<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-41947
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GROUP MAINTENANCE AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TEXAS 1711 76-0535259
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
RANDOLPH W. BRYANT
SENIOR VICE PRESIDENT, GENERAL COUNSEL
8 GREENWAY PLAZA, SUITE 1500 AND SECRETARY
HOUSTON, TEXAS 77046 8 GREENWAY PLAZA, SUITE 1500
(713) 860-0100 HOUSTON, TEXAS 77046
(ADDRESS, INCLUDING ZIP CODE, AND (713) 860-0100
TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S PRINCIPAL AND TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
----------------
Copies to:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
711 LOUISIANA STREET, SUITE 2900
HOUSTON, TEXAS 77002-2781
(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: [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED FEBRUARY 5, 1998
7,000,000 SHARES
LOGO
[Logo of Group Maintenance America appears here]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
-----------
Group Maintenance America Corp., a Texas corporation (collectively with its
subsidiaries, the "Company") may offer and issue from time to time up to
7,000,000 shares of common stock, par value $0.001 ("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 February 5, 1998, 22,148,723 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 February 4, 1998, the last reported sales price of the
Common Stock on the New York Stock Exchange was $15.75 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 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
February , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 12
Price Range of Common Stock............................................... 13
Capitalization............................................................ 14
Dividend Policy........................................................... 14
Selected Historical and Pro Forma Financial Data.......................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 32
Management................................................................ 43
Related Party Transactions................................................ 51
Security Ownership of Certain Beneficial Owners and Management............ 53
The Acquisitions.......................................................... 54
Description of Capital Stock.............................................. 55
Description of Bank Credit Agreement...................................... 57
Shares Eligible for Future Sale........................................... 59
Plan of Distribution...................................................... 61
Experts................................................................... 61
Available Information..................................................... 62
Index to Financial Statements............................................. F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUB-
SEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
2
<PAGE>
PROSPECTUS SUMMARY
The Company has acquired 33 companies (the "GroupMAC Companies"). 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" or
"GroupMAC" refers to Group Maintenance America Corp. ("GroupMAC Parent") and
the GroupMAC Companies, 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 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 Companies, and references to pro
forma financial information of the Company or combined financial information of
any group of the GroupMAC Companies refer to a year ending December 31 of the
relevant year. Upon completion of the closing of the initial public offering of
the Company's Common Stock (the "IPO") on November 13, 1997, the Company's
fiscal year was changed to the calendar year.
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services to residential and commercial customers. Since inception, the Company
has acquired 33 companies totaling $391.7 million in combined 1996 revenues.
Nine of the companies were acquired after the IPO (the "Post-Offering
Companies), 13 of the companies (the "Offering Acquisition Companies") were
acquired on November 13, 1997 concurrently with the closing of the IPO and 11
of the companies ("Pre-Offering Companies") had been acquired previously. The
Company believes it is one of the largest diversified providers of HVAC,
plumbing and electrical services in the United States.
The Company offers a comprehensive range of services to residential and
commercial customers in both the new installation and the maintenance, repair
and replacement segments of the HVAC, plumbing and electrical service
industries. The Company's services include installing and maintaining,
repairing and replacing central air conditioning systems, furnaces, heat pumps
and plumbing and electrical systems.
The Company is a Texas corporation with its principal executive offices
located at 8 Greenway Plaza, Suite 1500, Houston, Texas 77046, and its
telephone number is (713) 860-0100.
RISK FACTORS
An investment in the shares of Common Stock involves significant risks that a
potential investor should consider carefully. See "Risk Factors" beginning on
page 6 for certain information that should be considered by prospective
investors of the Common Stock offered hereby.
