and customer
service personnel are given intensive training in customer communication,
sales and problem-solving skills.
The Company also conducts a detailed internal evaluation of each operating
unit's strengths, weaknesses and compliance with recognized industry or
Company "best practices," and then designs a training program to develop and
enhance the communication, sales, management and other relevant skills of its
employees and management to bring about continuous improvement in these areas.
The Company acquired Callahan Roach and USA in part for their professional
training and consulting capabilities and intends to implement their market-
leading training programs throughout the Company.
Callahan Roach provides Customer Assurance Pricing models to over 1,300 HVAC
and plumbing service companies across the United States. Callahan Roach has
been an industry leader in the development and commercialization of this flat
rate pricing best practice known as Customer Assurance Pricing. USA provides
training and other products and services to a network of 83 independent
service companies focused on maintenance, repair and replacement of commercial
HVAC systems.
In order to ensure that best practices are shared among each of the
individual operating units, the Company has created a Council of Presidents
composed of the president or senior executive of each unit. The Council meets
on a regular basis, as well as dividing into smaller working committees, to
share operating practices and develop additional means to improve the overall
performance of the Company and the individual operating units. Best practices
that result from the work of the Council will be included in the training and
monitoring programs developed and disseminated throughout the Company and to
USA members.
Advertising and Marketing
The Company uses both general advertising and a direct sales force to market
its residential and commercial services (both new installation and repair
services) in its geographic markets. The Company continues to preserve and
enhance the value of the unique and long-standing trade names and customer
identification enjoyed by the individual operating units. The GroupMAC logo
and identifying marks will be featured on service trucks, marketing materials
and advertising of the operating units, but in a manner that does not detract
from the local brand. The Company proposes to develop (initially for its
subsidiaries, but ultimately for delivery to the market
35
<PAGE>
through licensed affiliates developed by Callahan Roach and USA) market-
leading warranty and service programs for the residential and commercial
markets, as well as an aggressive national account sales program focused on
national and large regional home builders, as well as major corporations,
governmental and private institutions, real estate investment trusts, real
estate management firms and other multi-location commercial property owners
and managers. For the ten months ended December 31, 1997, advertising and
marketing expenditures represented 1.2% of the Company's combined revenue.
COMPETITION
The market for HVAC, plumbing and electrical services is highly competitive.
The Company believes that the principal competitive factors in the residential
and commercial services industry are (i) timeliness, reliability and quality
of services provided, (ii) range of services offered, (iii) market share and
visibility and (iv) price. The Company believes its strategy of creating a
leading national provider of comprehensive services directly addresses these
factors. The ability of the Company to employ, train and retain highly
motivated service technicians to provide quality services should be enhanced
by its ability to utilize professionally managed recruiting and training
programs. In addition, the Company expects to offer compensation, health and
savings benefits that are more comprehensive than most offered in the
industry, including stock options for substantially all employees. Competitive
pricing is possible through purchasing economies and other cost saving
opportunities that exist across each of the service lines offered and from
productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single market. Certain of these smaller competitors may
have lower overhead cost structures and may be able to provide their services
at lower rates. Moreover, many homeowners have traditionally relied on
individual persons or small repair service firms with whom they have long-
established relationships for a variety of home repairs. There are currently a
limited number of public companies focused on providing residential or
commercial services in some of the same service lines provided by the Company.
In addition, there are a number of national retail chains that sell a
variety of plumbing fixtures and equipment and HVAC equipment for residential
use and offer, either directly or through various subcontractors,
installation, warranty and repair services. Other companies or trade groups
engage in franchising their names and marketing programs in some service
lines. In the future, competition may be encountered from, among others, HVAC
equipment manufacturers, the unregulated business segments of regulated gas
and electric utilities or from newly deregulated utilities entering into
various residential or commercial service areas. Certain of the Company's
competitors and potential competitors have greater financial resources than
the Company to finance acquisition and development opportunities, to pay
higher prices for the same opportunities or to develop and support their own
residential or commercial service operations if they decide to enter the
field.
EMPLOYEES
As of 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 August 1998 and March 2003. The Company believes that its
relationship with its employees is generally satisfactory.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their
respective trades, (ii) building, HVAC, plumbing and electrical codes and
zoning ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and
protection of human health and
36
<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
37
<PAGE>
Act restrictions has also increased the cost of CFCs in recent years and is
expected to continue to increase such costs in the future. As a result, the
number of conversions of existing HVAC systems that use CFCs to systems using
alternative refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles
in large vehicle fleets to use "alternative fuels," such as compressed natural
gas or propane, and meet reduced emissions standards. The Company does not
anticipate that the cost of fleet conversion that may be required under
current laws will be material. Future costs of compliance with these laws will
be dependent upon the number of vehicles purchased in the future for use in
the covered geographic regions, as well as the number and size of future
business acquisitions by the Company in these regions. The Company cannot
determine to what extent its future operations and earnings may be affected by
new regulations or changes in existing regulations relating to vehicle
emissions.
Capital expenditures related to environmental matters during the ten month
period ended December 31, 1997 were not material. The Company does not
currently anticipate any material adverse effect on its business or
consolidated financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may
be material.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James P. Norris...................... 59 Chairman of the Board; Director
J. Patrick Millinor, Jr. ............ 52 Chief Executive Officer; Director
Donald L. Luke....................... 61 President and Chief Operating
Officer; Director
William Michael Callahan............. 52 Executive Vice President-Training,
Technology and Field Support
Chester J. Jachimiec................. 43 Executive Vice President-
Acquisitions; Director
Alfred R. Roach, Jr. ................ 54 Executive Vice President
Richard S. Rouse..................... 51 Executive Vice President-Corporate
Development and Administration
Randolph W. Bryant................... 47 Senior Vice President, General
Counsel and Secretary
Darren B. Miller..................... 38 Senior Vice President and Chief
Financial Officer
Ronald D. Bryant..................... 51 President of Masters; Director
David L. Henninger................... 53 President of Van's; Director
Timothy Johnston..................... 42 Senior Vice President and Chief
Financial Officer of Airtron;
Director
Andrew Jeffrey Kelly................. 44 President of K&N; Director
Fredric J. Sigmund................... 57 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
39
<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.
RANDOLPH W. BRYANT became Senior Vice President, General Counsel and
Secretary of the Company upon its formation in April 1997. From December 1996
to April 1997, Mr. Bryant served as Associate General Counsel of El Paso
Natural Gas Company. From 1984 to 1996, he was an attorney with Tenneco Inc.
and Tenneco Energy, Inc., last serving as Associate General Counsel.
DARREN B. MILLER is Senior Vice President and Chief Financial Officer of the
Company and has served in such capacities with the Company and its predecessor
since October 1996. From 1989 to 1996, Mr. Miller served in several capacities
at Allwaste, Inc., a consolidator of industrial service companies, including
Vice President-Treasurer and Controller from 1995 to 1996. Prior to 1989, he
was employed in the audit practice of Arthur Andersen LLP.
TIMOTHY JOHNSTON became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1995, Mr. Johnston has served as a
Senior Vice President of Airtron. Mr. Johnston has served as
Secretary/Treasurer of Airtron since 1991 and as Chief Financial Officer of
Airtron since 1988.
RONALD D. BRYANT became a Director of the Company in November 1997. He
founded Masters, which installs HVAC and plumbing systems in the Washington,
D.C. area, in 1986 and has served as its president since that time.
DAVID L. HENNINGER became a Director of the Company in November 1997. He
acquired Van's, which provides HVAC services to residential and light
commercial customers in the Palm Beach-Ft. Lauderdale, Florida area, in 1975
and has served as its president since that time.
ANDREW JEFFREY KELLY became a Director of the Company in November 1997. He
founded K&N, which provides plumbing services to residential new construction
markets, in 1979 and has served as its president since that time.
FREDRIC J. SIGMUND became a Director of the Company in November 1997. Since
1986, he has served as Chief Executive Officer of MacDonald-Miller, which
provides a full range of HVAC services to commercial and industrial customers
in the Northwestern United States. From 1967 to 1986, he served in various
positions with MacDonald-Miller.
40
<PAGE>
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 1998, 1999 and 2000, respectively. At each
annual meeting of shareholders, one class of directors will be elected for a
full term of three years to succeed the class of directors whose terms are
expiring.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees--the Audit
Committee, the Compensation Committee and the Acquisitions Committee. Pursuant
to resolutions of the Board, these committees have the following described
responsibilities and authority.
The Audit Committee has the responsibility, among other things, for (i)
recommending the selection of the Company's independent public accountants,
(ii) reviewing and approving the scope of the independent public accountants'
audit activity and extent of non-audit services, (iii) reviewing with
management and such independent public accountants the adequacy of the
Company's basic accounting system and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with management and the
independent public accountants the Company's financial statements and
exercising general oversight of the Company's financial reporting process, (v)
reviewing with the Company litigation and other legal matters that may affect
the Company's financial condition, and (vi) monitoring compliance with the
Company's business ethics and other policies. The members of the Audit
Committee are Messrs. Morrison (Chair), McDade and Sullivan.
The Compensation Committee has the responsibility, among other things, for
(i) establishing the salary rates of officers and employees of the Company and
its subsidiaries, (ii) examining periodically the compensation structure of
the Company and (iii) supervising the welfare and pension plans and
compensation plans of the Company. The members of the Compensation Committee
are Messrs. Sullivan (Chair), Morrison and Weaver.
The Acquisitions Committee has the authority to approve the terms and
conditions of acquisitions by the Company of businesses having less than $40
million of revenues and $20 million of assets, including the authority to
approve the issuance of debt and equity securities of the Company in
connection with such acquisitions, provided that the consideration paid by the
Company for each such business is less than $20 million. The members of the
Acquisitions Committee are Messrs. Millinor (Chair), Jachimiec and Rouse.
The Company's Board may also establish other committees.
41
<PAGE>
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.
42
<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.
43
<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.
44
<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.
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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
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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.
[PERFORMANCE 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
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not covered by the Company's disability insurance policies. In the event his
employment is terminated, Mr. Millinor will receive compensation for the
periods described in the agreement. In addition, Mr. Millinor has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1997, Mr. Luke entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on August 1, 2000. In the event of Mr. Luke's death, the agreement
will terminate. In the event of Mr. Luke's disability, the Company will
continue payment of compensation during the first 12 month period of such
disability to the extent not covered by the Company's disability insurance
policies. In the event his employment is terminated, Mr. Luke will receive
compensation for the periods described in the agreement. In addition, Mr. Luke
has agreed not to compete with the Company during the six-month period
following his termination of employment.
In 1996, Mr. Jachimiec entered into an employment agreement with the Company
which provides for an annual base salary of $140,000 and an annual cash bonus
of up to 100% of Mr. Jachimiec's annual base salary depending on the actual
annual performance of the Company. The agreement expires on October 24, 1999.
In the event of Mr. Jachimiec's death, the agreement will terminate. In the
event of Mr. Jachimiec's disability, the Company will continue payment of
compensation during the first 12 month period of such disability to the extent
not covered by the Company's disability insurance policies. In the event his
employment is terminated, Mr. Jachimiec will receive compensation for the
periods described in the agreement. In addition, Mr. Jachimiec has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1996, Mr. Rouse entered into an employment agreement with the Company
which provides for an annual base salary of $140,000 and an annual cash bonus
of up to 100% of Mr. Rouse's annual base salary depending on the actual annual
performance of the Company. The agreement expires on October 24, 1999. In the
event of Mr. Rouse's death, the agreement will terminate. In the event of Mr.
Rouse's disability, the Company will continue payment of compensation during
the first 12 month period of such disability to the extent not covered by the
Company's disability insurance policies. In the event his employment is
terminated, Mr. Rouse will receive compensation for the periods described in
the agreement. In addition, Mr. Rouse has agreed not to compete with the
Company during the six-month period following his termination of employment.
In 1997, Mr. Jennings entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Jennings also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 3.55% of Airtron's EBITDA before corporate bonus not to exceed
$366,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Jennings' death, the agreement will terminate. In the event of Mr.
Jennings' disability, Airtron will continue payment of compensation during the
first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Jennings will receive compensation for the periods described
in the agreement. In addition, Mr. Jennings has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
In 1997, Mr. Johnston entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Johnston also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 1.50% of Airtron's EBITDA before corporate bonus, not to exceed
$154,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Johnston's death, the agreement will terminate. In the event of Mr.
Johnston's disability, Airtron will continue payment of compensation during
the first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Johnston will receive compensation for the periods described
in the agreement. In addition, Mr. Johnston has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
Each of the foregoing employment agreements (other than the employment
agreements of Messrs. Jennings and Johnston) grants the executive certain
rights in the event of a change in control of the Company. Under the
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terms of each agreement, the Company must pay the executive an amount equal to
twelve months compensation at the executive's current salary and provide
benefits to the executive for twelve months if the Company terminates the
executive's employment without "cause." In addition, if an executive's
employment terminates within six months after a sale of all or substantially
all of the assets of the Company or a merger, consolidation, liquidation or
reorganization of the Company, the Company shall pay the executive an amount
equal to three times the executive's severance benefits otherwise available
under the employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, Messrs. Morrison, Sullivan and Weaver (none of whom was or had
been an officer or employee of the Company or any of its subsidiaries) served
on the Company's Compensation Committee. There were no interlocks or insider
participation with other companies within the meaning of the proxy rules of
the Securities and Exchange Commission during 1997.
INCENTIVE BONUS PROGRAM
The Company has implemented a cash bonus program for the key employees of
its subsidiaries under which awards will be determined based upon the
performance of each subsidiary. The size of the bonus pool will be equal to a
defined percentage of the amount by which the subsidiary's after-tax net
operating profit (as defined) less a charge for capital allocated to the
subsidiary exceeds a similar calculation of the previous year's results. A
certain percentage of earned bonuses are carried over to the following year
for retention purposes and to promote long-term goal achievement. Messrs.
Jennings and Johnston participated in such program in 1997 and will also
participate in 1998. Messrs. Bryant, Henninger, Kelly and Sigmund will
participate in 1998.
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RELATED PARTY TRANSACTIONS
Airtron leases its headquarters offices in Dayton, Ohio and its operating
facilities in Cincinnati and Cleveland, Ohio, Indianapolis, Indiana,
Clearwater, Florida, Dallas, Houston and San Antonio, Texas and Wichita,
Kansas from entities controlled by certain former shareholders of Airtron,
including Messrs. Jennings and Johnston. None of these leases expire prior to
2008. The aggregate annual base rent to be paid under these leases is
approximately $735,000 with annual increases based on the consumer price
index. The Company believes that the terms of such leases are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties.
In the Company's acquisition of Airtron, Mr. Jennings received $3,729,653,
together with 933,908 shares of Common Stock and 2,711,344 shares of Series A
Preferred Stock, and Mr. Johnston received $1,393,474, together with 374,713
shares of Common Stock and 1,057,473 shares of Series A Preferred Stock. All
of such shares of preferred stock were redeemed at a redemption price of $1.00
per share. Additionally, Messrs. Jennings and Johnston have the right to
receive payments from the Company equal to the tax benefits received by the
Company with respect to payments of deferred compensation to them. The Company
estimates these payments will be $3.2 million and $1.4 million, respectively.
In the Company's acquisition of K&N, Andrew Jeffrey Kelly received
$1,568,000, together with 362,800 shares of Common Stock and 1,568,000 shares
of Series D Preferred Stock. All of such shares of preferred stock were
redeemed at a redemption price of $1.00 per share. Mr. Kelly may receive
contingent consideration based on the operating results of K&N for the 15
month period ended June 30, 1998. The Company estimates that such payments
will be approximately $600,000. K&N entered into a new five year renewable
lease with Sigma Management, a company owned by Mr. Kelly, to replace the
existing lease for the Company's Arlington, Texas facility. The annual base
rent to be paid under this lease is approximately $94,800. The Company
believes that the terms of such lease are no less favorable to the Company
than could have been negotiated by the Company with unaffiliated third
parties.
In the Company's acquisition of MacDonald-Miller, Fredric J. Sigmund
received approximately $1,937,000 and 207,588 shares of Common Stock.
MacDonald-Miller has entered into a new ten year renewable lease with F&V
Investments, a company owned by Mr. Sigmund, to replace the existing lease for
MacDonald-Miller's Seattle, Washington facility. The annual base rent to be
paid under this lease is approximately $475,000. The Company believes that the
terms of such lease are no less favorable to the Company than could have been
negotiated by the Company with unaffiliated third parties.
In the Company's acquisition of Masters, Ronald D. Bryant received
approximately $5,325,000 and 466,806 shares of Common Stock. Additionally,
Masters entered into a new six year renewable lease with Mr. Bryant to replace
the existing lease for Masters' Gaithersburg, Maryland facility. The annual
base rent to be paid under this lease is approximately $242,000, with annual
increases of 4%. The Company believes that the terms of such lease are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties.
In the Company's acquisition of Van's, David L. Henninger received, together
with his spouse, approximately $1,497,000 and 112,200 shares of Common Stock.
Additionally, Van's entered into a new five-year renewable lease with Mr.
Henninger to replace the existing lease for Van's Delray Beach, Florida
facility. The initial annual base rent to be paid under this lease is
approximately $90,000 with annual increases of 3%. The Company believes that
the terms of such lease are no less favorable to the Company than could have
been negotiated by the Company with unaffiliated third parties. Finally, Mr.
Henninger owed approximately $80,000 to Van's at the time it was acquired by
the Company. This indebtedness was satisfied in December 1997 by an offset to
a purchase price adjustment owed by the Company to Mr. Henninger.
In 1997, Mr. Sullivan, a director of the Company, exercised options to
purchase 10,000 shares at a price of $3.08 per share.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 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 1.8%
David L. Henninger....................................... 112,202(3) *
Chester J. Jachimiec..................................... 147,401(4) *
James D. Jennings........................................ 720,853(5) 2.7%
Timothy Johnston......................................... 349,945(5) 1.3%
Andrew J. Kelly.......................................... 362,800 1.4%
Donald L. Luke........................................... 5,823 *
Thomas B. McDade......................................... 8,000 *
J. Patrick Millinor, Jr.................................. 239,313(6) *
Lucian A. Morrison....................................... 5,500 *
James P. Norris.......................................... 9,833 *
Richard S. Rouse......................................... 126,602 *
Fredric J. Sigmund....................................... 207,588(7) *
John M. Sullivan......................................... 112,050(8) *
James D. Weaver.......................................... 86,500 *
William M. Callahan...................................... 301,137(9) 1.1%
Alfred R. Roach.......................................... 301,137(9) 1.1%
Randolph W. Bryant....................................... 7,666(2) *
Darren B. Miller......................................... 64,002 *
Gordon Cain.............................................. 2,417,950 9.2%
8 Greenway Plaza, Suite 705
Houston, Texas 77046
All executive officers and directors as a group.......... 3,635,158(10) 13.8%
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise noted, each shareholder, director and executive
officer has sole voting and investment power over the shares beneficially
owned as set forth in this column.
(2) Includes shares that are subject to options granted by the Company
exercisable at March 31, 1998, or within 60 days thereafter, for Messrs.
Millinor, Jachimiec, Luke, Norris, Rouse, Bryant and Miller to purchase
18,868, 16,801, 4,823, 9,333, 14,752, 6,666 and 10,002 shares,
respectively.
(3) Includes 55,001 shares held by Mr. Henninger's spouse.
(4) Includes 32,000 shares held by Mr. Jachimiec as trustee of two trusts for
the benefit of his children as to which Mr. Jachimiec disclaims beneficial
ownership.
(5) Includes 263,955 and 303,605 shares beneficially owned by Messrs. Jennings
and Johnston through Airtron, Inc. employee benefit plans.
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(6) Includes 200 shares held by Mr. Millinor's children as to which Mr.
Millinor disclaims beneficial ownership.
(7) Includes 33,748 shares beneficially owned by Mr. Sigmund through the
MacDonald-Miller Industries, Inc. Employee Stock Ownership Plan.
(8) Includes 82,050 shares with respect to which Mr. Sullivan has a limited
power of attorney to vote and exercise investment powers until revoked by
the actual owner.
(9) Includes 257,000 shares that each of Messrs. Callahan and Roach has the
right to acquire pursuant to warrants that are presently exercisable.
(10) Includes 81,245 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 June 30, 1998, the Company had outstanding 26,415,243
shares of Common Stock and no shares of Preferred Stock.
The following summary description of the material features of the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the Articles, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Articles authorize the issuance of Preferred Stock in one or more series
having designations, rights and preferences determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without approval of holders of Common Stock, to issue Preferred Stock with
dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present
intention to issue any additional shares of its Preferred Stock, there can be
no assurance that it will not do so in the future.
COMMON STOCK
Voting Rights. Holders of Common Stock are entitled to one vote for each
share on all matters on which shareholders generally are entitled to vote,
including elections of directors. The Board of Directors is classified into
three classes of five directors, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. The Articles do not provide for cumulative voting for
the election of directors.
Dividends. Subject to the preferential rights of any outstanding Preferred
Stock that may be created by the Board of Directors under the Articles,
dividends may be paid to holders of Common Stock when, as and if declared by
the Board of Directors out of funds legally available for such purpose. The
declaration and payment of dividends on Common Stock could be restricted by
the terms of any Preferred Stock issued. Under the TBCA, dividends may be paid
by the Company out of "surplus" (as defined under Article 1.02 of the TBCA)
or, if
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there is no surplus, out of net profits for the fiscal year in which the
dividends are declared and/or the preceding fiscal year. However, the Company
does not intend to pay dividends at the present time. See "Dividend Policy"
and "Description of Bank Credit Agreement."
Liquidation. In the event of the dissolution or winding up of the Company,
after payment or provision for payment of debts and other liabilities of the
Company and any other series or class of the Company's stock hereafter issued
that ranks senior as to liquidation rights to the Common Stock, the holders of
Common Stock will be entitled to receive pro rata all remaining assets of the
Company available to such holders.
Miscellaneous. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights.
The Common Stock is listed on the New York Stock Exchange under the symbol
"MAK."
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Article 13 of the TBCA ("Article 13") which, with
certain exceptions, prohibits a Texas corporation from engaging in a "business
combination" (as defined in Article 13) with any shareholder who is a
beneficial owner of 20% or more of the corporation's outstanding stock for a
period of three years after such shareholder's acquisition of a 20% ownership,
unless: (i) the board of directors of the corporation approves the transaction
or the shareholder's acquisition of shares prior to the acquisition or (ii)
two-thirds of the unaffiliated shareholders of the corporation approve the
transaction at a shareholders' meeting. Shares that are issuable, but have not
yet been issued, pursuant to options, conversion or exchange rights or other
agreements are not considered outstanding for purposes of Article 13.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles contain a "fair price" provision which generally requires that
certain mergers, business combinations and similar transactions constituting a
"Business Combination" with an "Interested Shareholder" (generally the
beneficial owner of at least 10 percent of the Company's voting stock) be
approved by the holders of a least 80 percent of the Company's voting stock,
unless (i) the transaction is approved by at least 80 percent of the
"Continuing Directors" of the Company, who constitute a majority of the entire
board or (ii) certain "fair price" and procedural requirements are satisfied.
The Articles define "Business Combination" as (i) any merger or consolidation
involving the Company or a subsidiary of the Company, (ii) any sale, lease,
exchange, transfer or other disposition (in one transaction or a series of
transactions), including without limitation a mortgage or any other security
device, of all or any substantial part of the assets either of the Company or
of a subsidiary of the Company to or with any Interested Shareholder, (iii)
the issuance, sale, exchange, transfer or other disposition by the Company or
a subsidiary of the Company of any securities of the Company or any subsidiary
of the Company to or with any Interested Shareholder, (iv) any
recapitalization or reclassification of the Company's securities (including
without limitation, any reverse stock split) or other transaction that would
have the effect of increasing the voting power of an Interested Shareholder,
(v) any liquidation, spinoff, splitoff, splitup or dissolution of the Company
proposed by or on behalf of any Interested Shareholder, and (vi) any
agreement, contract or other arrangement providing for any of the transactions
described in this definition of Business Combination. "Continuing Director" is
defined to mean a director who either was a member of the Board of Directors
of the Company prior to the time such Interested Shareholder became an
Interested Shareholder or who subsequently became a director of the Company
and whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least 80 percent of the Continuing Directors then
on the Board of Directors, either by a specific vote or by approval of the
proxy statement issued by the Company on behalf of the Board of Directors in
which such person is named as nominee for director, without an objection to
such nomination; provided, however, that in no event shall a director be
considered a "Continuing Director" if
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such director is an Interested Shareholder and the Business Combination to be
voted upon is with such Interested Shareholder or is one in which such
Interested Shareholder otherwise has an interest (except proportionately as a
shareholder of the Company).
In accordance with the Company's Bylaws, a shareholder of the Company may
nominate persons for election to the Board of the Company if the shareholder
submits such nomination, together with certain related information required by
the Company's Bylaws, in writing to the Secretary of the Company not less than
50 days nor more than 75 days prior to the date of any annual meeting of
shareholders.
DESCRIPTION OF CREDIT AGREEMENT
GENERAL
The lenders under the Company's Credit Agreement are committed to provide
the Company, subject to certain terms and conditions, the entire $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 Bank Credit
Agreement) plus a margin depending on the ratio of indebtedness for borrowed
money to Adjusted EBITDA (as defined in the Credit Agreement), or (ii) the
Eurodollar Rate (as defined in the Credit Agreement) plus a margin depending
on the ratio of indebtedness for borrowed money to Adjusted EBITDA.
FEES, EXPENSES AND COSTS; CREDIT FACILITIES
The terms of the Credit Agreement require the Company to pay the following
fees in connection with the maintenance of loans under the Credit Agreement:
(i) commitment fees to be paid to the Lenders in amounts between 0.25% and
0.375% per annum with respect to the unused commitments under the Credit
Agreement depending on the ratio of indebtedness for borrowed money to
Adjusted EBITDA, payable quarterly in arrears until such time as such facility
is terminated; and (ii) administration fees payable annually to the Agent. In
addition, the Company paid various underwriting and arrangement fees and
closing costs in connection with the origination and syndication of the Credit
Agreement.
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The Company is required to reimburse the Agent for all reasonable out-of-
pocket costs and expenses incurred in the preparation, documentation and
administration of the Credit Agreement and to reimburse the Lenders for all
reasonable costs and expenses incurred in connection with the enforcement of
their rights in connection with a default or the enforcement of the Credit
Agreement. The Company must indemnify the Agent and the Lenders and their
respective officers, directors, shareholders, employees, agents and attorneys
against certain costs, expenses (including fees and reimbursements of counsel)
and liabilities arising out of or relating to the Credit Agreement and the
transactions contemplated thereby. The Lenders also are entitled to be
reimbursed for certain reserve requirements and increases therein, changes in
law and circumstances, taxes (other than on overall net income), capital
adequacy, and consequential costs. Further, the inability to determine
Eurodollar Rates or the possible future illegality of the Eurodollar Rate
option will result in such rate option being unavailable.
COVENANTS
The Credit Agreement contains substantial restrictive covenants limiting the
ability of the Company and its subsidiaries to: (i) incur Indebtedness (as
defined in the Credit Agreement), including contractual contingent
obligations; (ii) pay certain debt after default; (iii) create or allow to
exist liens or other encumbrances; (iv) transfer assets except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business; (v) enter into mergers, consolidations and asset
dispositions of all or substantially all of its properties; (vi) make
investments; (vii) extend credit to any entity; (viii) sell, transfer or
otherwise dispose of any class of stock or the voting rights of any subsidiary
of the Company; (ix) enter into transactions with related parties other than
on an arm's-length basis on terms no less favorable to the Company than those
available from third parties; (x) amend certain agreements; (xi) make any
material change in the nature of the business conducted by the Company; (xii)
pay dividends or redeem shares of capital stock; and (xiii) make capital
expenditures.
In addition, the Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company and its subsidiaries
to: (i) maintain the existence, qualification and good standing of the Company
and its subsidiaries; (ii) comply in all material respects with all material
applicable laws; (iii) maintain material properties, rights and franchises;
(iv) deliver certain financial and other information; (v) maintain specified
insurance; (vi) pay taxes; and (vii) notify the Lenders of any default under
the Loan Documents (as defined in the Credit Agreement) and of certain other
material events.
Under the Credit Agreement, the Company is required to satisfy certain
financial covenants and tests, including (i) a minimum fixed charge coverage
ratio; (ii) a 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).
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 1998, the Company had outstanding 26,415,243 shares of Common
Stock. Of these shares, the 8,340,000 shares sold in the IPO are freely
tradeable in the public market without restriction or limitation under the
Securities Act, except for any shares held by an "affiliate" (as defined in
the Securities Act) of the Company. Approximately 9.4 million shares of Common
Stock held by existing shareholders of the Company immediately prior to the
IPO and the 3.3 million shares of Common Stock which were issued in connection
with the acquisition of the Offering Acquisition Companies, Costner, Way
Residential and Callahan Roach, are "restricted securities" within the meaning
of Rule 144, except for the approximately 725,000 shares of Common Stock
registered under the Securities Act in connection with the acquisition of
MacDonald-Miller. The approximately 5.8 million shares issued or to be issued
in connection with the acquisition of the Post-Offering Companies are
registered and freely tradeable under the Securities Act, but are subject to
contractual restrictions on resale during the two years from the date of
issuance. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares issued by
the Company to affiliates of any of the Post-Offering Companies for a period
of one year from the date of issuance.
In 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 9.1 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 3.6 million shares of Common Stock,
approximately 0.8 million of which are exercisable within 60 days of the date
of this Prospectus. The Company has filed a registration statement on Form S-8
under the Securities Act to register the shares of Common Stock issuable upon
the exercise of options granted under the Stock Awards Plan and the stock
option plan for nonmanagement employees. Accordingly, such shares will be
freely tradeable by holders who are not affiliates of the Company and, subject
to the volume and manner of sale limitations of Rule 144, by holders who are
affiliates of the Company.
No predictions can be made of the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have
on the market price prevailing from time to time. Nevertheless, 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;
56
<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 12,472,525 shares of Common Stock. Pursuant to the
Registration Rights Agreements, the shareholders who are parties thereto will
be entitled, subject to certain limitations, to include their shares of Common
Stock in a registration of shares of Common Stock subsequent to the IPO which
is initiated by the Company under the Securities Act. The Registration Rights
Agreement with respect to the founding shareholders of the Company
additionally provides that any one or more shareholders holding a minimum
number of shares of Common Stock has the right to require the Company to
effect a registration of all or any part of the shares of Common Stock under
the Securities Act (a "Demand Registration"). In the event the aggregate
number of shares of Common Stock which the shareholders request the Company to
include in any registration, together, in the case of a registration initiated
by the Company, with the shares of Common Stock of the Company to be included
in such registration, exceeds the number that in the opinion of the managing
underwriter can be sold in such offering without materially affecting the
offering price of such shares, the number of shares of each shareholder to be
included in such registration will be reduced pro rata based on the aggregate
number of shares for which registration was requested.
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
57
<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. and Atlantic Industrial Constructors, Inc.
to the extent and for the periods indicated in their reports, have been
included herein and in the registration statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Masters, Inc. as of December 31, 1995, December
31, 1996 and June 30, 1997 and for each of the three years in the period ended
December 31, 1996 and for the six month period ended June 30, 1997 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
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.
58
<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.
59
<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-10
HISTORICAL FINANCIAL STATEMENTS
GROUP MAINTENANCE AMERICA CORP. (GROUPMAC PARENT)
Report of Independent Public Accountants................................. F-16
Balance Sheets........................................................... F-17
Statements of Operations................................................. F-18
Statements of Shareholders' Equity....................................... F-19
Statements of Cash Flows................................................. F-20
Notes to Financial Statements............................................ F-21
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets.................................... F-26
Consolidated Condensed Statements of Operations.......................... F-27
Consolidated Condensed Statements of Cash Flows.......................... F-28
Notes to Consolidated Condensed Financial Statements..................... F-29
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-31
Consolidated Balance Sheets.............................................. F-32
Consolidated Statements of Operations.................................... F-33
Consolidated Statements of Shareholders' Equity.......................... F-34
Consolidated Statements of Cash Flows.................................... F-35
Notes to Consolidated Financial Statements............................... F-36
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-48
Consolidated Balance Sheets.............................................. F-49
Consolidated Statements of Income........................................ F-50
Consolidated Statements of Shareholders' Equity.......................... F-51
Consolidated Statements of Cash Flows.................................... F-52
Notes to Consolidated Financial Statements............................... F-53
MASTERS, INC.
