<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13565
----------------
GROUP MAINTENANCE AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0535259
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
8 GREENWAY PLAZA, SUITE 1500
HOUSTON, TX 77046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 860-0100
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value $0.001 per share; 31,540,833 shares outstanding as
of October 31, 1998.
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<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements General Information........................ 1
Consolidated Condensed Balance Sheets........................... 2
Consolidated Condensed Statements of Operations................. 3
Consolidated Condensed Statements of Cash Flows................. 4
Notes to Consolidated Condensed Financial Statements............ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... *
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... *
Item 2. Changes in Securities and Use of Proceeds....................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... *
Item 6. Exhibits and Reports on Form 8-K................................ 16
</TABLE>
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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
i
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Group Maintenance America Corp., a Texas corporation ("GroupMAC"), is one of
the largest diversified providers of mechanical and electrical services to
commercial/industrial and residential customers in the United States. As used
herein, the "Company" refers to GroupMAC and its consolidated subsidiaries.
GroupMAC was incorporated in 1997 as the successor to a corporation ("Old
GroupMAC") which developed a business plan to consolidate businesses engaged
in the mechanical and electrical service industries. Prior to that time, Old
GroupMAC 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.
The first 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 consolidated condensed financial
statements for periods prior to the acquisition of Airtron only include the
accounts of Airtron.
During June and July 1997, the Company acquired, in separate transactions,
10 additional companies (the "Pre-IPO Companies") through a combination of
cash, preferred stock, Common Stock and warrants to purchase shares of Common
Stock. During the fourth quarter of 1997, the Company acquired, concurrently
with the IPO, 13 additional companies (the "IPO Companies" and, together with
Airtron and the Pre-IPO Companies, the "Founding Companies") through a
combination of cash and Common Stock.
During November and December 1997, the Company completed the initial public
offering (the "IPO") of its common stock, par value $0.001 per share (the
"Common Stock"), 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.
The Founding Companies had approximately $329.0 million in combined 1997
annual revenues. During the nine months ended September 30, 1998, the Company
acquired 35 platform companies (the "Post-IPO Companies" and, together with
the Founding Companies, the "GroupMAC Companies") representing approximately
$453.2 million in combined 1997 annual revenues. From October 1, 1998 through
November 13, 1998, the Company has acquired four additional platform companies
with combined 1997 annual revenues of $196.3 million. The Company currently
operates in 55 cities in 26 states.
1
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GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 2,189 $ 25,681
Accounts receivable, net.......................... 138,335 45,516
Inventories....................................... 15,624 8,834
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 24,674 3,116
Prepaid expenses and other current assets......... 4,990 1,013
Deferred tax assets............................... 3,936 1,647
-------- --------
Total current assets............................ 189,748 85,807
PROPERTY AND EQUIPMENT, net......................... 31,632 11,312
GOODWILL, net....................................... 281,354 84,533
DEFERRED TAX ASSETS................................. 4,798 4,739
REFUNDABLE INCOME TAXES............................. 3,478 4,529
OTHER LONG-TERM ASSETS.............................. 3,157 1,767
-------- --------
Total assets.................................... $514,167 $192,687
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt................................... $ 7,745 $ 2,769
Accounts payable and accrued expenses............. 81,307 28,519
Due to related parties............................ 10,877 3,358
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 21,612 4,737
Deferred service contract revenue................. 4,897 3,305
Income taxes payable.............................. 9,041 31
Other current liabilities......................... 5,350 2,610
-------- --------
Total current liabilities....................... 140,829 45,329
LONG-TERM DEBT, net of current maturities........... 108,620 169
DUE TO RELATED PARTIES.............................. 4,360 9,745
OTHER LONG-TERM LIABILITIES......................... 1,281 791
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; 28,800 and 20,629 shares issued and
outstanding, respectively........................ 29 21
Additional paid-in capital........................ 274,821 169,143
Retained deficit.................................. (15,773) (32,511)
-------- --------
Total shareholders' equity...................... 259,077 136,653
-------- --------
Total liabilities and shareholders' equity...... $514,167 $192,687
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES................................ $211,667 $39,382 $477,944 $82,226
COST OF SERVICES........................ 161,681 28,290 364,225 59,211
-------- ------- -------- -------
Gross profit.......................... 49,986 11,092 113,719 23,015
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 32,107 8,481 77,814 19,510
AMORTIZATION OF GOODWILL................ 1,582 173 3,586 204
COMPENSATION EXPENSE FROM REVERSE
ACQUISITION............................ -- -- -- 6,978
-------- ------- -------- -------
Income (loss) from operations....... 16,297 2,438 32,319 (3,677)
OTHER INCOME (EXPENSE):
Interest expense...................... (1,699) (740) (3,013) (1,135)
Interest income....................... 99 91 328 245
Other................................. 197 38 346 266
-------- ------- -------- -------
Income (loss) before income tax
provision.......................... 14,894 1,827 29,980 (4,301)
INCOME TAX PROVISION.................... 6,525 802 13,243 1,156
-------- ------- -------- -------
NET INCOME (LOSS)....................... $ 8,369 $ 1,025 $ 16,737 $(5,457)
======== ======= ======== =======
BASIC EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE............. $ 0.30 $ 0.11 $ 0.66 $ (0.62)
======== ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING... 27,649 9,450 25,361 8,787
======== ======= ======== =======
DILUTED EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE............. $ 0.30 $ 0.11 $ 0.65 $ (0.62)
======== ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING... 28,157 9,642 25,781 8,787
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 16,737 $ (5,457)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 8,653 761
Gain from sale of property and equipment.............. (67) (219)
Deferred income taxes................................. (617) (3,985)
Non-cash compensation expense......................... -- 6,978
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as purchases:
(Increase) decrease in--
Accounts receivable................................. (17,958) 640
Inventories......................................... (181) (2,718)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... (10,605) (1,960)
Prepaid expenses and other current assets........... (2,699) 8,889
Refundable income taxes............................. 1,051 3,324
Other long-term assets.............................. 2,072 (2,231)
Increase (decrease) in--
Accounts payable.................................... 3,004 (6,249)
Accrued expenses.................................... (203) 980
Due to related parties.............................. (5,385) 158
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 6,332 (106)
Deferred service contract revenue................... 188 540
Income taxes payable................................ 7,771 1,567
Other current liabilities........................... 494 1,620
Compensation and benefits payable................... -- 3,967
Other long-term liabilities......................... (214) 916
--------- --------
Net cash provided by operating activities......... 8,373 7,415
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired of
$8,610 and $1,787...................................... (111,095) (8,852)
Deferred acquisition costs.............................. (1,197) (261)
Purchase of property and equipment...................... (6,602) (1,629)
Proceeds from sale of property and equipment............ 200 285
--------- --------
Net cash used in investing activities............. (118,694) (10,457)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt...................................... 142,100 32,500
Payments of debt........................................ (55,271) (5,155)
Exercise of stock options............................... -- 31
Proceeds from issuance of common stock.................. -- 1,907
Distributions to shareholders prior to initial public
offering............................................... -- (20,367)
--------- --------
Net cash provided by financing activities......... 86,829 8,916
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (23,492) 5,874
CASH AND CASH EQUIVALENTS, beginning of period............ 25,681 1,927
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................. $ 2,189 $ 7,801
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................... $ 2,365 $ 770
Income taxes paid....................................... $ 5,707 $ 1,039
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of the Company and management's discussion and analysis of financial
condition and results of operations included in the Company's Transition
Report on Form 10-K for the ten-month period ended December 31, 1997.
2. Basic earnings per share have been calculated by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings per share have been calculated by dividing net income (loss) 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>
NINE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER
SEPTEMBER 30, 30,
-------------- ------------
1998 1997 1998 1997
------- ------ ------ -----
<S> <C> <C> <C> <C>
Shares issued in the acquisition of Airtron....... 4,652 4,652 4,652 4,652
Shares issued, excluding acquisitions and the
IPO.............................................. 3,637 3,627 3,637 3,627
Shares issued for the acquisition of the Pre-IPO
Companies........................................ 1,437 1,171 1,437 508
Shares issued for the acquisition of the IPO
Companies........................................ 3,007 -- 3,007 --
Shares issued pursuant to the IPO................. 8,340 -- 8,340 --
Shares issued for the acquisition of the Post-IPO
Companies........................................ 6,576 -- 4,288 --
------- ------ ------ -----
Weighted average shares outstanding--Basic........ 27,649 9,450 25,361 8,787
Incremental effect of options and warrants
outstanding...................................... 508 192 420 --
------- ------ ------ -----
Weighted average shares outstanding--Diluted...... 28,157 9,642 25,781 8,787
======= ====== ====== =====
</TABLE>
Because the Company reported a net loss for the nine month period ended
September 30, 1997, the potentially dilutive common shares (including warrants
and stock options) had an anti-dilutive effect on loss per share. Accordingly,
diluted loss per share is the same as basic loss per share for this period.
3. During the nine months ended September 30, 1998, the Company completed
the acquisition of the Post-IPO Companies for approximately $237.8 million,
which includes cash paid or to be paid of $126.8 million, $0.8 million of
subordinated convertible debt, $4.0 million of notes payable, 7.8 million
shares of common stock and options to purchase 0.3 million shares of Common
Stock. Of the total consideration, approximately $9.3 million of cash and 0.1
million shares of Common Stock is due to former shareholders at September 30,
1998. All such acquisitions were accounted for as purchases. In connection
with these acquisitions, the Company assumed approximately $26.6 million of
debt. The combined 1997 annual revenues of the Post-IPO Companies were
approximately $453.2 million.
Also during the nine months ended September 30, 1998, the Company has
increased goodwill related to earnout payments of $1.5 million payable in cash
and due to a director and former shareholder of one of the Pre-IPO Companies.
In addition, the Company has paid approximately $2.2 million of previously
recorded amounts due to former shareholders of the Pre-IPO and IPO Companies.
5
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC, Airtron and the other GroupMAC Companies as if
the acquisitions were effective on the first day of the period being reported
(in thousands, except for per share amounts). The pro forma results of
operations neither purport to represent what the Company's results of
operations would have been had such transactions in fact occurred at the
beginning of the periods presented nor purport to project the Company's
results of operations in any future period.