3
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The Company previously acquired the Pre-Offering Companies, acquired the
Offering Acquisition Companies simultaneously with the closing of the IPO and
acquired the Post-Offering Companies after the IPO. 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 the GroupMAC Parent (Group Maintenance
America Corp. parent only), because the former shareholders of Airtron owned a
majority of GroupMAC Parent'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 Parent and the Pre-Offering Companies are included in the Financial
Statements from their respective dates of acquisition. The historical balance
sheet data as of September 30, 1997 include: A-ABC Appliance, Inc. ("A-ABC")
and A-1 Appliance & Air Conditioning, Inc. ("A-1" and, together with A-ABC, "A-
ABC/A-1"), Hallmark Air Conditioning, Inc. ("Hallmark") and K&N Plumbing,
Heating and Air Conditioning, Inc. ("K&N"), which were acquired effective June
1, 1997; Charlie Crawford, Inc. (d/b/a Charlie's Plumbing) ("Charlie's"),
Costner Brothers, Inc. ("Costner"), AA JARL, Inc. (d/b/a Jarrell Plumbing)
("Jarrell") and the residential service assets of Way Service, Inc. ("Way
Residential"), which were acquired effective June 30, 1997; Callahan/Roach
Products & Publications, Inc. ("CRPP"), Callahan/Roach & Associates ("CRA" and,
together with CRPP, ("Callahan Roach"), and Sibley Services, Incorporated
("Sibley"), which were acquired as of July 1, 1997; and United Service Alliance
("USA") which was acquired as of July 31, 1997.
The summary pro forma financial data of the Company as of and for the nine
months ended September 30, 1996 and 1997 and the year ended December 31, 1996
are derived from the Unaudited Pro Forma Combined Financial Statements of the
Company that appear elsewhere in this Prospectus. The pro forma financial data
listed below present certain information for the Company, as adjusted for (i)
the effects of the acquisitions of the GroupMAC Companies and (ii) the effects
of certain pro forma adjustments to the historical financial statements of the
GroupMAC Companies which are directly related to these acquisitions. The pro
forma as adjusted financial data give effect to consummation of the IPO and the
application of the net proceeds therefrom. The 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 date or at the beginning of the period indicated, nor are they intended
to project the Company's results of operations or financial position for any
future date or period.
The data presented below should be read in conjunction with the Selected
Historical and Pro Forma Financial Data, Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Financial Statements and
the related notes thereto and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere herein.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------------
FISCAL YEARS ENDED NINE MONTHS ENDED
FEBRUARY 28 OR 29, SEPTEMBER 30,
-------------------------- DECEMBER 31, -----------------
1995 1996 1997 1996(2) 1996(2) 1997(2)
------- ------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA(1):
Revenues................ $72,226 $73,765 $81,880 $391,728 $296,737 $324,109
Gross Profit............ 21,766 21,091 23,374 89,978 67,912 73,321
Selling, General and
Administrative
Expenses(3)............ 20,282(4) 17,615 19,811 61,240(5) 46,133 52,480(6)
Goodwill
Amortization(7)........ -- -- -- 2,903 2,178 2,178
------- ------- ------- -------- -------- --------
Income from Operations.. 1,484 3,476 3,563 25,835 19,601 18,663
Interest Income
(Expense), Net......... 76 68 89 246 220 390
Other Income, Net....... 140 246 256 462 418 701
------- ------- ------- -------- -------- --------
Income Before Income Tax
Provision.............. 1,700 3,790 3,908 26,543 20,239 19,754
Income Tax Provision.... 911 1,651 1,572 11,778 8,931 8,744
------- ------- ------- -------- -------- --------
Net Income.............. $ 789 $ 2,139 $ 2,336 $ 14,765 $ 11,308 $ 11,010
======= ======= ======= ======== ======== ========
Net Income Per Share.... $ 0.64 $ 0.49 $ 0.48
======== ======== ========
Weighted Average Shares
Outstanding(8)......... 22,930 22,930 22,930
======== ======== ========
OTHER DATA:
EBITDA(9)............... $ 1,853 $ 3,960 $ 4,027 $ 29,513 $ 22,336 $ 21,712
======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(2)
------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.................... $ 7,801 $ (8,810) $ 1,785
Working Capital.............................. 3,334 (33,909) 19,274
Total Assets................................. 81,156 220,097 226,446
Total Debt................................... 32,071 48,483 3,178
Preferred Stock.............................. 19,271 19,271 --
Shareholders' Equity (Deficit)............... (4,680) 49,912 153,099
</TABLE>
- -------
(1) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31.
(2) Pro forma financial data give effect to the acquisitions that are described
in the Unaudited Pro Forma Combined Financial Statements, as if they had
occurred at January 1, 1996 for the Income Statement Data and on September
30, 1997 for the Balance Sheet Data. Pro forma as adjusted data give effect
to a reduction in interest expense as a result of reductions in
indebtedness upon application of a portion of the net proceeds to the
Company from the IPO and the redemption of preferred stock.