Report of Independent Public Accountants................................. F-63
Balance Sheets........................................................... F-64
Statements of Operations................................................. F-65
Statements of Shareholder's Equity....................................... F-66
Statements of Cash Flows................................................. F-67
Notes to Financial Statements............................................ F-68
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. F-75
Balance Sheet............................................................ F-76
Statement of Operations.................................................. F-77
Statement of Shareholders' Equity........................................ F-78
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Cash Flows................................................. F-79
Notes to Financial Statements........................................... F-80
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................ F-85
Combined Balance Sheets................................................. F-86
Combined Statements of Operations....................................... F-87
Combined Statements of Shareholders' Equity............................. F-88
Combined Statements of Cash Flows....................................... F-89
Notes to Combined Financial Statements.................................. F-90
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................ F-95
Combined Balance Sheets................................................. F-96
Combined Statements of Operations....................................... F-97
Combined Statements of Shareholders' Equity............................. F-98
Combined Statements of Cash Flows....................................... F-99
Notes to Combined Financial Statements.................................. F-100
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................ F-106
Balance Sheets.......................................................... F-107
Statements of Operations................................................ F-108
Statements of Shareholders' Equity...................................... F-109
Statements of Cash Flows................................................ F-110
Notes to Financial Statements........................................... F-111
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................ F-114
Balance Sheets.......................................................... F-115
Statements of Operations................................................ F-116
Statements of Shareholders' Equity...................................... F-117
Statements of Cash Flows................................................ F-118
Notes to Financial Statements........................................... F-119
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-124
Consolidated Balance Sheets............................................. F-125
Consolidated Statements of Operations................................... F-126
Consolidated Statements of Shareholders' Equity......................... F-127
Consolidated Statements of Cash Flows................................... F-128
Notes to Consolidated Financial Statements.............................. F-129
SIBLEY SERVICES, INCORPORATED
Report of Independent Public Accountants................................ F-135
Balance Sheets.......................................................... F-136
Statements of Operations................................................ F-137
Statements of Shareholders' Equity...................................... F-138
Statements of Cash Flows................................................ F-139
Notes to Financial Statements........................................... F-140
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants................................ F-146
Balance Sheets.......................................................... F-147
Statements of Operations................................................ F-148
Statements of Shareholders' Equity...................................... F-149
Statements of Cash Flows................................................ F-150
Notes to Financial Statements........................................... F-151
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants................................ F-155
Balance Sheets.......................................................... F-156
Statements of Operations................................................ F-157
Statements of Shareholders' Equity...................................... F-158
Statements of Cash Flows................................................ F-159
Notes to Financial Statements........................................... F-160
YALE, INCORPORATED
Report of Independent Public Accountants................................ F-165
Balance Sheets.......................................................... F-166
Statements of Operations................................................ F-167
Statements of Shareholders' Equity...................................... F-168
Statements of Cash Flows................................................ F-169
Notes to Financial Statements........................................... F-170
HUNGERFORD MECHANICAL CORPORATION
Report of Independent Public Accountants................................ F-175
Balance Sheet........................................................... F-176
Statement of Operations................................................. F-177
Statement of Shareholder's Equity....................................... F-178
Statement of Cash Flows................................................. F-179
Notes to Financial Statements........................................... F-180
MECHANICAL INTERIORS, INC.
Report of Independent Public Accountants................................ F-184
Balance Sheet........................................................... F-185
Statement of Operations................................................. F-186
Statement of Shareholders' Equity....................................... F-187
Statement of Cash Flows................................................. F-188
Notes to Financial Statements........................................... F-189
PREMEX, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-193
Balance Sheet........................................................... F-194
Statement of Operations................................................. F-195
Statement of Shareholders' Equity....................................... F-196
Statement of Cash Flows................................................. F-197
Notes to Financial Statements........................................... F-198
BARR ELECTRIC CORPORATION
Report of Independent Public Accountants................................ F-204
Balance Sheets.......................................................... F-205
Statements of Operations................................................ F-206
Statements of Shareholders' Equity...................................... F-207
Statement of Cash Flows................................................. F-208
Notes to Financial Statements........................................... F-209
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ATLANTIC INDUSTRIAL CONSTRUCTORS INCORPORATED AND AFFILIATES
Report of Independent Public Accountants................................ F-212
Combined Balance Sheets................................................. F-213
Combined Statements of Operations....................................... F-214
Combined Statements of Shareholders' Equity............................. F-215
Combined Statements of Cash Flows....................................... F-216
Notes to Combined Financial Statements.................................. F-217
</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-
Offering Companies"), (ii) 13 companies acquired in connection with the IPO
(the "Offering Acquisition Companies") and (iii) 15 companies in the first
quarter of 1998 (the "First Quarter Post-Offering Companies") and 12 companies
in the second quarter of 1998 and one probable future acquisition (the "Second
Quarter Post-Offering Companies", and together with the First Quarter Post-
Offering Companies, the "Post-Offering Companies", the Pre-Offering Companies
and the Offering Acquisition Companies, the "GroupMAC Companies"). The Post-
Offering Companies are as follows:
<TABLE>
<CAPTION>
DATE
COMPANY ACQUIRED
- ------- --------
<S> <C>
Sterling Air Conditioning, Inc........................................ 1/6/98
A-1 Mechanical of Lansing, Inc........................................ 1/15/98
Air Conditioning Engineers, Inc....................................... 1/15/98
Air Conditioning, Plumbing & Heating 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
The Farfield Company.................................................. *
</TABLE>
- --------
*GroupMAC has identified this company as an acquisition probable of occurring.
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.
F-5
<PAGE>
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheet of the Company and the balance sheets of the Second
Quarter Post-Offering Companies, as if such acquisitions had occurred
on March 31, 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 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
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
2ND QUARTER
GROUPMAC AND COMMERCIAL BARR ATLANTIC ACQUISITION PRO FORMA
SUBSIDIARIES AIR ELECTRIC INDUSTRIAL COMPANIES ADJUSTMENTS PRO FORMA
ASSETS ------------ ---------- -------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equiva-
lents.................. $ 5,715 $ 18 $1,127 $1,750 $ 2,014 $(10,624) $ --
Accounts receivable
Trade, net of allow-
ance................. 67,745 3,560 432 3,447 21,737 -- 96,921
Other................ -- -- 12 4 46 -- 62
Due from related par-
ties................... -- 66 -- -- 336 (403) (1)
Inventories............ 12,227 475 105 -- 1,938 -- 14,745
Costs and estimated
earnings in excess of
billings on uncom-
pleted contracts....... 8,047 452 24 1,153 4,500 -- 14,176
Deferred tax asset..... 2,734 158 -- -- 12 (1,028) 1,876
Prepaid expenses and
other current assets... 1,912 34 20 59 914 -- 2,939
-------- ------ ------ ------ ------- -------- --------
Total current as-
sets................ 98,380 4,763 1,720 6,413 31,497 (12,055) 130,718
PROPERTY AND EQUIPMENT,
net..................... 18,806 1,271 122 1,005 7,633 -- 28,837
GOODWILL, net........... 139,789 -- -- -- -- 82,709 222,498
DEFERRED TAX ASSETS..... 4,804 334 -- -- 42 (240) 4,940
REFUNDABLE INCOME TAXES. 3,478 -- -- -- -- -- 3,478
OTHER NONCURRENT ASSETS. 1,886 279 226 142 175 (114) 2,594
-------- ------ ------ ------ ------- -------- --------
Total assets........ $267,143 $6,647 $2,068 $7,560 $39,347 $ 70,300 $393,065
======== ====== ====== ====== ======= ======== ========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and
accrued expenses....... $ 41,334 $2,186 $ 160 $1,440 $ 9,090 $ -- $ 54,210
Short-term debt, in-
cluding current matu-
rities................. 1,466 649 -- -- 4,090 (1,837) 4,368
Billings in excess of
costs and estimated
earnings on uncom-
pleted contracts....... 10,482 457 -- 178 4,188 -- 15,305
Liability for warranty
costs.................. -- -- -- -- 109 -- 109
Deferred service reve-
nue.................... 3,127 83 -- -- 42 -- 3,252
Income taxes payable... 1,722 102 -- -- 706 -- 2,530
Deferred tax liabili-
ties................... -- -- -- -- 961 (961) --
Other current liabili-
ties................... 5,375 -- -- -- -- -- 5,375
Due to related par-
ties................... 2,151 96 -- 205 -- (301) 2,151
-------- ------ ------ ------ ------- -------- --------
Total current lia-
bilities............ 65,657 3,573 160 1,823 19,186 (3,099) 87,300
LONG-TERM DEBT, net of
current maturities...... 21,313 580 -- -- 2,498 52,381 76,772
SUBORDINATED DEBT....... 820 -- -- -- -- -- 820
LEASE OBLIGATIONS....... -- 402 -- -- 107 (509) --
DEFERRED TAX LIABILI-
TIES.................... -- -- -- -- 240 (240) --
DEFERRED COMPENSATION... -- 678 -- -- -- (678) --
DUE TO RELATED PARTIES.. 9,745 -- -- -- 616 (616) 9,745
OTHER LONG-TERM LIABILI-
TIES.................... 1,048 -- -- -- -- -- 1,048
SHAREHOLDERS' EQUITY:
Common stock........... 23 1 50 2 873 (922) 27
Additional paid-in
capital................ 198,776 1 -- 376 3,055 45,384 247,592
Retained earnings
(deficit).............. (30,239) 1,412 2,107 5,359 12,982 (21,860) (30,239)
Treasury stock......... -- -- (249) -- (210) 459 --
-------- ------ ------ ------ ------- -------- --------
Total shareholders'
equity.............. 168,560 1,414 1,908 5,737 16,700 23,061 217,380
-------- ------ ------ ------ ------- -------- --------
Total liabilities
and shareholders'
equity.............. $267,143 $6,647 $2,068 $7,560 $39,347 $ 70,300 $393,065
======== ====== ====== ====== ======= ======== ========
</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 THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
POST-
GROUPMAC AND COMMERCIAL BARR ATLANTIC OFFERING PRO FORMA
SUBSIDIARIES AIR ELECTRIC INDUSTRIAL COMPANIES ADJUSTMENTS PRO FORMA
------------ ---------- -------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $107,092 $5,003 $950 $5,428 $34,336 $ -- $152,809
COST OF SERVICES........ 82,706 3,921 712 4,397 27,279 -- 119,015
-------- ------ ---- ------ ------- ------- --------
Gross profit.......... 24,386 1,082 238 1,031 7,057 -- 33,794
SELLING, GENERAL AND AD-
MINISTRATIVE EXPENSES... 18,994 918 206 403 5,451 (117)(a) 25,855
GOODWILL AMORTIZATION... 821 -- -- -- -- 570 (b) 1,391
-------- ------ ---- ------ ------- ------- --------
Income from opera-
tions................. 4,571 164 32 628 1,606 (453) 6,548
OTHER INCOME (EXPENSE):
Interest expense...... (413) (41) -- (4) (186) (722)(c) (1,366)
Interest income....... 184 -- 10 31 24 (249)(d) --
Other................. (5) 25 -- 13 10 -- 43
-------- ------ ---- ------ ------- ------- --------
INCOME BEFORE INCOME
TAX PROVISION........ 4,337 148 42 668 1,454 (1,424) 5,225
INCOME TAX PROVISION.... 2,065 394 -- 8 36 145 (e) 2,648
-------- ------ ---- ------ ------- ------- --------
NET INCOME.............. $ 2,272 $ (246) $ 42 $ 660 $ 1,418 $(1,569) $ 2,577
======== ====== ==== ====== ======= ======= ========
BASIC EARNINGS PER
SHARE:
EARNINGS PER SHARE.... $ 0.10 $ 0.10
======== ========
WEIGHTED AVERAGE
SHARES................ 23,141 26,892 (f)
======== ========
DILUTED EARNINGS PER
SHARE:
EARNINGS PER SHARE.... $ 0.10 $ 0.09
======== ========
WEIGHTED AVERAGE
SHARES................ 23,495 27,283 (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 YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER PRE-
OFFERING,
GROUPMAC AND OFFERING
SUBS ACQUISITION
YEAR ENDED SUPPLEMENTAL AND POST-
DECEMBER 31, COMMERCIAL BARR ATLANTIC PRO FORMA SUPPLEMENTAL OFFERING
1997 HUNGERFORD MIINC AIR ELECTRIC INDUSTRIAL ADJUSTMENTS PRO FORMA COMPANIES
------------ ---------- ------- ---------- -------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........... $138,479 $32,850 $42,283 $20,750 $7,717 $37,035 $ -- $279,114 $390,798
COST OF SERVICES... 101,762 24,602 35,909 13,855 5,148 28,625 -- 209,901 303,785
-------- ------- ------- ------- ------ ------- ------- -------- --------
Gross profit...... 36,717 8,248 6,374 6,895 2,569 8,410 -- 69,213 87,013
SELLING, GENERAL
AND ADMINISTRATIVE
EXPENSES........... 35,862 5,591 5,360 5,649 1,496 1,936 (1,844)(a) 54,050 79,485
GOODWILL AMORTIZA-
TION............... 633 -- -- -- -- -- 1,641 (b) 2,274 --
-------- ------- ------- ------- ------ ------- ------- -------- --------
Income from oper-
ations............ 222 2,657 1,014 1,246 1,073 6,474 203 12,889 7,528
OTHER INCOME (EX-
PENSE):
Interest expense.. (1,542) (121) (73) (152) -- (24) (850)(c) (2,762) (2,018)
Interest income... 398 89 21 10 42 91 -- 651 437
Other............. 112 42 -- 69 (4) 27 -- 246 387
-------- ------- ------- ------- ------ ------- ------- -------- --------
INCOME (LOSS)
BEFORE INCOME
TAX PROVISION... (810) 2,667 962 1,173 1,111 6,568 (647) 11,024 6,334
INCOME TAX PROVI-
SION............... 2,832 -- 409 493 -- 11 4,477 (e) 8,222 2,578
-------- ------- ------- ------- ------ ------- ------- -------- --------
NET INCOME (LOSS).. $ (3,642) $ 2,667 $ 553 $ 680 $1,111 $ 6,557 $(5,124) $ 2,802 $ 3,756
======== ======= ======= ======= ====== ======= ======= ======== ========
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>
COMBINED
PRO FORMA
ADJUSTMENTS PRO FORMA
------------- -------------
<S> <C> <C>
REVENUES........... $ -- $669,912
COST OF SERVICES... -- 513,686
------------- -------------
Gross profit...... -- 156,226
SELLING, GENERAL
AND ADMINISTRATIVE
EXPENSES........... (26,614)(a) 106,921
GOODWILL AMORTIZA-
TION............... 3,288 (b) 5,562
------------- -------------
Income from oper-
ations............ 23,326 43,743
OTHER INCOME (EX-
PENSE):
Interest expense.. (685)(c) (5,465)
Interest income... (1,088)(d) --
Other............. -- 633
------------- -------------
INCOME (LOSS)
BEFORE INCOME
TAX PROVISION... 21,553 38,911
INCOME TAX PROVI-
SION............... 6,989 (e) 17,789
------------- -------------
NET INCOME (LOSS).. $14,564 $ 21,122
============= =============
BASIC EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.79
=============
WEIGHTED AVERAGE
SHARES............ 26,892 (f)
=============
DILUTED EARNINGS
(LOSS) PER SHARE:
EARNINGS (LOSS)
PER SHARE......... $ 0.77
=============
WEIGHTED AVERAGE
SHARES............ 27,283 (f)
=============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-9
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
The respective results of operations for the Pre-Offering and Offering
Acquisition Companies from January 1, 1997 to the dates of the acquisitions
were combined with the Company and the Post-Offering Companies', excluding
Premex, Inc. ("Commercial Air"), actual results of operations for the twelve
months ended December 31, 1997 and Commercial Air for the twelve months ended
March 31, 1998 to determine the pro forma results of operations for the twelve
months ended December 31, 1997. The respective results of operations for the
Post-Offering Companies from January 1, 1998 to the dates of the acquisitions,
or March 31, 1998 for acquisitions consummated subsequent to March 31, 1998,
were combined with actual results of the Company for the three months ended
March 31, 1998 to determine the pro forma results of operations for the three
months ended March 31, 1998.
2. ACQUISITIONS:
The acquisitions of the Pre-Offering Companies were financed by borrowings
under a credit agreement dated May 2, 1997 (the "Original Credit Agreement").
The Original Credit Agreement provided secured facilities consisting of (a) an
18-month revolving credit facility providing up to $3 million in revolving
loans (the "Revolving Credit Facility"), (b) a six-year term loan of $20
million to help fund the acquisition of Airtron (the "Airtron Term Loan"), and
(c) a term loan facility available until October 31, 1998, providing for up to
$12 million in term loans having a final maturity six years after the date of
the Original Credit Agreement (the "Acquisition Credit Facility"). Borrowings
under this facility were repaid with proceeds from the IPO.
The results of operations of the acquired businesses are included in the
actual results of operations of the Company from the date of acquisition and
the historical balance sheet at March 31, 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
Offering Acquisition Companies and the Post-Offering Companies was provided by
proceeds from the IPO and borrowings under a credit agreement dated December
11, 1997 (the "Credit Agreement"). The Credit Agreement is more fully
described in Note 7 to the GroupMAC and subsidiaries consolidated financial
statements and notes thereto included elsewhere herein.
The following table sets forth the consideration paid or to be paid in (a)
cash, (b) subordinated debt, (c) shares of non-convertible, non-voting
Preferred Stock to the shareholders of the Pre-Offering Companies and (d)
shares of Common Stock to the shareholders of the Pre-Offering, Offering
Acquisition and Post-Offering Companies. The Preferred Stock was redeemable at
any time after the initial issuance, in whole or in part, at the option of the
Company, at an amount equal to the liquidation value of $1.00 per share plus
any accrued but unpaid dividends. Redemption of all outstanding Preferred
Stock occurred in connection with the IPO.
For purposes of computing the estimated purchase price for accounting
purposes for the Second Quarter Post-Offering Companies, the value of the
Common Stock is determined using an estimated weighted average fair value of
$13.79 per share, which represents a discount rate of 19% from the weighted
average stock price of $17.08 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-10
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The estimated purchase price and related allocations of the excess purchase
price for the Post-Offering Companies are based upon preliminary estimates and
are subject to certain purchase price adjustments at and following closing.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the assets and liabilities of the Second Quarter
Post-Offering Companies (representing $22.4 million) will approximate fair
value. This results in an allocation to goodwill of approximately $82.7
million. Management has not identified any other material tangible or
identifiable intangible assets to which a portion of the purchase price could
reasonably be allocated. Amounts in thousands.
<TABLE>
<CAPTION>
SUBORDINATED SHARES OF SHARES OF TOTAL
CASH DEBT PREFERRED STOCK(1) COMMON STOCK(3) CONSIDERATION(2)
-------- ------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Airtron................. $ 20,849 $ -- 14,873 4,652 $ 58,192
-------- ---- ------ ------ --------
Pre-Offering Companies
(excluding Airtron).... 12,504 -- 4,405 1,437 32,033
Offering Acquisition
Companies.............. 30,585 -- -- 3,007 64,851
First Quarter Post-
Offering Companies..... 36,666 820 -- 2,506 68,228
Second Quarter Post-
Offering Companies..... 56,243 -- -- 3,313 105,063
-------- ---- ------ ------ --------
Total Acquisitions.... 135,998 820 4,405 10,263 270,175
-------- ---- ------ ------ --------
Totals................ $156,847 $820 19,278 14,915 $328,367
======== ==== ====== ====== ========
</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 $8.1 million representing substantially all of the previously
taxed undistributed earnings of such acquired companies from the acquired
companies that are S corporations.
(3) Excludes 0.2 million of options to purchase common stock.
F-11
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Records the S Corporation distributions of $4.3 million on one of the
Second Quarter Post-Offering 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 Second
Quarter Post-Offering Companies that are specifically excluded as part of the
purchase transaction.
d) Records the elimination of the historical equity accounts of the Second
Quarter Post-Offering Companies.
e) Records the purchase of the Second Quarter Post-Offering Companies,
including the cash, 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 Second Quarter Post-Offering 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............ $(1,400) $ (514) $ -- $ -- $ (8,710) $ -- $(10,624)
Due from related
parties................ -- (403) -- -- -- -- (403)
Deferred tax assets..... (1,028) -- -- -- -- -- (1,028)
Goodwill................ 67 -- (564) (21,457) 104,663 -- 82,709
Deferred tax assets
(noncurrent)........... (240) -- -- -- -- -- (240)
Other noncurrent assets. -- -- (114) -- -- -- (114)
Short-term debt,
including current
maturities............. (2,902) -- -- -- -- 4,739 1,837
Deferred tax
liabilities............ 961 -- -- -- -- -- 961
Due to related parties.. -- 301 -- -- -- -- 301
Long-term debt, net of
current maturities..... -- -- -- -- (47,133) (5,248) (52,381)
Lease obligations....... -- -- -- -- -- 509 509
Deferred tax liabilities
(noncurrent)........... 240 -- -- -- -- -- 240
Deferred compensation... -- -- 678 -- -- -- 678
Due to related parties.. -- 616 -- -- -- -- 616
Common stock............ -- -- -- 925 (3) -- 922
Additional paid-in
capital................ -- -- -- 3,433 (48,817) -- (45,384)
Retained earnings....... 4,302 -- -- 17,558 -- -- 21,860
Treasury stock.......... -- -- -- (459) -- -- (459)
------- ------ ---- ------- -------- ------ --------
Total................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ====== ==== ======= ======== ====== ========
</TABLE>
F-12
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
MARCH 31, 1998
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the Post-Offering 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 of each of the Post-Offering Companies
amounted to $903,000 for the periods presented. The contractually agreed upon
compensation and benefits for these same businesses, on a going forward basis,
amount to $786,000 for the periods presented. The difference between these
amounts equates to $117,000 and is reflected as a pro forma adjustment.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
c) 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-Offering
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 assuming the acquisitions occurred on January 1, 1997, is as
follows (in thousands):
<TABLE>
<CAPTION>
INTEREST QUARTERLY
BALANCE RATE INTEREST
------- -------- ---------
<S> <C> <C> <C>
Short-Term Debt:
Historical March 31, 1998 short-term debt. $ 531 6.6875%(i) $ 9
Historical March 31, 1998 S Corporation
Notes.................................... 935 6.0000%(ii) 14
------- ------
1,466 23
Second Quarter Post-Offering Companies S
Corporation Notes........................ 2,902 6.0000%(ii) 44
------- ------
Total pro forma short-term debt/interest
expense................................ $ 4,368 $ 67
======= ======
Long-Term Debt:
Historical March 31, 1998 long-term debt.. $21,313 6.6875%(i) $ 356
Historical March 31, 1998 subordinated
debt..................................... 820 8.0000%(iii) 16
------- ------
22,133 372
Second Quarter Post-Offering Companies
assumed debt refinanced.................. 8,326 6.6875%(i) 139
Second Quarter Post-Offering Companies
borrowings to fund cash portion of
purchase prices.......................... 47,133 6.6875%(i) 788
------- ------
Total pro forma long-term debt/interest
expense................................ $77,592 $1,299
======= ======
Total pro forma debt/interest expense... $81,960 $1,366
======= ======
</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 March 31, 1998.
F-13
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 Post-Offering Companies.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
f) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<S> <C>
Shares issued in Initial Public Offering.............................. 8,340
Shares issued under Subscription Agreement dated October 24, 1996..... 2,600
Shares issued to Pre-Offering Companies............................... 6,089
Shares issued to Offering Acquisition Companies....................... 3,007
Shares issued to First Quarter Post-Offering Companies................ 2,506
Shares issued to Second Quarter Post-Offering Companies............... 3,313
Shares issued to Founding Management and Directors.................... 1,037
------
Weighted average shares outstanding--basic............................ 26,892
Incremental effect of options and warrants on shares outstanding...... 391
------
Weighted average shares outstanding--diluted.......................... 27,283
======
</TABLE>
DECEMBER 31, 1997
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of Hungerford, MIINC, Commercial Air, Barr Electric and Atlantic
Industrial (the "Supplemental Companies") under the Supplemental Pro Forma
Adjustments and all other companies (the "Combined Companies") in the Combined
Pro Forma Adjustments 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 $3.2 million and $26.6 million for
the Supplemental Companies and the Combined Companies respectively, for the
periods presented. The contractually agreed upon compensation and benefits for
these same businesses, on a going forward basis, amount to $1.4 million and
$7.0 million, respectively. The difference between these respective amounts
equates to $1.8 million and $19.6 million and is reflected as a pro forma
adjustment in the Supplemental Pro Forma Adjustments and the Combined Pro
Forma Adjustments, respectively.
Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $7.0 million recorded by the
Company in the second quarter of 1997 related to the reverse acquisition of
GroupMAC.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
c) 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-Offering
Companies, and interest related to the subordinated debt and notes issued to
fund the S Corporation distributions
F-14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
discussed in Note 3a. A summary of the historical and pro forma debt
outstanding and a summary of the pro forma interest expense assuming the
acquisitions occurred on January 1, 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
INTEREST ANNUAL
BALANCE RATE INTEREST
------- -------- --------
<S> <C> <C> <C>
Short-Term Debt:
Historical March 31, 1998 short-term debt. $ 531 6.6875%(i) $ 35
Historical March 31, 1998 S Corporation
Notes.................................... 935 6.0000%(ii) 56
------- ------
1,466 91
Second Quarter Post-Offering Companies S
Corporation Notes........................ 2,902 6.0000%(ii) 174
------- ------
Total pro forma short-term debt/interest
expense................................ $ 4,368 $ 265
======= ======
Long-Term Debt:
Historical March 31, 1998 long-term debt.. $21,313 6.6875%(i) $1,425
Historical March 31, 1998 subordinated
debt..................................... 820 8.0000%(iii) 66
------- ------
22,133 1,491
Second Quarter Post-Offering Companies
assumed debt refinanced.................. 8,326 6.6875%(i) 557
Second Quarter Post-Offering Companies
borrowings to fund cash portion of
purchase prices.......................... 47,133 6.6875%(i) 3,152
------- ------
Total pro forma long-term debt/interest
expense................................ $77,592 $5,200
======= ======
Total pro forma debt/interest expense... $81,960 $5,465
======= ======
</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 March 31, 1998.
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 Pro Forma Combined Companies.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
f) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<S> <C>
Shares issued in Initial Public Offering.............................. 8,340
Shares issued under Subscription Agreement dated October 24, 1996..... 2,600
Shares issued to Pre-Offering Companies............................... 6,089
Shares issued to Offering Acquisition Companies....................... 3,007
Shares issued to First Quarter Post-Offering Companies................ 2,506
Shares issued to Second Quarter Post-Offering Companies............... 3,313
Shares issued to Founding Management and Directors.................... 1,037
------
Weighted average shares outstanding--basic............................ 26,892
Incremental effect of options and warrants on shares outstanding...... 391
------
Weighted average shares outstanding--diluted.......................... 27,283
======
</TABLE>
F-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 5,715 $ 25,681
Accounts receivable, net............................ 67,745 45,516
Inventories......................................... 12,227 8,834
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 8,047 3,116
Prepaid expenses and other current assets........... 1,912 1,013
Deferred tax assets................................. 2,734 1,647
-------- --------
Total current assets.............................. 98,380 85,807
PROPERTY AND EQUIPMENT, net........................... 18,806 11,312
GOODWILL, net......................................... 139,789 84,533
DEFERRED TAX ASSETS................................... 4,804 4,739
REFUNDABLE INCOME TAXES............................... 3,478 4,529
OTHER LONG-TERM ASSETS................................ 1,886 1,767
-------- --------
Total assets...................................... $267,143 $192,687
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 1,466 $ 2,769
Accounts payable and accrued expenses............... 41,334 28,519
Due to related parties.............................. 2,151 3,358
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 10,482 4,737
Deferred service contract revenue................... 3,127 3,305
Income taxes payable................................ 1,722 31
Other current liabilities........................... 5,375 2,610
-------- --------
Total current liabilities......................... 65,657 45,329
LONG-TERM DEBT, net of current maturities............. 22,133 169
DUE TO RELATED PARTIES................................ 9,745 9,745
OTHER LONG-TERM LIABILITIES........................... 1,048 791
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; 23,309, and 20,629 shares issued and
outstanding, respectively.......................... 23 21
Additional paid-in capital.......................... 198,776 169,143
Retained deficit.................................... (30,239) (32,511)
-------- --------
Total shareholders' equity........................ 168,560 136,653
-------- --------
Total liabilities and shareholders' equity........ $267,143 $192,687
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-26
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES................................................... $ 107,092 $ 17,425
COST OF SERVICES........................................... 82,706 12,385
--------- --------
Gross profit............................................. 24,386 5,040
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............... 18,994 6,100
AMORTIZATION OF GOODWILL................................... 821 --
--------- --------
Income (loss) from operations.......................... 4,571 (1,060)
OTHER INCOME (EXPENSE):
Interest expense......................................... (413) (51)
Interest income.......................................... 184 72
Other.................................................... (5) 230
--------- --------
Income (loss) before income tax provision (benefit).... 4,337 (809)
INCOME TAX PROVISION (BENEFIT)............................. 2,065 (325)
--------- --------
NET INCOME (LOSS).......................................... $ 2,272 $ (484)
========= ========
BASIC EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE................................ $ 0.10 $ (0.10)
========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 23,141 4,652
========= ========
DILUTED EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE................................ $ 0.10 $ (0.10)
========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 23,495 4,652
========= ========
</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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 2,272 $ (484)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 2,045 54
Gain from sale of property and equipment............... (3) (219)
Deferred income taxes.................................. (617) --
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as purchases:
(Increase) decrease in -
Accounts receivable.................................. 2,467 908
Inventories.......................................... (431) (537)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... (1,916) (433)
Prepaid expenses and other current assets............ (454) 4,330
Refundable income taxes.............................. 1,051 --
Other long-term assets............................... 493 --
Increase (decrease) in -
Accounts payable..................................... (1,329) (4,029)
Accrued expenses..................................... (3,040) (563)
Due to related parties............................... (139) --
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 443 --
Deferred service contract revenue.................... (1,020) (117)
Income taxes payable................................. 985 (647)
Other current liabilities............................ 1,687 --
Other long-term liabilities.......................... (76) (586)
--------- --------
Net cash provided by (used in) operating activities. 2,418 (2,323)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired of
$3,265................................................. (35,553) --
Deferred acquisition costs.............................. (308) --
Purchases of property and equipment..................... (2,241) (93)
Proceeds from sale of property and equipment............ 108 285
--------- --------
Net cash provided by (used in) investing activities. (37,994) 192
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt...................................... 21,300 --
Payments of debt........................................ (5,690) --
Bank overdraft.......................................... -- 203
--------- --------
Net cash provided by financing activities........... 15,610 203
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................. (19,966) (1,928)
CASH AND CASH EQUIVALENTS, beginning of period............ 25,681 1,928
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................. $ 5,715 $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................... $ 346 $ --
Income taxes paid....................................... $ 84 $ 1,039
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-28
<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
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 elsewhere herein.
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 MARCH 31,
----------------
1998 1997
-------- -------
<S> <C> <C>
Shares issued in the acquisition of Airtron................... 4,652 4,652
Shares issued, excluding acquisitions and the IPO............. 3,637 --
Shares issued for the acquisition of the Pre-Offering
Companies.................................................... 1,422 --
Shares issued for the acquisition of the Offering Acquisition
Companies.................................................... 2,997 --
Shares issued pursuant to the IPO............................. 8,340 --
Shares issued for the acquisition of the First Quarter Post-
Offering Companies........................................... 2,093 --
-------- -------
Weighted average shares outstanding--Basic.................... 23,141 4,652
Incremental effect of options and warrants outstanding........ 354 --
-------- -------
Weighted average shares outstanding--Diluted.................. 23,495 4,652
======== =======
</TABLE>
3. During the first quarter of 1998, the Company completed the acquisition
of 15 platform companies ("the First Quarter Post-Offering Companies"). The
combined annual revenues of the First Quarter Post-Offering Companies were
approximately $151.8 million. Total consideration paid was $67.1 million,
which included cash payments of $35.6 million, $0.8 million of subordinated
convertible debt and 2.5 million shares of common stock. All such acquisitions
were accounted for as purchases. In connection with these acquisitions, the
Company assumed approximately $5.0 million of debt.
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 ENDED
MARCH 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues.............................................. $ 112,082 $ 106,317
Net income............................................ $ 2,136 $ 2,591
Net income per share:
Basic............................................... $ 0.09 $ 0.11
Diluted............................................. $ 0.09 $ 0.11
</TABLE>
F-29
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Pro forma adjustments included in the amounts above consist of 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 or otherwise retired, additional interest expense
on funds borrowed for acquisitions of certain First Quarter Post-Offering
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 for the periods presented. The pro forma
amounts above also include actual corporate overhead costs. These costs
increased $1.2 million (approximately $0.03 per basic and diluted share)
during the three months ended March 31, 1998 compared to the three months
ended March 31, 1997 due to the formation of the corporate management team and
infrastructure necessary to execute the Company's operating and acquisition
strategies.
From March 31, 1998 through May 14, 1998, the Company acquired three
additional platform companies with combined annual revenues of $33.9 million.
Total consideration paid was approximately $24.7 million that included cash
payments of $13.6 million and 0.8 million shares of common stock. These
acquisitions will be accounted for as purchases.
4. The acquisitions of the GroupMAC 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 March 31, 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 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 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-30
<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-31
<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-32
<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-33
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS TREASURY SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK RECEIVABLE EQUITY
------ ------ ---------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28,
1995................... 6,688 $ 7 $ 2,754 $ 3,476 $ (281) $ -- $ 5,956
Purchases of stock..... -- -- -- -- (2,658) -- (2,658)
Cancellation of trea-
sury stock............ (996) (1) (53) (1,948) 2,002 -- --
Contributions to bene-
fit trust............. -- -- -- -- 937 -- 937
Net income............. -- -- -- 2,139 -- -- 2,139
------ --- -------- -------- ------- ------ --------
BALANCE, February 29,
1996................... 5,692 6 2,701 3,667 -- -- 6,374
Purchases of stock..... -- -- -- -- (2,112) -- (2,112)
Repurchase of warrants. -- -- -- (600) -- -- (600)
Cancellation of trea-
sury stock............ (1,040) (1) (55) (2,056) 2,112 -- --
Distributions to share-
holders............... -- -- -- (7) -- -- (7)
Net income............. -- -- -- 2,336 -- -- 2,336
------ --- -------- -------- ------- ------ --------
BALANCE, February 28,
1997................... 4,652 5 2,646 3,340 -- -- 5,991
Purchase of acquired
companies............. 5,612 6 58,781 -- -- (6,153) 52,634
Public offering, net of
offering costs........ 8,340 8 103,543 -- -- -- 103,551
Compensation expense
from issuance of man-
agement shares and
stock options......... 5 -- 241 -- -- -- 241
Preferred stock issued
to Airtron sharehold-
ers in reverse
acquisition........... -- -- -- (14,873) -- -- (14,873)
Distribution to Airtron
shareholders in re-
verse acquisition..... -- -- -- (17,336) -- -- (17,336)
Shares issued under
subscription agree-
ment.................. 2,000 2 -- -- -- 6,153 6,155
Exercise of stock op-
tions................. 20 -- 61 -- -- -- 61
Common stock to be is-
sued in
acquisitions.......... -- -- 3,871 -- -- -- 3,871
Net loss............... -- -- -- (3,642) -- -- (3,642)
------ --- -------- -------- ------- ------ --------
BALANCE, December 31,
1997................... 20,629 $21 $169,143 $(32,511) $ -- $ -- $136,653
====== === ======== ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<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-35
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. ("GroupMAC") was incorporated as a Texas
corporation to build a national company providing commercial and residential
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services.