<TABLE>
<CAPTION>
PRO FORMA DATA
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Revenues...................................................... $627,919 $579,645
Net income.................................................... $ 20,346 $ 18,837
Net income per share:
Basic....................................................... $ 0.70 $ 0.65
Diluted..................................................... $ 0.69 $ 0.65
</TABLE>
Pro forma adjustments included in the amounts above consist of (i)
compensation differentials, (ii) elimination of a non-recurring, non-cash
compensation charge of $7.0 million in the nine months ended September 30,
1997 related to the reverse acquisition of Airtron, (iii) adjustment for
goodwill amortization over a period of 40 years, (iv) elimination of
historical interest expense on long-term debt which was repaid with the
proceeds of the IPO or otherwise retired, (v) additional interest expense on
funds borrowed for acquisition of certain Post-IPO Companies, and (vi)
adjustment to the federal and state income tax provisions based on pro forma
operating results. Net income per share assumes all shares issued for the
acquisitions were outstanding from the beginning of the periods presented. The
pro forma amounts above also include actual corporate overhead costs. These
costs increased by $4.5 million during the nine month period ended September
30, 1998 compared to the nine month period ended September 30, 1997,
respectively, due to the formation of the corporate management team and
infrastructure necessary to execute the Company's operating and acquisition
strategies. This increase amounts to approximately $0.09 per basic and diluted
share in the nine month period ended September 30, 1998.
From October 1, 1998 through November 13, 1998, the Company acquired four
additional platform companies with combined 1997 annual revenues of $196.3
million. Total consideration paid or to be paid was approximately $127.2
million that included cash payments of $67.9 million, subordinated debt of
$16.0 million, 4.2 million shares of Common Stock, options to purchase 0.1
million shares of Common Stock and warrants to purchase 0.8 million shares of
Common Stock. These acquisitions will be accounted for as purchases.
4. The acquisitions of the Post-IPO Companies included in the accompanying
financial statements were accounted for under the purchase method of
accounting. Purchase price consideration is subject to final adjustment. The
allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of
fair values and may be revised as additional information becomes available.
However, the Company does not expect any significant adjustments to the
purchase price allocations or amount of goodwill at September 30, 1998.
5. The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This report contains forward-looking statements regarding (i) the
seasonality and cyclicality of the Company's business, (ii) the Year 2000
issue (relating to potential computer failures by or at the change of the
century), (iii) liquidity and capital resources, and (iv) the adoption of new
accounting standards. See "Seasonality and Cyclicality," "Year 2000,"
"Liquidity and Capital Resources" and "New Accounting Pronouncements." These
statements are based on the Company's current expectations and involve risks
and uncertainties that could cause the Company's actual results to differ
materially from those set forth in the statements. Among the factors that
could cause results to differ materially from current expectations are: (i)
the general political, economic and competitive conditions in markets where
the Company operates; (ii) unusual weather patterns; (iii) changes in capital
availability or costs; (iv) decreases in demand for the Company's services and
the resulting negative impact on the Company's revenues and margins from such
products; (v) employee workforce factors; (vi) the Company's ability to
integrate the operations of acquired businesses quickly and in a cost-
effective manner; (vii) the ability of the Company, its customers and its
suppliers to timely resolve the Year 2000 issue without incurring
unanticipated costs; (viii) unanticipated consequences from the application of
new accounting standards; and (ix) the timing and occurrence (or non-
occurrence) of transactions and events, which may be subject to circumstances
beyond the Company's control.
GENERAL
The Company's revenues are derived from providing new installation services
and maintenance, repair and replacement services for mechanical and electrical
systems to commercial/industrial and residential customers. Approximately 55%
of the Founding Companies pro forma combined 1997 revenues of $329.0 million
were derived from new installation services and 45% were attributable to
maintenance, repair and replacement services. Maintenance, repair and
replacement revenues are recognized as the services are performed, except for
service contract revenue, which is recognized ratably over the life of the
contract. Revenues from fixed price installation and retro-fit 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 two main
technical disciplines (mechanical and electrical) within the
commercial/industrial and residential markets. The Company's long-term
objective is to develop maintenance, repair and replacement capabilities (both
residential and commercial/ industrial) 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/industrial 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 maintenance, repair and replacement
revenue. When considering the 35 Post-IPO Companies, the pro forma combined
1997 revenues increased to approximately $782.2 million and the business mix
shifted to 44% new installation services and 56% maintenance, repair and
replacement services.
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 administrative salaries and benefits, advertising, office
rent and utilities, communications and professional fees.
RESULTS OF OPERATIONS
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange with Airtron, in which cash, shares of GroupMAC preferred stock and
shares of GroupMAC Common Stock were issued to shareholders of Airtron in
exchange for all of the then outstanding shares of Airtron. Although for legal
purposes Airtron was acquired by GroupMAC, for accounting purposes the
transaction was accounted for as a reverse acquisition, as if Airtron acquired
GroupMAC, due to the fact that the former shareholders of Airtron then owned a
majority of the outstanding GroupMAC Common Stock. The consolidated financial
statements presented elsewhere herein for the periods prior to the effective
date of the acquisition only include the accounts of Airtron.