(3) Reflects a decrease of $14.1 million, $8.1 mllion and $8.3 million for the
year ended December 31, 1996, nine months ended September 30, 1996 and
1997, respectively, for pro forma reductions in salaries, bonuses and
benefits to former owners of the GroupMAC Companies to which they have
agreed prospectively. Also excludes non-recurring, non-cash compensation
expense of $7.0 million related to the reverse acquisition of GroupMAC
Parent during the second quarter of 1997.
(4) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(5) Includes $0.5 million of expenses for the formation and build-up of
corporate management and infrastructure.
(6) Includes $2.8 million of expenses for the formation and build-up of
corporate management and infrastructure.
(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 the Unaudited Pro Forma Combined
Financial Statements.
(8) Computed on a basis described in Note 4 of the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(9) Represents earnings before interest, taxes, depreciation and amortization
("EBITDA"). Based on its experience in the industry, the Company believes
that EBITDA is an important tool for measuring the performance of companies
in the industry (including potential acquisition targets) in several areas
such as liquidity, operating performance and leverage. In addition, lenders
use EBITDA as a criterion in evaluating companies in the industry and the
Company's financing arrangement contains covenants in which EBITDA is used
as a measure of financial performance. The EBITDA measure for the Company
may not be consistent with similarly titled measures for other companies.
EBITDA should not be considered as an alternative to operating or net
income (as determined in accordance with GAAP) as an indicator of the
Company's performance or to cash flow from operations (as determined in
accordance with GAAP) as a measure of liquidity. See the comparative
historical statements of cash flows included herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "--Liquidity and Capital Resources" for discussion of other measures of
performance determined in accordance with GAAP and the Company's sources
and applications of cash flow.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors in the Common Stock offered hereby should consider carefully the
following factors before deciding to invest in the Common Stock.
LIMITED COMBINED OPERATING HISTORY
The Company has conducted limited operations to date. See "The Company."
Prior to their acquisition by the Company, the GroupMAC Companies operated as
separate, independent businesses. The Company will rely on the separate
systems of the GroupMAC Companies for the foreseeable future. There can be no
assurance that the Company will be able to integrate the operations of the
GroupMAC Companies successfully or to institute the necessary systems and
procedures, including accounting and financial reporting systems, to manage
the combined enterprise on a profitable basis. 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 pro forma and combined historical financial results
of the GroupMAC Companies cover periods when the GroupMAC Companies were not
under common control or management and may not be indicative of the Company's
future financial or operating results. The inability of the Company to
integrate and manage the GroupMAC Companies and such additional businesses as
the Company may acquire as a cohesive, efficient enterprise or to eliminate
unnecessary duplication may have a material adverse effect on the business,
financial condition and results of operations of the Company.
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.
See "Business--Acquisition Strategy."
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
The Company historically has financed capital expenditures and acquisitions
primarily through the issuance of equity securities, secured bank borrowings
and internally generated cash flow. The timing, size and success of the
Company's acquisition efforts and the associated capital commitments cannot be
readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a substantial
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
6
<PAGE>
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."
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
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 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--
Seasonal and Cyclical Nature of Business."
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's operations are subject to economic cycles and seasonal
variations. General and local economic conditions can cause fluctuations in
demand for the Company's services. Except in the Southeastern and Southwestern
United States, the demand for new installations of HVAC systems can be
substantially lower during the winter months. Demand for HVAC services,
especially in the residential sector, is generally higher in the second and
third calendar quarters. Commercial HVAC maintenance, repair and replacement
service is subject to seasonality as well. The Company expects that its
revenues and operating results generally will be lower in its first and fourth
calendar quarters. The HVAC, plumbing and electrical service industries are
also subject to fluctuations caused by periods of inclement weather. Prolonged
climate or weather conditions may cause unpredictable fluctuations in
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonal and Cyclical Nature of
Business."
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."
RISKS ASSOCIATED WITH 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 the GroupMAC Companies including, but not limited to,
accounting systems, employment and human resources policies, uniform
purchasing programs and certain centralized marketing programs. Each of the
GroupMAC
7
<PAGE>
Companies and companies to be acquired in the future 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. The Company may experience delays, complications and expenses in
implementing, integrating and operating such systems, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Operating Strategy."
FACTORS AFFECTING INTERNAL GROWTH
The Company's ability to increase the revenues of the GroupMAC Companies and
any subsequently acquired company will be affected by various factors,
including demand for HVAC, plumbing and electrical services, the level of new
construction, the Company's ability to expand the range of services offered to
customers of individual GroupMAC Companies and other acquired businesses, the
Company's ability to develop national accounts and other marketing programs in
order to attract new customers and the Company's ability to attract and retain
a sufficient number of qualified technicians and other necessary personnel.