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Agreement") with Airtron, Inc. ("Airtron") and certain of its
shareholders, pursuant to which $20.4 million in cash, 14.9 million shares of
GroupMAC preferred stock and 4.7 million shares of GroupMAC common stock were
issued to shareholders of Airtron in exchange for all of the then outstanding
shares of Airtron.
Although for legal purposes Airtron was acquired by GroupMAC, for accounting
purposes, the transaction was accounted for as a reverse acquisition, as if
Airtron acquired GroupMAC, due to the fact that the former shareholders of
Airtron then owned a majority of GroupMAC common stock. In connection with the
purchase of GroupMAC, the consideration paid to the shareholders of GroupMAC
was recorded as nonrecurring compensation expense of $7.0 million in the
accompanying statements of operations for the ten months ended December 31,
1997. The consolidated financial statements presented herein for the periods
prior to the effective date of the acquisition only include the accounts of
Airtron. The consolidated statements of shareholders' equity have been
converted from Airtron's capital structure to GroupMAC's capital structure to
reflect the exchange of shares pursuant to the Agreement. The cash and
redeemable preferred stock paid to the Airtron shareholders, net of existing
liabilities to former shareholders, has been treated as a distribution to the
Airtron shareholders. The consolidated group of companies are collectively
referred to herein as GroupMAC and Subsidiaries or the "Company." All
significant intercompany balances have been eliminated. Concurrent with the
initial public offering of GroupMAC's common stock (the "IPO"), the Company
changed its fiscal year end fromFebruary 28 to December 31.
Airtron was incorporated in 1970 as a Delaware corporation. Airtron installs
and services brand name heating and air conditioning equipment for residential
and commercial customers located in Ohio, Indiana, Kansas, Kentucky, Florida
and Texas.
In June and July 1997, the Company acquired, in separate transactions, 10
additional companies (the "Pre-Offering Companies") through a combination of
cash, preferred stock, common stock and warrants to purchase shares of common
stock of GroupMAC. During the fourth quarter of 1997, the Company acquired,
concurrently with the IPO, 13 additional companies (the "Offering Acquisition
Companies" and, together with Airtron and the Pre-Offering Companies, the
"GroupMAC Companies") through a combination of cash and common stock of the
Company.
The acquisitions of the GroupMAC Companies (other than Airtron) were
accounted for as purchase business combinations, with the results of
operations included in the Company's financial statements from the effective
date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-36
<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-37
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of GroupMAC's common stock
at the date of the grant over the amount an employee must pay to acquire the
common stock.
Warranty Costs
The Company generally warrants all of its work for a period of one year from
the date of installation. A provision for estimated warranty costs is made at
the time a product is sold or service is rendered.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, Earnings Per Share, which the Company is required to
adopt for both interim and annual periods ending after December 15, 1997. SFAS
No. 128 simplifies the earnings per share calculation. Basic earnings per
share, which excludes the impact of common share equivalents, replaces primary
earnings per share. Diluted earnings per share, which utilizes the average
market price per share as opposed to the greater of the average market price
per share or ending market price per share when applying the treasury stock
method in determining common share equivalents, replaces fully diluted
earnings per share.
Weighted average shares outstanding for each of the periods presented were
as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Shares issued in the acquisition of
Airtron................................ 4,652 5,172 6,190
Shares issued, excluding acquisitions
and the IPO............................ 3,628 -- --
Shares issued for the acquisition of the
Pre-Offering Companies................. 763 -- --
Shares issued for the acquisition of the
Offering Acquisition Companies......... 496 -- --
Shares issued in the IPO................ 1,261 -- --
------ ----- -----
Weighted average shares outstanding... 10,800 5,172 6,190
====== ===== =====
</TABLE>
Basic earnings per share have been calculated by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings
per share are typically computed by dividing net income by the weighted
average number of common shares outstanding plus potentially dilutive common
shares. Because the Company reported a net loss for the ten months ended
December 31, 1997, the potentially dilutive
F-38
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common shares (including warrants and stock options discussed in Note 9) had
an anti-dilutive effect on earnings per share. Accordingly, diluted earnings
per share is the same as basic earnings per share for each of the periods
presented.
3. BUSINESS COMBINATIONS
During June and July 1997, the Company acquired the Pre-Offering Companies
for approximately $12.5 million in cash, 1.4 million shares of common stock,
4.4 million shares of redeemable preferred stock (which were retired in
connection with the IPO), options to acquire 60,000 shares of common stock and
warrants to purchase 514,000 shares of common stock. Of the total
consideration, approximately $0.4 million of cash and 22,500 shares of common
stock is due to former owners at December 31, 1997.
During the fourth quarter of 1997, the Company acquired the Offering
Acquisition Companies for approximately $31.7 million in cash, 3.1 million
shares of common stock and 42,000 options to acquire shares of common stock.
Of the total consideration, approximately $2.8 million of cash and 0.3 million
shares of common stock is due to former owners at December 31, 1997.
In conjunction with the above mentioned acquisitions the Company assumed
$16.1 million of debt.
For the above mentioned acquisitions, the common stock was valued at its
estimated fair value at the time of the respective acquisition and the
preferred stock was valued at its redemption value of $1 per share. The
allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of
fair value and may be revised as additional information becomes available.
However, the Company does not expect any significant adjustments to the
purchase price allocations or amount of goodwill at December 31, 1997.
Several former owners of the GroupMAC Companies have the ability to receive
additional amounts of purchase price, payable in cash and common stock in 1998
through 2000, contingent upon the occurence of future events. The Company will
record such contingent consideration as additional purchase price when earned.
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC, Airtron and the other GroupMAC Companies as if
the acquisitions were effective on the first day of the period being reported
(in thousands, except for per share amounts).
<TABLE>
<CAPTION>
PRO FORMA DATA
(UNAUDITED)
-------------------------
TWELVE TWELVE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues........................................ $329,038 $306,025
Net income...................................... $ 10,436 $ 10,926
Net income per share:
Basic......................................... $ 0.49 $ 0.52
Diluted....................................... $ 0.49 $ 0.51
</TABLE>
Pro forma adjustments included in the amounts above include compensation
differentials, adjustment for goodwill amortization over a period of 40 years,
elimination of historical interest expense on long-term debt which was repaid
with the proceeds of the IPO, and adjustment to the federal and state income
tax provisions based on pro forma operating results. Net income per share
assumes all shares issued for the acquisitions were outstanding for the
periods presented.
F-39
<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-40
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, FEBRUARY 28,
LIVES 1997 1997
----------- ------------ ------------
<S> <C> <C> <C>
Land...................... -- $ 218 $ 217
Buildings and
improvements............. 20-30 years 677 640
Service and other
vehicles................. 4-7 years 5,385 135
Machinery and equipment... 5-10 years 4,118 686
Office equipment,
furniture and fixtures... 5-10 years 2,516 724
Leasehold improvements.... -- 1,220 550
------- -------
14,134 2,952
Less accumulated depre-
ciation................ (2,822) (1,663)
------- -------
$11,312 $ 1,289
======= =======
</TABLE>
7. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Notes payable to the former shareholders of GroupMAC
Companies at 6%, payable May 1998................... $ 2,466 $ --
Equipment installment loans payable to banks and
other lenders, interest varying from 7.5% to 10%,
secured by certain equipment, payable in monthly and
quarterly installments including interest, final
installment due December 1999....................... 228 --
Other notes payable to former shareholders at
interest rates ranging from 4.8%
to 8.25%, payable in monthly installments through
March 2002.......................................... 244 1,290
------- ------
Total short- and long-term debt.................. 2,938 1,290
Less short-term borrowings and current maturities.... (2,769) (149)
------- ------
$ 169 $1,141
======= ======
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the "Original
Credit Agreement") with a total commitment of $35 million. The Original Credit
Agreement consisted of three portions: (i) a revolving credit agreement
providing up to $3 million for use as working capital, (ii) a $12 million
advancing acquisition line of credit to finance acquisitions, and (iii) a $20
million term loan to finance the acquisition of Airtron. Borrowings under the
Original Credit Agreement totaled $32.5 million to fund the cash portion of
the purchase prices related to Airtron and the Pre-Offering Companies. The
Original Credit Agreement was repaid from the proceeds of the IPO and
terminated in December 1997.
In connection with the acquisition of certain Offering Acquisition Companies
taxed under Subchapter S of the Internal Revenue Code, distributions totalling
$4.2 million were made to former shareholders, with $1.8 million paid from
acquired cash and $2.5 million satisfied with a note to the selling
shareholders. These notes bear interest at 6% and are payable in May 1998.
On December 11, 1997, the Company entered into a three-year revolving credit
agreement (the "Credit Agreement") with an initial borrowing capacity of $75
million. Borrowings under the Credit Agreement bear interest either at the
prime rate or Eurodollar rate adjusted for margins ranging from 0% to 0.5% or
1.0% to 2.0%, respectively, depending on the ratio of the Company's funded
debt to its historical earnings before interest,
F-41
<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-42
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, the Company granted to directors, senior management and other
employees options to purchase an aggregate of 388,800 shares of common stock
at an exercise price of $3.08. During 1997, options to purchase 20,000 shares
of common stock were exercised, 25,000 options terminated and the remaining
options were outstanding at December 31, 1997. These options vest and expire
over various periods.
In connection with the purchase of one of the Pre-Offering Companies, the
Company issued warrants to purchase 514,000 shares of common stock at $17.50.
The following is a summary of stock option and warrant activity (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE OPTIONS
EXERCISE OR
PRICE WARRANTS
-------- ---------
<S> <C> <C>
Granted...................................................... $ 3.08 292
-----
Balance at December 31, 1996................................. 3.08 292
Granted...................................................... 3.08 69
-----
Balance at April 30, 1997, date of Agreement................. 3.08 361
Granted...................................................... 14.33 2,611
Exercised.................................................... 3.08 (20)
Surrendered.................................................. 3.08 (25)
-----
Balance at December 31, 1997................................. 13.07 2,927
=====
</TABLE>
Exercisable options at February 28, 1997 and February 29, 1996 were zero. A
summary of outstanding and exercisable options and warrants as of December 31,
1997 follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE NUMBER OF AVERAGE WEIGHTED AVERAGE NUMBER OF
OPTION OUTSTANDING REMAINING EXERCISABLE PRICE EXERCISABLE
RANGE OF OR OPTIONS OR CONTRACTUAL OF EXERCISABLE OPTIONS OR
OPTION OR WARRANT WARRANTS LIFE OPTIONS OR WARRANTS
WARRANT PRICES PRICES (THOUSANDS) (YEARS) WARRANTS (THOUSANDS)
- --------------- -------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$0.00 to $3.08 $ 3.08 369 9.0 $ 3.08 128
$3.09 to $7.00 $ 7.00 42 3.5 $ 7.00 25
$7.01 to $17.50 $14.63 2,516 5.9 $17.50 514
----- ---
2,927 667
===== ===
</TABLE>
The Company applies Accounting Principle Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its stock option plans.
Accordingly, compensation cost has been recognized only for the options that
have an exercise price less than the fair market value of the underlying stock
at date of grant. A compensation charge of $0.2 million is reflected in the
consolidated statements of operations and shareholders' equity for the ten
months ended December 31, 1997 related to the issuance of management shares
and stock options at prices below the fair market value at the date of issue
or grant.
The following unaudited pro forma data is calculated as if compensation
expense for the Company's stock option plans were determined based on the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation:
F-43
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, 1997
---------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss.................................................. $(3,642) $(3,983)
Net loss per share:
Basic................................................... $ (0.34) $ (0.37)
Diluted................................................. $ (0.34) $ (0.37)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
SUBSEQUENT TO PRIOR TO THE
THE AGREEMENT AGREEMENT
------------- ------------
<S> <C> <C>
Dividend yield.................................. -- --
Expected volatility............................. 33.0% 0%
Risk-free interest rate......................... 5.83% 6.26%
Expected lives.................................. 6.6 years 10 years
Fair value of options at grant date............. $ 5.425 $ 1.425
</TABLE>
In July 1994, Airtron granted warrants to purchase 60,000 common shares at
$1 each until August 1, 2011. The appraised value of Airtron's stock at that
time was $40 per share, resulting in a charge of $2.4 million and an
offsetting increase in retained earnings in fiscal 1995. All 60,000 warrants
were outstanding at February 29, 1996. In August 1996, 15,000 of these
warrants were purchased from a former shareholder for $0.5 million, resulting
in a reduction in retained earnings for the original recorded value of the
warrants of $0.6 million with the offset recorded as other income. At February
28, 1997, 45,000 warrants were outstanding. In connection with the Agreement
these warrants were exchanged for cash and preferred and common shares of
GroupMAC.
Airtron had deferred compensation arrangements for certain members of its
management and its board of directors. The assets and liabilities previously
recorded by the Company have been reflected as distributions in the
accompanying financial statements.
10. SHAREHOLDERS' EQUITY
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual providing for the sale of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. At December 31, 1997, the
Company had sold all of the 2.6 million shares.
On August 16, 1997, the Board of Directors of GroupMAC approved a 1-for-2.5
reverse stock split on the Company's common stock. The reverse stock split was
approved by the shareholders of GroupMAC on September 24, 1997 and became
effective shortly thereafter. All share and per share data have been restated
to reflect the reverse stock split.
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of common stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of one Pre-Offering Company
and the Offering Acquisition Companies, $42.6 million to repay corporate
indebtedness and debt assumed in connection with the acquisition of the
GroupMAC Companies, $19.3
F-44
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million to retire all of the then outstanding preferred stock and $11.9
million for general corporate purposes including working capital, final
consideration settlements related to the GroupMAC Companies and future
acquisitions.
11. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................ $ -- $(1,020) $ 2,530
State and local........................ 489 385 536
------ ------- -------
489 (635) 3,066
Deferred:
Federal, state and local............... 2,343 2,207 (1,415)
------ ------- -------
$2,832 $ 1,572 $ 1,651
====== ======= =======
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. federal statutory income tax rate of 34% to income (loss) before income
tax provision as a result of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 29,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory
rate................................... $ (275) $1,329 $1,289
Increase (decrease) resulting from:
State income taxes, net of federal
benefit.............................. 323 254 354
Compensation expense from reverse
acquisition.......................... 2,455 -- --
Non-deductible goodwill amortization.. 199 -- --
Other................................. 130 (11) 8
------ ------ ------
$2,832 $1,572 $1,651
====== ====== ======
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts..................... $ 713 $ 187
Inventories......................................... 279 246
Accrued expenses.................................... 2,489 577
Deferred revenue.................................... 348 --
Compensation and benefits........................... 3,736 2,987
Net operating loss carryforward..................... 1,231 --
Other............................................... 183 --
------- ------
Total deferred income tax assets.................. 8,979 3,997
------- ------
Deferred income tax liabilities:
Depreciation........................................ (585) (37)
Completed contract accounting for tax purposes...... (1,836) --
Other............................................... (172) --
------- ------
Total deferred income tax liabilities............. (2,593) (37)
------- ------
Net deferred income tax assets.................. $ 6,386 $3,960
======= ======
</TABLE>
F-45
<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-46
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Many computer software programs, as well as certain hardware and equipment
containing date sensitive data, were structured to utilize a two-digit date
field meaning that they may not be able to properly recognize dates in the
year 2000 and later. This could result in significant system and equipment
failures. The Company recognizes that it must take action to ensure that its
products and operations will not be adversely impacted by Year 2000 software
failures and is currently developing detailed assessments and action plans to
address Year 2000 issues. Irrespective of the Year 2000 issue, the Company is
in the process of developing data processing systems throughout the
organization for its overall information needs which will be free of any Year
2000 limitations. The common data processing system will be implemented first
at GroupMAC Companies with identified Year 2000 constraints which are not
expected to be corrected by other means. The Company expects to commence user-
acceptance testing of the new data processing system by the end of 1998 with
implementation beginning in 1999. The Company currently does not have an
overall estimate of the cost associated with the purchase and implementation
of the new processing system.
The Year 2000 considerations may have an effect on some of the Company's
customers and suppliers, and thus indirectly on the Company. The Company has
not assessed the potential adverse effect on the Company with respect to
customers and suppliers with Year 2000 problems.
15. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
restricted investments (carried at cost--see Note 4) and debt. The Company
believes that the carrying values of these instruments on the accompanying
consolidated balance sheets approximate their fair value.
16. SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 1998, the Company completed the acquisition of
15 platform and four tuck-in companies (the "Post-Offering Companies"). The
combined annual revenues of the Post-Offering Companies were approximately
$155.0 million. Total consideration paid was $68.5 million, which included
cash payments of $36.9 million, $0.8 million of subordinated convertible debt,
and 2.5 million shares of common stock. All such acquisitions will be
accounted for as purchases.
The Company has signed definitive agreements to purchase two platform
companies with combined annual revenues of $28.4 million. Total consideration
to be paid is approximately $21.7 million which includes cash payments of
$11.9 million, and 0.8 million shares of common stock. Both acquisitions will
be accounted for as purchases.
F-47
<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-48
<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
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
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-49
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ------------------------ ------------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $39,534,230 $45,508,339 $66,058,958 $36,382,305 $38,835,662 $52,184,305 $54,560,008
COST OF SERVICES........ 32,256,651 36,927,012 56,372,933 31,590,195 33,451,024 45,192,195 46,400,433
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......... 7,277,579 8,581,327 9,686,025 4,792,110 5,384,638 6,992,110 8,159,575
SELLING, GENERAL AND AD-
MINISTRATIVE EXPENSES.. 6,088,076 7,338,381 7,631,851 3,705,694 3,787,822 5,566,694 6,239,243
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from opera-
tions............... 1,189,503 1,242,946 2,054,174 1,086,416 1,596,816 1,425,416 1,920,332
OTHER INCOME (EXPENSE):
Interest expense....... (275,490) (370,603) (519,842) (244,135) (214,381) (386,135) (333,334)
Other.................. (25,865) (42,527) 7,926 66,751 167,209 23,751 183,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
(301,355) (413,130) (511,916) (177,384) (47,172) (362,384) (149,824)
Income before income
tax provision....... 888,148 829,816 1,542,258 909,032 1,549,644 1,063,032 1,770,508
INCOME TAX PROVISION.... 325,730 344,238 574,000 347,059 569,001 402,059 649,600
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643 $ 660,973 $ 1,120,908
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<PAGE>
MASTERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------------------- ----------------------- -----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $30,327,333 $35,160,419 $39,825,843 $18,278,841 $19,318,196 $29,088,014 $31,166,233
COST OF SERVICES........ 28,018,280 31,746,287 35,854,155 16,639,076 17,457,471 26,308,282 27,955,896
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 2,309,053 3,414,132 3,971,688 1,639,765 1,860,725 2,779,732 3,210,337
SELLING, GENERAL AND AD-
MINISTRATIVE
EXPENSES............... 1,664,069 2,373,300 2,483,875 1,008,650 1,196,777 1,738,751 2,014,689
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations. 644,984 1,040,832 1,487,813 631,115 663,948 1,040,981 1,195,648
INTEREST EXPENSE........ 86,940 102,428 134,718 58,888 64,672 100,546 90,934
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 558,044 $ 938,404 $ 1,353,095 $ 572,227 $ 599,276 $ 940,435 $ 1,104,714
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<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-66
<PAGE>
MASTERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ----------------------- ----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING
ACTIVITIES:
Net income............. $ 558,044 $ 938,404 $ 1,353,095 $572,227 $ 599,276 $ 940,435 $ 1,104,714
Adjustments to recon-
cile net income to net
cash provided by (used
in) operating activi-
ties:
Depreciation........... 227,572 236,131 258,079 144,065 139,740 189,589 210,017
Loss(Gain) on disposal
of assets............. 20,576 8,480 2,223 -- (305) 2,223 1,601
Bad debt expense....... 425,602 626,625 434,250 100,000 169,741 223,250 279,241
Changes in operating
assets and liabili-
ties:
(Increase) decrease
in--
Notes and accounts
receivable.......... (517,095) (1,881,816) (1,035,935) (701,119) (170,055) (910,274) (885,037)
Costs and estimated
earnings in excess
of billings on un-
completed contracts. (104,401) (278,186) (359,379) (667,721) 446,342 (825,871) 262,473
Inventories.......... 116,978 9,039 (99,652) 31,423 (33,197) 86,925 171,651
Prepaid expenses and
other assets........ (16,255) (17,607) 1,337 9,945 (21,989) 16,862 (41,974)
Increase (decrease)
in--
Accounts payable..... 380,925 120,221 (20,018) 326,793 391,192 435,238 403,551
Billings in excess of
costs and estimated
earnings on uncom-
pleted contracts.... 43,624 209,499 (94,107) 26,087 223,635 (6,538) 164,983
Accrued salaries and
wages............... 2,662 16,042 17,360 58,963 40,363 93,177 70,593
Accrued profit shar-
ing and bonus....... 143,148 256,752 189,431 (43,433) (162,176) 86,425 (150,903)
Accrued vacation ben-
efits............... 53,589 40,105 61,561 29,600 35,858 68,284 66,769
Payroll taxes and
withholding......... 22,291 (5,665) (69,252) 57,517 4,356 61,390 22,021
Other current liabil-
ities............... 238,406 80,814 (86,259) (52,484) 75,371 (29,779) (1,774)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) operating ac-
tivities............... 1,595,666 358,838 552,734 (108,137) 1,738,152 431,336 1,677,926
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM INVEST-
ING
ACTIVITIES:
Purchases of property
and equipment......... (284,326) (1,045,919) (295,198) (169,080) (130,357) (226,027) (188,846)
Proceeds from sale of
equipment............. 18,208 566 -- -- 6,327 -- 6,327
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash used in in-
vesting activities.... (266,118) (1,045,353) (295,198) (169,080) (124,030) (226,027) (182,519)
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM FINANC-
ING
ACTIVITIES:
Proceeds from long-term
debt.................. 160,000 1,604,746 659,234 944,234 -- 659,234 --
Payments of long-term
debt.................. (1,237,110) (345,617) (113,506) (51,018) (945,145) (83,925) (810,714)
Dividends paid......... (219,912) (489,345) (667,743) (567,324) (702,423) (609,348) (720,273)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ (1,297,022) 769,784 (122,015) 325,892 (1,647,568) (34,039) (1,530,987)
----------- ----------- ----------- -------- ----------- --------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIV-
ALENTS................. 32,526 83,269 135,521 48,675 (33,446) 171,270 (35,580)
CASH AND CASH EQUIVA-
LENTS, beginning of pe-
riod................... 419,460 451,986 535,255 535,255 670,776 535,255 670,776
----------- ----------- ----------- -------- ----------- --------- -----------
CASH AND CASH EQUIVA-
LENTS, end of
period................. $ 451,986 $ 535,255 $ 670,776 $583,930 $ 637,330 $ 706,525 $ 635,196
=========== =========== =========== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
DECEMBER 31, -------------------- ------------------
1996 1996 1997 1996 1997
------------ --------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............ $ 359,941 $ 266,268 $ 247,078 $322,268 $542,206
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and am-
ortization.......... 109,624 65,735 89,354 100,008 114,932
Gain on sale of prop-
erty and equipment.. -- -- -- -- (5,627)
Changes in operating
assets and liabili-
ties:
(Increase) decrease
in--
Accounts receivable. (368,388) (366,932) (376,997) (81,715) (192,725)
Inventories......... (10,142) (34) (20,826) (10,117) (25,027)
Costs and estimated
earnings in excess
of billings on un-
completed con-
tracts............. (27,750) (52,223) 16,107 12,542 112,313
Due from related
parties............ 69,661 85,066 3,738 90,952 (20,149)
Prepaid expenses and
other current as-
sets............... (5,009) (20,847) (2,879) (23,044) (17,678)
Increase (decrease)
in--
Accounts payable.... 215,954 367,492 195,680 75,850 (142,147)
Accrued expenses.... 43,524 10,842 (88,240) 4,933 (104,452)
Billings in excess
of costs and esti-
mated earnings on
uncompleted con-
tracts............. 23,641 (71,807) (17,836) (89,241) (82,258)
Due to related par-
ties............... (41,609) (41,609) 35,150 (41,609) 98,780
Other long-term lia-
bilities........... -- -- -- (55,000) --
--------- --------- --------- -------- --------
Net cash provided
by operating ac-
tivities......... 369,447 241,951 80,329 305,827 278,168
--------- --------- --------- -------- --------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of property
and equipment........ (237,113) (130,895) (86,563) (31,898) (95,525)
Proceeds from sales of
property and equip-
ment................. 15,000 -- -- -- 12,000
--------- --------- --------- -------- --------
Net cash used in
investing activi-
ties............. (222,113) (130,895) (86,563) (31,898) (83,525)
--------- --------- --------- -------- --------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from short-
term borrowings...... 590,000 440,000 110,000 -- 110,000
Payments of short-term
borrowings........... (410,000) (260,000) (100,000) -- (191,454)
Proceeds from long-
term debt............ 194,326 98,775 37,499 120,764 39,750
Payments of long-term
debt................. (145,389) (39,145) (72,829) -- (110,000)
Distributions to
shareholders......... (295,714) (155,000) (73,000) (370,715) (73,000)
--------- --------- --------- -------- --------
Net cash provided
by (used in)
financing
activities....... (66,777) 84,630 (98,330) (249,951) (224,704)
--------- --------- --------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 80,557 195,686 (104,564) 23,978 (30,061)
CASH AND CASH EQUIVA-
LENTS, beginning of
period................ 44,130 44,130 124,687 44,130 124,687
--------- --------- --------- -------- --------
CASH AND CASH EQUIVA-
LENTS, end of period.. $ 124,687 $ 239,816 $ 20,123 $ 68,108 $ 94,626
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<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-182
<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-183
<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-184
<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-185
<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-186
<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-187
<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-188
<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-189
<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-190
<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-191
<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-192
<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-193
<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-194
<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-195
<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-196
<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-197
<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-198
<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-199
<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-200
<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-201
<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-202
<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-203
<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-204
<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
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
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-205
<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-206
<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-207
<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-208
<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-209
<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-210
<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-211
<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-212
<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-213
<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-214
<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-215
<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-216
<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 inter-
est.................. $ 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-217
<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-218
<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-219
<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-220
<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-221
<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-222
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02A of the TBCA provides, in relevant part, as follows:
Subject to the provisions of Sections B and C of this Article, each
corporation shall have power:
(16) to indemnify directors, officers, employees, and agents of the
corporation and to purchase and maintain liability insurance for those
persons.
Article IX of the Articles of Incorporation of the Company (therein referred
to as the "Corporation") provides as follows:
1. Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such
action, suit or proceeding, and any inquiry or investigation that would
lead to such action, suit or proceeding (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director or
officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to any employee benefit
plan (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any
other capacity while serving as a director or officer, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by
the TBCA, as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all judgments, fines, penalties (including excise tax and
similar taxes), settlements, and reasonable expenses actually incurred by
such indemnitee in connection therewith. The right to indemnification
conferred in this Article shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the TBCA requires, an advancement
of expenses incurred by an indemnitee shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such indemnitee, to
repay all amounts so advanced if it shall ultimately be determined that
such indemnitee is not entitled to be indemnified for such expenses under
this Article or otherwise.
2. Insurance. The Corporation may purchase and maintain insurance, at its
expense, on behalf of any indemnitee against any liability asserted against
him and incurred by him in such a capacity or arising out of his status as
a representative of the Corporation, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or
loss under the TBCA.
3. Indemnity of Employees and Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the board of directors,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the
provisions of this Article or as otherwise permitted under the TBCA with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
The Company has entered into indemnity agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
TBCA as described above.
The Company has purchased liability insurance policies covering the
directors and officers of the Company, including, to provide protection where
the Company cannot legally indemnify a director or officer and where a claim
arises under the Employee Retirement Income Security Act of 1974 against a
director or officer based on an alleged breach of fiduciary duty or other
wrongful act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1* Articles of Incorporation of the Company, as amended.
3.2* Bylaws of the Company, as amended.
4.1* Form of Certificate representing the Common Stock, par value $0.001
per share, of the Company.
5 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
Common Stock being offered.
10.1* Form of Stock Awards Plan.
10.2* Form Option Agreement of Stock Awards Plan.
10.3* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of a Majority of the Outstanding Common Stock of
Airtron, Inc., dated April 30, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.4* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of K & N
Plumbing, Heating and Air Conditioning, Inc., dated
June 20, 1997. (Confidential information has been omitted from this
document and has been filed separately with the Commission.)
10.5* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Costner
Brothers, Inc., dated June 21, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.6* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Hallmark Air
Conditioning, Inc., dated June 24, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.7* Agreement and Plan of Merger among Group Maintenance America Corp.,
JARL Acquisition Corp., AA JARL, Inc., and James Wilburn, dated March
17, 1997.
10.8* Asset Purchase Agreement among Hallmark Air Conditioning, Inc., and
Way Service, Inc., dated June 24, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.9* Agreement and Plan Exchange by and among Group Maintenance America
Corp, and the Holders of the Outstanding Capital Stock Charlie
Crawford, Inc., dated June 25, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.10* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of A-ABC
Appliance, Inc. and A-1 Appliance & Air Conditioning, Inc., dated July
3, 1997. (Confidential information has been omitted from this document
and has been filed separately with the Commission.)
10.11* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Sibley
Services, Inc., dated July 15, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.12* Agreement and Plan of Merger by and among Group Maintenance America
Corp., CRP Acquisition Corp., Callahan Roach Products & Publications,
Inc. and the Holders of the Outstanding Capital Stock of Callahan
Roach Products & Publications, Inc., dated July 16, 1997.
10.13* Agreement and Plan of Merger by and among Group Maintenance America
Corp, CRP Acquisition Corp, Callahan Roach & Associates and all of the
Partners of Callahan Roach & Associates, dated
July 16, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14* Asset Purchase Agreement among United Acquisition Corp, Group
Maintenance America Corp, United Service Alliance, L.C. and the
Members of United Service Alliance, L.C., Inc., dated July 1, 1997.
(Confidential information has been omitted from this document and has
been filed separately with the Commission.)
10.15* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., All Service Acquisition Corp., All Service Electric,
Inc. and the Holder of the Outstanding Capital Stock of All Service
Electric, Inc., dated as of August 18, 1997.
10.16* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Arkansas Mechanical Services,
Inc. and the Holders of the Outstanding Capital Stock of Arkansas
Mechanical Services, Inc., dated as of August 18, 1997.
10.17* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Central Carolina Acquisition Corp., Central Carolina
Air Conditioning Company and the Holders of the Outstanding Capital
Stock of Central Carolina Air Conditioning Company, dated as of August
18, 1997.
10.18* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Evans Acquisition Corp, Evans Services, Inc., the Holder
of the Outstanding Capital Stock of Evans Services, Inc., dated as of
August 18, 1997.
10.19* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Linford Acquisition Corp., Linford Service Company and
the Holders of the Outstanding Common Stock of Linford Service
Company, dated as of August 18, 1997.
10.20* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., MacDonald-Miller Acquisition Corp., MacDonald-Miller
Industries, Inc., the Principal Holders of the Outstanding Capital
Stock of MacDonald-Miller Industries, Inc. and the Trustee of the
MacDonald-Miller Stock Ownership Plan and Trust, dated as of August
18, 1997.
10.21* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Masters Accusation Corp., Masters, Inc. and the Holder
of the Outstanding Capital Stock of Masters, Inc., dated as of August
18, 1997.
10.22* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Mechanical Services, Inc. and
the Holders of the Outstanding Capital Stock of Mechanical Services,
Inc., dated as of August 18, 1997.
10.23* Form of Agreement and Plan of Exchange by and among Group Maintenance
America Corp., Paul E. Smith Co., Inc. and the Holders of the
Outstanding Capital Stock of Paul E. Smith Co., Inc., dated as of
August 18, 1997.
10.24* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Southeast Mechanical Service, Inc. and the Holders of
the Outstanding Capital Stock of Southeast Mechanical Service, Inc.,
dated as of August 18, 1997.
10.25* Form of Agreement and Plan of Merger by and among Group Maintenance
Corp, Van's Acquisition Corp., Van's Comfortemp Air Conditioning, Inc.
and the Holders of the Outstanding Capital Stock of Van's Comfortemp
Air Conditioning, Inc., dated as of August 18, 1997.
10.26* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Willis Acquisition Corp., Willis Refrigeration, Heating
& Air Conditioning, Inc. and the Holders of the Outstanding Capital
Stock of Willis Refrigeration, Heating & Air Conditioning, Inc., dated
as of August 18, 1997.
10.27* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Yale Acquisition Corp., Yale Incorporated and the
Holders of the Outstanding Capital Stock of Yale Incorporated, dated
as of August 18, 1997.
10.28* Form of Employment Agreement by and between Group Maintenance America
Corp. and James P. Norris.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.29* Form of Employment Agreement by and between Group Maintenance America
Corp. and J. Patrick Millinor, Jr.