7
<PAGE>
The historical results of operations presented below are derived from the
consolidated condensed financial statements contained elsewhere herein. The
combined results of operations presented below do not represent combined
results of operations presented in accordance with generally accepted
accounting principles, but are only a summation of the revenues and cost of
services of the individual GroupMAC Companies on a historical basis. The
combined results of operations assume that each of the GroupMAC Companies was
combined from the beginning of each period presented. The combined results may
not be indicative of the Company's post-combination results of operations
because (i) the GroupMAC Companies were not under common control or management
during the periods presented and (ii) the combined data does not reflect the
potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
HISTORICAL COMBINED
THREE MONTHS ENDED SEPTEMBER THREE MONTHS ENDED SEPTEMBER
30 30
------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $211,667 100.0% $39,382 100.0% $232,090 100.0% $208,580 100.0%
Cost of Services........ 161,681 76.4 28,290 71.8 178,984 77.1 161,245 77.3
-------- ----- ------- ----- -------- ----- -------- -----
Gross Profit............ 49,986 23.6 11,092 28.2 $ 53,106 22.9% $ 47,335 22.7%
======== ===== ======== =====
Selling, General and
Administrative
Expenses............... 33,689 15.9 8,654 22.0
-------- ----- ------- -----
Income from Operations.. 16,297 7.7 2,438 6.2
Interest Expense, Net... (1,600) (0.7) (649) (1.6)
Other................... 197 0.1 38 --
-------- ----- ------- -----
Income Before Income Tax
Provision.............. 14,894 7.1 1,827 4.6
Income Tax Provision.... 6,525 3.1 802 2.0
-------- ----- ------- -----
Net Income.............. $ 8,369 4.0% $ 1,025 2.6%
======== ===== ======= =====
</TABLE>
Historical Three Months Ended September 30, 1998 Compared to Historical
Three Months Ended September 30, 1997
Revenues. Revenues increased $172.3 million to $211.7 million for the three
months ended September 30, 1998 from $39.4 million for the three months ended
September 30, 1997. Such increase in revenues included $167.4 million
attributable to the acquisitions of the IPO Companies during November 1997 and
the acquisitions of the Post-IPO Companies during the nine months ended
September 30, 1998. Also contributing to the increase was a $3.4 million
increase in revenues at Airtron and a $1.5 million increase in revenues at the
Pre-IPO Companies. The Airtron increase related to strong housing starts
throughout the country, particularly in the Midwestern and South Central
United States. The increase at the Pre-IPO Companies relates primarily to the
Company's residential service operations in Houston and Dallas, Texas and its
commercial operations in Memphis, Tennessee due to favorable weather patterns
in the current year quarter.
Gross Profit. Gross profit increased $38.9 million to $50.0 million for the
three months ended September 30, 1998 from $11.1 million for the three months
ended September 30, 1997. Such increase in gross profit included approximately
$0.5 million in materials purchases savings and $35.5 million attributable to
the acquisitions of the IPO Companies during November 1997 and the
acquisitions of the Post-IPO Companies during the nine months ended September
30, 1998. Gross profit at Airtron increased by $1.9 million between periods.
This increase correlates favorably with the $3.4 million revenue increase as
Airtron was operating near full capacity to accommodate housing start demand
in its geographic markets and has deployed resources to further broaden its
service base. Gross profit at the Pre-IPO Companies increased $1.0 million due
primarily to the favorable weather patterns discussed above. Gross profit
margin decreased 4.6% to 23.6% for the three months ended September 30, 1998
compared to 28.2% for the three months ended September 30, 1997. The
8
<PAGE>
overall decrease in gross margin was attributable to the acquisition of
primarily commercial/industrial companies in 1998 which has shifted the
Company's overall business mix toward the lower gross margin
commercial/industrial business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $25.0 million to $33.7 million for the three
months ended September 30, 1998 from $8.7 million for the three months ended
September 30, 1997. Such increase included $20.7 million attributable to the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the nine months ended September 30, 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, $1.4
million of goodwill amortization and $1.1 million related to increases from
Airtron, the Pre-IPO Companies and field bonuses, offset by savings related to
the Company's property and casualty insurance programs. As a percentage of
revenues, selling, general and administrative expenses, excluding corporate
expenses and goodwill amortization, decreased to 13.7% for the three months
ended September 30, 1998 from 18.3% for the three months ended September 30,
1997, respectively, due primarily to achieving lower selling and
administrative expense margins within the Founding Companies and acquiring a
higher mix of commercial/industrial companies which tend to have lower selling
and administrative expense structures. When including corporate expenses and
goodwill amortization, selling, general and administrative expenses as a
percentage of revenue decreased to 15.9% for the three months ended September
30, 1998 from 22.0% for the three months ended September 30, 1997.
Net Interest. Net interest increased $1.0 million during the three months
ended September 30, 1998 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility to finance the Company's aggressive acquisition program during
1998. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $5.7 million to
$6.5 million for the three months ended September 30, 1998 from $0.8 million
for the three months ended September 30, 1997. This increase corresponds with
the pretax income increase of $13.1 million between periods. The effective tax
rate for the three months ended September 30, 1998 was 43.8% compared to 43.9%
for the three months ended September 30, 1997. The effective tax rate exceeds
the Company's statutory federal and state tax rate due primarily to non-
deductible goodwill amortization of $1.6 million and $0.2 million in the three
months ended September 30, 1998 and 1997, respectively.