Many of these factors are beyond the control of the Company, and there can be
no assurance that the Company's operating and internal growth strategies will
be successful or that it will be able to generate cash flow adequate for its
operation and to support internal growth. Furthermore, there can be no
assurance that management can integrate acquired companies and reduce overhead
expenses. See "Business--Operating Strategy."
COMPETITION
The HVAC, plumbing and electrical service industries are highly 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. Four companies
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, may enter the industry. These consolidators and other entrants
may have greater financial resources and name recognition 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 the senior management of the GroupMAC Companies, 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
or an acquired business and the Company is unable to attract and retain
qualified replacements. See "Business--Centralized Support Services--Employee
Screening, Training and Development" and "Management."
REGULATION
HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, (i) laws and regulations implementing the
federal Clean Air Act, as amended (the "Clean Air Act"), relating to minimum
energy efficiency standards of HVAC systems and the production, servicing and
disposal of certain ozone depleting refrigerants used in such systems and (ii)
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), which 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
8
<PAGE>
the transportation of hazardous substances to such facilities. In connection
with its entry into new markets, the Company may become subject to compliance
with additional regulations, and there can be no assurance that the regulatory
environment in which the Company operates will not change significantly in the
future. Various local, state and federal laws and regulations, including, but
not limited to, laws and regulations implementing the Clean Air Act impose
licensing standards on technicians who service heating and air conditioning
units. While the installers and technicians employed by the Company are duly
certified by applicable local, state and federal agencies and have been able
to meet or exceed such standards to date, there can be no assurance that they
will be able to meet future standards. In some states, warranties provided for
in the Company's service agreements may be deemed insurance contracts by
applicable state insurance regulatory agencies thereby subjecting the Company
and the service agreements to the insurance laws and regulations of such
state. See "Business--Governmental Regulation and Environmental Matters."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The executive officers, directors and certain founding shareholders of the
Company beneficially own a significant percentage of the outstanding Common
Stock. Accordingly, such persons 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 the Company'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. See "Security Ownership of Certain Beneficial Owners and
Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of February 5, 1998, 22,148,723 million shares of Common Stock were
outstanding. The 8,340,000 shares sold in the IPO (other than shares that may
be 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 700,000 shares in connection with the
acquisition of MacDonald-Miller Industries, Inc. ("MacDonald-Miller") and
approximately 1,710,000 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 Common Stock outstanding on the date hereof 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
9
<PAGE>
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 the GroupMAC
Companies have agreed with the Company that they generally will not sell,
transfer or otherwise dispose of any of their shares for one year following
the date of acquisition of such shares and for one additional year will limit
sales to no more than 36% of their holdings. Sales made pursuant to Rule 144
must comply with its applicable volume limitations and other requirements. At
the date of this Prospectus, approximately 1.2 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. 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 2.9 million shares of Common Stock, of which only warrants
and options to purchase approximately 730,000 shares are exercisable within 60
days after the date of this Prospectus. The Company intends to register
substantially all the shares subject to these options and warrants under the
Securities Act for public resale.
The Company, its directors and executive officers and certain other
shareholders have agreed not to offer or sell any shares until May 6, 1998
without the prior written consent of The Robinson-Humphrey Company, LLC,
except (A) that the Company may issue Common Stock in connection with
acquisitions generally, and pursuant to the exercise of stock options which
are either (i) outstanding on the date of the IPO, (ii) issued under the
Company's 1997 Stock Awards Plan or (iii) issued under the Company's stock
option plan for non-management employees, and (B) that such directors,
executive officers and shareholders may sell Common Stock pursuant to a
cashless exercise of such stock options or make a bona fide gift of Common
Stock provided the donee agrees to be bound by the terms of the donor's lockup
agreement.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
RESTRICTIONS ON DIVIDENDS; DEPENDENCE ON SUBSIDIARIES
The Company will conduct its operations through subsidiaries, and is
therefore dependent upon the cash flow of and the transfer of funds by those
subsidiaries to the Company in the form of loans, dividends or otherwise to
meet its financial obligations. Each GroupMAC Company and any future
subsidiary of the Company will be distinct legal entities and will have no
obligation, contingent or otherwise, to transfer funds to the Company. The
Company's ability to pay dividends on the Common Stock is restricted by the
terms of the $75 million bank credit facility (the "Bank 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" and "Description of Capital Stock--Common
Stock." Additionally, the ability of the GroupMAC Companies to pay dividends
to the Company is limited by the terms of the Bank Credit Agreement. See
"Description of Bank 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
10
<PAGE>
Company by means of a tender offer, business combination, proxy contest or
otherwise. These provisions include the authorization in the Company's
Articles of Incorporation of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the Common Stock respecting dividends, distributions and voting rights)
as the Board of Directors may determine, classification of the Board of
Directors, a TBCA restriction on the ability of shareholders to take actions
by written consent and a TBCA provision imposing restrictions on business
combinations with certain interested parties. See "Description of Capital
Stock."