10.30* Form of Employment Agreement by and between Group Maintenance America
Corp. and Donald L. Luke.
10.31* Form of Employment Agreement by and between Group Maintenance America
Corp. and James D. Jennings.
10.32* Form of Employment Agreement by and between Group Maintenance America
Corp. and Timothy Johnston.
10.33* Form of Employment Agreement by and between Group Maintenance America
Corp. and William Michael Callahan.
10.34* Form of Employment Agreement by and between Group Maintenance America
Corp. and Alfred R. Roach, Jr.
10.35* Airtron, Inc. 1997 Corporate Staff Bonus Plan.
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).
21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's
Transition Report on Form 10-K for the ten month period ended December
31, 1997).
23.1 Consent of Bracewell & Patterson, L.L.P. (included in its opinion
filed as Exhibit 5 hereto).
23.2** Consent of KPMG Peat Marwick LLP.
23.3** Consent of Deloitte & Touche LLP.
23.4** Consent of Moss Adams LLP.
24 Powers of attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* FILED AS AN EXHIBIT TO THE COMPANY'S FORM S-1 (REGISTRATION NO. 333-34067)
UNDER AN EXHIBIT NUMBER IDENTICAL TO THAT DESCRIBED HEREIN AND INCORPORATED
HEREIN BY THIS REFERENCE.
** FILED HEREWITH.
(b) Financial Statement Schedules
No financial statement schedules are included herein. All other schedules
for which provision is made in the applicable accounting regulations of the
Commission are not required under the related instructions, are inapplicable,
or the information is included in the consolidated financial statements, and
have therefore been omitted.
(c) Reports, Opinions, and Appraisals
The following reports, opinions and appraisals are included herein.
None.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) Regulation S-K, Item 512 Undertakings
(1) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(iii) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(2) Registration on Form S-4 of Securities Offered for Resale.
(i) The undersigned hereby undertakes as follows: That prior to any
public reoffering of the securities registered hereunder through the
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by person who may be
deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(ii) The registrant undertakes that every prospectus (a) that is
filed pursuant to the paragraph immediately preceding, or (b) that
purports to meet the requirements of section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of new securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Company
of expenses incurred or paid by a director, officer or controlling person
of the Company in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities
II-5
<PAGE>
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4 of this Form, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(c) The undersigned hereby undertakes to supply by means of a supplement or
a post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in
the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Group Maintenance
America Corp. has duly caused this Registration Statement or amendment thereto
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, State of Texas, on July 20, 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 JULY 20, 1998.
<TABLE>
<S> <C>
SIGNATURE TITLE
James P. Norris* Chairman of the Board; Director
-------------------------------------
James P. Norris
/s/ J. Patrick Millinor, Jr. Director and Chief Executive
------------------------------------- Officer (principal executive
J. Patrick Millinor, Jr. officer)
/s/ Darren B. Miller Senior Vice President--Chief
------------------------------------- Financial Officer (principal
Darren B. Miller financial officer)
/s/ Daniel W. Kipp Vice President and Corporate
------------------------------------- Controller (principal
Daniel W. Kipp accounting officer)
Donald L. Luke* Director, President and Chief
------------------------------------- Operating Officer
Donald L. Luke
Ronald D. Bryant* Director
-------------------------------------
Ronald D. Bryant
David L. Henninger* Director
-------------------------------------
David L. Henninger
Chester J. Jachimiec* Director
-------------------------------------
Chester J. Jachimiec
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 10.36
AMENDED AND RESTATED CREDIT AGREEMENT
$125,000,000 REVOLVING CREDIT LOAN
AMONG
GROUP MAINTENANCE AMERICA CORP.,
AS THE COMPANY,
THE SUBSIDIARIES OF THE COMPANY
LISTED AS GUARANTORS HEREIN
AND
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
AS THE AGENT
PARIBAS AND ABN AMRO BANK, N.V.
AS THE CO-AGENTS
AND
THE BANKS NAMED HEREIN
DATED AS OF JUNE 12, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I
DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION 1
SECTION 1.01 Definitions 1
SECTION 1.02 Types of Advances 15
SECTION 1.03 Accounting Terms 15
SECTION 1.04 Schedules 15
ARTICLE II
THE LOANS 15
SECTION 2.01 The Loans 15
SECTION 2.02 The Notes 16
SECTION 2.03 Notice of Advance 16
SECTION 2.04 Disbursement of Funds for Loans 16
SECTION 2.05 Conversions and Continuances 17
SECTION 2.06 Voluntary Prepayments 17
SECTION 2.07 Mandatory Repayments 17
SECTION 2.08 Method and Place of Payment 17
SECTION 2.09 Pro Rata Advances 18
SECTION 2.10 Interest 18
SECTION 2.11 Interest Periods 19
SECTION 2.12 Interest Rate Not Ascertainable 20
SECTION 2.13 Legality 20
SECTION 2.14 Increased Costs, Taxes or Capital Adequacy Requirements 21
SECTION 2.15 Eurodollar Advance Prepayment and Default Penalties 22
SECTION 2.16 Additional Costs, Taxes or Similar Requirements 23
SECTION 2.17 Tax Forms 23
SECTION 2.18 Voluntary Reduction of Commitment 24
SECTION 2.19 Fees 24
SECTION 2.20 Extension of Maturity Date 24
SECTION 2.21 Replacement of Banks 25
ARTICLE III
LETTERS OF CREDIT 25
SECTION 3.01 Letters of Credit 25
SECTION 3.02 Letters of Credit Requests 26
SECTION 3.03 Letter of Credit Participations 27
SECTION 3.04 Increased Costs 28
SECTION 3.05 Conflict between Applications and Agreement 29
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IV
CONDITIONS PRECEDENT 29
SECTION 4.01 Conditions Precedent to the Initial Advance 29
SECTION 4.02 Conditions Precedent to All Credit Events 31
SECTION 4.03 Delivery of Documents 32
ARTICLE V
REPRESENTATIONS AND WARRANTIES 32
SECTION 5.01 Organization and Qualification 32
SECTION 5.02 Authorization and Validity 32
SECTION 5.03 Governmental Consents 33
SECTION 5.04 Conflicting or Adverse Agreements or Restrictions 33
SECTION 5.05 Title to Assets 33
SECTION 5.06 Litigation 33
SECTION 5.07 Financial Statements 33
SECTION 5.08 Default 34
SECTION 5.09 Investment Company Act 34
SECTION 5.10 Public Utility Holding Company Act 34
SECTION 5.11 ERISA 34
SECTION 5.12 Tax Returns and Payments 34
SECTION 5.13 Environmental Matters 34
SECTION 5.14 Purpose of Loans 35
SECTION 5.15 Franchises and Other Rights 36
SECTION 5.16 Subsidiaries and Assets 36
SECTION 5.17 Solvency 36
ARTICLE VI
AFFIRMATIVE COVENANTS 36
SECTION 6.01 Information Covenants 36
SECTION 6.02 Books, Records and Inspections 38
SECTION 6.03 Insurance and Maintenance of Properties 39
SECTION 6.04 Payment of Taxes 39
SECTION 6.05 Corporate Existence 39
SECTION 6.06 Compliance with Statutes 39
SECTION 6.07 Material Privileges, Permits, Licenses and Other Rights 40
SECTION 6.08 ERISA 40
SECTION 6.09 Additional Subsidiaries 40
SECTION 6.10 Acquisition Agreements 41
SECTION 6.11 Material Contracts 41
SECTION 6.12 Employee Agreements 41
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VII
NEGATIVE COVENANTS 41
SECTION 7.01 Change in Business 41
SECTION 7.02 Consolidation, Merger or Sale of Assets 42
SECTION 7.03 Indebtedness 42
SECTION 7.04 Liens 43
SECTION 7.05 Investments 44
SECTION 7.06 Restricted Payments 45
SECTION 7.07 Change in Accounting 45
SECTION 7.08 Certain Indebtedness 45
SECTION 7.09 Transactions with Affiliates 45
SECTION 7.10 Changes to Acquisition Agreements 45
SECTION 7.11 Consolidated Net Worth 46
SECTION 7.12 Funded Debt to EBITDA Ratio 46
SECTION 7.13 Funded Debt to Capitalization Ratio 46
SECTION 7.14 Capital Expenditures 46
SECTION 7.15 Fixed Charge Coverage Ratio 46
SECTION 7.16 New Installations Revenues 46
SECTION 7.17 Limitations on Acquisitions 46
ARTICLE VIII
GUARANTY 47
SECTION 8.01 Guaranty 47
SECTION 8.02 Continuing Guaranty 48
SECTION 8.03 Effect of Debtor Relief Laws 49
SECTION 8.04 Waiver of Subrogation 49
SECTION 8.05 Subordination 50
SECTION 8.06 Waiver 50
SECTION 8.07 Full Force and Effect 51
SECTION 8.08 Negative Pledge 51
ARTICLE IX
EVENTS OF DEFAULT AND REMEDIES 51
SECTION 9.01 Events of Default 51
SECTION 9.02 Primary Remedies 52
SECTION 9.03 Other Remedies 53
ARTICLE X
THE AGENT 53
SECTION 10.01 Authorization and Action 53
SECTION 10.02 Agent's Reliance 54
SECTION 10.03 Agent and Affiliates; Chase and Affiliates 54
SECTION 10.04 Banks' Credit Decision 55
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 10.05 Agent's Indemnity 55
SECTION 10.06 Successor Agent 56
SECTION 10.07 Notice of Default 56
ARTICLE XI
MISCELLANEOUS 57
SECTION 11.01 Amendments 57
SECTION 11.02 Notices 57
SECTION 11.03 No Waiver; Remedies 58
SECTION 11.04 Costs and Expenses 59
SECTION 11.05 Release and Indemnity 59
SECTION 11.06 Right of Setoff 60
SECTION 11.07 Governing Law 60
SECTION 11.08 Interest 60
SECTION 11.09 Survival of Representations and Warranties 61
SECTION 11.10 Successors and Assigns; Participations 61
SECTION 11.11 Confidentiality 63
SECTION 11.12 Pro Rata Treatment 63
SECTION 11.13 Separability 64
SECTION 11.14 Execution in Counterparts 64
SECTION 11.15 Interpretation 64
SECTION 11.16 SUBMISSION TO JURISDICTION 65
SECTION 11.17 WAIVER OF JURY TRIAL 66
SECTION 11.18 FINAL AGREEMENT OF THE PARTIES 66
</TABLE>
iv
<PAGE>
Exhibits and Schedules:
- ----------------------
Exhibit 1.01A Administrative Questionnaire
Exhibit 2.02 Form of Note
Exhibit 2.03 Form of Notice of Advance
Exhibit 2.05 Form of Notice of Conversion
Exhibit 2.20 Form of Extension Request
Exhibit 3.02 Form of Letter of Credit Request
Exhibit 4.01(d)(i) Form of Security Agreement
Exhibit 4.01(d)(ii) Form of Pledge Agreement
Exhibit 4.01(h)(i) Form of Opinion of Borrower's Counsel - Bracewell &
Patterson
Exhibit 4.01(h)(ii) Form of Opinion of Borrower's Counsel - Randolph W.
Bryant
Exhibit 11.10(c) Form of Assignment and Acceptance
Schedule 5.04 Agreements
Schedule 5.06 Litigation
Schedule 5.13 Exceptions to Environmental Matters
Schedule 5.16 Subsidiaries
Schedule 6.03 Existing Insurance Policies
Schedule 6.11 Material Contracts
Schedule 7.03(b) Existing Indebtedness
Schedule 7.04(a) Existing Liens
Schedule 7.05(b) Investments
v
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AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 12, 1998
(this "Agreement") is among GROUP MAINTENANCE AMERICA CORP., a Texas corporation
(the "Company"), the Subsidiaries of the Company listed on the signature pages
hereto as Guarantors (together with each other Person who subsequently becomes a
Guarantor, collectively the "Guarantors"), the banks and other financial
institutions listed on the signature pages hereto under the caption "Banks"
(together with each other person who becomes a Bank, collectively the "Banks"),
ABN AMRO BANK, N.V. and PARIBAS, individually, as Banks and as co-agents ("Co-
Agents"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, individually as a Bank
("Chase") and as agent for the other Banks (in such capacity together with any
other Person who becomes the agent, the "Agent").
The Company, the Agent (then known as Texas Commerce Bank National
Association) and certain of the Banks have entered into that one certain Credit
Agreement dated December 11, 1997 (as amended the "Prior Credit Agreement"),
relating to the extension of a series of loans with a commitment totaling
$75,000,000.00 by said Banks to the Company. The Company has now requested the
Agent and the Banks to amend and restate the prior Credit Agreement to increase
the amount of credit that may be extended to Borrower to $125,000,000.00. The
Agent and the Banks have agreed to do so, subject to the terms and conditions
hereof and wish to execute this document for the purpose of setting forth their
amended and restated agreement in regard thereto.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth herein, the Company, the Agent, the Guarantors, and the
Banks agree to amend and restate the Prior Credit Agreement as follows:
ARTICLE I
DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION
----------------------------------------------
SECTION 1.01 Definitions. As used in this Agreement, the following terms
have the following meanings:
"Accounts" means all accounts, accounts receivable or other indebtedness
owing to the Company or to a Subsidiary of the Company which is a Guarantor
as consideration for goods sold, services rendered and accrued receivables,
if billed during the immediately succeeding billing cycle and, in any
event, not later than the end of the month following the month in which
same were incurred all accounts, accounts receivable or other indebtedness
owing to the Company or any Guarantor as consideration for goods sold or
services rendered and billed within thirty (30) days of the providing of
such goods or services.
"Acquisition Agreements" has the meaning set forth in Section 6.10.
"Add Back Expenses" means expense items of IPO Subsidiaries and
Qualified Companies which will be eliminated after acquisition of said IPO
Subsidiary or Qualified
<PAGE>
Company, as the case may be, by the Company, identified by the Company and
approved by the Majority Banks at the time of such acquisition.
"Administrative Questionnaire" means the questionnaire attached hereto
as Exhibit 1.01A to be completed by each Bank and returned to the Agent.
"Advance" means an advance, pursuant to a Notice of Advance, comprised
of a single Type of Loan from all the Banks (or resulting from a conversion
or conversions on the same date having, in the case of Eurodollar Rate
Advances, the same Interest Period (except as otherwise provided in this
Agreement)), made by all of the Banks concurrently to the Company.
"Advance Date" means, with respect to each Advance, the Business Day
upon which the proceeds of such Advance are to be made available to the
Company.
"Affiliate" means any other Person directly or indirectly controlling
(including all directors and officers of such Person), controlled by, or
under direct or indirect common control with such Person, and any other
Person in which such Person's direct or indirect equity interest is 20% or
more of the total outstanding equity interests of such Person and any
immediate family member (parent, spouse or child) and all spouses of said
Persons.
"Agent" has the meaning specified in the introduction to this Agreement.
"Agreement" has the meaning specified in the introduction to this
Agreement.
"Alternate Base Rate" means, for any day, a rate per annum (adjusted, to
the nearest 1/16 of 1%) equal to the greater of (a) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1% and (b) the Prime Rate
in effect on such day. For purposes hereof, the term "Prime Rate" means, as
of a particular date, the prime rate of Chase most recently announced by
Chase and in effect on such date, automatically fluctuating upward or
downward, as the case may be, with and at the time of each change therein
without notice to the Company or any other Person, which prime rate may not
necessarily represent the lowest or best rate actually charged to a
customer. "Federal Funds Effective Rate" means, for any day, the weighted
average of the rates on overnight federal funds transactions with members
of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the
next preceding Business Day) by the Federal Reserve Bank of New York, or,
if such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by the
Agent from three federal funds brokers of recognized standing selected by
it. If, for any reason, the Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is unable
to ascertain the Federal Funds Effective Rate, including the inability or
failure of the Agent to obtain sufficient quotations in accordance with the
terms hereof, the Alternate Base Rate shall be determined without regard
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<PAGE>
to clause (a) of the first sentence of this definition until the
circumstances giving rise to such inability no longer exist. Any change in
the Alternate Base Rate due to a change in the Prime Rate or the Federal
Funds Effective Rate shall be effective on the effective date of such
change in the Prime Rate or the Federal Funds Effective Rate, respectively.
"Alternate Base Rate Advance" means any Advance bearing interest at a
rate determined by reference to the Alternate Base Rate in accordance with
the provisions of Article II.
"Alternative Facility" means, as of any day, the short term, uncommitted
working capital loan facility of the Company with any Bank or Affiliate
thereof other than those, if any, provided for in the Loan Documents.
"Alternative Facilities Advances" means, on any day, the aggregate
advances made by any of the Banks under an Alternative Facility which are
outstanding as of such day.
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of an Alternate Base Rate
Advance and such Bank's Eurodollar Lending Office in the case of a
Eurodollar Rate Advance.
"Assignment and Acceptance" has the meaning specified in Section 11.10
(c).
"Bank" has the meaning provided in the introduction to this Agreement.
"Bankruptcy Code" has the meaning specified in Section 9.01(e).
"Board" means the Board of Governors of the Federal Reserve System of
the United States (or any successor).
"Business Day" means any day (other than a day which is a Saturday,
Sunday or legal holiday in the State of Texas) on which most banks are open
for business in Houston, Texas.
"Capital Expenditures" means, with respect to any Person for any period,
the sum of all expenditures (whether paid in cash, capitalized as an asset
or accrued as a liability) by such Person and its consolidated Subsidiaries
during such period which, in accordance with GAAP, are or should be
included in capital expenditures or similar items reflected in the
consolidated statement of cash flows of such Person; provided, however,
that Capital Expenditures shall not include any such amounts incurred in
connection with the Investment in a Qualified Company permitted by Section
7.05.
"Capitalization Ratio" means, as to the Company and its Subsidiaries for
any period, the ratio of (i) Funded Debt of the Company and its
Subsidiaries determined on a
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<PAGE>
consolidated basis, to (ii) the sum of Funded Debt of the Company and its
Subsidiaries determined on a consolidated basis plus Consolidated Net
Worth.
"Capitalized Lease Obligations" means all lease or rental obligations
which, pursuant to GAAP, are capitalized for balance sheet purposes.
"Change of Control" means either (i) any Unrelated Person, or two or
more Unrelated Persons acting in concert, acquire after the date hereof
beneficial ownership of 50% or more of the shares of voting stock of the
Company outstanding at the time of such acquisition, or (ii) all or
substantially all of the assets of the Company are sold after the date
hereof in a single transaction or series of related transactions to any
Persons, if the effect of such transaction or transactions is to change the
Persons controlling the Company. The term "Unrelated Person" shall mean any
Person other than a Related Person. A "Related Person" means (i) any Plan
or trust for any Plan, and (ii) any wholly-owned Subsidiary of the Company.
Any Person who is a party to any stockholders' agreement shall not be
considered to be acting in concert with any other party thereto merely
because such Person is a party thereto.
"Chase" means Chase Bank of Texas, National Association, a national
banking association.
"Code" means the Internal Revenue Code of 1986 and the regulations
promulgated thereunder.
"Collateral" means all, or substantially all, of the accounts and
inventory of the Company and its Material Subsidiaries, all as more fully
described in the Security Documents.
"Commitment" and "Commitments" means the obligation of each of the Banks
to enter into and perform this Agreement, to make available the Loans to
the Company in the amounts shown on the signature page of each Bank hereto
and all other duties and obligations of the Banks hereunder.
"Commitment Fee" has the meaning specified in Section 2.19.
"Company" has the meaning specified in the introduction to this
Agreement.
"Consolidated Net Worth" means, as at any date of determination, all
items which in conformity with GAAP would be included in the calculation of
shareholders' equity on a consolidated balance sheet of the Company as at
such date, plus any amounts included on such consolidated balance sheet in
respect of the Company's preferred stock, provided the terms of such
preferred stock have been approved by the Majority Banks in their sole
discretion.
4
<PAGE>
"Conversion" or "Convert" (in each case whether or not capitalized)
means the changing of a Eurodollar Rate Advance to an Alternate Base Rate
Advance or vice versa in accordance with the provisions hereof.
"Credit Event" means the making of any Advance or the conversion of any
Advance into a Eurodollar Rate Advance.
"Default" means the occurrence of any event which with or without the
giving of notice or the passage of time or both would become an Event of
Default.
"Default Rate" means the lesser of (i) the Highest Lawful Rate and (ii)
the Alternate Base Rate plus two percent (2%).
"Designated Payment Date" means February 28, May 31, August 31 and
November 30 of each year; provided, however, if a Designated Payment Date
shall be a day which is not a Business Day, such Designated Payment Date
shall be the next succeeding Business Day, and such extension of time shall
be included in determining the amount to be paid on such date.
"Domestic Lending Office" means, with respect to any Bank, the office of
such Bank designated from time to time as its "Domestic Lending Office"
hereunder.
"EBITDA" means, for any period, and determined in accordance with GAAP,
the sum of:
(a) the consolidated pre tax income of the Company, plus the aggregate
amount which was deducted for such period in determining such
consolidated pre tax income for (i) interest expense, (ii)
depreciation expense, (iii) amortization expense, and (iv)
compensation expense relating to the issuance of stock and stock
options to employees (to the extent same do not constitute a use of
cash); (b) for each IPO Subsidiary acquired by the Company during the
twelve months preceding the date of the calculation of EBITDA and with
respect to the period beginning 12 months prior the calculation of
EBITDA through the date of said IPO Subsidiary's acquisition by the
Company, the sum of the consolidated pre tax income of the IPO
Subsidiary, plus (A) the aggregate amount which was deducted for such
period in determining such consolidated pre tax income for (i)
interest expense, (ii) depreciation expense and (iii) amortization
expense, and (B) Add-back Expenses; and (c) for each acquisition of a
Qualified Company with total consideration of $10,000,000 or greater
acquired by the Company during the twelve (12) months preceding the
date of the calculation of EBITDA and with respect to the period
beginning twelve (12) months prior to the calculation of EBITDA
through the date of said acquisition by the
5
<PAGE>
Company, the sum of the consolidated pre-tax income of such Qualified
Company, plus: (A) the aggregate amount which was deducted for such
period in determining such consolidated pre-tax income for (i)
interest expense, (ii) depreciation expense, and (iii) amortization
expense, and (B) Add-Back Expenses of such Qualified Company.
"Effective Date" means the date on which all conditions to make an
Advance set forth in Section 4.01 are first met or waived in accordance
with Section 11.01 hereof.
"Eligible Assignee" means (a) any Bank; (b) a commercial bank organized
under the laws of the United States, or any state thereof, and having total
assets in excess of $1,000,000,000.00; (c) a commercial bank organized
under the laws of any other country which is a member of the Organization
for Economic Cooperation and Development or any successor organization, or
a political subdivision of any such country, and having total assets in
excess of $1,000,000,000.00; provided that such bank is acting through a
branch or agency located in the country in which it is organized or another
country which is also a member of the Organization for Economic Cooperation
and Development or any successor organization; (d) the central bank of any
country which is a member of the Organization for Economic Cooperation and
Development or any successor organization; and (e) any other bank or
similar financial institution approved by the Agent and the Majority Banks.
"Employee Agreements" has the meaning set forth in Section 6.12.
"Environmental Laws" means federal, state or local laws, rules or
regulations, and any judicial, arbitral or administrative interpretations
thereof, including any judicial, arbitral or administrative order,
judgment, permit, approval, decision or determination pertaining to
conservation or protection of the environment as in effect and enforceable
against the Company or any of its Subsidiaries at the time in question,
including the Clean Air Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Federal Water Pollution
Control Act, the Occupational Safety and Health Act, the Resource
Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic
Substances Control Act, the Superfund Amendment and Reauthorization Act of
1986, the Hazardous Materials Transportation Act, and comparable state and
local laws, and other environmental conservation and protection laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which is either a member of the same "controlled group" or
under "common control," within the meaning of Section 414 of the Code and
the regulations thereunder, with the Company.
6
<PAGE>
"Eurocurrency Liabilities" has the meaning specified in Regulation D as
in effect from time to time.
"Eurodollar Lending Office" means, with respect to each Bank, the
branches or affiliates of such Bank designated as its "Eurodollar Lending
Office" from time to time hereunder.
"Eurodollar Rate" means, with respect to any Eurodollar Rate Advance,
the rate (rounded to the nearest whole multiple of 1/16 of 1%) at which
dollar deposits approximately equal in principal amount to the entire
portion of such Advance and for a maturity equal to the applicable Interest
Period are offered in immediately available funds to the Agent by prime
banks in whatever Eurodollar interbank market may be selected by the Agent
in its sole and absolute discretion at the time of determination and in
accordance with the then usual practice in such market at approximately
10:00 a.m. (Houston, Texas time) two Business Days prior to the
commencement of such Interest Period.
"Eurodollar Rate Advance" means any Advance bearing interest at a rate
determined by reference to the Eurodollar Rate in accordance with the
provisions of Article II.
"Events of Default" has the meaning specified in Section 9.01.
"Execution Date" means June 12, 1998.
"Existing Letters of Credit" means all letters of credit issued by
Chase, outstanding on the Effective Date and described in Section 3.01(c).
"Extension Request" means each request by the Company made pursuant to
Section 2.20 for the Banks to extend the Maturity Date.
"Federal Funds Effective Rate" has the meaning specified in the
definition of the term "Alternate Base Rate."
"Fees" has the meaning specified in Section 2.19.
"Financials" has the meaning specified in Section 5.07.
"Funded Debt" means all indebtedness for borrowed money evidenced by a
written document and subject to periodic, required payments of interest
and/or principal.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States as set forth in the opinions, statements
and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, the Financial Accounting
Standards Board and such other Persons who shall be approved by a
7
<PAGE>
significant segment of the accounting profession and concurred in by the
independent certified public accountants certifying any audited financial
statements of the Company.
"Guaranteed Obligations" has the meaning specified in Section 8.01.
"Guarantors" has the meaning provided in the introduction to this
Agreement and, except as otherwise agreed by the Majority Banks and the
Company, shall include all of the Material Subsidiaries of the Company.
"Guaranty" means the obligations contained in Article VIII hereof.
"Hazardous Materials" means (a) hazardous waste as defined in the
Resource Conservation and Recovery Act of 1976, or in any applicable
federal, state or local law or regulation, (b) hazardous substances, as
defined in CERCLA, or in any applicable state or local law or regulation,
(c) gasoline, or any other petroleum product or by-product, (d) toxic
substances, as defined in the Toxic Substances Control Act of 1976, or in
any applicable federal, state or local law or regulation or (e)
insecticides, fungicides, or rodenticides, as defined in the Federal
Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable
federal, state or local law or regulation, as each such Act, statute or
regulation may be amended from time to time.
"Highest Lawful Rate" means, as to any Bank, the maximum nonusurious
rate of interest that, under applicable law, may be contracted for, taken,
reserved, charged or received by such Bank on the Loans or under the Loan
Documents at any time or from time to time. If the maximum rate of interest
which, under applicable law, any of the Banks are permitted to charge the
Company on the Loans shall change after the date hereof, to the extent
permitted by applicable law, the Highest Lawful Rate shall be automatically
increased or decreased, as the case may be, as of the effective time of
such change without notice to the Company or any other Person.
"IPO Subsidiaries" means the Offering Acquisition Companies and Pre-
Offering Companies identified in registration statement no. 333-34067 filed
with the Securities and Exchange Commission by the Company on August 21,
1997, as such terms are defined therein.
"Indebtedness" means, without duplication, (a) all indebtedness for
borrowed money (whether by loan or the issuance and sale of debt
securities) or for the deferred purchase price of property or services, (b)
all indebtedness evidenced by bonds, debentures, notes or other similar
instruments, (c) all Capitalized Lease Obligations, (d) all obligations to
reimburse the issuer of any Letter of Credit for amounts drawn or drawable,
and (e) all other items that would be classified as a liability on the
Company's balance sheet pursuant to GAAP.
"Interest Period" has the meaning specified in Section 2.11.
8
<PAGE>
"Issuing Bank" means Chase, in its capacity as a Bank, or such other
Bank to which the Company and the Majority Banks subsequently agree.
"Investment" means, as applied to any Person, any direct or indirect
purchase or other acquisition by such Person of the assets, stock or other
securities of any other Person, or any direct or indirect loan, advance or
capital contribution by such Person to any other Person, and any other item
which would be classified as an "investment" on a balance sheet of such
Person, including any direct or indirect contribution by such Person of
property or assets to a joint venture, partnership or other business entity
in which such Person retains an interest but shall not include demand
deposits.
"IPO" means the initial public offering of the Company.
"Letter of Credit Fee" has the meaning specified in Section 2.19(c).
"Letter of Credit Request" has the meaning specified in Section 3.02(a).
"Letters of Credit" has the meaning specified in Section 3.01(a).
"Lien" means, when used with respect to any Person, any mortgage, lien,
charge, pledge, security interest or encumbrance of any kind (whether
voluntary or involuntary and whether imposed or created by operation of law
or otherwise) upon, or pledge of, any of its property or assets, whether
now owned or hereafter acquired, any capital lease in the nature of the
foregoing, any conditional sale agreement or other title retention
agreement, in each case, for the purpose, or having the effect, of
protecting a creditor against loss or securing the payment or performance
of an obligation.
"Loan" and "Loans" has the meaning set forth in Section 2.01.
"Loan Documents" means this Agreement, the Notes, the Security
Documents, the Notice of Advance, and the corporate resolutions authorizing
the Loan Documents.
"Majority Banks" means Banks holding at least 66 2/3% of the Advances
outstanding under the Loans, or, if no Advances are outstanding, Banks
holding such percentage of the Total Commitment.
9
<PAGE>
"Margin" means, with respect to Alternate Base Rate Advances, Eurodollar
Rate Advances, or Commitment Fees, as applicable, the percentage determined
in accordance with the following table:
<TABLE>
<S> <C> <C> <C> <C> <C>
2.25
Funded Debt/ to 1.00 2.00 - 2.24 1.50 - 1.99 1.00 - 1.49 Less than
EBITDA Ratio or higher to 1.00 to 1.00 to 1.00 1.00 to 1.00
- ----------------------------------------------------------------------------------------------------------
Alternate Base Rate Margin .50% .25% 0% 0% 0%
- ----------------------------------------------------------------------------------------------------------
Eurodollar Margin 2.00% 1.75% 1.50% 1.25% 1.00%
- ----------------------------------------------------------------------------------------------------------
Commitment Fee .375% .375% .375% .25% .25%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
If sufficient information does not exist to calculate the Margin,
Eurodollar Rate Advances shall not be available to the Company and the
Margin for Alternate Base Rate Advances shall be deemed to be 0%.
"Margin Period" means a period commencing three (3) days after the
date on which the quarterly or annual financial statements of the Company
are required to be delivered pursuant to Section 6.01(a) or Section
6.01(b), as the case may be, and ending three (3) days after the next
date a financial statement is required to be so delivered.
"Material Adverse Effect" means, relative to any occurrence of
whatever nature (including any adverse determination in any litigation,
arbitration or governmental investigation or proceeding), (a) a material
adverse effect on the financial condition, business or operations of the
Company and its Subsidiaries taken as a whole or (b) a material
impairment of the collective ability of the Company and its Subsidiaries
taken as a whole to make payment hereunder or under any Note or the right
of any Bank to enforce any of its remedies to collect any amounts owing
under the Loan Documents.
"Material Contract" means the Contracts listed on Schedule 6.11, as
amended from time to time.
"Material Subsidiary" means a direct or indirect Subsidiary of the
Company which has one percent (1%) or more of either total consolidated
assets or total consolidated revenues of the Company.
"Maturity Date" means December 11, 2000, unless accelerated pursuant to
Article IX hereof.
"Maximum Guaranteed Amount" means for each Guarantor the maximum amount
which any Guarantor could pay under the Guaranty without having such
payment set
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<PAGE>
aside as a fraudulent transfer or conveyance or similar action under the
Bankruptcy Code or any applicable state or foreign law.
"Multiemployer Plan" means any plan that is a "multiemployer plan"
(as such term is defined in Section 4001(a)(3) of ERISA).
"New Installation" means the business of providing the installation of
new heating, ventilation and air conditioning, indoor air quality,
plumbing, appliance, electric, septic and sewer systems to residential or
commercial structures, as such structure is being newly constructed,
provided that New Installations does not include installations of systems
in buildings that have previously been occupied.
"Note" and "Notes" have the meanings specified in Section 2.02.
"Notice of Advance" has the meaning provided in Section 2.03(a).
"Notice of Conversion" has the meaning provided in Section 2.05.
"Notice of Default" has the meaning specified in Section 9.02.
"Obligations" means all the obligations of the Company now or hereafter
existing under the Loan Documents, whether for principal, interest, Fees,
expenses, indemnification or otherwise.
"Other Activities" has the meaning specified in Section 10.03.
"Other Financings" has the meaning specified in Section 10.03.
"Payment Office" means the office of the Agent located at 1111 Fannin
Street, Houston, Texas 77002, or such other office as the Agent may
hereafter designate in writing as such to the other parties hereto.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to all or a substantial portion of its functions under ERISA.
"Permitted Investments" means, as to any Person:
(a) securities issued or directly and fully guaranteed or insured by
the United States or any agency or instrumentality thereof (provided
that the full faith and credit of the United States is pledged in
support thereof) having maturities of not more than twelve months from
the date of acquisition thereof,
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(b) time deposits and certificates of deposit with maturities
of not more than twelve months from the date of acquisition by such
Person which deposits or certificates are either: (a) fully insured
by the Federal Deposit Insurance Corporation or (b) in any Bank or
other commercial bank incorporated in the United States or any U.S.
branch of any other commercial bank, in each case having capital,
surplus and undivided profits aggregating $100,000,000.00 or more
with a long-term unsecured debt rating of at least A- from Standard
& Poor's Ratings Group or A3 from Moody's Investors Service,
(c) commercial paper issued by any Person incorporated in the
United States rated at least A2 or the equivalent thereof by
Standard & Poor's Ratings Group or at least P2 or the equivalent
thereof by Moody's Investors Service and, in each case, maturing not
more than 270 days after the date of issuance,
(d) investments in money market mutual funds having assets in
excess of $2,000,000,000.00 substantially all of whose assets are
comprised of securities of the types described in clauses (a)
through (c) above, and
(e) repurchase or reverse purchase agreements respecting
obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into
with any bank listed in or meeting the qualifications specified in
clause (b) above.