Combined Three Months Ended September 30, 1998 Compared to Combined Three
Months Ended September 30, 1997
Revenues. Combined revenues increased $23.5 million, or 11.3%, to $232.1
million for the three months ended September 30, 1998 from $208.6 million for
the three months ended September 30, 1997. The increase in combined revenues
was attributable to (i) the companies that primarily provide residential new
installation services which experienced a $6.3 million increase, or 13.9%, due
to an increase in new home starts in the markets they serve, (ii) the
companies that primarily provide residential maintenance, repair and
replacement services which experienced a $3.5 million increase, or 13.7%, due
to favorable weather patterns in the markets they serve and (iii) an increase
of $13.7 million, or 10.0%, from the companies that provide commercial
services primarily in the Seattle, Salt Lake City, Minneapolis, Baltimore and
Philadelphia markets partially offset by economic softening in the Company's
Richmond, Virginia market.
Gross Profit. Combined gross profit increased $5.8 million, or 12.3%, to
$53.1 million for the three months ended September 30, 1998 from $47.3 million
for the three months ended September 30, 1997. The increase in gross profit
was attributable to the increase in combined revenues described above. Gross
profit margin increased to 22.9% for the three months ended September 30, 1998
compared to 22.7% for the three months ended September 30, 1997. The increase
in gross profit margin was a result of (i) overall margin improvement at the
companies that primarily provide residential new installation services as
these companies have operated near full capacity to accommodate housing start
demand in the geographic markets they serve, (ii) a slightly higher mix of
higher margin maintenance, repair and replacement business in the residential
sector from the favorable weather patterns discussed above, and (iii)
purchasing materials savings experienced in the current year.
9
<PAGE>
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
HISTORICAL COMBINED
NINE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER
30 30
------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $477,944 100.0% $82,226 100.0% $627,919 100.0% $579,645 100.0%
Cost of Services........ 364,225 76.2 59,211 72.0 483,180 76.9 447,216 77.2
-------- ----- ------- ----- -------- ----- -------- -----
Gross Profit............ 113,719 23.8 23,015 28.0 $144,739 23.1% $132,429 22.8%
======== ===== ======== =====
Selling, General and
Administrative
Expenses............... 81,400 17.0 26,692 32.4
-------- ----- ------- -----
Income (Loss) from
Operations............. 32,319 6.8 (3,677) (4.4)
Interest Expense, Net... (2,685) (0.6) (890) (1.1)
Other................... 346 0.1 266 0.3
-------- ----- ------- -----
Income (Loss) Before
Income Tax Provision... 29,980 6.3 (4,301) (5.2)
Income Tax Provision.... 13,243 2.8 1,156 1.4
-------- ----- ------- -----
Net Income (Loss)....... $ 16,737 3.5% $(5,457) (6.6)%
======== ===== ======= =====
</TABLE>
Historical Nine Months Ended September 30, 1998 Compared to Historical Nine
Months Ended September 30, 1997
Revenues. Revenues increased $395.7 million to $477.9 million for the nine
months ended September 30, 1998 from $82.2 million for the nine months ended
September 30, 1997. Such increase in revenues included $357.6 million
attributable to the acquisition of the IPO Companies during November 1997 and
the acquisitions of the Post-IPO Companies during the nine months ended
September 30, 1998. Also contributing to the increase was a $10.0 million
increase in revenues at Airtron, which related to strong housing starts
throughout the country, particularly in the Midwestern and South Central
United States. The remaining $28.1 million increase relates to the Pre-IPO
Companies that have nine months of activity in the current year versus two to
four months of activity in the prior year.
Gross Profit. Gross profit increased $90.7 million to $113.7 million for the
nine months ended September 30, 1998 from $23.0 million for the nine months
ended September 30, 1997. Such increase in gross profit included approximately
$1.5 million in materials purchases savings and $76.6 million attributable to
the acquisitions of the IPO Companies during November 1997 and the
acquisitions of the Post-IPO Companies during the nine months ended September
30, 1998. Gross profit at Airtron increased by $3.5 million between periods.
This increase correlates favorably with the $10.0 million revenue increase as
Airtron is operating near full capacity to accommodate housing start demand in
its geographic markets and has deployed resources to further broaden its
service base. The remaining $9.1 million increase relates to the Pre-IPO
Companies that have nine months of activity in the current year versus two to
four months of activity in the prior year. Gross profit margin decreased 4.2%
to 23.8% for the nine months ended September 30, 1998 compared to 28.0% for
the nine months ended September 30, 1997. The overall decrease in gross margin
was attributable to the acquisition of primarily commercial/industrial
companies in 1998 which has shifted the Company's business mix toward the
lower gross margin commercial/industrial business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $54.7 million to $81.4 million for the nine
months ended September 30, 1998 from $26.7 million for the nine months ended
September 30, 1997. Such increase included $47.6 million attributable to the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the nine months ended September 30, 1998 and
$6.7 million related to the Pre-IPO Companies that have nine months of
activity in the current year versus two to four months of activity in the
prior year. Also contributing to the increase was a $5.3 million increase in
corporate expenses representing the formation of the corporate management team
and
10
<PAGE>
infrastructure necessary to execute the Company's operating and acquisition
strategies and $3.4 million of goodwill amortization. Offsetting the increases
was a $7.0 million reduction in compensation expense recognized in the prior
year from the reverse acquisition of Airtron and a $1.3 million reduction due
primarily to the prospective reductions in compensation to the former owners
of Airtron. As a percentage of revenues, selling, general and administrative
expenses, excluding corporate expenses, goodwill amortization and the 1997
non-recurring compensation expense, decreased to 14.8% for the nine months
ended September 30, 1998 from 21.4% for the nine months ended September 30,
1997, respectively, due primarily to achieving lower selling and
administrative expense margins within the Founding Companies and acquiring a
higher mix of commercial companies which tend to have lower selling and
administrative expense structures. When including corporate expenses and
goodwill amortization, but excluding the non-recurring compensation expense of
$7.0 million related to the reverse acquisition, selling, general and
administrative expenses as a percentage of revenue decreased to 17.0% for the
nine months ended September 30, 1998 from 24.0% for the nine months ended
September 30, 1997.