ASSET ENCUMBRANCE
The obligations of the Company under the Bank Credit Agreement are secured
by a first priority security interest on the accounts receivable and inventory
of the Company and its material subsidiaries and all the capital stock of its
domestic subsidiaries. In addition, borrowings under the Bank Credit Agreement
have been guaranteed by the material GroupMAC Companies, 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
Bank Credit Agreement so as to result in a default thereunder or if the
Company were unable to repay its borrowings thereunder, lenders under the Bank
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 Bank 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 Bank Credit
Agreement."
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 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.
11
<PAGE>
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
HVAC, plumbing and electrical services to residential and commercial
customers. To this end, the Company purchased the 33 companies described
below. The initial capitalization of the Company was provided through private
equity capital and a $35 million acquisition and working capital borrowing
facility. This initial financing allowed the Company to acquire the Pre-
Offering Companies, including Airtron, a residential HVAC service company with
new installation and maintenance, repair and replacement services in 14 cities
in six states. The Company has approximately 4,000 employees at operations in
43 cities in 22 states, with combined 1996 revenues of $391.7 million, and is
among the largest providers of HVAC, plumbing and electrical services in the
United States.
For a description of the transactions pursuant to which the businesses of
the GroupMAC Companies were acquired, see "The Acquisitions." The GroupMAC
Companies are described below.
<TABLE>
<CAPTION>
1996
REVENUES YEAR
PRE-OFFERING COMPANIES: ($ IN 000'S)(1) FOUNDED HEADQUARTERS SITE PRIMARY SERVICES
- ----------------------- --------------- ------- ----------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Airtron(2)....... $ 81,880 1970 Dayton, OH Residential & Commercial HVAC
K&N(2)........... 24,279 1978 Arlington, TX Residential Plumbing & HVAC
A-ABC/A-1(2)..... 8,546 1976 Dallas, TX Residential HVAC & Plumbing
Sibley........... 6,962 1974 Memphis, TN Commercial HVAC
Hallmark(2)...... 6,516 1951 Houston, TX Residential & Commercial HVAC
Charlie's........ 3,058 1979 Houston, TX Commercial & Residential Plumbing
Costner.......... 3,042 1985 Rock Hill, SC Residential HVAC & Electrical
Callahan
Roach(2)........ 1,867 1989 Denver, CO Residential Training, Products & Publications
Jarrell.......... 1,236 1957 Houston, TX Residential Plumbing
USA.............. 763 1988 Denver, CO Commercial Training & Member Services
Way Residential.. 659 1977 Houston, TX Residential HVAC
--------
Total........... $138,808
--------
<CAPTION>
OFFERING ACQUISITION COMPANIES:
- -------------------------------
<S> <C> <C> <C> <C>
MacDonald-Mill-
er(2)........... $ 66,059 1965 Seattle, WA Commercial HVAC, Plumbing & Electrical
Masters(2)....... 39,826 1986 Gaithersburg, MD Residential Plumbing & HVAC
Linford(2)....... 11,305 1960 Oakland, CA Commercial HVAC
Yale............. 10,065 1939 Minneapolis, MN Commercial HVAC
Central Caroli-
na(2)........... 8,161 1967 Greensboro, NC Residential & Commercial HVAC
Willis........... 6,781 1954 Cincinnati, OH Residential HVAC
Paul E. Smith.... 5,573 1967 Indianapolis, IN Residential Plumbing
Southeast Mechan-
ical............ 5,282 1979 Hollywood, FL Commercial HVAC
Van's............ 4,289 1965 Delray Beach, FL Residential HVAC
Arkansas Mechani-
cal(2).......... 3,337 1988 Little Rock, AR Commercial HVAC
Mechanical(2).... 2,900 1993 Little Rock, AR Commercial HVAC
All Service...... 2,826 1990 Jacksonville, FL Commercial & Residential Electrical