"Permitted Liens" means: (a) Liens for taxes, assessments, levies
or other governmental charges not yet due or which are being contested in
good faith by appropriate proceedings and for which adequate reserves are
maintained in accordance with GAAP; (b) Liens in connection with worker's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations not yet due or which are being
contested in good faith by appropriate proceedings and for which adequate
reserves are maintained in accordance with GAAP; (c) operator's,
vendors', carriers', warehousemen's, repairmen's, mechanics', workers',
materialmen's or other like Liens arising by operation of law in the
ordinary course of business (or deposits to obtain the release of any
such Lien) and securing amounts of $50,000.00 or less or amounts not yet
due or which are being contested in good faith by appropriate proceedings
and for which adequate reserves are maintained in accordance with GAAP;
(d) deposits to secure insurance or adequate self insurance arrangements
in the ordinary course of business; (e) deposits and other Liens to
secure the performance of bids, tenders, contracts (other than contracts
for the payment of indebtedness for borrowed money or the deferred
purchase price of goods or services), leases, licenses, franchises, trade
contracts, statutory obligations, surety and appeal bonds and performance
bonds and other obligations of a like nature incurred in the ordinary
course of business; (f) easements, rights of way, covenants,
restrictions, reservations, exceptions, encroachments, zoning and similar
restrictions and other similar encumbrances (other than to secure the
payment of
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<PAGE>
indebtedness for borrowed money or the deferred purchase price of goods
or services) or title defects, in each case incurred in the ordinary
course of business which, in the aggregate, are not substantial in
amount, and which do not in any case singly or in the aggregate
materially detract from the value or usefulness of the Property subject
thereto for the business conducted by the Company and its Subsidiaries or
materially interfere with the ordinary conduct of the business of the
Company and its Subsidiaries; (g) bankers' liens arising by operation of
law; (h) inchoate Liens arising under ERISA to secure contingent
liabilities of the Company and its Subsidiaries; (i) landlord's liens
that are subordinated to the liens in favor of the Agent, unless waived
by the Agent; (j) Liens on assets of Subsidiaries to secure indebtedness
to the Company provided same are collaterally assigned to the Agent,
provided, such Liens may be incurred only to the extent the underlying
Indebtedness is otherwise permitted under the terms of this Agreement;
and (k) liens on the right to rebates of prepaid insurance premiums
financed by third parties on behalf of the Company or any of its
Subsidiaries to secure up to $500,000.00 outstanding at any time.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a foreign
or domestic state or political subdivision thereof or any agency of such
state or subdivision.
"Plan" means any employee pension benefit plan (as defined in
Section 3(2) of ERISA), subject to Title IV of ERISA or Section 412 of
the Code, other than a Multiemployer Plan, with respect to which the
Company or an ERISA Affiliate contributes or has an obligation or
liability to contribute, including any such plan that may have been
terminated.
"Prescribed Forms" shall mean such duly executed form(s) or
statement(s), and in such number of copies, which may, from time to time,
be prescribed by law and which, pursuant to applicable provisions of the
Code or an income tax treaty between the United States and the country of
residence of the party providing the form(s) or statement(s), permit each
of the Company and the Agent to make payments hereunder for the account
of such party free of deduction or withholding of income and other taxes.
"Prior Credit Agreement" has the meaning specified in the
Introduction hereto on page one.
"Property" or "assets" (whether or not capitalized) means any
interest in any kind of property or asset, whether real, personal or
mixed, or tangible or intangible.
"Qualified Company" means any Person in the residential or
commercial/industrial service industry whose primary business is to
provide residential or commercial/industrial services, consisting of
heating, ventilation and air conditioning,
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indoor air quality, plumbing, process piping, appliance, electrical,
installation, reinstallation and maintenance services.
"Regulations A, D, T, U and X" means Regulations A, D, T, U and X of
the Board as the same are from time to time in effect, and all official
rulings and interpretations thereunder or thereof.
"Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment (including the abandonment or discarding
of barrels, containers and other closed receptacles).
"Reportable Event" means an event described in Section 4043(b) of
ERISA with respect to a Plan as to which the 30-day notice requirement
has not been waived by the PBGC.
"Requirements of Environmental Laws" means, as to any Person, the
requirements of any applicable Environmental Law relating to or affecting
such Person or the condition or operation of such Person's business or
its properties, both real and personal.
"Reserve Percentage" means, for any Interest Period and for any
Bank, the reserve percentage applicable during such Interest Period under
regulations issued from time to time by the Board (or if more than one
such percentage is so applicable, the daily average for such percentages
for those days in such Interest Period during which any such percentage
shall be so applicable) for determining the maximum reserve requirement
(including any marginal, supplemental or emergency reserves) for such
Bank in respect of liabilities or assets consisting of or including
Eurocurrency Liabilities.
"Responsible Officer" means, with respect to the Company, the
president, chief executive officer, chief operating officer, treasurer or
chief financial officer of the Company.
"Security Documents" means the documents described in Section 4.01
(f), of the Prior Credit Agreement and those in Section 4.01(d) of this
Agreement executed by the Company and its Subsidiaries in favor of Chase,
as Agent, for the benefit of the Banks, pursuant to the terms hereof.
"Subsidiary" means, with respect to any Person, (a) any corporation
more than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time stock of any
class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time owned
by such Person, directly or indirectly, and (b) any partnership,
association, joint venture or other
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entity in which such Person, directly or indirectly, has greater than 50%
of the equity interest. Unless otherwise provided or the context
otherwise requires, the term "Subsidiary" or "Subsidiaries" shall mean a
Subsidiary or Subsidiaries of the Company.
"Total Commitment" means the aggregate Commitments of all Banks
totaling a maximum of $125,000,000.00 for all Banks.
"Unrelated Person" means any Person who is not a Related Person.
"Unutilized Commitment" means the Total Commitment less the sum of
outstanding Advances and all issued and outstanding Letters of Credit.
SECTION 1.02 Types of Advances. Advances and Loans hereunder are
distinguished by "Type". The Type of an Advance refers to the determination
whether such Advance is a Eurodollar Rate Advance or an Alternate Base Rate
Advance.
SECTION 1.03 Accounting Terms. All accounting terms not defined
herein shall be construed in accordance with GAAP, as applicable, and all
calculations required to be made hereunder and all financial information
required to be provided hereunder shall be done or prepared in accordance with
GAAP.
SECTION 1.04 Schedules. Schedules hereto may be updated by the
Company from time to time to reflect transactions and other matters not
prohibited by the Loan Documents.
ARTICLE II
THE LOANS
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SECTION 2.01 The Loans. Subject to the terms and conditions hereof,
each Bank severally agrees at any time and from time to time on and after the
Execution Date and prior to the Maturity Date, to make and maintain a revolving
credit loan or loans (each a "Loan" and collectively, the "Loans") to the
Company not to exceed at any time outstanding the maximum amount of its
Commitment, which Loans (i) shall, at the option of the Company, be made and
maintained pursuant to one or more Advances comprised of Alternate Base Rate
Advances or Eurodollar Rate Advances, provided that, except as otherwise
specifically provided herein, all Advances made pursuant to a single notice of
advance shall be of the same Type, (ii) in the case of Eurodollar Rate Advances,
shall be made in the minimum amount of $1,000,000.00 and integral multiples of
$100,000.00 and, in the case of Alternate Base Rate Advances, in the minimum
amount of $300,000.00 and integral multiples thereof, or, in either case, the
amount of the Unutilized Commitment, (iii) may be repaid and, so long as no
Default or Event of Default exists hereunder, reborrowed, at the option of the
Company in accordance with the provisions hereof, and (iv) shall, in the
aggregate at any time outstanding, not exceed the maximum total amount of the
Commitment. There shall be no further Advances after the Maturity Date.
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SECTION 2.02 The Notes. The Loans shall be evidenced by Notes in favor
of each Bank (individually a "Note" and collectively, the "Notes"),
substantially in the form of: Exhibit 2.02 hereto.
SECTION 2.03 Notice of Advance. Whenever the Company desires an Advance,
it shall give written notice thereof (a "Notice of Advance") (or telephonic
notice promptly confirmed in writing) to the Agent in the case of an Alternate
Base Rate Advance, not later than 10:00 a.m. (Houston, Texas time) on the date
of such Advance and in the case of a Eurodollar Rate Advance, not later than
11:00 a.m. (Houston, Texas time) three Business Days prior to the date of such
Advance. Each Notice of Advance shall be irrevocable and shall be in the form of
Exhibit 2.03 hereto, specifying (i) the aggregate principal amount of the
Advance to be made, (ii) the date of such Advance (which shall be a Business
Day), (iii) the Type of Advance, and (iv) if the proposed Advance is to be a
Eurodollar Rate Advance, the initial Interest Period to be applicable thereto.
The Agent shall promptly give the Banks written notice or telephonic notice
(promptly confirmed in writing) of each proposed Advance, of each Bank's
proportionate share thereof and of the other matters covered by each Notice of
Advance.
SECTION 2.04 Disbursement of Funds for Loans. No later than 1:00 p.m.
(Houston, Texas time) on any Advance Date for Loans, each Bank shall make
available its pro rata portion of the amount of such Advance in U.S. dollars and
in immediately available funds at the Payment Office. At such time, the Agent
shall credit the amounts so received to the general deposit account of the
Company maintained with the Agent in immediately available funds.
Unless the Agent shall have been notified by any Bank prior to disbursement of
the Advance by the Agent that such Bank does not intend to make available to the
Agent such Bank's portion of the Advance to be made on such date, the Agent may
assume that such Bank has made such amount available to the Agent on such
Advance Date and the Agent may, in reliance upon such assumption, make available
to the Company a corresponding amount. If such corresponding amount is not in
fact made available to the Agent by such Bank and the Agent has made available
same to the Company, the Agent shall be entitled to recover such corresponding
amount on demand from such Bank. If such Bank does not pay such corresponding
amount forthwith upon the Agent's demand therefor, the Agent shall promptly
notify the Company, and the Company shall pay such corresponding amount to the
Agent within two (2) Business Days after demand therefor. The Agent shall also
be entitled to recover from such Bank or the Company, as the case may be,
interest on such corresponding amount from the date such corresponding amount
was made available by the Agent to the Company to the date such corresponding
amount is recovered by the Agent, at a rate per annum equal to the Alternate
Base Rate or the Eurodollar Rate plus the applicable Margin, as appropriate.
Nothing herein shall be deemed to relieve any Bank from its obligation to
fulfill its Commitments hereunder or to prejudice any rights which the Company
may have against any Bank as a result of any default by such Bank hereunder. No
failure of any Bank hereunder shall relieve any other Bank of its obligations.
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SECTION 2.05 Conversions and Continuances. The Company shall have the
option to convert or continue on any Business Day all or a portion of the
outstanding principal amount of one Type of Advance into another Type of
Advance, provided, no Advances may be converted into or continued as Eurodollar
Rate Advances if a Default or Event of Default is in existence on the date of
the conversion. Any continuation of an Advance as the same Type of Advance in
the same amount shall be effected by the Company giving notice to the Agent, in
writing, or by telephone promptly confirmed in writing, of its intention to
continue such Advance as an Advance of the same Type. Each such conversion shall
be effected by the Company giving the Agent written notice (each a "Notice of
Conversion"), substantially in the form of Exhibit 2.05 hereto, prior to 11:00
a.m. (Houston, Texas time) at least (a) three (3) Business Days prior to the
date of such conversion in the case of conversion into or continuance as
Eurodollar Rate Advances and (b) prior to 10:00 a.m. (Houston, Texas time) one
Business Day prior to the date of conversion in the case of a conversion into
Alternate Base Rate Advances, specifying each Advance (or portions thereof) to
be so converted and, if to be converted into or continued as Eurodollar Rate
Advances, the Interest Period to be initially applicable thereto. The Agent
shall thereafter promptly notify each Bank of such Notice of Conversion.
SECTION 2.06 Voluntary Prepayments. The Company shall have the right to
voluntarily prepay the Loans in whole or in part at any time on the following
terms and conditions: no Eurodollar Rate Advance may be prepaid prior to the
last day of its Interest Period unless, simultaneously therewith, the Company
pays to the Agent for the benefit of the Banks all sums necessary to compensate
the Banks for all reasonable costs and expenses actually incurred by the Banks
as a result of such prepayment (excluding loss of anticipated profits), as
reasonably determined by the Banks, including but not limited to those costs
described in Section 2.15 hereof; and each prepayment pursuant to this section
shall be applied first, to the payment of accrued and unpaid interest, and then,
to the outstanding principal, pro-rata, on all such scheduled principal payments
thereafter coming due on said Loans.
SECTION 2.07 Mandatory Repayments. The Company shall repay Loans on any
day on which the aggregate outstanding principal amount of the Loans plus the
amount of all outstanding Alternative Advances exceeds the Total Commitment in
the amount of such excess. The aggregate amount under the Notes (and all
accrued, unpaid interest) shall be due and payable, and the Total Commitment
shall terminate, on the Maturity Date.
SECTION 2.08 Method and Place of Payment. Except as otherwise
specifically provided herein, all payments under this Agreement due from the
Company shall be made to the Agent for the benefit of the Banks not later than
1:00 p.m. (Houston, Texas time) on the date when due and shall be made in lawful
money of the United States in immediately available funds at the Payment Office.
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SECTION 2.09 Pro Rata Advances. All Advances under this Agreement shall
be incurred from the Banks pro rata, on the basis of their respective
Commitments. It is understood that no Bank shall be responsible for any default
by any other Bank in its obligation to make Loans hereunder and that each Bank
shall be obligated to make the Loans provided to be made by it hereunder,
regardless of the failure of any other Bank to fulfill its commitments
hereunder.
SECTION 2.10 Interest. (a) Subject to Section 11.08, the Company shall
pay interest on the total outstanding principal balance of all Alternate Base
Rate Advances from the date of each respective Advance to maturity of said Loan
(whether by acceleration or otherwise) at a rate per annum which shall at all
times be equal to the lesser of (i) the Highest Lawful Rate and (ii) the
Alternate Base Rate in effect from time to time plus the Margin for Alternate
Base Rate Advances, which Margin shall be adjusted on the first day of each
Margin Period. If the Alternate Base Rate is based on the Prime Rate, interest
shall be computed on the basis of the actual number of days elapsed over a year
of 365 or 366 days, as the case may be. If the Alternate Base Rate is based on
the Federal Funds Effective Rate, interest shall be computed on the basis of the
actual number of days elapsed over a year of 360 days.
(b) Subject to Section 11.08, the Company shall pay interest on the
total outstanding principal balance of all Eurodollar Rate Advances under
all of the Loans from the date of each respective Advance to maturity of
said Loan (whether by acceleration or otherwise) at a rate per annum
(computed on the basis of the actual number of days elapsed over a year of
360 days) which shall, during each Interest Period applicable thereto, be
equal to the lesser of (i) the Highest Lawful Rate and (ii) the applicable
Eurodollar Rate for such Interest Period plus the Margin for Eurodollar
Rate Advances. The applicable Eurodollar Rate shall be fixed for each
Interest Period and shall not change during said Interest Period nor shall
the applicable Margin, which is added to said Eurodollar Rate to determine
the total interest payable to the Banks, be adjusted until the first day of
each Interest Period that begins after the effective date of the new Margin
Period.
(c) Subject to Section 11.08, overdue principal and, to the extent
permitted by law, overdue interest in respect of any Advance and all other
overdue amounts owing hereunder shall bear interest for each day that such
amounts are overdue at a rate per annum equal to the Default Rate.
(d) Interest on each Advance shall accrue from and including the date of
such Advance to but excluding the date of any repayment thereof and shall
be payable in arrears (i) in respect of Eurodollar Rate Advances (A) on the
last day of the Interest Period (as defined below) applicable thereto and
on each Designated Payment Date during any Interest Period in excess of
three (3) months and (B) on the date of any voluntary or mandatory
repayment or any conversion or continuance, (ii) in respect of Alternate
Base Rate Advances (A) on each Designated Payment Date commencing November
30, 1997, and (B) on the date of any voluntary or mandatory repayment of
such Advances on the principal amount repaid and (iii) in respect of each
Advance, at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
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(e) The Agent, upon determining the Eurodollar Rate for any Interest
Period, shall notify the Company thereof. Each such determination shall,
absent manifest error, be final and conclusive and binding on all parties
hereto. In addition, prior to the due date for the payment of interest on
any Advances set forth in the immediately preceding paragraph, the Agent
shall notify the Company of the amount of interest due by the Company on
all outstanding Advances on the applicable due date, but any failure of the
Agent to so notify the Company shall not reduce the Company's liability for
the amount owed.
(f) So long as any Bank shall be required under regulations of the Board
to maintain reserves with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities and, as a result, the cost to such Bank
is increased above the level it would be but for such requirement, then
such Bank may require the Company to pay to the Agent, for the account of
such Bank, additional interest on the unpaid principal amount of each such
Eurodollar Rate Advance, from the date of such Advance until such principal
amount is paid in full, at an interest rate per annum equal at all times
during the Interest Period for such Advance to the lesser of (i) the
Highest Lawful Rate and (ii) the remainder obtained by subtracting (A) the
Eurodollar Rate for such Interest Period from (B) the rate obtained by
dividing such Eurodollar Rate referred to in clause (A) above by that
percentage equal to 100% minus the Reserve Percentage of such Bank for such
Interest Period. Such additional interest shall be determined by such Bank
as incurred and shall be payable upon demand therefor by the Bank to the
Company. Each determination by such Bank of additional interest due under
this Section shall be conclusive and binding for all purposes in the
absence of manifest error if such determination is made on a reasonable
basis.
SECTION 2.11 Interest Periods. (a) At the time the Company gives any
Notice of Advance or Notice of Conversion or provides notice of its intent to
continue a loan as the same Type in respect of the making of, or conversion
into, a Eurodollar Rate Advance, the Company shall have the right to elect, by
giving the Agent on the dates and at the times specified in Section 2.03 or
Section 2.05, as the case may be, notice of the interest period (each an
"Interest Period") applicable to such Eurodollar Rate Advance, which Interest
Period shall be either a one, two, three or six month period; provided, that:
(i) the initial Interest Period for any Eurodollar Rate Advance shall
commence on the date of such Eurodollar Rate Advance (including the date of
any conversion thereto or continuance thereof pursuant to Section 2.05);
each Interest Period occurring thereafter in respect of such Eurodollar
Rate Advance shall commence on the expiration date of the immediately
preceding Interest Period;
(ii) if any Interest Period relating to a Eurodollar Rate Advance begins
on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period, such Interest Period
shall end on the last Business Day of such calendar month;
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(iii) if any Interest Period would otherwise expire on a day which is
not a Business Day, such Interest Period shall expire on the next
succeeding Business Day, provided, that if there are no more Business Days
in that month, the Interest Period shall expire on the preceding Business
Day;
(iv) no Interest Period for Advances shall extend beyond the applicable
Maturity Date; and
(v) the Company shall be entitled to have a maximum of nine (9) separate
Eurodollar Rate Advances hereunder for all Loans outstanding at any one
time.
(b) If, upon the expiration of any Interest Period applicable to a
Eurodollar Rate Advance, the Company has failed to elect a new Interest Period
to be applicable to such Advance as provided above, the Company shall be deemed
to have elected to convert such Advance into an Alternate Base Rate Advance
effective as of the expiration date of such current Interest Period.
SECTION 2.12 Interest Rate Not Ascertainable. In the event that the
Agent shall determine (which determination shall, absent manifest error, be
final, conclusive and binding upon all parties) that on any date for determining
the Eurodollar Rate for any Interest Period, by reason of any changes arising
after the date of this Agreement affecting the Eurodollar interbank market
adequate and fair means do not exist for ascertaining the applicable interest
rate on the basis provided for in the definition of Eurodollar Rate, then, and
in any such event, the Agent shall forthwith give notice to the Company and to
the Banks of such determination. Until the Agent notifies the Company that the
circumstances giving rise to the suspension described herein no longer exist,
the obligations of the Banks to make Eurodollar Rate Advances shall be
suspended.
SECTION 2.13 Legality. (a) Notwithstanding anything to the contrary
herein contained, if any law or regulation or the interpretation thereof by any
governmental authority charged with the administration or interpretation thereof
makes it unlawful for any Bank or its Eurodollar Lending Office to make or
maintain any Eurodollar Rate Advance or to give effect to its obligations as
contemplated hereby, then, by prompt written notice to the Company, such Bank
may:
(i) declare that Eurodollar Rate Advances will not thereafter be made by
such Bank hereunder, whereupon the right of the Company to receive
Eurodollar Rate Advances from such Bank hereunder shall be suspended until
such declaration is subsequently withdrawn, provided, such request for a
Eurodollar Rate Advance shall be automatically converted (as to such Bank)
into a request for an Alternate Base Rate Advance and the affected Bank or
Banks shall respond thereto as provided herein; and
(ii) require that all outstanding Eurodollar Rate Advances made by such
Bank be converted to Alternate Base Rate Advances, in which event (A) all
such Eurodollar Rate Advances shall be automatically converted to Alternate
Base Rate Advances as of
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the effective date of such notice as provided in paragraph (b) below if
required by applicable law or regulation, or if not so required, at the end
of the current Interest Period and (B) all payments and prepayments of
principal which would otherwise have been applied to repay the converted
Eurodollar Rate Advances shall instead be applied to repay the Alternate
Base Rate Advances resulting from the conversion of such Eurodollar Rate
Advances.
(b) For purposes of this Section, a notice to the Company by the Agent
pursuant to paragraph (a) above shall be effective on the date of receipt
thereof by the Company.
SECTION 2.14 Increased Costs, Taxes or Capital Adequacy Requirements.
(a) If any applicable law or regulation or compliance by any Bank with any
applicable guideline or request by any central bank or governmental authority
having jurisdiction over such Bank (whether or not having the force of law)
(i) shall change the basis of taxation of payments to such Bank of the
principal of or interest on any Eurodollar Rate Advance made by such Bank
or any other fees or amounts payable hereunder with respect to Eurodollar
Rate Advances (other than taxes imposed on the overall net income of such
Bank or its Applicable Lending Office or franchise taxes imposed upon it by
the jurisdiction in which such Bank or its Applicable Lending Office has an
office),
(ii) shall impose, modify or deem applicable any reserve, special
deposit or similar requirement with respect to Eurodollar Rate Advances
against assets of, deposits with or for the account of, or credit extended
by, such Bank (without duplication of any amounts paid pursuant to Section
2.10(f)) or
(iii) shall impose on such Bank any other condition affecting this
Agreement with respect to Eurodollar Rate Advances or any Eurodollar Rate
Advance made by such Bank, and the result of any of the foregoing shall be
to increase the cost to such Bank of maintaining its Commitment or of
making or maintaining any Eurodollar Rate Advance or to reduce the amount
of any sum received or receivable by such Bank hereunder (whether of
principal, interest or otherwise) in respect thereof by an amount deemed in
good faith by such Bank to be material,
then the Company shall pay to such Bank such additional amount as will
compensate it for such increase or reduction within ten (10) days after notice
thereof pursuant to Section 2.14(c).
(b) If any Bank shall have determined in good faith that any law, rule,
regulation or guideline regarding capital adequacy, or any interpretation or
administration thereof of any such authority, central bank or comparable agency
has or would have the effect of reducing the rate of return on the capital of
such Bank as a consequence of, or with reference to, such Bank's obligations to
lend hereunder to a level below that which it could have achieved but for such
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adoption, change or compliance by an amount deemed by such Bank to be material,
then, from time to time, the Company shall pay to the Agent for the benefit of
such Bank such additional amount as will reasonably compensate it for such
reduction within ten (10) days after notice thereof pursuant to Section 2.14(c).
(c) Each Bank will notify the Company through the Agent of any event
occurring after the date of this Agreement which will entitle it to compensation
pursuant to this Section, as promptly as practicable after it becomes aware
thereof and determines to request compensation and in any case, within 180 days
after becoming aware thereof. A certificate setting forth in reasonable detail
the amount necessary to compensate the Bank in question as specified in
paragraph (a) or (b) above, as the case may be, and the calculation of such
amount shall be delivered to the Company and shall be conclusive absent manifest
error if such determination is made on a reasonable basis. The Company shall pay
to the Agent for the account of such Bank the amount shown as due on any such
certificate within ten (10) days after its receipt of the same. The failure on
the part of any Bank to demand increased compensation with respect to any
Interest Period shall not constitute a waiver of the right to demand
compensation thereafter within the 180 day time limit set forth above. Each Bank
agrees, to the extent it may lawfully do so without incurring additional costs,
to use its best efforts to minimize costs arising under this section by
designating another lending office for the Loans affected, provided no Bank
shall be required to do so.
(d) Any notice given pursuant to this Section 2.14 shall be deemed to
contain a representation by the Bank issuing such notice that the increased
costs and charges are common to substantially all of the loan customers of such
Bank and are not unique to the Company.
SECTION 2.15 Eurodollar Advance Prepayment and Default Penalties.
Subject to Section 11.08, the Company shall indemnify each Bank against any loss
or expense (excluding loss of anticipated profits) which it may sustain or incur
as a consequence of (a) an Advance of, or a conversion from or into, Eurodollar
Rate Advances that does not occur on the date specified therefor in a Notice of
Advance or Notice of Conversion, (b) any payment, prepayment or conversion of a
Eurodollar Rate Advance required by any other provision of this Agreement or
otherwise made on a date other than the last day of the applicable Interest
Period or (c) any default in the payment or prepayment of the principal amount
of any Eurodollar Rate Advance or any part thereof or interest accrued thereon,
as and when due and payable (at the due date thereof, by notice of prepayment or
otherwise). Such loss or expense shall include an amount equal to the excess
determined by each Bank of (i) its cost of obtaining the funds for the Advance
being paid, prepaid or converted or not borrowed (based on the Eurodollar Rate)
for the period from the date of such payment, prepayment or conversion or
failure to borrow to the last day of the Interest Period for such Advance (or,
in the case of a failure to borrow, the Interest Period for the Advance which
would have commenced on the date of such failure to borrow) over (ii) the amount
of interest (as determined by each Bank) that would be realized in reemploying
the funds so paid, prepaid or converted or not borrowed for such period or
Interest Period, as the case may be. The Agent, on behalf of the Banks, will
notify the Company of any loss or expense which will entitle the Banks to
compensation pursuant to this Section, as promptly as possible after it becomes
aware thereof, but failure to so
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notify shall not affect the Company's liability therefor. A certificate of any
Bank setting forth any amount which it is entitled to receive pursuant to this
Section shall be delivered to the Company and shall be conclusive absent
manifest error if such determination is made on a reasonable basis. The Company
shall pay to the Agent for the account of the Banks the amount shown as due on
any certificate within ten (10) days after its receipt of the same. Without
prejudice to the survival of any other obligations of the Company hereunder, the
obligations of the Company under this Section shall survive the termination of
this Agreement and the assignment of any of the Notes.
SECTION 2.16 Additional Costs, Taxes or Similar Requirements. Subject to
the terms of Section 11.08, all payments by the Company to any Bank shall be
payable in full by the Company without any reduction or set off of any kind for
any purpose and all costs and expenses incurred by any Bank in connection
herewith, direct or indirect, shall be reimbursed by the Company. To the extent
that any additional payments of any kind are required, any reductions to
payments made to any Bank occur or may reasonably be expected to occur, any
costs are incurred, any taxes (or the withholding thereof) are due to, or
required by, any governmental or regulatory agency, foreign or domestic, state,
federal, local, regional or national, based on any law, rule, regulation,
guideline or similar provision, (other than taxes payable on the taxable income
of any Bank to the United States of America or any state or local entity), or
any similar items, all such payments and costs or reduced income shall be the
responsibility of the Company. This provision shall be interpreted in the
broadest possible terms to include any increased costs, payments or reduced
income for any reason, including, but specifically not by way of limitation, due
to taxes, capital adequacy provisions, reserve requirements, withholding
obligations, costs due to the payment of any sums on a date other than the
regularly scheduled date or for any other reason and the Company does hereby
indemnify and hold harmless each Bank, for all such costs and does agree to pay
same or cover any Bank's expenses or losses in regard to same. The Company shall
immediately pay such sums to any Bank as are necessary to mitigate all such
items. This obligation is in addition to all other obligations of the Company
contained herein.
SECTION 2.17 Tax Forms. If any Bank or any entity that is or hereafter
becomes a borrower is organized under the laws of a jurisdiction outside the
United States, such Person shall provide the Agent and the other parties hereto
with the Prescribed Forms on the date of the initial Advance hereunder or on the
date it becomes a party hereto, as the case may be, and from time to time
thereafter if requested by the affected party hereto or the Agent. Unless the
party requesting them and the Agent have received such Prescribed Forms, the
Agent, if required by applicable law or regulation, may withhold taxes from
payments under the Loan Documents at the applicable rate in the case of payments
to or for any Bank organized under the laws of a jurisdiction outside the United
States, provided the Company shall, unless otherwise directed in writing by the
Agent, make all payments in full to the Agent without deducting any withholding
or similar taxes.
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SECTION 2.18 Voluntary Reduction of Commitment. Upon at least five (5)
Business Days' prior written notice, the Company shall have the right, without
premium or penalty, to reduce ratably in part or terminate in whole the unused
portions of the respective Commitments of the Banks provided that each partial
reduction shall be in the aggregate amount of $5,000,000 or any integral
multiple of $1,000,000 in excess thereof.
SECTION 2.19 Fees. Subject to Section 11.08 hereof, the Company agrees
to pay the following fees (the "Fees"):
(a) The Company shall pay to the Agent for the ratable account of the
Banks a commitment fee (the "Commitment Fee") for the period from and
including the Execution Date to the Maturity Date calculated on the basis
of a 360-day year and computed on the daily average of the Unutilized
Commitment of each Bank at the rate for Commitment Fees set forth in the
definition of Margin. Commitment Fees shall be due and payable in arrears
on each Designated Payment Date commencing on the first such date following
the Execution Date and on the Maturity Date.
(b) The Company shall pay to the Agent for the benefit of the Banks an
annual fee (the "Letter of Credit Fee") in respect of each Letter of Credit
issued hereunder equal to (y) the greater of the then effective Eurodollar
Margin multiplied by the face amount of such Letter of Credit or $500.00,
plus (z) 0.125% multiplied by the face amount of such Letter of Credit, to
be paid to the Issuing Bank. Such fees shall be payable quarterly in
arrears.
SECTION 2.20 Extension of Maturity Date. Not less than 60 days and no
more than 90 days prior to the Maturity Date then in effect, provided that no
Event of Default shall have occurred and be continuing, the Company may request
an extension of such Maturity Date by submitting to the Agent an Extension
Request containing the information in respect of such extension specified in
Exhibit 2.20, which the Agent shall promptly furnish to each Bank. Each Bank
shall, not less than 30 days and not more than 60 days prior to the Maturity
Date then in effect, notify the Company and the Agent of its election (in its
sole and absolute discretion) to extend or not extend the Maturity Date as
requested in such Extension Request. Notwithstanding any provision of this
Agreement to the contrary, any notice by any Bank of its willingness to extend
the Maturity Date shall be revocable by such Bank in its sole and absolute
discretion at any time prior to the date that is 30 days prior to the Maturity
Date then in effect. If all Banks shall approve in writing the extension of the
Maturity Date requested in such Extension Request, the Maturity Date shall
automatically and without any further action by any Person be extended for the
period specified in such Extension Request; provided that (i) each extension
pursuant to this Section 2.20 shall be for a maximum of 364 days and (ii) the
Maturity Date shall not be extended beyond the second anniversary of the
original Maturity Date. If, not less than 30 days and not more than 60 days
prior to the Maturity Date then in effect, all Banks shall not approve in
writing the extension of the Maturity Date requested in an Extension Request,
the Maturity Date shall not be extended pursuant to such Extension Request. The
Agent shall promptly notify the Banks and the Company of any extension of the
Maturity Date pursuant to this Section 2.20.
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SECTION 2.21 Replacement of Banks. If any Bank requests compensation
under Section 2.10(f), 2.14 or 2.16 or if any Bank notifies the Company that it
cannot fund certain Loans or is unable to deliver the Prescribed Forms, or if
any Bank defaults in its obligation to fund Advances hereunder, then the Company
may, at its sole expense and effort, upon notice to such Bank and the Agent,
require such Bank to assign and delegate, without recourse (in accordance with
and subject to the restrictions contained in Section 11.10), all its interests,
rights and obligations under this Agreement to an assignee that shall assume
such obligations (which assignee may be another Bank, if a Bank accepts such
assignment); provided that (i) the Company shall have received the prior written
consent of the Agent, which consent shall not unreasonably be withheld, (ii)
such Bank shall have received payment of an amount equal to the outstanding
principal of its Advances, accrued interest thereon, accrued fees and all other
amounts payable to it hereunder, from the assignee (to the extent of such
outstanding principal and accrued interest and fees) or the Company (in the case
of all other amounts) and (iii) in the case of any such assignment resulting
from a claim for compensation under Section 2.10(f), 2.14 or 2.16, such
assignment will result in a reduction in such compensation. A Bank shall not be
required to make any such assignment and delegation if, prior thereto, as a
result of a waiver by such Bank or otherwise, the circumstances entitling the
Company to require such assignment and delegation cease to apply.