Net Interest. Net interest increased $1.8 million during the nine months
ended September 30, 1998 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility to finance the Company's aggressive acquisition program during
1998. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $12.0 million to
$13.2 million for the nine months ended September 30, 1998 from $1.2 million
for the nine months ended September 30, 1997. This increase corresponds with
the pretax income increase of $27.3 million between periods after adding back
the $7.0 million of compensation expense related to the reverse acquisition of
Airtron. The effective tax rate for the nine months ended September 30, 1998
was 44.2% compared to 43.2% for the nine months ended September 30, 1997 after
adding back the $7.0 million of compensation expense related to the reverse
acquisition of Airtron. This increase results primarily from the increase in
non-deductible goodwill amortization of $3.4 million in the nine months ended
September 30, 1998.
Combined Nine Months Ended September 30, 1998 Compared to Combined Nine
Months Ended September 30, 1997
Revenues. Combined revenues increased $48.3 million, or 8.3%, to $627.9
million for the nine months ended September 30, 1998 from $579.6 million for
the nine months ended September 30, 1997. The increase in combined revenues
was attributable to (i) the companies that primarily provide residential new
installation services which experienced a $19.3 million increase, or 16.0%,
due to an increase in new home starts in the markets they serve, (ii)
companies that primarily provide residential maintenance, repair and
replacement services which experienced a $10.0 million increase, or 14.6%, due
to favorable weather patterns in the markets they serve and (iii) an increase
of $19.4 million, or 5.0%, from the companies that provide
commercial/industrial services primarily in the Seattle, Salt Lake City,
Baltimore, Philadelphia and Dallas markets partially offset by economic
softening in the Company's Richmond, Virginia market.
Gross Profit. Combined gross profit increased $12.3 million, or 9.3%, to
$144.7 million for the nine months ended September 30, 1998 from $132.4
million for the nine months ended September 30, 1997. The increase in gross
profit was primarily attributable to the increase in combined revenues
described above. Gross profit margin increased to 23.1% for the nine months
ended September 30, 1998 compared to 22.8% for the nine months ended September
30, 1997. The increase in gross profit margin was a result of (i) overall
margin improvement at the companies that primarily provide residential new
installation services as these companies have operated near full capacity to
accommodate housing start demand in the geographic markets they serve, (ii) a
slightly higher mix of higher margin maintenance, repair and replacement
business in the residential sector from the favorable weather patterns
discussed above, and (iii) purchasing materials savings experienced in the
current year.
INFLATION
Inflation did not have a significant effect on the results of operations of
the Company for the three and nine month periods ended September 30, 1998 and
September 30, 1997.
11
<PAGE>
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.
YEAR 2000
Background. The Year 2000 issue refers to the inability of certain date-
sensitive computer chips, software and systems to recognize a two-digit date
field as belonging to 21st century. Many computer software programs, as well
as certain hardware and equipment containing date sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which
could result in significant system and equipment failures. This is a
significant issue for most if not all companies, with far reaching
implications, some of which cannot be anticipated or predicted with any degree
of certainty. The Company recognizes that it must take action to ensure that
its operations will not be adversely impacted by Year 2000 software failures.
The Company's State of Readiness. An initial systems survey of the GroupMAC
Companies was completed in March 1998 and revealed that several of the
Company's core business applications possess Year 2000 problems. The Company
retained an outside consulting firm to evaluate more thoroughly the extent of
the problem and to assist the Company in preparing an action plan to address
the issues in a timely manner. The evaluation project began in early July of
this year.
With the exception of eight recent acquisitions, the evaluation project is
substantially complete. The Company estimates that the cost of bringing the
evaluated systems into compliance is between $130,000 and $175,000, including
all software upgrade fees and implementation and expects that substantially
all of these costs will be expensed. These costs are independent of any costs
associated with the common information system discussed below. The projected
effort for the majority of the systems includes an upgrade to recent vendor
software releases that are fully Year 2000 compliant. Management is working
with the consultant to finalize implementation planning and to develop
tracking mechanisms to ensure upgrades are completed in a timely manner.
Additionally, the Company has engaged an outside consulting firm to evaluate
and estimate the impact of Year 2000 problems on potential future acquisitions
as part of the due diligence process. As of September 30, 1998, the Company
has incurred expenses of approximately $75,000 related to the evaluation phase
of this project.