ARTICLE III
LETTERS OF CREDIT
-----------------
SECTION 3.01 Letters of Credit. (a) Subject to and upon the terms and
conditions herein set forth, the Issuing Bank agrees that it will, at any time
and from time to time on or after the Execution Date and prior to the Maturity
Date, promptly following its receipt of a Letter of Credit Request and
application for Letter of Credit, issue for the account of the Company or any of
the Guarantors and in support of the obligations of the Company or any of its
Subsidiaries, one or more irrevocable letters of credit (all such letters of
credit together with the Existing Letters of Credit collectively, the "Letters
of Credit"), up to a maximum amount outstanding at any one time for all Letters
of Credit and Existing Letters of Credit equal to $10,000,000.00, provided that
the Issuing Bank shall not issue any Letter of Credit if at the time of such
issuance: (i) the stated amount of such Letter of Credit is greater than an
amount which, when added to all other Letters of Credit outstanding and all
other Advances under the Notes then outstanding, would exceed the Total
Commitment; or (ii) the expiry date or, in the case of any Letter of Credit
containing an expiry date that is extendible at the option of the Issuing Bank,
the initial expiry date of such Letter of Credit is a date that is later than
the Maturity Date, unless such Letter of Credit is secured by cash.
(b) The Issuing Bank shall neither renew nor permit the renewal of any
Letter of Credit if any of the conditions precedent to such renewal set forth in
Section 4.02 are not satisfied or, after giving effect to such renewal, the
expiry date of such Letter of Credit would be a date that is later than twelve
months after the Maturity Date.
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(c) The Company, the Agent and the Banks acknowledge that Chase has
issued, for the account of the Company, the Existing Letters of Credit. Upon the
Execution Date, the Letters of Credit outstanding shall be that amount equal to
the aggregate stated amount of the Existing Letters of Credit, and the amount
available for Loans and Letters of Credit under the Commitments shall be reduced
by such amount so long as said Letters of Credit are outstanding and the amount
available under each Bank's Commitment shall be reduced by such Bank's
percentage participation of such amount. If the Company or any of the Guarantors
desires to extend the existing expiry date of any Existing Letter of Credit, or
request a substitute letter of credit be issued for any reason in respect of any
Existing Letter of Credit, the Company or any of the Guarantors shall submit to
the Issuing Bank a Letter of Credit Request as provided in Section 3.02(a).
SECTION 3.02 Letters of Credit Requests. (a) Whenever the Company
desires that a Letter of Credit be issued for its account or that the existing
expiry date shall be extended, it shall deliver to the Issuing Bank (with copies
to be sent to the Agent) in the case of a Letter of Credit to be issued, at
least three (3) Business Days' prior written request therefor and in the case of
the extension of the existing expiry date of any Letter of Credit, at least five
days prior to the date on which the Issuing Bank must notify the beneficiary
thereof that the Issuing Bank does not intend to extend such existing expiry
date. Each such request shall be executed by the Company and shall be in the
form of Exhibit 3.02 attached hereto (each a "Letter of Credit Request") and
shall be accompanied by an application for Letter of Credit therefor, completed
to the reasonable satisfaction of the Issuing Bank, and such other certificates,
documents and other papers and information as the Issuing Bank or any Bank
(through the Agent) may reasonably request. Each Letter of Credit shall be
denominated in U.S. dollars, shall expire no later than the date specified in
Section 3.01, shall not be in an amount greater than is permitted under clauses
(i) or (ii) of Section 3.01(a) and shall be in such form as may be reasonably
approved from time to time by the Issuing Bank and the Company.
(b) The delivery of each Letter of Credit Request shall be deemed to be
a representation and warranty by the Company that such Letter of Credit may be
issued in accordance with, and will not violate the requirements of, this
Agreement. Unless the Issuing Bank has received notice from any Bank before it
issues the respective Letter of Credit or extends the existing expiry date of a
Letter of Credit that one or more of the conditions specified in Article IV are
not then satisfied, or that the issuance of such Letter of Credit would violate
this Agreement, then the Issuing Bank may issue the requested Letter of Credit
in accordance with the Issuing Bank's usual and customary practices. Upon its
issuance of any Letter of Credit or the extension of the existing expiry date of
any Letter of Credit, as the case may be, the Issuing Bank shall promptly notify
the Company, the Agent and each Bank of such issuance or extension, which notice
shall be accompanied by a copy of the Letter of Credit actually issued or a copy
of any amendment extending the existing expiry date of any Letter of Credit, as
the case may be.
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SECTION 3.03 Letter of Credit Participations. (a) All Obligations of the
Company and the Guarantors with respect to all Existing Letters of Credit and
all Letters of Credit issued subsequent hereto shall be deemed to have been sold
and transferred by the Issuing Bank to each Bank, and each Bank shall be deemed
irrevocably and unconditionally to have purchased and received from the Issuing
Bank, without recourse or warranty, an undivided interest and participation, (to
the extent of such Bank's percentage participation in the Commitments) in each
such Obligation, each substitute letter of credit, each drawing made thereunder
and the obligations of the Company under this Agreement and the other Loan
Documents with respect thereto, and any security therefor or guaranty pertaining
thereto including the Guaranty.
(b) The Issuing Bank shall have no obligation relative to the Banks
other than to confirm that any documents required to be delivered under such
Letter of Credit appear to have been delivered and that they appear to comply on
their face with the requirements of such Letter of Credit.
(c) In the event that the Issuing Bank makes any payment under any
Letter of Credit, the same shall be considered an Alternate Base Rate Advance
without further action by any Person. The Issuing Bank shall promptly notify the
Agent, which shall promptly notify each Bank thereof. Each Bank shall
immediately pay to the Agent for the account of the Issuing Bank the amount of
such Bank's percentage participation of such Advance. If any Bank shall not have
so made its percentage participation available to the Agent, such Bank agrees to
pay interest thereon, for each day from such date until the date such amount is
paid at the lesser of the Federal Funds Effective Rate and the Highest Lawful
Rate.
(d) The Issuing Bank shall not be liable for, and the obligations of the
Company and the Banks to make payments to the Agent for the account of the
Issuing Bank with respect to Letters of Credit shall not be subject to, any
qualification or exception whatsoever, including any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement or any of
the other Loan Documents;
(ii) the existence of any claim, setoff, defense or other right which
the Company may have at any time against a beneficiary named in a Letter of
Credit, any transferee of any Letter of Credit, the Agent, the Issuing
Bank, any Bank, or any other Person, whether in connection with this
Agreement, any Letter of Credit, the transactions contemplated herein or
any unrelated transactions (including any underlying transaction between
the Company and the beneficiary named in any such Letter of Credit);
(iii) any draft, certificate or any other document presented under the
Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect;
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(iv) the surrender or impairment of any security for the performance or
observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Default or Event of Default.
(e) THE ISSUING BANK SHALL NOT BE LIABLE FOR ANY ERROR, OMISSION,
INTERRUPTION OR DELAY IN TRANSMISSION, DISPATCH OR DELIVERY OF ANY MESSAGE
OR ADVICE, HOWEVER TRANSMITTED, IN CONNECTION WITH ANY LETTER OF CREDIT,
EXCEPT FOR ERRORS OR OMISSIONS CAUSED BY THE ISSUING BANK'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. IT IS THE EXPRESS INTENTION OF THE
PARTIES HERETO THAT THE ISSUING BANK, ITS OFFICERS, DIRECTORS, EMPLOYEES
AND AGENTS SHALL BE INDEMNIFIED AND HELD HARMLESS FROM ANY ACTION TAKEN OR
OMITTED BY SUCH PERSON UNDER OR IN CONNECTION WITH ANY LETTER OF CREDIT OR
ANY RELATED DRAFT OR DOCUMENT ARISING OUT OF OR RESULTING FROM SUCH
PERSON'S SOLE OR CONTRIBUTORY NEGLIGENCE. The Company agrees that any
action taken or omitted by the Issuing Bank under or in connection with any
Letter of Credit or the related drafts or documents, if done in accordance
with the standards of care specified in the Uniform Customs and Practice
for Documentary Credits (1993 Revision), International Chamber of Commerce,
Publication No. 500 (and any subsequent revisions thereof approved by a
Congress of the International Chamber of Commerce and adhered to by the
Issuing Bank) and, to the extent not inconsistent therewith, the Uniform
Commercial Code of the State of Texas, shall not result in any liability of
the Issuing Bank to the Company.
SECTION 3.04 Increased Costs. (a) Notwithstanding any other provision
herein, but subject to Section 11.08, if any Bank shall have determined in good
faith that any law, rule, regulation or guideline or the application or
effectiveness of any applicable law or regulation or any change in applicable
law or regulation or any change after the Execution Date in the interpretation
or administration thereof, or compliance by any Bank (or any lending office of
such Bank) with any applicable guideline or request from any central bank or
governmental authority (whether or not having the force of law) either shall
impose, modify or make applicable any reserve, deposit, capital adequacy or
similar requirement against letters of credit issued, or participated in, by any
Bank or shall impose on any Bank any other conditions affecting this Agreement
or any Letter of Credit, and the result of any of the foregoing is to increase
the cost to any Bank of issuing, maintaining or participating in any Letter of
Credit, or reduce the amount received or receivable by any Bank hereunder with
respect to Letters of Credit, by an amount deemed by such Bank to be material,
then, from time to time, the Company shall pay to the Agent for the account of
such Bank such additional amount or amounts as will reasonably compensate such
Bank for such increased cost or reduction by such Bank.
(b) Each Bank will notify the Company through the Agent of any event
occurring after the date of this Agreement which will entitle such Bank to
compensation pursuant to subsection (a) above, as promptly as practicable. A
certificate of a Bank setting forth in reasonable detail such amount or amounts
as shall be necessary to compensate such Bank as specified in subsection (a)
above may be delivered to the Company (with a copy to the Agent) and shall be
conclusive absent manifest error. The Company shall pay to the Agent for the
account of
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such Bank the amount shown as due on any such certificate within 30 days after
its receipt of the same. No Bank shall be entitled to recover any costs pursuant
to this Section 3.04(b) incurred more than 180 days prior to such Bank's giving
notice to the Company for reimbursement thereof.
SECTION 3.05 Conflict between Application and Agreement. To the extent
that any provision of any application for Letter of Credit is inconsistent with
the provisions of this Agreement, the provisions of this Agreement shall
control.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
SECTION 4.01 Conditions Precedent to the Initial Advance. The obligation
of each Bank to make its initial Advance hereunder to the Company is subject to
the occurrence of or receipt by the Agent of the following, all in form and
substance satisfactory to the Agent, and, where relevant, executed by all
appropriate parties:
(a) this Agreement (which includes the Guaranty);
(b) one Note for each Bank;
(c) Landlord's lien waivers as required by the Agent in respect of all
leased property;
(d) each of the following security documents (the "Security Documents")
granting a first and prior (except for Liens permitted under Section 7.04) Lien
or security interest on the Collateral to the Agent for the benefit of itself
and the Banks as security for the Obligations, substantially in the form of
Exhibits 4.01(d)(i) and (ii) hereto, or in the case of real estate collateral,
in a form reasonably requested by the Agent;
(i) Security Agreements covering substantially all of the accounts and
inventory of the Company and each of its Material Subsidiaries existent as
of the date hereof (except as set forth in such Security Agreement or other
Security Documents which exclusions have been agreed to by the Majority
Banks), accompanied by all documents, instruments and other items necessary
to obtain and perfect a Lien thereon;
(ii) Pledge Agreements pledging to the Agent all stock owned by the
Company or any Subsidiary in all domestic Material Subsidiaries and 65% of
all foreign Material Subsidiaries accompanied by original stock
certificates evidencing such shares and executed stock powers for such
certificates;
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Failure of the Agent to request the information contained in this
paragraph prior to the Execution Date shall not preclude it from
requesting such information at any time thereafter, in its sole
discretion, during the time the Loan is outstanding; and
(iii) UCC-1 and UCC-3 Financing Statements and other documents or
instruments necessary to perfect the Liens granted in the Security
Documents.
(e) A Notice of Advance with respect to the initial Advance meeting the
requirements of Section 2.03(a);
(f) a certificate of the secretary or an assistant secretary of the
Company and each Guarantor certifying, inter alia, (i) true and complete copies
of each of the articles or certificate of incorporation, as amended and in
effect of the Company and each of the Guarantors, the bylaws, as amended and in
effect, of the Company and each of the Guarantors and the resolutions adopted by
the Board of Directors of the Company and each of the Guarantors (A) authorizing
the execution, delivery and performance by the Company and each of its
Subsidiaries of this Agreement and the other Loan Documents to which it is or
will be a party and, in the case of the Company, the Advances to be made
hereunder, (B) approving the forms of the Loan Documents to which it is or will
be a party and which will be delivered at or prior to the date of the initial
Advance hereunder and (C) authorizing officers of the Company and each of its
Subsidiaries to execute and deliver the Loan Documents to which it is or will be
a party and any related documents, including, any agreement contemplated by this
Agreement, and (ii) the incumbency and specimen signatures of the officers of
the Company and each of its Subsidiaries executing any documents on its behalf;
(g) a certificate of the President, Chief Financial Officer or Treasurer
of the Company certifying that there has been no change in the businesses or
financial condition of the Company which could reasonably be expected to have a
Material Adverse Effect since December 11, 1997;
(h) opinions addressed to the Agent and the Banks from (i) Bracewell &
Patterson, L.L.P., counsel to the Company and the Guarantors, substantially in
the form set forth as Exhibit 4.01(h)(i), and (ii) from Randolph W. Bryant,
General Counsel to the Company, substantially in the form of
Exhibit 4.01(h)(ii);
(i) the payment to the Agent and the Banks of all reasonable fees and
expenses agreed upon by such parties to be paid on the Execution Date including,
without limitation, any accrued unpaid portions of Commitment Fees due under the
Prior Credit Agreement;
(j) certificates of appropriate public officials as to the existence,
good standing and qualification to do business as a foreign corporation, as
applicable, of the Company and its Material Subsidiaries in each jurisdiction in
which the ownership of its properties or the conduct of its business requires
such qualifications and where the failure to so qualify would have a Material
Adverse Effect;
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(k) certificates of insurance as contemplated by Section 6.03(a); and
(l) UCC searches and other title information reasonably requested by the
Agent on the Company and each of its Material Subsidiaries.
The acceptance of the benefits of the initial Credit Event hereunder
shall constitute a representation and warranty by the Company to the Agent and
each of the Banks that, to the best of its knowledge, all of the conditions
specified in this Section above shall have been satisfied or waived as of that
time.
SECTION 4.02 Conditions Precedent to All Credit Events. The obligation
of the Banks to make any Advance, including, without limitation, the initial
Advance hereunder, is subject to the further conditions precedent that on the
date of such Credit Event:
(a) The representations and warranties set forth in Article V shall be
true and correct in all material respects as of, and as if such representations
and warranties were made on, the date of the proposed Advance (unless such
representation and warranty expressly relates to an earlier date or is no longer
true and correct solely as a result of transactions permitted by the Loan
Documents), and the Company shall be deemed to have certified to the Agent and
the Banks that such representations and warranties are true and correct in all
material respects by submitting a Notice of Advance.
(b) The Company shall have complied with the provisions of Section 2.03
hereof.
(c) No Default or Event of Default shall have occurred and be continuing
or would result from such Credit Event.
(d) No Material Adverse Effect shall have occurred in the consolidated
financial condition of the Company and its consolidated Subsidiaries since the
delivery of the most recent financial statements delivered pursuant to Section
6.01(b).
(e) the Agent shall have received the most recent unqualified report and
opinion on the Company's financial statements issued by KPMG Peat Marwick LLP,
or other independent certified public accountant of recognized national
standing.
(f) Except for any foreign Subsidiaries, all Persons that have become
Material Subsidiaries subsequent to the Execution Date shall have executed this
Agreement.
(g) The Agent shall have received such other approvals, opinions and
documents as the Agent or the Banks may reasonably request.
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The acceptance of the benefits of each such Credit Event shall
constitute a representation and warranty by the Company to the Agent and each of
the Banks that all of the conditions specified in this Section above exist as of
that time.
SECTION 4.03 Delivery of Documents. All of the Notes, certificates,
legal opinions and other documents and papers referred to in this Article IV,
unless otherwise specified, shall be delivered to the Agent for the account of
each of the Banks and, except for the Notes, in sufficient counterparts for each
of the Banks and shall be reasonably satisfactory in form and substance to the
Banks.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Banks to enter into this Agreement and to make
the Advances provided for herein, the Company, as to itself and each of its
Subsidiaries, makes, on or as of the occurrence of each Credit Event (except to
the extent such representations or warranties relate to an earlier date or are
no longer true and correct in all material respects solely as a result of
transactions not prohibited by the Loan Documents), the following
representations and warranties to the Agent and the Banks:
SECTION 5.01 Organization and Qualification. Each of the Company and its
Material Subsidiaries is duly formed or organized, validly existing and in good
standing under the laws of the state of its organization, has the power to own
its property and to carry on its business as now conducted, except where the
failure to do so would not have a Material Adverse Effect and (c) is duly
qualified to do business and is in good standing in every jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect.
SECTION 5.02 Authorization and Validity. Each of the Company and its
Subsidiaries has the corporate power and authority to execute, deliver and
perform its obligations hereunder and under the other Loan Documents to which it
is a party and all such action has been duly authorized by all necessary
corporate proceedings on its part. Each Loan Document to which the Company or
any of its Subsidiaries is a party have been duly and validly executed and
delivered by such Person and constitute a valid and legally binding agreement of
such Person enforceable in accordance with the respective terms thereof, except,
in each case, as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws relating
to or affecting the enforcement of creditors' rights generally, and by general
principles of equity regardless of whether such enforceability is sought in a
proceeding in equity or at law.
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SECTION 5.03 Governmental Consents. No authorization, consent, approval,
license or exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is necessary for the valid execution or delivery by the Company or any
Subsidiary of any Loan Document.
SECTION 5.04 Conflicting or Adverse Agreements or Restrictions. Neither
the Company nor any Subsidiary is a party to any contract or agreement or
subject to any restriction which would reasonably be expected to have a Material
Adverse Effect. As of the Execution Date, all agreements of the Company relating
to the lending of money or the issuance of letters of credit by any party are
described hereto on Schedule 5.04. Neither the execution nor delivery of the
Loan Documents nor compliance with the terms and provisions hereof or thereof
will be contrary to the provisions of, or constitute a default under, (a) the
charter or bylaws of the Company or any Material Subsidiary (b) or any law,
regulation, order, writ, injunction or decree of any court or governmental
instrumentality that is applicable to the Company or any Material Subsidiary or
(c) any material agreement to which the Company or any of its Subsidiaries is a
party or by which it is bound or to which any of them is subject.
SECTION 5.05 Title to Assets. Each of the Company and its Material
Subsidiaries has good title to all material personal property and good and
indefeasible title to all material real property as reflected on the books and
records of the Company or any of its Material Subsidiaries as being owned by
them, except for properties disposed of in the ordinary course of business,
subject to no Liens, except those permitted hereunder, except where the failure
to do so could not reasonably be expected to have a Material Adverse Effect. All
of such assets have been and are being maintained by the appropriate Person in
good working condition in accordance with industry standards, except where the
failure to do so could not reasonably be expected to have a Material Adverse
Effect.
SECTION 5.06 Litigation. No proceedings against the Company or any
Subsidiary are pending or, to the knowledge of the Company, threatened before
any court or governmental agency or department which involve a reasonable
material risk of having a Material Adverse Effect except those listed on
Schedule 5.06 hereof.
SECTION 5.07 Financial Statements. Prior to the Execution Date, the
Company has furnished to the Banks its audited consolidated balance sheet as of
December 31, 1997 and audited consolidated income statement and statement of
cash flows for the period ended December 31, 1997, and the unaudited balance
sheet and consolidated income statement and statements of cash flow for the
period from January 1, 1998 through March 31, 1998 (such financials, the
"Financials"). The Financials have been prepared in conformity with GAAP
consistently applied (except as otherwise disclosed in such financial
statements) throughout the periods involved and present fairly, in all material
respects, the consolidated financial condition of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations for the periods then ended. As of the Execution Date, no
Material Adverse Effect
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has occurred in the consolidated financial condition of the Company and its
consolidated Subsidiaries since the date of said Financials.
SECTION 5.08 Default. Neither the Company nor any Subsidiary is in
default under any material provisions of any instrument evidencing any
Indebtedness or of any agreement relating thereto, or in default in any respect
under any order, writ, injunction or decree of any court, or in default in any
respect under or in violation of any order, injunction or decree of any
governmental instrumentality, in each case in such manner as to cause a Material
Adverse Effect.
SECTION 5.09 Investment Company Act. Neither the Company nor any
Subsidiary is, or is directly or indirectly controlled by or acting on behalf of
any Person which is, an "investment company," as such term is defined in the
Investment Company Act of 1940, as amended.
SECTION 5.10 Public Utility Holding Company Act. Neither the Company nor
any Subsidiary is a non-exempt "holding company," or subject to regulation as
such, or, to the knowledge of the Company's or such Subsidiary's officers, an
"affiliate" of a "holding company" or a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
SECTION 5.11 ERISA. No accumulated funding deficiency (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived, exists
or is expected to be incurred with respect to any Plan. No liability to the PBGC
(other than required premium payments) has been or is expected by the Company to
be incurred with respect to any Plan by the Company or any ERISA Affiliate.
Neither the Company nor any ERISA Affiliate has incurred any withdrawal
liability under Title IV of ERISA with respect to any Multi-Employer Plans.
SECTION 5.12 Tax Returns and Payments. Each of the Company and its
Subsidiaries has filed all federal income tax returns and other tax returns,
statements and reports (or obtained extensions with respect thereto) which are
required to be filed and has paid or deposited or made adequate provision, in
accordance with GAAP for the payment of all taxes (including estimated taxes
shown on such returns, statements and reports) which are shown to be due
pursuant to such returns, except for such taxes as are being contested in good
faith and by appropriate proceedings, except, in each such case, where such
failure could not reasonably be expected to have a Material Adverse Effect.
SECTION 5.13 Environmental Matters. Each of the Company and its
Subsidiaries (a) possesses all environmental, health and safety licenses,
permits, authorizations, registrations, approvals and similar rights necessary
under law or otherwise for the Company or such Subsidiary to conduct its
operations as now being conducted (other than those with respect to which the
failure to possess or maintain would not, individually or in the aggregate for
the Company and such Subsidiaries, reasonably be expected to have a Material
Adverse Effect) and (b) each of such licenses, permits, authorizations,
registrations, approvals and similar rights is valid and subsisting,
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in full force and effect and enforceable by the Company or such Subsidiary, and
each of the Company and its Subsidiaries is in compliance with all effective
terms, conditions or other provisions of such permits, authorizations,
registrations, approvals and similar rights except for such failure or
noncompliance that, individually or in the aggregate for the Company and such
Subsidiaries, would not reasonably be expected to have a Material Adverse
Effect. Except as disclosed on Schedule 5.13, neither the Company nor any of its
Subsidiaries has received any notices of any violation of, noncompliance with,
or remedial obligation under, Requirements of Environmental Laws (which
violation or non-compliance has not been cured), and there are no writs,
injunctions, decrees, orders or judgments outstanding, or lawsuits, claims,
proceedings, investigations or inquiries pending or, to the knowledge of the
Company or any Subsidiary, threatened, relating to the ownership, use,
condition, maintenance or operation of, or conduct of business related to, any
property owned, leased or operated by the Company or such Subsidiary or other
assets of the Company or such Subsidiary, other than those violations, instances
of noncompliance, obligations, writs, injunctions, decrees, orders, judgments,
lawsuits, claims, proceedings, investigations or inquiries that, individually or
in the aggregate for the Company and such Subsidiaries, would not have a
Material Adverse Effect. Except as disclosed on Schedule 5.13, there are no
material obligations, undertakings or liabilities arising out of or relating to
Environmental Laws to which the Company or any of its Subsidiaries has agreed,
assumed or retained, or, to the knowledge of the Company, by which the Company
or any of its Subsidiaries is adversely affected, by contract or otherwise and,
further, except as disclosed on Schedule 5.13, neither the Company nor any of
its Subsidiaries has received a written notice or claim to the effect that the
Company or any of its Subsidiaries is or may be liable to any other Person as
the result of a Release or threatened Release of a Hazardous Material which, in
either case, could reasonably be expected to have a Material Adverse Effect.
SECTION 5.14 Purpose of Loans. (a) The proceeds of the Loan will be used
for general corporate purposes.
(b) None of the proceeds of any Advance will be used directly or
indirectly for the purpose of purchasing or carrying any "margin stock" within
the meaning of Regulation U or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any margin
stock.
(c) Use of Proceeds. Neither the Company nor any affiliate of the
Borrower shall use any portion of the proceeds of the Loans nor have any Letter
of Credit issued, either directly or indirectly, for the purposes of (i)
purchasing any securities underwritten by ABN AMRO Chicago Corporation ("AACC"),
an affiliate of one of the Banks, (ii) purchasing from AACC any securities in
which AACC makes a market, or (iii) refinancing or making payments of principal,
interest or dividends on any securities issued by the Company or any affiliate
of the Company, and underwritten or dealt in by AACC.
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SECTION 5.15 Franchises and Other Rights. The Company and each of its
Subsidiaries has all franchises, permits, licenses, patents, trademarks and
other intangible assets or authority as are necessary to enable them to carry on
their respective businesses as now being conducted and is not in default in
respect thereof where the absence of such or any such default could reasonably
be expected to have a Material Adverse Effect.
SECTION 5.16 Subsidiaries and Assets. The Subsidiaries listed on
Schedule 5.16 are all of the Subsidiaries of the Company as of the Execution
Date and the address given for such Subsidiaries is the correct mailing address
as of the Execution Date. The Subsidiaries executing this Agreement are all of
the Material Subsidiaries as of the Execution Date.
SECTION 5.17 Solvency. After giving effect to the initial Advance
hereunder and all other Indebtedness of the Company existing at the time of such
Advance, the Company and its Subsidiaries, viewed as a consolidated entity, will
have at such time (a) capital sufficient to carry on their businesses and
transactions and (b) assets, the fair market value of which exceeds their
consolidated liabilities (as reflected on the Financials or on the financial
statements most recently delivered to the Banks).
ARTICLE VI
AFFIRMATIVE COVENANTS
---------------------
The Company, as to itself and each of its Subsidiaries, covenants and
agrees that on and after the date hereof until the Notes have been paid in full
and the Commitments have terminated:
SECTION 6.01 Information Covenants. The Company will furnish to each
Bank:
(a) As soon as available, and in any event within fifty (50) days of the
end of each fiscal quarter, the consolidated and, if requested by the Agent, the
consolidating balance sheet of the Company and its Subsidiaries as of the end of
such period and the related consolidated and, if requested by the Agent,
consolidating statements of income for such period and, in each case, also for
the portion of the fiscal year ended at the end of such period, setting forth,
in each case after the first anniversary of the Effective Date, comparative
consolidated figures for the related periods in the prior fiscal year, all of
which shall be certified by the chief financial officer or chief executive
officer of the Company as fairly presenting in all material respects, the
financial position of the Company and its Subsidiaries as of the end of such
period and the results of their operations for the period then ended in
accordance with GAAP, subject to changes resulting from normal year-end audit
adjustments.
(b) As soon as available, and in any event within ninety-five (95) days
after the close of each fiscal year of the Company, the audited consolidated
and, if requested by the Agent,
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the unaudited consolidating balance sheets of the Company and its Subsidiaries
as at the end of such fiscal year and the related consolidated and, if requested
by the Agent, consolidating statements of income, stockholders' equity and cash
flows for such fiscal year, setting forth, in each case after the first
anniversary of the Effective Date, comparative figures for the preceding fiscal
year and certified by KPMG Peat Marwick LLP or other independent certified
public accountants of recognized national standing, whose report shall be
without limitation as to the scope of the audit and reasonably satisfactory in
substance to the Banks.
(c) Immediately after any Responsible Officer of the Company obtains
verified knowledge thereof, notice of:
(i) any material violation of, noncompliance with, or remedial
obligations under, Requirements of Environmental Laws;
(ii) any material Release or threatened material Release of Hazardous
Materials affecting any property owned, leased or operated by the Company
or any of its Subsidiaries;
(iii) any event or condition which constitutes a Default or an Event of
Default;
(iv) any condition or event which, in the opinion of management of the
Company, would reasonably be expected to have a Material Adverse Effect;
(v) any Person having given any written notice to the Company or taken
any other action with respect to a claimed material default or event under
any material instrument or material agreement;
(vi) the institution of any litigation which could reasonably be
expected in the good faith judgment of the Company either to have a
Material Adverse Effect or result in a final, non-appealable judgment or
award in excess of $1,000,000.00 with respect to any single cause of
action;
(vii) all ERISA notices required by Section 6.08; and
(viii) any sale of Assets other than as permitted hereby;
Such notice shall specify the nature and period of existence thereof and the
action taken by such Person and the nature of any such claimed default, event or
condition and, in the case of an Event of Default or Default, what action has
been taken, is being taken or is proposed to be taken with respect thereto.
(d) At the time of the delivery of the quarterly and annual financial
statements provided for in Sections 6.01(a) and 6.01(b), a certificate of a
Responsible Officer to the effect that,
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<PAGE>
to his knowledge, no Default or Event of Default exists or, if any Default or
Event of Default does exist, specifying the nature and extent thereof and the
action that is being taken or that is proposed to be taken with respect thereto,
which certificate shall set forth the calculations required to establish whether
the Company was in compliance with the provisions of Sections 7.11 through 7.17
as at the end of such fiscal period or year, as the case may be.
(e) Upon request by the Agent, a summary report (by Subsidiary) of all
Accounts of the Company and its Subsidiaries.
(f) Promptly following request by the Agent such environmental reports,
studies and audits of the Company's procedures and policies, assets and
operations in respect of Environmental Laws as the Agent may reasonably request.
(g) Promptly upon receipt thereof, a copy of any report or letter
submitted to the Company by its independent accountants in connection with any
regular or special audit of the Company's records and simultaneously with the
sending or filing thereof, copies of all proxy statements, financial statements
and reports which the Company sends to its stockholders, and copies of all
regular, periodic or special reports, and all registration statements, in each
case, which the Company or any of its Subsidiaries files with the Securities and
Exchange Commission or any other securities exchange or securities market.
(h) Promptly following request by the Agent such financial projections,
budgets and unaudited consolidating financial statements of the Company and its
Subsidiaries as the Agent may reasonably request.
(i) From time to time and with reasonable promptness, such other
information or documents as the Agent or any Bank through the Agent may
reasonably request.
SECTION 6.02 Books, Records and Inspections. The Company will maintain,
and will cause its Subsidiaries to maintain, the corporate books and financial
records of the Company and its Subsidiaries and will permit, or cause to be
permitted, any Person designated by any Bank or the Banks to visit and inspect
any of the properties of the Company and its Subsidiaries, to examine such books
and records and make copies thereof or extracts therefrom, audit its accounts,
inventory and finances of any such corporations with the officers, employees and
agents of the Company and its Subsidiaries and with their independent public
accountants, all at such reasonable times and as often as the Agent or such Bank
may request. Such inspections shall be at the expense of the Company if made
annually and shall be at the expense of the Bank or Banks requiring same if made
more often than annually.
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<PAGE>
SECTION 6.03 Insurance and Maintenance of Properties. (a) Each of the
Company and its Subsidiaries will keep reasonably adequately insured by
financially sound and reputable insurers all of its material property, and
against the interruption of its business, which is of a character, and in
amounts and against such risks, usually and reasonably insured by similar
Persons engaged in the same or similar businesses, including, without
limitation, insurance against fire, casualty and any other hazards normally
insured against, which policies shall name the Agent for the benefit of the
Banks, as a loss payee. Each of the Company and its Subsidiaries will at all
times maintain insurance against its liability for injury to Persons or
property, which insurance shall be by financially sound and reputable insurers
and in such amounts and form as are customary for corporations of established
reputation engaged in the same or a similar business and owning and operating
similar properties and which shall name the Agent, for the benefit of the Banks,
as an additional insured. The Company shall provide the Agent a listing of all
such insurance and such other certificates and other evidence thereof, on or
prior to the Execution Date hereof and annually thereafter. A listing of all
policies of the Company and its Subsidiaries as of the Execution Date is
attached hereto as Schedule 6.03.
(b) Each of the Company and its Subsidiaries will cause all of its
material properties used or useful in the conduct of its business to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and will cause to be made all reasonably necessary
repairs, renewals and replacements thereof, all as in the reasonable judgment of
such Person may be reasonably necessary so that the business carried on in
connection therewith may be properly conducted at all times, except where such
failure could not reasonably be expected to have a Material Adverse Effect.
SECTION 6.04 Payment of Taxes. Each of the Company and its Subsidiaries
will pay and discharge all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits, or upon any properties belonging
to it, prior to the date on which penalties attach thereto, except for such
amounts that are being contested in good faith and by appropriate proceedings,
except where such failure could not reasonably be expected to have a Material
Adverse Effect.
SECTION 6.05 Corporate Existence. Each of the Company and its
Subsidiaries will do all things necessary to preserve and keep in full force and
effect (a) the existence of the Company, and (b) unless the failure to do so
would not reasonably be expected to have a Material Adverse Effect, the rights
and franchises of each of the Company and its Subsidiaries.
SECTION 6.06 Compliance with Statutes. Each of the Company and its
Subsidiaries will comply with all applicable statutes, regulations and orders
of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property, except to the extent the failure to do so would not reasonably
be expected to have a Material Adverse Effect.