Independent of its Year 2000 activities discussed in the previous paragraph,
the Company continues to develop a common information system throughout the
organization for its overall information needs that will be free of any Year
2000 limitations. While the Company is not dependent on the implementation of
the common information system to remedy its Year 2000 problem, priority for
implementation of the common information system will be given to those
GroupMAC Companies where correction of the Year 2000 problem is an issue. The
Company expects to commence user-acceptance testing of the new information
system during the second quarter of 1999 with implementation to follow
immediately thereafter.
The Company is completing a plan to evaluate the effect of the Year 2000
problem on the Company's most significant customers and suppliers, and thus
indirectly on the Company. This evaluation is expected to be complete by
December 31, 1998. At this time, the Company has not assessed the potential
adverse effect on the Company with respect to customers and suppliers.
Embedded Technology. The Company has focused its assessments to date on its
information technology systems. These assessments indicate that, due to the
nature of the Company's operations, the non-information technology systems
(i.e. embedded technology such as microcontrollers) do not represent a
significant area of risk relative to Year 2000 readiness. The Company's
operations do not include capital intensive equipment with embedded
microcontrollers.
12
<PAGE>
Contingency Plan. The Company has not implemented a Year 2000 contingency
plan. As explained above, the Company has initiated action to identify and
resolve Year 2000 problems. The Company intends to develop and implement a
contingency plan in the event the Company's present course of action to solve
the Year 2000 problem should fall behind schedule.
LIQUIDITY AND CAPITAL RESOURCES
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 the
accounts receivable and inventory of the Company.
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. On October 15, 1998 the Company amended and
restated the Credit Agreement to increase its borrowing capacity from $125.0
million to $230.0 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 pro forma 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 October 13,
2001.
The Company entered into agreements to lock in the ten year U.S. Treasury
rates to be used to price an anticipated debt offering ("the Offering") of at
least $100 million. The Company has locked in $100 million at 5.4737%, which
the Company believes is an attractive long-term base rate. This agreement
expires on December 15, 1998. Subsequent to entering into the lock agreements,
market conditions for credit deteriorated and U.S. Treasury rates declined. As
a result, the Company has delayed the Offering until market conditions
stabilize. Because the Company does not expect to consummate the Offering
before December 15, 1998, it intends to extend the treasury lock agreement
prior to its expiration date, although there is no assurance that the
counterparty to these agreements will agree to an extension.
As of November 13, 1998, the ten year Treasury yield was 4.81%, representing
a potential additional pre-tax financing cost of approximately $5.1 million if
the agreements were settled as of this date. In accordance with Statement of
Financial Accounting Standards No. 80, Accounting for Futures Contracts, this
agreement is considered a hedge against rising interest rates for an
anticipated transaction considered probable that should be recorded as
deferred costs associated with the Offering and amortized into interest
expense over the term of the related debt. However, if the Offering at some
point does not meet the probable of occurrence standard, a gain or loss would
be recognized in earnings for the fair value of the instrument at that date.
It should be noted that a decline in interest rates will generally have a
positive impact on the Company's operations.
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 its business. During the nine months ended September 30,
1998, capital expenditures aggregated $6.6 million. The Company anticipates
that its cash flow from operations for the remainder of 1998 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 nine months ended September 30, 1998 and September 30, 1997, the
Company generated $8.4 million and $7.4 million in cash from operating
activities, respectively. For the nine months ended September 30, 1998, net
income, depreciation, amortization, gain from sale of property and equipment
and deferred taxes generated $24.7 million and changes in asset and liability
accounts utilized a net $16.3 million. For the nine months ended September 30,
1997, net loss, depreciation, amortization, deferred taxes, gain from sale of
property and equipment and non-cash compensation expense utilized $1.9
million, and changes in asset and liability accounts generated a net $9.3
million.
13
<PAGE>
For the nine months ended September 30, 1998, the Company used $118.7
million in investing activities. The cash expended during the nine months
ended September 30, 1998 consisted of $111.1 million for acquisitions, $6.4
million for net capital expenditures and $1.2 million for deferred acquisition
costs. For the nine months ended September 30, 1997, the Company used $10.5
million in investing activities. The cash expended during the nine months
ended September 30, 1997 consisted of $8.9 million for acquisitions, $1.3
million for net capital expenditures and $0.3 million for deferred acquisition
costs.
For the nine months ended September 30, 1998, the Company generated $86.8
million in cash from financing activities. These activities principally
consisted of proceeds from the Credit Agreement of $142.1 million less
payments of debt of $55.3 million. For the nine months ended September 30,
1997, the Company generated $8.9 million in cash from financing activities.
These activities principally consisted of proceeds from debt of $32.5 million
and net proceeds from the issuance of Common Stock of $1.9 million less
payments of debt of $5.1 million and distributions to shareholders of $20.4
million.
Since the IPO, the Company registered fourteen 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 nine months ended September 30, 1998, the Company completed the
acquisition of the Post-IPO Companies, which were accounted for as purchases,
for approximately $237.8 million, which includes cash payments of $126.8
million, $0.8 million of subordinated convertible debt, $4.0 million of notes
payable, 7.8 million shares of Common Stock and options to purchase 0.3
million shares of Common Stock. Of the total consideration, approximately $9.3
million of cash and 0.1 million shares of Common Stock is due to former
shareholders at September 30, 1998. The Company financed the cash portion of
the purchase price using (i) remaining funds from the IPO, (ii) cash borrowed
under the Credit Agreement and (iii) internally generated funds. The combined
1997 annual revenues of these companies were $453.2 million.