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SECTION 6.07 Material Privileges, Permits, Licenses and Other Rights.
Each of the Company and its Subsidiaries will do all things necessary to
preserve and keep in full force and effect all material privileges, permits,
licenses and other rights necessary to conduct business as such business is
currently conducted as of the Effective Date, except to the extent the failure
to do so would not reasonably be expected to have a Material Adverse Effect.
SECTION 6.08. ERISA. Immediately after any Responsible Officer of the
Company or any of its Subsidiaries knows or has reason to know any of the
following items are true the Company will deliver or cause to be delivered to
the Banks a certificate of the chief financial officer of the Company setting
forth details as to such occurrence and such action, if any, the Company or its
ERISA Affiliate is required or proposes to take, together with any notices
required or proposed to be given to or filed with or by the Company or its ERISA
Affiliate with respect thereto: (i) that a Reportable Event has occurred or that
an application may be or has been made to the Secretary of the Treasury for a
waiver or modification of the minimum funding standard; (ii) that a
Multiemployer Plan has been or may be terminated, reorganized, partitioned or
declared insolvent under Title IV of ERISA; (iii) that any required contribution
to a Plan or Multiemployer Plan has not been or may not be timely made; (iv)
that proceedings may be or have been instituted under Section 4069(a) of ERISA
to impose liability on the Company or an ERISA Affiliate or under Section 4042
of ERISA to terminate a Plan or appoint a trustee to administer a Plan; (v) that
the Company or any ERISA Affiliate has incurred or may incur any liability
(including any contingent or secondary liability) on account of the termination
of or withdrawal from a Plan or a Multiemployer Plan; and (vi) that the Company
or an ERISA Affiliate may be required to provide security to a Plan under
Section 401(a)(29) of the Code.
SECTION 6.09 Additional Subsidiaries. (a) The Company will cause any
Person that becomes a Material Subsidiary subsequent to the Execution Date to
(i) within thirty (30) Business Days after becoming a Subsidiary, to execute a
Guaranty or a counterpart of this Agreement and deliver same to the Agent and
(ii) within thirty (30) days after becoming a Subsidiary, to deliver to the
Agent evidence, satisfactory to the Agent, that all Indebtedness owing by such
Subsidiary to any other Person has been paid in full and said Indebtedness has
been canceled and all Liens securing such Indebtedness have been released,
(except for Indebtedness and Liens permitted hereby) provided, if said
Subsidiary is not incorporated under the laws of the United States or one of its
states or territories, no such guaranty will be required if the Company makes
arrangements, satisfactory to the Agent, in its sole discretion, regarding
restrictions on transfer of funds or other assets by the Company or any
Subsidiary to said new foreign Subsidiary. Further, the Company, or its
Affiliate that owns the stock of said Material Subsidiary, will deliver to the
Agent a Pledge Agreement as described in Section 4.01(d)(ii) in respect of such
Material Subsidiary.
(b) Subsequent to the Execution Date, if the Company and all of the
Material Subsidiaries that are Guarantors do not have both total revenue and
total assets equal to eighty-five percent (85%) of the total consolidated
revenue and the total consolidated assets, respectively, of the Company and all
of its Subsidiaries on a consolidated basis, as shown by the reports required
under Section 6.01, the Company will immediately pledge, or cause to be pledged,
the stock of
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Subsidiaries sufficient to attain each of said eighty-five percent (85%) levels
and will cause such Subsidiaries to become Guarantors, all with appropriate
supporting documentation as referenced above.
SECTION 6.10 Acquisition Agreements. Upon request of the Agent, the
Company shall provide the Agent with: (a) copies of all acquisition agreements
relating to the acquisitions of Qualified Companies, (b) a specimen form of such
acquisition agreement (the "Acquisition Agreements") and (c) listing of each
then existing Acquisition Agreement.
SECTION 6.11 Material Contracts. (a) The Company and its Subsidiaries
shall provide the Agent with copies of all material contracts (the "Material
Contracts") as of the Effective Date. A listing of each such Material Contract
is attached hereto as Schedule 6.11.
(b) The Company and its Subsidiaries shall provide the Agent with an
executed copy of each additional Material Contract entered into after the
Effective Date, within ten (10) Business Days after request therefor by the
Agent.
SECTION 6.12 Employee Agreements. The Company and its Subsidiaries shall
provide the Agent with copies of all agreements relating to the employees of the
Company and its Subsidiaries, upon request by the Agent, including, but not
limited to, all collective bargaining agreements, employment contracts, non-
compete agreements, employee savings, employee retirement and employee benefit
plans. Upon request by the Agent, the Company will provide the Agent with a list
of (i) each employment agreement between the Company and each of its officers,
(ii) each employment agreement between a Subsidiary and the key employees of
such Subsidiary (or its predecessor), (iii) each union with which a Subsidiary
of the Company has entered into a collective bargaining agreement, and (iv) each
employee pension benefit plan (as defined in ERISA) sponsored by the Company or
any of its subsidiaries.
ARTICLE VII
NEGATIVE COVENANTS
------------------
The Company covenants and agrees, as to itself and, except as
otherwise provided herein, each of its Subsidiaries, that on and after the date
hereof until the Notes have been paid in full and the Commitments have
terminated:
SECTION 7.01 Change in Business. The Company will not, and will not
permit any of its Subsidiaries to, engage in any businesses not of the same
general type as those conducted by the Company on the Execution Date, those
conducted by a Qualified Company when acquired and businesses reasonably related
thereto.
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SECTION 7.02 Consolidateion, Merger or Sale of Assets. Except as
previously disclosed to the Agent, the Company will not, and will not permit any
of its Subsidiaries to, wind up, liquidate or dissolve their affairs, or agree
to be acquired by any third party in any transaction of merger or consolidation
in which the Company or such Subsidiary is not the sole surviving entity, or
sell or otherwise dispose of all or any substantial part of their property or
assets (including the capital stock of any Subsidiary) other than: (a) sales of
inventory and surplus or obsolete assets in the ordinary course of business that
do not prejudice the Banks in any material way, (b) dispositions of the stock of
Subsidiaries to other wholly-owned Subsidiaries of the Company that have
complied with Section 6.09, and (c) sales of assets with a value equal to or
less than five percent (5%) of the Company's Consolidated Net Worth, provided
the proceeds of such sale are used to acquire assets for use in the Company's
business, or, at the option of the Company, to reduce the Obligations.
SECTION 7.03 Indebtedness. Neither the Company nor any Subsidiary of the
Company will create, incur, assume or permit to exist any Indebtedness of the
Company or any Subsidiary except:
(a) Indebtedness existing hereunder;
(b) Indebtedness existing on the Execution Date and described in the
Financials or, if not shown, listed on Schedule 7.03(b);
(c) Indebtedness arising as a result of the endorsement in the ordinary
course of business of negotiable instruments in the course of collection;
(d) accounts payable and unsecured, current and long-term, liabilities
(including accrued insurance related liabilities), not the result of
indebtedness for borrowed money, to vendors, suppliers and other Persons for
goods and services in the ordinary course of business;
(e) agreements (including agreements of intent) to acquire any Person or
assets issued by the Company or any of its Subsidiaries in anticipation of
acquiring such Person or assets if such acquisition is not prohibited by this
Agreement, including any ongoing, contingent payment obligations contained in
such agreements;
(f) Intercompany Indebtedness of any Subsidiary of the Company to the
Company or any other Subsidiary and Indebtedness of the Company to any
Subsidiary of the Company assuming same is subordinate to the Obligations in the
manner provided in Section 8.05 hereof;
(g) guarantees by the Company or any of its Subsidiaries of Indebtedness
of any Subsidiary of the Company permitted to be incurred, created or existing
pursuant to this Agreement, provided, that such guarantees are not directly
secured by any Liens;
(h) current and deferred taxes;
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(i) contingent liabilities under surety bonds or otherwise incurred in
the ordinary course of business;
(j) earn-out agreements that are a part of Investments allowed under
Section 7.05(d);
(k) Other Indebtedness not in excess of five percent (5%) of
Consolidated Net Worth in the aggregate at any time outstanding;
(l) Indebtedness not to exceed two percent (2%) of Consolidated Net
Worth at any time outstanding secured in accordance with clause (j) of the
definition herein of Permitted Liens;
(m) Indebtedness not to exceed $10,000,000.00, subordinated to the
satisfaction of the Agent, owing to Sellers of Qualified Companies, in
connection with the acquisition of said Qualified Company;
(n) liabilities incurred in connection with interest rate hedging and
swap agreements, provided, same are entered into in connection with the day to
day business operations of the Company and not for speculative purposes;
(o) Alternative Facilities Advances, provided, the Alternative
Facilities Advances do not exceed at any time the lesser of the Aggregate Unused
Commitment as of such time or $15,000,000; and
(p) renewals and extensions with the same lenders (in the same or
lesser principal amount on similar terms and conditions) of any Indebtedness
listed in subparagraphs (a) through (o) above.
SECTION 7.04 Liens. Neither the Company nor any Subsidiary of the
Company will create, incur, assume or suffer to exist any Lien upon or with
respect to any of its property or assets of any kind whether now owned or
hereafter acquired (nor will they covenant with any other Person not to grant
such a Lien to the Agent on Collateral, except property secured or to be secured
by a Lien permitted by this Agreement), except:
(a) Liens existing on the Execution Date and listed on Schedule 7.04(a);
(b) Liens securing currently secured Indebtedness permitted under
Section 7.03(b) or (m) above;
(c) Permitted Liens;
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(d) Liens created by the Loan Documents;
(e) Other Liens securing obligations allowed pursuant to Section 7.03(k)
or (l) not exceeding $1,500,000.00 in the aggregate at any one time;
(f) deposits under real property leases and deposits with utilities,
provided that such deposits do not exceed amounts customarily deposited by other
Persons similarly situated; and
(g) any renewal, extension or replacement of any Lien referred to above
with the same lenders; provided, that no Lien arising or existing as a result of
such extension, renewal or replacement shall be extended to cover any property
not theretofore subject to the Lien being extended, renewed or replaced and
provided further that the principal amount of the Indebtedness secured thereby
shall not exceed the principal amount of the Indebtedness so secured at the time
of such extension, renewal or replacement.
SECTION 7.05 Investments. Neither the Company nor any Subsidiary will,
directly or indirectly, make or own any Investment in any Person, except:
(a) Permitted Investments;
(b) Investments owned on the Effective Date as set forth on Schedule
7.05(b), including Investments in the Subsidiaries, direct and indirect;
(c) Investments arising out of loans and advances for expenses, travel
per diem and similar items in the ordinary course of business to officers,
directors and employees and intercompany Indebtedness permitted by Section
7.03(f);
(d) Subject to the limitations contained in Section 7.17, investments in
the stock, warrants, stock appreciation rights, other securities and/or other
assets of Qualified Companies;
(e) other Investments not exceeding two and one-half percent (2.5%) of
Consolidated Net Worth in the aggregate at any one time outstanding;
(f) Investments in the form of stock buy backs allowed under Section
7.06; and
(g) Investments in wholly-owned Subsidiaries of the Company.
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SECTION 7.06 Restricted Payments. The Company will not pay any dividends
or redeem, retire, purchase or guaranty the value of or make any other
acquisition, direct or indirect, of any shares of any class of stock of the
Company, or of any warrants, rights or options to acquire any such shares, now
or hereafter outstanding, except to the extent that the consideration therefor
consists solely of shares of stock (including warrants, rights or options
relating thereto) of the Company or is approved by the Majority Banks; provided,
the Company may (i) purchase its stock in a maximum, aggregate amount not to
exceed $1,000,000.00 in the aggregate; and (ii) purchase its stock in an
additional aggregate amount not to exceed $5,000,000.00 provided the stock is
unrestricted stock and is purchased only from former owners of acquired
businesses and provided further, that the purchased stock is reissued or the
same number of shares of the same class of stock is issued, for value, within
one hundred fifty (150) days of purchase and the Company receives the full net
proceeds therefor.
SECTION 7.07 Change in Accounting. The Company will not and will not
permit any Subsidiary to, change its method of accounting except for (a) changes
permitted by GAAP in which the Company's auditors concur, (b) changes with
respect to any Person or assets acquired by the Company to conform with the
Company's policies and procedures and which are permitted by GAAP or (c) changes
required by GAAP. The Company shall advise the Agent in writing promptly upon
making any material change to the extent same is not disclosed in the financial
statements required under Section 6.01 hereof. In the event of any such change,
the Company, the Banks and the Agent agree to negotiate amendments to Sections
7.11 through 7.18 hereof (and related definitions, if relevant) so as to
equitably reflect such changes thereon with the intended result that the
criteria for evaluating the financial condition of the Company and its
Subsidiaries shall be substantially the same after such changes as before.
SECTION 7.08 Certain Indebtedness. The Company will not make, and will
not permit any of its Subsidiaries to make, after the occurrence and during the
continuance of any Event of Default, any prepayments of principal or interest on
any other of the Company's Indebtedness, except as may be required thereby.
SECTION 7.09 Transactions with Affiliates. The Company will not,
directly or indirectly, engage in any transaction with any Affiliate, including
the purchase, sale or exchange of assets or the rendering of any service, except
in the ordinary course of business or pursuant to the reasonable requirements of
its business and, in each case, upon terms that are no less favorable than those
which might be obtained in an arm's-length transaction at the time from non-
Affiliates.
SECTION 7.10 Changes to Acquisition Agreements. The Company will not,
and will not permit any of its Subsidiaries to amend, modify, alter or change in
any way, to the material detriment of the Banks, those Acquisition Agreements
listed on Schedule 6.10 attached hereto.
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SECTION 7.11 Consolidated Net Worth. The Company will not permit its
Consolidated Net Worth to be less than the actual net worth as of the Execution
Date minus $750,000.00, plus, in all cases: (a) 100% of the increase in
Consolidated Net Worth resulting from the issuance of any capital stock by the
Company or any Subsidiary subsequent to the Execution Date at any time during
the term hereof and (b) 75% of the consolidated after tax income (if positive)
of the Company and its Subsidiaries since September 30, 1997 (to be adjusted
semi-annually at mid-year and fiscal year-end) for each fiscal year during the
term hereof (including any Subsidiaries acquired subsequent hereto).
SECTION 7.12 Funded Debt to EBITDA Ratio. (a) The Company will not
permit the ratio of its Funded Debt to EBITDA calculated for the preceding four
(4) quarters on a rolling four (4) quarter basis to be greater than 2.75 to 1.0
at any time during the term hereof.
(b) The definition of EBITDA contained in Section 1.01 of this
Agreement shall be effective retroactively to December 11, 1997 for purposes of
calculating the ratio of the Company's Funded Debt to EBITDA under the Prior
Credit Agreement and under this Agreement.
SECTION 7.13 Funded Debt to Capitalization Ratio. The Company will not
permit its Capitalization Ratio to be greater than fifty-five percent (55%) at
any time during the term hereof.
SECTION 7.14 Capital Expenditures. The Company will not permit non-
acquisition related consolidated Capital Expenditures (including Capitalized
Lease Obligations) to be greater than eight percent (8%) of Consolidated Net
Worth for any fiscal year during the term hereof.
SECTION 7.15 Fixed Charge Coverage Ratio. The Company will not permit
the ratio of (a) EBITDA calculated for the preceding four (4) quarters on a
rolling four (4) quarter basis less cash taxes less Capital Expenditures
actually paid during such four (4) quarters to (b) the sum of: interest expense,
plus scheduled amortization of principal plus Capital Lease Obligation payments
calculated for the preceding four (4) quarters on a rolling four quarter basis,
plus twenty percent (20%) of Advances outstanding under this Agreement to be
less than 1.20 to 1.0, as of the end of any fiscal quarter.
SECTION 7.16 New Installations Revenues. The Company will not permit its
percentage of its total revenues derived from New Installations on a
consolidated basis to be greater than or equal to fifty percent (50%) at any
time after June 30, 1999.
SECTION 7.17 Limitations on Acquisitions. The Company will not and will
not permit any Subsidiary to acquire any Qualified Company by funding such
acquisition with consideration other than common stock, without first obtaining
prior approval of such acquisition from the Majority Banks as follows:
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<TABLE>
<S> <C> <C>
---------------------------------------------------------------------
Acquisition of a Qualified Acquisition of a Qualified
Company having total revenues Company having total revenues
derived from New Installations derived from New Installations
(greater or equal to) 50% (less than) 50%
- ------------------------------------------------------------------------------------------------------
From the Effective Date to the Approval from Majority Banks Approval from Majority Banks
Maturity Date required when non-equity required when non-equity
consideration consideration
(greater than) $5,000,000 (greater than) $10,000,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
ARTICLE VIII
GUARANTY
--------
SECTION 8.01 Guaranty. In consideration of, and in order to induce the
Banks to make the Loans hereunder, the Guarantors hereby absolutely,
unconditionally and irrevocably, jointly and severally guarantee the punctual
payment and performance when due, whether at stated maturity, by acceleration or
otherwise, of the Obligations, and all other obligations and covenants of the
Company now or hereafter existing under this Agreement, the Notes and the other
Loan Documents whether for principal, interest (including interest accruing or
becoming owing both prior to and subsequent to the commencement of any
proceeding against or with respect to the Company under any chapter of the
Bankruptcy Code), Fees, commissions, expenses (including reasonable attorneys'
fees and expenses) or otherwise, and all reasonable costs and expenses, if any,
incurred by the Agent or any Bank in connection with enforcing any rights under
this Guaranty (all such obligations being the "Guaranteed Obligations"), and
agree to pay any and all reasonable expenses incurred by each Bank and the Agent
in enforcing this Guaranty; provided that notwithstanding anything contained
herein or in any of the Loan Documents to the contrary, the maximum liability of
each Guarantor hereunder and under the other Loan Documents shall in no event
exceed such Guarantor's Maximum Guaranteed Amount, and provided further, each
Guarantor shall be unconditionally required to pay all amounts demanded of it
hereunder prior to any determination of such Maximum Guaranteed Amount and the
recipient of such payment, if so required by a final non-appealable order of a
court of competent jurisdiction, shall then be liable for the refund of any
excess amounts. If any such rebate or refund is ever required, all other
Guarantors (and the Company) shall be fully liable for the repayment thereof to
the maximum extent allowed by applicable law. This Guaranty is an absolute,
unconditional, present and continuing guaranty of payment and not of
collectibility and is in no way conditioned upon any attempt to collect from the
Company or any other action, occurrence or circumstance whatsoever. Each
Guarantor agrees that the Guaranteed Obligations may at any time and from time
to time exceed the Maximum Guaranteed Amount of such Guarantor without impairing
this Guaranty or affecting the rights and remedies of the Banks hereunder.
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SECTION 8.02 Continuing Guaranty. Each Guarantor guarantees that the
Guaranteed Obligations will be paid strictly in accordance with the terms of
this Agreement, the Notes and the other Loan Documents. Each Guarantor agrees
that the Guaranteed Obligations and Loan Documents may be extended or renewed,
and Loans repaid and reborrowed in whole or in part, without notice to or assent
by such Guarantor, and that it will remain bound upon this Guaranty
notwithstanding any extension, renewal or other alteration of any Guaranteed
Obligations or Loan Documents, or any repayment and reborrowing of Loans. To the
maximum extent permitted by applicable law, the obligations of each Guarantor
under this Guaranty shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms hereof under any
circumstances whatsoever, including:
(a) any extension, renewal, modification, settlement, compromise, waiver
or release in respect of any Guaranteed Obligations;
(b) any extension, renewal, amendment, modification, rescission, waiver
or release in respect of any Loan Documents;
(c) any release, exchange, substitution, non-perfection or invalidity
of, or failure to exercise rights or remedies with respect to, any direct or
indirect security for any Guaranteed Obligations, including the release of any
Guarantor or other Person liable on any Guaranteed Obligations;
(d) any change in the corporate existence, structure or ownership of the
Company, any Guarantor, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting the Company, such Guarantor, any other Guarantor or
any of their respective assets;
(e) the existence of any claim, defense, set-off or other rights or
remedies which such Guarantor at any time may have against the Company, or the
Company or such Guarantor may have at any time against the Agent, any Bank, any
other Guarantor or any other Person, whether in connection with this Guaranty,
the Loan Documents, the transactions contemplated thereby or any other
transaction other than by the payment in full by the Company of the Guaranteed
Obligations after the termination of the Commitments of the Banks;
(f) any invalidity or unenforceability for any reason of this Agreement
or other Loan Documents, or any provision of law purporting to prohibit the
payment or performance by the Company, such Guarantor or any other Guarantor of
the Guaranteed Obligations or Loan Documents, or of any other obligation to the
Agent or any Bank; or
(g) any other circumstances or happening whatsoever, whether or not
similar to any of the foregoing.
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SECTION 8.03 Effect of Debtor Relief Laws. If after receipt of any
payment of, or proceeds of any security applied (or intended to be applied) to
the payment of all or any part of the Guaranteed Obligations, the Agent or any
Bank is for any reason compelled to surrender or voluntarily surrenders (under
circumstances in which it believes it could reasonably be expected to be so
compelled if it did not voluntarily surrender), such payment or proceeds to any
Person (a) because such payment or application of proceeds is or may be avoided,
invalidated, declared fraudulent, set aside, determined to be void or voidable
as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-
off or a diversion of trust funds or (b) for any other similar reason, including
(i) any judgment, decree or order of any court or administrative body having
jurisdiction over the Agent, any Bank or any of their respective properties or
(ii) any settlement or compromise of any such claim effected by the Agent or any
Bank with any such claimant (including the Company), then the Guaranteed
Obligations or part thereof intended to be satisfied shall be reinstated and
continue, and this Guaranty shall continue in full force as if such payment or
proceeds have not been received, notwithstanding any revocation thereof or the
cancellation of any Note or any other instrument evidencing any Guaranteed
Obligations or otherwise; and the Guarantors, jointly and severally, shall be
liable to pay the Agent and the Banks, and hereby do indemnify the Agent and the
Banks and hold them harmless for the amount of such payment or proceeds so
surrendered and all expenses (including reasonable attorneys' fees, court costs
and expenses attributable thereto) incurred by the Agent or any Bank in the
defense of any claim made against it that any payment or proceeds received by
the Agent or any Bank in respect of all or part of the Guaranteed Obligations
must be surrendered. The provisions of this paragraph shall survive the
termination of this Guaranty, and any satisfaction and discharge of the Company
by virtue of any payment, court order or any federal or state law.
SECTION 8.04 Waiver of Subrogation. Notwithstanding any payment or
payments made by any Guarantor hereunder, or any set-off or application by the
Agent or any Bank of any security or of any credits or claims, no Guarantor will
assert or exercise any rights of the Agent or any Bank or of such Guarantor
against the Company to recover the amount of any payment made by such Guarantor
to the Agent or any Bank hereunder by way of any claim, remedy or subrogation,
reimbursement, exoneration, contribution, indemnity, participation or otherwise
arising by contract, by statute, under common law or otherwise, and such
Guarantor shall not have any right of recourse to or any claim against assets or
property of the Company, in each case unless and until the Obligations of the
Company guaranteed hereby have been fully and finally satisfied. Until such
time, each Guarantor hereby expressly waives any right to exercise any claim,
right or remedy which such Guarantor may now have or hereafter acquire against
the Company that arises under this Agreement or any other Loan Document or from
the performance by any Guarantor of the Guaranty hereunder including any claim,
remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification or participation in any claim, right or remedy of the Agent or
any Bank against the Company or any Guarantor, or any security that the Agent or
any Bank now has or hereafter acquires, whether or not such claim, right or
remedy arises in equity, under contract, by statute, under common law or
otherwise. If any amount shall be paid to a Guarantor by the Company or another
Guarantor after payment in full of the Obligations, and the Obligations shall
thereafter be reinstated in whole or in part and the Agent or any Bank forced to
repay any sums
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received by any of them in payment of the Obligations, this Guaranty shall be
automatically reinstated and such amount shall be held in trust for the benefit
of the Agent and the Banks and shall forthwith be paid to the Agent to be
credited and applied to the Guaranteed Obligations, whether matured or
unmatured. The provisions of this paragraph shall survive the termination of
this Guaranty, and any satisfaction and discharge of the Company by virtue of
any payment, court order or any federal or state law.
SECTION 8.05 Subordination. If any Guarantor becomes the holder of any
indebtedness payable by the Company or another Guarantor, each Guarantor hereby
subordinates all indebtedness owing to it from the Company to all indebtedness
of the Company to the Agent and the Banks, and agrees that during the
continuance of any Event of Default it shall not accept any payment on the same
until payment in full of the Obligations of the Company under this Agreement and
the other Loan Documents after the termination of the Commitments of the Banks
and shall in no circumstance whatsoever attempt to set-off or reduce any
obligations hereunder because of such indebtedness. If any amount shall
nevertheless be paid in violation of the foregoing to a Guarantor by the Company
or another Guarantor prior to payment in full of the Guaranteed Obligations,
such amount shall be held in trust for the benefit of the Agent and the Banks
and shall forthwith be paid to the Agent to be credited and applied to the
Guaranteed Obligations, whether matured or unmatured.
SECTION 8.06 Waiver. Each Guarantor hereby waives promptness, diligence,
notice of acceptance and any other notice with respect to any of the Guaranteed
Obligations and this Guaranty and waives presentment, demand of payment, notice
of intent to accelerate, notice of dishonor or nonpayment and any requirement
that the Agent or any Bank institute suit, collection proceedings or take any
other action to collect the Guaranteed Obligations, including any requirement
that the Agent or any Bank protect, secure, perfect or insure any Lien against
any property subject thereto or exhaust any right or take any action against the
Company or any other Person or any collateral (it being the intention of the
Agent, the Banks and each Guarantor that this Guaranty is to be a guaranty of
payment and not of collection). It shall not be necessary for the Agent or any
Bank, in order to enforce any payment by any Guarantor hereunder, to institute
suit or exhaust its rights and remedies against the Company, any other Guarantor
or any other Person, including others liable to pay any Guaranteed Obligations,
or to enforce its rights against any security ever given to secure payment
thereof. Each Guarantor hereby expressly waives to the maximum extent permitted
by applicable law each and every right to which it may be entitled by virtue of
the suretyship laws of the State of Texas, including any and all rights it may
have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the
Texas Civil Practice and Remedies Code and Chapter 34 of the Texas Business and
Commerce Code. Each Guarantor hereby waives marshaling of assets and
liabilities, notice by the Agent or any Bank of any indebtedness or liability to
which such Bank applies or may apply any amounts received by such Bank, and of
the creation, advancement, increase, existence, extension, renewal,
rearrangement or modification of the Guaranteed Obligations. Each Guarantor
expressly waives, to the extent permitted by applicable law, the benefit of any
and all laws providing for exemption of property from execution or for valuation
and appraisal upon foreclosure.
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SECTION 8.07 Full Force and Effect. This Guaranty is a continuing
guaranty and shall remain in full force and effect until all of the Obligations
of the Company under this Agreement and the other Loan Documents and all other
amounts payable under this Guaranty have been paid in full (after the
termination of the Commitments of the Banks). All rights, remedies and powers
provided in this Guaranty may be exercised, and all waivers contained in this
Guaranty may be enforced, only to the extent that the exercise or enforcement
thereof does not violate any provisions of applicable law which may not be
waived.
SECTION 8.08 Negative Pledge. No Guarantor will create any lien on its
assets to any other Person during the pendency of this Agreement except for
liens that would be permitted by Section 7.04 nor will any of them enter any
agreement with any Person not to grant liens on or pledge assets to the Agent.
ARTICLE IX
EVENTS OF DEFAULT AND REMEDIES
------------------------------
SECTION 9.01 Events of Default. The following events shall constitute
Events of Default ("Events of Default") hereunder:
(a) any installment of principal is not paid when due or any payment of
interest or Fees is not paid on the date on which such payment is due and
such failure continues for a period of five (5) days; or
(b) any representation or warranty made or deemed made by the Company or
any Subsidiary herein or in any of the Loan Documents or other document,
certificate or financial statement delivered in connection with this Agreement
or any other Loan Document shall prove to have been incorrect in any material
respect when made or deemed made or reaffirmed, as the case may be; or
(c) the Company shall fail to perform or observe or cause any Subsidiary
to fail to perform or observe any duty or covenant contained in Article VI of
this Agreement or in any of the Security Documents and such failure continues
for a period of fifteen (15) days or shall fail to perform or observe any other
covenant or duty contained in this Agreement or in any of the Loan Documents; or
(d) the Company or any Subsidiary shall (i) fail to make (whether as
primary obligor or as guarantor or other surety) any principal payment of or
interest or premium, if any, on any instrument of Indebtedness in excess of
1,000,000.00 allowed hereunder outstanding beyond any period of grace provided
with respect thereto or (ii) shall fail to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument of
Indebtedness in excess of $1,000,000.00, if the effect of such failure is to
cause, or to permit the holder or holders to cause, such obligations to become
due prior to any stated maturity; or
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(e) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i) relief
in respect of the Company or any Material Subsidiary, or of a substantial part
of the property or assets of the Company or any Material Subsidiary, under Title
11 of the United States Code, as now or hereafter in effect, or any successor
thereto (the "Bankruptcy Code"), or any other federal or state bankruptcy,
insolvency, receivership or similar law, (ii) the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for the
Company or any Material Subsidiary or for a substantial part of the property or
assets of the Company or any Material Subsidiary or (iii) the winding-up or
liquidation of the Company or any Subsidiary; and such proceeding or petition
shall continue undismissed for 60 days or an order or decree approving or
ordering any of the foregoing shall be entered; or
(f) the Company or any Material Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking relief under the Bankruptcy
Code or any other federal or state bankruptcy, insolvency, receivership or
similar law, (ii) consent to the institution of, or fail to contest in a timely
and appropriate manner, any proceeding or the filing of any petition described
in clause (e) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
the Company or any Subsidiary or for a substantial part of the property or
assets of the Company or any Subsidiary, (iv) file an answer admitting the
material allegations of a petition filed against it in any such proceeding, (v)
make a general assignment for the benefit of creditors, (vi) become unable, or
admit in writing its inability or fail generally, to pay its debts as they
become due or (vii) take any action for the purpose of effecting any of the
foregoing; or
(g) any Loan Document shall become or be deemed to be unenforceable in
any material respect in the sole judgment of the Majority Banks; or
(h) a judgment or order, which with other outstanding judgments and
orders against the Company and its Subsidiaries equal or exceed $1,000,000.00 in
the aggregate (to the extent not covered by insurance as to which the respective
insurer has acknowledged coverage), shall be entered against the Company or any
Subsidiary and (i) within 30 days after entry thereof such judgment shall not
have been paid or discharged or execution thereof stayed pending appeal or,
within 30 days after the expiration of any such stay, such judgment shall not
have been paid or discharged or any enforcement proceeding shall have been
commenced (and not stayed) by any creditor or upon such judgment; or
(i) a Change of Control shall occur.
SECTION 9.02 Primary Remedies. In any such event, and at any time after
the occurrence of any of the above described events, the Agent, if directed by
the Majority Banks, shall by written notice to the Company (a "Notice of
Default") take any or all of the following actions (without prejudice to the
rights of any Bank to enforce any other rights it may have against the Company,
provided that, if an Event of Default specified in Section 9.01(e) or Section
9.01(f) shall
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occur, the following shall occur automatically without the giving of any Notice
of Default): (a) declare the Commitments terminated, whereupon the Commitments
shall forthwith terminate immediately and any Commitment Fee and any other owing
and unpaid Fee shall forthwith become due and payable without any other notice
of any kind; (b) declare the principal of and any accrued and unpaid interest in
respect of all Advances, and all obligations owing hereunder, to be, whereupon
the same shall become, forthwith due and payable without presentment, demand,
notice of demand or of dishonor and non-payment, protest, notice of protest,
notice of intent to accelerate, declaration or notice of acceleration or any
other notice of any kind (except as herein provided), all of which are hereby
waived by the Company; (c) set off any assets or money of the Company or any
Guarantor in its or any Bank's possession against the Obligations (and
thereafter in accordance with Section 11.06); and (d) exercise any rights or
remedies under any of the Loan Documents or under any applicable state or
federal law.
SECTION 9.03 Other Remedies. Upon the occurrence and during the
continuance of any Event of Default, the Agent may proceed to protect and
enforce its and the Banks' rights, either by suit in equity or by action at law
or both, whether for the specific performance of any covenant or agreement
contained in this Agreement or in any other Loan Document or in aid of the
exercise of any power granted in this Agreement or in any other Loan Document;
or may proceed to enforce the payment of all amounts owing to the Banks under
the Loan Documents and any accrued and unpaid interest thereon in the manner set
forth herein or therein; it being intended that no remedy conferred herein or in
any of the other Loan Documents is to be exclusive of any other remedy, and each
and every remedy contained herein or in any other Loan Document shall be
cumulative and shall be in addition to every other remedy given hereunder and
under the other Loan Documents or now or hereafter existing at law or in equity
or by statute or otherwise.
ARTICLE X
THE AGENT
---------
SECTION 10.01 Authorization and Action. Each Bank hereby irrevocably
appoints and authorizes the Agent to act on its behalf and to exercise such
powers under this Agreement and the other Loan Documents as are specifically
delegated to or required of the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto. The Agent may perform any of its
duties hereunder by or through its agents and employees. The duties of the Agent
shall be mechanical and administrative in nature; the Agent shall not have by
reason of this Agreement or any other Loan Documents a fiduciary relationship in
respect of any Bank; and nothing in this Agreement or any other Loan Document,
expressed or implied, is intended to, or shall be so construed as to, impose
upon the Agent any obligations in respect of this Agreement or any other Loan
Document except as expressly set forth herein or therein. As to any matters not
expressly provided for by this Agreement, the Notes or the other Loan Documents
(including enforcement or collection of the Notes), the Agent shall not be
required to exercise any discretion or take any action, but shall be required to
act or to refrain from acting (and shall be fully protected in so acting or
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refraining from acting) upon the instructions of the Majority Banks, and such
instructions shall be binding upon the Banks and all holders of Notes and the
Obligations; provided, that the Agent shall not be required to take any action
which exposes the Agent to personal liability and shall not be required or
entitled to take any action which is contrary to any of the Loan Documents or
applicable law.
SECTION 10.02 Agent's Reliance. (a) Neither the Agent nor any of its
directors, officers, agents or employees shall be liable to the Banks for any
action taken or omitted to be taken by it or them under or in connection with
this Agreement, the Notes or any of the other Loan Documents (i) with the
consent or at the request of the Majority Banks or (ii) in the absence of its or
their own gross negligence or willful misconduct, it being the express intention
of the parties hereto that the Agent and its directors, officers, agents and
employees shall have no liability to the Banks for actions and omissions under
this Section resulting from their sole ordinary or contributory negligence.
(b) Without limitation of the generality of the foregoing, the Agent:
(i) may treat the payee of each Note and the Obligations as the holder thereof
until the Agent receives written notice of the assignment or transfer thereof
signed by such payee and in form satisfactory to the Agent; (ii) may consult
with legal counsel (including counsel for the Company), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such counsel, accountants or experts; (iii) makes no warranty or
representation to any Bank and shall not be responsible to any Bank for any
statements, warranties or representations made in or in connection with this
Agreement, any Note or any other Loan Document; (iv) except as otherwise
expressly provided herein, shall not have any duty to ascertain or to inquire as
to the performance or observance of any of the terms, covenants or conditions of
this Agreement, any Note or any other Loan Document or to inspect the property
(including the books and records) of the Company; (v) shall not be responsible
to any Bank for the due execution, legality, validity, enforceability,
collectibility, genuineness, sufficiency or value of this Agreement, any Note,
any other Loan Document or any other instrument or document furnished pursuant
hereto or thereto; (vi) shall not be responsible to any Bank for the perfection
or priority of any Lien securing the Obligations; and (vii) shall incur no
liability to the Banks under or in respect of this Agreement, any Note or any
other Loan Document by acting upon any notice, consent, certificate or other
instrument or writing (which may be by telegram, telecopier or cable) reasonably
believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 10.03 Agent and Affiliates; Chase and Affiliates. Without
limiting the right of any other Bank to engage in any business transactions with
the Company or any of its Affiliates, with respect to their Commitments, the
Loans made by them and the Notes issued to them, Chase and each other Bank who
may become the Agent shall have the same rights and powers under this Agreement
and its Notes as any other Bank and may exercise the same as though it was not
the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly
indicated, include Chase and any such other Bank, in their individual
capacities. Chase, each other Person who becomes the Agent and their respective
Affiliates may be engaged in, or may hereafter engage in, one or more
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loan, letter of credit, leasing or other financing activity not the subject of
this Agreement (collectively, the "Other Financings") with the Company, any
Subsidiary or any of its Affiliates, or may act as trustee on behalf of, or
depositary for, or otherwise engage in other business transactions with the
Company, any Subsidiary or any of its Affiliates (all Other Financings and other
such business transactions being collectively, the "Other Activities") with no
responsibility to account therefor to the Banks. Without limiting the rights and
remedies of the Banks specifically set forth herein, no other Bank by virtue of
being a Bank hereunder shall have any interest in (a) any Other Activities, (b)
any present or future guaranty by or for the account of the Company not
contemplated or included herein, (c) any present or future offset exercised by
the Agent in respect of any such Other Activities, (d) any present or future
property taken as security for any such Other Activities or (e) any property now
or hereafter in the possession or control of the Agent which may be or become
security for the Obligations of the Company hereunder and under the Notes by
reason of the general description of indebtedness secured, or of property
contained in any other agreements, documents or instruments related to such
Other Activities; provided, however, that if any payment in respect of such
guaranties or such property or the proceeds thereof shall be applied to
reduction of the Obligations evidenced hereunder and by the Notes, then each
Bank shall be entitled to share in such application according to its pro rata
portion of such Obligations.
SECTION 10.04 Banks' Credit Decision. Each Bank acknowledges and agrees
that it has, independently and without reliance upon the Agent or any other Bank
and based on the financial statements referred to in Section 6.01 and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also acknowledges
and agrees that it will, independently and without reliance upon the Agent or
any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement and the other Loan Documents.
SECTION 10.05 Agent's Indemnity. (a) The Agent shall not be required to
take any action hereunder or to prosecute or defend any suit in respect of this
Agreement, the Notes or any other Loan Document unless indemnified to the
Agent's satisfaction by the Banks against loss, cost, liability and expense. If
any indemnity furnished to the Agent shall become impaired, it may call for
additional indemnity and cease to do the acts indemnified against until such
additional indemnity is given. In addition, the Banks agree to indemnify the
Agent (to the extent not reimbursed by the Company), ratably according to the
respective aggregate principal amounts of the Notes then held by each of them
(or if no Notes are at the time outstanding, ratably according to the respective
amounts of the Commitments), from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against the Agent in any way relating to or arising
out of this Agreement or any action taken or omitted by the Agent under this
Agreement, the Notes and the other Loan Documents. Without limitation of the
foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its
ratable share of any out-of-pocket expenses (including reasonable counsel fees)
incurred by the Agent in connection with the preparation, execution,
administration, or enforcement of, or legal advice in respect of rights or
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responsibilities under, this Agreement, the Notes and the other Loan Documents
to the extent that the Agent is not reimbursed for such expenses by the Company.
The provisions of this Section shall survive the termination of this Agreement,
the payment of the Obligations and/or the assignment of any of the Notes.
(b) Notwithstanding the foregoing, no Bank shall be liable under this
Section to the Agent for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
due to the Agent resulting from the Agent's gross negligence or willful
misconduct. Each Bank agrees, however, that it expressly intends, under this
Section, to indemnify the Agent ratably as aforesaid for all such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements arising out of or resulting from the Agent's sole
ordinary or contributory negligence.
SECTION 10.06 Successor Agent. The Agent may resign at any time by
giving written notice thereof to the Banks and the Company and may be removed as
Agent under this Agreement, the Notes and the other Loan Documents at any time
with or without cause by the Majority Banks. Upon any such resignation or
removal, the Majority Banks shall have the right to appoint a successor Agent
with the approval of the Company, which shall not be unreasonably withheld. If
no successor Agent shall have been so appointed by the Majority Banks, and shall
have accepted such appointment, within 30 calendar days after the retiring
Agent's giving of notice of resignation or the Majority Banks' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent with the approval of the Company, which shall not be
unreasonably withheld, which shall be a commercial bank organized under the laws
of the United States of America or of any state thereof and having a combined
capital and surplus of at least $50,000,000. Upon the acceptance of any
appointment as Agent hereunder and under the Notes and the other Loan Documents
by a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement, the Notes and the other Loan Documents. After any retiring
Agent's resignation or removal as Agent hereunder and under the Notes and the
other Loan Documents, the provisions of this Article X shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement, the Notes and the other Loan Documents.
SECTION 10.07 Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent shall have received notice from a Bank or the Company
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default." If the Agent receives such
notice, the Agent shall give notice thereof to the Banks; provided, however, if
such notice is received from a Bank, the Agent also shall give notice thereof to
the Company. The Agent shall be entitled to take action or refrain from taking
action with respect to such Default or Event of Default as provided in Section
10.01 and Section 10.02.
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ARTICLE XI
MISCELLANEOUS
-------------
SECTION 11.01 Amendments. No amendment or waiver of any provision of
this Agreement, any Note or any other Loan Document, nor consent to any
departure by the Company herefrom or therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Company, as to amendments,
and by the Majority Banks in all cases, and then, in any case, such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, no such amendment, waiver or consent shall be
effective unless signed by all of the Banks if it attempts to: (a) change the
definition of "Commitment", "Designated Payment Date", "Majority Banks",
"Margin" or "Maturity Date"; (b) modify this Section or Sections 2.19 or 11.05
or any definition related to said sections; (c) release any Guarantor or
Collateral; (d) waive any Default under Section 9.01(a), (e) release any Liens
on any of the Collateral, or in any other manner change the repayment terms of
the Loans, including required principal payments or the rate, amount or time of
interest payments. Further, no provisions of Article III or Article X or other
terms affecting the Agent or the Issuing Bank may be changed without the consent
of said Agent or the Issuing Bank as appropriate.
SECTION 11.02 Notices. Except with respect to telephone notifications
specifically permitted pursuant to Article II, all notices, consents, requests,
approvals, demands and other communications provided for herein shall be in
writing (including telecopy communications) and mailed, telecopied, sent by
overnight courier or delivered:
(a) If to the Company and the Guarantors:
Group Maintenance America Corp.
8 Greenway Plaza
Suite 1500
Houston, Texas 77046
Telephone No.: (713) 860-0100
Telecopy No: (713) 626-4766
Attention: Chief Financial Officer
(b) If to the Agent:
Chase Bank of Texas
545 West 19th Street
Houston, Texas 77008
Telephone No.: (713) 868-6737
Telecopy No: (713) 868-8663
Attention: Mr. Mark Walshak
Senior Vice President
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with copies to:
Loan Syndication Services
1111 Fannin
9th Floor - M.S. 46
Houston, Texas 77002
Attention: Gale Manning
and to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Telephone No.: (713) 220-4268
Telecopy No.: (713) 220-4285
Attention: Mr. Thomas J. Perich
or, in the case of any party hereto, such other address or telecopy number as
such party may hereafter specify for such purpose by notice to the other
parties.
(c) If to any Bank, to the address shown on the signature page hereof or
specified by such Bank (or the Agent on behalf of any Bank) to the Company.
All communications shall, when mailed, telecopied or delivered, be
effective when mailed by certified mail, return receipt requested to any party
at its address specified above, or telecopied to any party to the telecopy
number set forth above, or delivered personally to any party at its address
specified above; provided, that communications to the Agent pursuant to Article
II shall not be effective until actually received by the Agent, and provided
further that communications sent by telecopy after 5:00 p.m., Houston, Texas
time, shall be effective on the next succeeding business day.
SECTION 11.03 No Waiver; Remedies. No failure on the part of any Bank or
the Agent to exercise, and no delay in exercising, any right hereunder, under
any Note or under any other Loan Document shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, or any abandonment or
discontinuance of any steps to enforce such right, preclude any other or further
exercise thereof or the exercise of any other right. No notice to or demand on
the Company in any case shall entitle the Company to any other or further notice
or demand in similar or other circumstances. The remedies herein are cumulative
and not exclusive of any other remedies provided by law, at equity or in any
other agreement.
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SECTION 11.04 Costs and Expenses. The Company agrees to pay on demand:
(a) all reasonable out-of-pocket costs and expenses of the Agent in connection
with the preparation, delivery, sale and syndication of this Agreement, the
Notes, the other Loan Documents and the other documents to be delivered
hereunder, including the reasonable fees and out-of-pocket expenses of counsel
for the Agent with respect thereto and with respect to advising the Agent as to
its rights and responsibilities under this Agreement, the Notes and the other
Loan Documents, and any modification, supplement or waiver of any of the terms
of this Agreement or any other Loan Document, (b) all reasonable out-of-pocket
costs and expenses of any Bank including reasonable legal fees and expenses, in
connection with the enforcement of this Agreement, the Notes and the other Loan
Documents and (c) reasonable costs and expenses incurred in connection with
third party professional services reasonably required by the Agent such as
appraisers, environmental consultants, accountants or similar Persons, provided
that, prior to any Event of Default hereunder, the Agent will first obtain the
consent of the Company to such expense, which consent shall not be unreasonably
withheld. Without prejudice to the survival of any other obligations of the
Company hereunder and under the Notes, the obligations of the Company under this
Section shall survive the termination of this Agreement or the replacement of
the Agent and each assignment of the Notes.
SECTION 11.05 Release and Indemnity. (a) The Company shall and hereby
does indemnify the Agent and each Bank and each Affiliate thereof and their
respective directors, officers, employees and agents from, and hold each of them
harmless against, any and all losses, liabilities, claims or damages (including
reasonable legal fees and expenses) to which any of them may become subject,
insofar as such losses, liabilities, claims or damages arise out of or result
from any actual or proposed use by the Company of the proceeds of any extension
of credit hereunder or any investigation, litigation or other proceeding
(including any threatened investigation or proceeding) relating to the foregoing
or any of the other Loan Documents, and the Company shall reimburse each Bank
and each Affiliate thereof and their respective directors, officers, employees
and agents, upon demand for any expenses (including legal fees) reasonably
incurred in connection with any such investigation or proceeding; but excluding
any such losses, liabilities, claims, damages or expenses incurred by reason of
the gross negligence or willful misconduct of the Person to be indemnified (the
"Indemnified Obligations").
(b) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS
INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER
SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL INDEMNIFIED
OBLIGATIONS ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR CONTRIBUTORY
NEGLIGENCE OF SUCH PERSON OR IMPOSED UPON SAID PARTY UNDER ANY THEORY OF STRICT
LIABILITY. Without prejudice to the survival of any other obligations of the
Company hereunder and under the other Loan Documents, the obligations of the
Company under this Section shall survive the termination of this Agreement and
the other Loan Documents and the payment of the Obligations or the assignment of
the Notes.
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SECTION 11.06 Right of Setoff. Without limiting the remedies provided
for in Article IX, each Bank is hereby authorized at any time and from time to
time, after acceleration of the Obligations after the occurrence of an Event of
Default to the fullest extent permitted by law, to set off and apply any and all
deposits held and other indebtedness owing by such Bank, or any branch,
subsidiary or Affiliate, to or for the credit or the account of the Company
against any and all the Obligations of the Company now or hereafter existing
under this Agreement and the other Loan Documents and other obligations of the
Company held by such Bank, irrespective of whether or not such Bank shall have
made any demand under this Agreement, its Note or the Obligations and although
the Obligations may be unmatured. Each Bank agrees promptly to notify the
Company after any such set-off and application made by such Bank, provided, that
failure to give such notice shall not affect the validity of such set-off and
application. The rights of each Bank under this Section are in addition to other
rights and remedies (including other rights of setoff) which such Bank may have.
SECTION 11.07 Governing Law. THIS AGREEMENT, ALL NOTES, THE OTHER LOAN
DOCUMENTS AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH SHALL BE
DEEMED TO BE CONTRACTS AND AGREEMENTS EXECUTED BY THE COMPANY AND EACH BANK
UNDER THE LAWS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA AND FOR
ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF
SAID STATE AND OF THE UNITED STATES OF AMERICA. Without limitation of the
foregoing, nothing in this Agreement, or in the Notes or in any other Loan
Document shall be deemed to constitute a waiver of any rights which any Bank may
have under applicable federal legislation relating to the amount of interest
which such Bank may contract for, take, receive or charge in respect of the Loan
and the Loan Documents, including any right to take, receive, reserve and charge
interest at the rate allowed by the law of the state where any Bank is located.
The Agent, each Bank and the Company further agree that insofar as the
provisions of Texas Finance Code, Chapter 303, as amended, are applicable to the
determination of the Highest Lawful Rate with respect to the Notes and the
Obligations hereunder and under the other Loan Documents, the weekly rate
ceiling of such Article, as described in Article 1D.003 of the Texas Credit
Title, shall be applicable; provided, however, that to the extent permitted by
such Article, the Agent may from time to time by notice to the Company revise
the election of such interest rate ceiling as such ceiling affects the then
current or future balances of the Loans. The provisions of the Texas Finance
Code, Chapter 346 do not apply to this Agreement, any Note issued hereunder or
the other Loan Documents.
SECTION 11.08 Interest. Each provision in this Agreement and each other
Loan Document is expressly limited so that in no event whatsoever shall the
amount paid, or otherwise agreed to be paid, to the Agent or any Bank, or
charged, contracted for, reserved, taken or received by the Agent or any Bank,
for the use, forbearance or detention of the money to be loaned under this
Agreement or any Loan Document or otherwise (including any sums paid as required
by any covenant or obligation contained herein or in any other Loan Document
which is for the use, forbearance or detention of such money), exceed that
amount of money which would cause the effective rate of interest to exceed the
Highest Lawful Rate, and all amounts owed under this Agreement and each other
Loan Document shall be held to be subject to reduction to the effect that
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such amounts so paid or agreed to be paid, charged, contracted for, reserved,
taken or received which are for the use, forbearance or detention of money under
this Agreement or such Loan Document shall in no event exceed that amount of
money which would cause the effective rate of interest to exceed the Highest
Lawful Rate. Anything in any Note or any other Loan Document to the contrary
notwithstanding, the Company shall not be required to pay unearned interest on
any Note and the Company shall not be required to pay interest on the
Obligations at a rate in excess of the Highest Lawful Rate, and if the effective
rate of interest which would otherwise be payable under such Note and such Loan
Documents would exceed the Highest Lawful Rate, or if the holder of such Note
shall receive any unearned interest or shall receive monies that are deemed to
constitute interest which would increase the effective rate of interest payable
by the Company under such Note and the other Loan Documents to a rate in excess
of the Highest Lawful Rate, then (a) the amount of interest which would
otherwise be payable by the Company shall be reduced to the amount allowed under
applicable law and (b) any unearned interest paid by the Company or any interest
paid by the Company in excess of the Highest Lawful Rate shall in the first
instance be credited on the principal of the Obligations of the Company (or if
all such Obligations shall have been paid in full, refunded to the Company). It
is further agreed that, without limitation of the foregoing, all calculations of
the rate of interest contracted for, reserved, taken, charged or received by any
Bank under the Notes and the Obligations and under the other Loan Documents are
made for the purpose of determining whether such rate exceeds the Highest Lawful
Rate, and shall be made, to the extent permitted by usury laws applicable to
such Bank, by amortizing, prorating and spreading in equal parts during the
period of the full stated term of the Notes and this Agreement all interest at
any time contracted for, charged or received by such Bank in connection
therewith. Furthermore, in the event that the maturity of any Note or other
obligation is accelerated or in the event of any required or permitted
prepayment, then such consideration that constitutes interest under applicable
law may never include more than the maximum amount allowed by applicable law and
excess interest, if any, provided for in this Agreement, any Note or otherwise
shall be canceled automatically as of the date of such acceleration or
prepayment and, if theretofore paid, shall be refunded to the Company.
SECTION 11.09 Survival of Representations and Warranties. All
representations, warranties and covenants contained herein or made in writing by
the Company in connection herewith and the other Loan Documents shall survive
the execution and delivery of this Agreement, the Notes and the other Loan
Documents and the termination of the Commitments of the Banks and will bind and
inure to the benefit of the respective successors and assigns of the parties
hereto, whether so expressed or not, provided, that the Commitments of the Banks
shall not inure to the benefit of any successor or assign of the Company.
SECTION 11.10 Successors and Assigns; Participations. (a) All covenants,
promises and agreements by or on behalf of the Company or the Banks that are
contained in this Agreement shall bind and inure to the benefit of their
respective permitted successors and assigns. The Company may not assign or
transfer any of its rights or obligations hereunder.
(b) Any of the Banks may assign to or sell participations to one or more
banks of all or a portion of its rights and obligations under this Agreement and
the other Loan Documents
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(including all or a portion of its Commitment, the Advances and the Obligations
of the Company owing to it and the Notes); provided, that the Company shall
continue to deal solely and directly with the Agent and such assigning or
selling Bank in connection with such Bank's rights and obligations under this
Agreement and the other Loan Documents. Except with respect to cost protections
provided to a participant pursuant to this paragraph and the items listed in
Section 11.01 hereof, no participant shall be a third party beneficiary of this
Agreement nor shall it be entitled to enforce any rights provided to the Banks
against the Company under this Agreement. In the case of participations (but not
assignments) (i) the original Bank's obligations under this Agreement (including
without limitation, its Commitment to the Company hereunder) shall remain
unchanged, (ii) such Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) such Bank shall remain the
holder of such Loan Documents for all purposes of this Agreement, (iv) the
Company, the Agent and the other Banks shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement, (v) such Bank shall continue to be able to agree to any
modification or amendment of this Agreement or any waiver hereunder without the
consent, approval or vote of any such participant or group of participants,
other than modifications, amendments and waivers described in Section 11.01, and
(vi) except as contemplated by the immediately preceding clause (v), no
participant shall be deemed to be or to have any of the rights of obligations of
a "Bank" hereunder.
(c) A Bank may assign to any other Bank or Banks or to any Affiliate of
a Bank and, with the prior written consent of the Company and the Agent (which
consent shall not be unreasonably withheld), a Bank may assign to one or more
other Eligible Assignees all or a portion of its interests, rights, and
obligations under this Agreement and the other Loan Documents (including all or
a portion of its Commitment and the same portion of the Loans and other
Obligations of the Company at the time owing to it and the Note held by it);
provided, however, that (i) each such assignment shall be in a minimum principal
amount of not less than $5,000,000.00 and shall be of a constant, and not a
varying, percentage of the assigning Bank's Commitment, its rights and
obligations under this Agreement, and its share of the outstanding balance of
each of the Notes, (ii) the parties to each such assignment shall execute and
deliver to the Agent, for its acceptance, an Assignment and Acceptance,
substantially in the form of Exhibit 11.10(c) hereto, in form and substance
satisfactory to the Agent (an "Assignment and Acceptance") and any Note subject
to such assignment, (iii) no assignment shall be effective until receipt by the
Agent of a reasonable service fee from the Assignee Bank in respect of said
assignment equal to $2,000.00, and (iv) the Assigning Bank shall retain a
minimum amount of $5,000,000.00 of the Commitment following the Assignment. Upon
such execution, delivery and acceptance, from and after the effective date
specified in each Assignment and Acceptance, which effective date (unless
otherwise agreed to by the assigning Bank, the Eligible Assignee thereunder and
the Agent) shall be at least five Business Days after the execution thereof, (x)
the Eligible Assignee thereunder shall be a party hereto as a "Bank" and to the
other Loan Documents and, to the extent provided in such Assignment and
Acceptance, have the rights and obligations of a Bank hereunder and under the
other Loan Documents and (y) the assignor Bank thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement and the other Loan Documents (and, in the case of an
Assignment and Acceptance covering all of the remaining portion
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of an assigning Bank's rights and obligations under this Agreement and the other
Loan Documents, such Bank shall cease to be a party hereto).
(d) Notwithstanding any other provision herein, any Bank may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this section, disclose to the assignee or participant
or proposed assignee or participant, any information relating to the Company
furnished to such Bank by or on behalf of the Company; provided, however, that
prior to any such disclosure, the assignee or participant or proposed assignee
or participant shall agree in writing for the benefit of the Company to preserve
the confidentiality of any confidential information relating to the Company or
any of its Subsidiaries received by it from such Bank in a manner consistent
with Section 11.11.
SECTION 11.11 Confidentiality. Each Bank and the Agent agrees to keep
any information delivered or made available to it by the Company or any of its
Subsidiaries, confidential from anyone other than Persons employed or retained
by its who are or are expected to become engaged in evaluating, approving,
structuring or administering the Loans and who are bound hereby; provided that
nothing herein shall prevent any Bank or the Agent from disclosing such
information (a) to any other Bank, (b) pursuant to subpoena or upon the order of
any court or administrative agency, (c) upon the request or demand of any
regulatory agency or authority having jurisdiction over such Bank, (d) which has
been publicly disclosed, (e) to the extent reasonably required in connection
with any litigation to which the Agent, any Bank, the Company or its respective
Affiliates may be a party, (f) to the extent reasonably required in connection
with the exercise of any remedy hereunder, (g) to such Bank's legal counsel and
independent auditors and who are bound hereby and (h) to any actual or proposed
participant or assignee of all or part of its rights hereunder which has agreed
in writing to be bound by the provisions of this Section. Each Bank or the Agent
will promptly notify the Company of any information that it is required or
requested to deliver pursuant to clause (b) or (c) of this Section and, if the
Company is a party to any such litigation, clause (e) of this Section.
SECTION 11.12 Pro Rata Treatment. (a) Except as otherwise specifically
permitted hereunder, each payment or prepayment of principal, if permitted under
this Agreement, and each payment of interest with respect to an Advance shall be
made pro rata among the Banks.
(b) Each Bank agrees that if, through the exercise of a right of
banker's Lien, setoff or claim of any kind against the Company as a result of
which the unpaid principal portion of the Notes and the Obligations held by it
shall be proportionately less than the unpaid principal portion of the Notes and
Obligations held by any other Bank, it shall be deemed to have simultaneously
purchased from such other Bank a participation in the Notes and Obligations held
by such other Bank, in the amount required to render such amounts proportional;
provided, however, that if any such purchase or purchases or adjustments shall
be made pursuant to this Section and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustments restored without interest.
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SECTION 11.13 Separability. Should any clause, sentence, paragraph or
Section of this Agreement be judicially declared to be invalid, unenforceable or
void, such decision will not have the effect of invalidating or voiding the
remainder of this Agreement, and the parties hereto agree that the part or parts
of this Agreement so held to be invalid, unenforceable or void will be deemed to
have been stricken herefrom and the remainder will have the same force and
effectiveness as if such part or parts had never been included herein.
SECTION 11.14 Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement. Any
Subsidiary of the Company that executes this Agreement after the date of this
Agreement shall, upon such execution, become a party hereto as a Guarantor.
SECTION 11.15 Interpretation. (a) In this Agreement, unless a clear
contrary intention appears:
(i) the singular number includes the plural number and vice versa;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision;
(iv) reference to any Person includes such Person's successors and
assigns but, if applicable, only if such successors and assigns are permitted by
this Agreement, and reference to a Person in a particular capacity excludes such
Person in any other capacity or individually, provided that nothing in this
clause is intended to authorize any assignment not otherwise permitted by this
Agreement;
(v) except as expressly provided to the contrary herein, reference to
any agreement, document or instrument (including this Agreement) means such
agreement, document or instrument as amended, supplemented or modified and in
effect from time to time in accordance with the terms thereof and, if
applicable, the terms hereof, and reference to any Note or other note includes
any Note issued pursuant hereto in extension or renewal thereof and in
substitution or replacement therefor;
(vi) unless the context indicates otherwise, reference to any Article,
Section, Schedule or Exhibit means such Article or Section hereof or such
Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning "include")
means including, without limiting the generality of any description preceding
such term;
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(viii) with respect to the determination of any period of time, except
as expressly provided to the contrary, the word "from" means "from and
including" and the word "to" means "to but excluding"; and
(ix) reference to any law, rule or regulation means such as amended,
modified, codified or reenacted, in whole or in part, and in effect from time to
time.
(b) The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or construed
against any Person solely because that Person or its legal representative
drafted such provision.
(d) In the event of any conflict between the specific provisions of this
Agreement and the provisions of any application pertaining to any letter of
credit secured by a Loan Document, the terms of this Agreement shall control.
SECTION 11.16 SUBMISSION TO JURISDICTION. (a) ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE
BROUGHT IN THE COURTS OF THE STATE OF TEXAS, IN HARRIS COUNTY OR OF THE UNITED
STATES FOR THE SOUTHERN DISTRICT OF TEXAS AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE COMPANY AND EACH GUARANTOR HEREBY IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE COMPANY AND
EACH GUARANTOR FURTHER IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS
ADDRESS PROVIDED IN SECTION 11.02 AND WITH RESPECT TO ANY GUARANTOR, AT THE
ADDRESS PROVIDED ON SCHEDULE 5.16 HERETO, SUCH SERVICE TO BECOME EFFECTIVE
THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY
OTHER JURISDICTION.
(b) EACH OF THE COMPANY AND THE GUARANTORS HEREBY IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF
THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT
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ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
SECTION 11.17 WAIVER OF JURY TRIAL. EACH OF THE COMPANY AND EACH
GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO
A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR
ARISING FROM OR RELATING TO ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH
THIS AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
SECTION 11.18 FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT (INCLUDING
THE SCHEDULES AND EXHIBITS HERETO), THE NOTES AND THE OTHER LOAN DOCUMENTS
CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS
BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
COMPANY:
GROUP MAINTENANCE AMERICA CORP.
By: /s/ Darren B. Miller
Name: Darren B. Miller
Title: Senior Vice President
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GUARANTORS/MATERIAL SUBSIDIARIES:
AA Advance Air, Inc., a Florida corporation
A-ABC Appliance, Inc., a Texas corporation
Air Conditioning Engineers, Inc., a Michigan corporation
Air Conditioning, Plumbing and Heating Service Co., Inc., a Colorado corporation
Aircon Energy Incorporated, a California corporation
Airtron, Inc., a Delaware corporation
Arkansas Mechanical Services, Inc., an Arkansas corporation
Barr Electric Corp., an Illinois corporation
Central Carolina Air Conditioning Company, a North Carolina corporation
Gilbert Mechanical Contractors, Inc., a Minnesota corporation
GroupMAC Holding Corp., a Delaware corporation
HPS Plumbing Services, Inc., a California corporation
Hallmark Air Conditioning, Inc., a Texas corporation
Hungerford Mechanical Corporation, a Virginia corporation
J. D. Steward Air Conditioning, Inc., a Colorado corporation
K & N Plumbing, Heating and Air Conditioning, Inc., a Texas corporation
Linford Service Co., a California corporation
MacDonald-Miller Co., Inc., a Washington corporation
MacDonald-Miller Industries, Inc., a Washington corporation
MacDonald-Miller Service, Inc., a Washington corporation
Masters, Inc., a Maryland corporation
Mechanical Interiors, Inc., a Texas corporation
Paul E. Smith Co., Inc., an Indiana Corporation
Ray and Claude Goodwin, Inc., a Florida corporation
Sibley Services, Incorporated, a Tennessee corporation
Southeast Mechanical Service, Inc., a Florida corporation
Sterling Air Conditioning, Inc., a Texas corporation
Valley Wide Plumbing and Heating, Inc., a Colorado corporation
Vantage Mechanical Contractors, Inc., a Maryland corporation
Wade's Heating and Cooling, Inc., a Florida corporation
Willis Refrigeration, Air Conditioning & Heating, Inc., an Ohio corporation
Yale Incorporated, a Minnesota corporation
By: /s/ Darren B. Miller
Name: Darren B. Miller
Title: Vice President
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AGENT/SECURED PARTY:
Amount of Commitment: CHASE BANK OF TEXAS,
$22,000,000.00 NATIONAL ASSOCIATION,
as Agent and Individually, as a Bank
By: /s/ J. M. Walshak
J. M. Walshak
Vice President
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CO-AGENT:
Amount of Commitment: ABN AMRO BANK, N.V., as Co-Agent and
$20,000,000.00 Individually, as a Bank
By: /s/ Laurie C. Tuzo
Laurie C. Tuzo
Group Vice President
By: /s/ Eric R. Hollingsworth
Eric R. Hollingsworth
Assistant Vice President
Address for Notice:
Three Riverway #1700
Houston, TX 77056
Telephone No.: (713) 964-3360
Telecopy No.: (713) 629-7533
Attention: Ms. Laurie C. Tuzo
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Amount of Commitment: PARIBAS, as Co-Agent and Individually, as
$20,000,000.00 a Bank
By: /s/ Larry Robinson
Name: Larry Robinson
Title: Vice President
By: /s/ Roger May
Name: Roger May
Title: Assistant Vice President
Address for Notice:
1200 Smith, Suite 3100
Houston, TX 77002
Telephone No.: (713) 659-4811
Telecopy No.: (713) 659-5305
Attention: Leah Evans Hughes
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BANKS:
Amount of Commitment: BANK OF AMERICA TEXAS, N.A.
$17,500,000.00
By: /s/ Victor Tekell
Name: Victor Tekell
Title: Vice President
Address for Notice:
333 Clay Street, Suite 3600
Houston, Texas 77002
Telephone No.: (713) 652-3615
Telecopy No.: (713) 652-3619
Attn: George Smith
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Amount of Commitment: NATIONAL CITY BANK, KENTUCKY
$17,500,000.00
By: /s/ Kevin L. Anderson
Name: Kevin L. Anderson
Title: Vice President
Address for Notice:
101 South 5th Street, 31-T08J
Louisville, Kentucky 40202
Telephone No.: (502) 581-6352
Telecopy No.: (502) 581-5122
Attn: Donald R. Pullen
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Amount of Commitment: CREDIT LYONNAIS NEW YORK BRANCH
$14,000,000.00
By: /s/ Robert Ivosevich
Name: Robert Ivosevich
Title: Senior Vice President
Address for Notice:
2200 Ross Avenue, Suite 4400W
Dallas, Texas 75201
Telephone No.: 214-220-2303
Telecopy No.: 214-220-2323
Attn: Blake Wright
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Amount of Commitment: UNION BANK OF CALIFORNIA
$14,000,000.00
By: /s/ Corinne Heyning
Name: Corinne Heyning
Title: Vice President
Address for Notice:
445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Telephone No.: 213-236-6566
Telecopy No.: 213-236-7636
Attn: Corinne Heyning
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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
July 20, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 3 to Registration
Statement No. 333-41947 of Group Maintenance America Corp. of our report dated
July 24, 1997 (relating to the financial statements of Masters, Inc.)
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Washington, D.C.
July 17, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Prospectus constituting part of Post
Effective Amendment No. 3 (Registration No. 333-41947) of this Registration
Statement of Group Maintenance America Corp., on Form S-4 of our report dated
August 7, 1997, except for Notes 2 and 11, as to which the date is August 18,
1997, relating to the financial statements of MacDonald-Miller Industries,
Inc., which appear in such Prospectus. We also consent to the reference to our
Firm under the heading "Experts" in this Prospectus.
Moss Adams L.L.P.
Seattle, Washington
July 17, 1998