Also during the nine months ended September 30, 1998, the Company has
increased goodwill related to earnout payments of $1.5 million payable in cash
and due to a director and former shareholder of one of the Pre-IPO Companies.
In addition, the Company has settled approximately $2.2 million of previously
recorded amounts due to former shareholders of the Pre-IPO and IPO Companies.
From October 1, 1998 through November 13, 1998, the Company acquired four
additional platform companies with combined 1997 annual revenues of $196.3
million. Total consideration paid or to be paid was approximately $127.2
million consisting of cash payments of $67.9 million, subordinated debt of
$16.0 million, 4.2 million shares of Common Stock, options to purchase 0.1
million shares of Common Stock and warrants to purchase 0.8 million shares of
Common Stock. These acquisitions will be accounted for as purchases. The
Company financed the cash portion of the purchase price with borrowings under
the Credit Agreement. As of November 13, 1998, the funds available under the
Credit Agreement totaled $51.3 million, subject to the maintenance of
financial ratios and covenants.
The Company intends to aggressively pursue acquisition opportunities.
Management believes the Company has viable financing alternatives to meet the
Company's anticipated requirements for acquisitions. Estimates as to working
capital needs, the level of acquisition activity 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.
14
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 will begin publishing the required segment
information in its 1998 annual report on Form 10-K.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which
establishes new accounting and reporting standards for the costs of computer
software developed or obtained for internal use. This statement will be
applied prospectively and is effective for fiscal years beginning after
December 15, 1998. The impact of this new standard is not expected to have a
significant effect on the Company's financial position or results of
operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires capitalized costs related to start-
up activities to be expensed as a cumulative effect of a change in accounting
principle when the statement is adopted. The adoption of this new standard is
not expected to have a significant effect on the Company's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new accounting
and reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This statement is
effective for all fiscal years beginning after June 15, 1999. The Company has
not yet determined the impact this standard will have on its financial
position or results of operations.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits.
<TABLE>
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated as of August 31, 1998 among
the Company, Romanoff Electric Acquisition Corp., Romanoff
Electric Corp. and the shareholders of Romanoff Electric Corp.
(incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K dated September 15, 1998, File No. 1-13565).
3.1 -- Articles of Incorporation of the Company, as amended (Exhibit
3.1 to Registration Statement No. 333-34067).
3.2 -- Bylaws of the Company, as amended (Exhibit 3.2 to Registration
Statement No. 333-34067).
4 -- None
10 -- None
11 -- None
15 -- None
18 -- None
19 -- None
22 -- None
23 -- None
24 -- None
27 -- Financial Data Schedule
99 -- None
</TABLE>
(2) Reports on Form 8-K.
On July 20, 1998, the Company filed (i) an amendment to the Current Report
on Form 8-K that it filed on May 22, 1998 with respect to the acquisition by
the Company of Premex, Inc. ("Premex") and Barr Electric Corp. ("Barr") and
(ii) an amendment to the Current Report on Form 8-K that it filed on June 26,
1998 with respect to the acquisition by the Company of Atlantic Industrial
Constructors, Inc. ("Atlantic"). Each amendment included audited financial
statements of the companies included in the original report and pro forma
financial statements for the Company reflecting the acquisition of Premex,
Barr and Atlantic.
On September 15, 1998, the Company filed a Current Report on Form 8-K which
disclosed, under Item 2 thereof, the Company's acquisition of Romanoff
Electric Corp. Such report was amended on September 21, 1998 to include the
audited financial statements of Romanoff Electric Corp., as well as the pro
forma financial statements for the Company reflecting the acquisition of these
entities.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Group Maintenance America Corp.
November 16, 1998 /s/ Darren B. Miller
(Date) ----------------------------------------
Darren B. Miller
Executive Vice President and Chief
Financial Officer
(principal financial officer)
November 16, 1998 /s/ Daniel W. Kipp
(Date) ----------------------------------------
Daniel W. Kipp
Senior Vice President and Corporate
Controller
(principal accounting officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,189
<SECURITIES> 0
<RECEIVABLES> 142,043
<ALLOWANCES> 3,708
<INVENTORY> 15,624
<CURRENT-ASSETS> 189,748
<PP&E> 39,287
<DEPRECIATION> 7,655
<TOTAL-ASSETS> 514,167
<CURRENT-LIABILITIES> 140,829
<BONDS> 108,620
0
0
<COMMON> 29
<OTHER-SE> 259,048
<TOTAL-LIABILITY-AND-EQUITY> 514,167
<SALES> 477,944
<TOTAL-REVENUES> 477,944
<CGS> 364,225
<TOTAL-COSTS> 364,225
<OTHER-EXPENSES> 81,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,685
<INCOME-PRETAX> 29,980
<INCOME-TAX> 13,243
<INCOME-CONTINUING> 16,737
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<NET-INCOME> 16,737
<EPS-PRIMARY> 0.66
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</TABLE>