Evans............ 2,295 1901 Birmingham, AL Residential Plumbing & HVAC
--------
Total........... $168,699
--------
<CAPTION>
POST-OFFERING COMPANIES:
- ------------------------
<S> <C> <C> <C> <C>
Mechanical Inte-
riors........... $ 28,517 1984 Dallas, TX Commercial HVAC
Hungerford....... 22,612 1957 Richmond, VA Commercial HVAC & Plumbing
APH Service...... 9,048 1963 Denver, CO Residential & Commercial HVAC & Plumbing
Valley Wide...... 5,727 1988 Avon, CO Commercial & Residential HVAC & Plumbing
Sterling......... 5,484 1990 Pearland, TX Residential HVAC
AC Engineers..... 5,017 1989 Utica, MI Commercial HVAC
Weigold.......... 3,428 1982 Naples, FL Residential HVAC
A-1 Mechanical... 3,282 1985 Lansing, MI Residential HVAC
Chappell......... 1,106 1994 Clearwater, FL Residential HVAC
--------
Total........... $ 84,221
--------
Pro Forma Com-
bined........... $391,728
========
<CAPTION>
SOURCE OF 1996 REVENUES
-------------------------
MAINTENANCE,
NEW REPAIR AND
PRE-OFFERING COMPANIES: INSTALLATION REPLACEMENT
- ----------------------- ------------ ------------
<S> <C> <C>
Airtron(2)....... 81% 19%
K&N(2)........... 89% 11%
A-ABC/A-1(2)..... 0% 100%
Sibley........... 0% 100%
Hallmark(2)...... 0% 100%
Charlie's........ 0% 100%
Costner.......... 0% 100%
Callahan
Roach(2)........ N/A N/A
Jarrell.......... 0% 100%
USA.............. N/A N/A
Way Residential.. 0% 100%
Total...........
<CAPTION>
OFFERING ACQUISITION COMPANIES:
- -------------------------------
<S> <C> <C>
MacDonald-Mill-
er(2)........... 41% 59%
Masters(2)....... 100% 0%
Linford(2)....... 0% 100%
Yale............. 28% 72%
Central Caroli-
na(2)........... 17% 83%
Willis........... 59% 41%
Paul E. Smith.... 61% 39%
Southeast Mechan-
ical............ 0% 100%
Van's............ 4% 96%
Arkansas Mechani-
cal(2).......... 0% 100%
Mechanical(2).... 14% 86%
All Service...... 14% 86%
Evans............ 0% 100%
Total...........
<CAPTION>
POST-OFFERING COMPANIES:
- ------------------------
<S> <C> <C>
Mechanical Inte-
riors........... 46% 54%
Hungerford....... 46% 54%
APH Service...... 5% 95%
Valley Wide...... 35% 65%
Sterling......... 98% 2%
AC Engineers..... 0% 100%
Weigold.......... 8% 92%
A-1 Mechanical... 59% 41%
Chappell......... 0% 100%
Total...........
Pro Forma Com-
bined........... 53% 47%
===== ======
</TABLE>
12
<PAGE>
- --------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is now the year end of all of the GroupMAC
Companies.
(2) Operates through multiple locations.
The consideration paid by the Company for each GroupMAC Company was the
result of arm's-length negotiations between representatives of the Company and
representatives of that company and was based generally on the Company's
evaluation of such company's operating results, assets and capitalization.
Certain shareholders and key managers of the GroupMAC Companies were required
to enter into employment agreements containing, among other things,
confidentiality and non-competition provisions.
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 (based on the NYSE Composite Transactions Reporting System) for
the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997:
Fourth Quarter (From November 7, 1997 through
December 31, 1997)........................................ 17.00 13.25
1998:
First Quarter (From January 1, 1998 through February 4,
1998)..................................................... 17.06 15.75
</TABLE>
On February 4, 1998, the closing price of the Common Stock on the New York
Stock Exchange (as reported on the Composite Transactions Reporting System)
was $15.75 and there were 211 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.
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of September 30, 1997, (ii) the pro forma capitalization of the
Company as of September 30, 1997, giving effect to the acquisition of the
GroupMAC Companies, and (iii) the pro forma capitalization of the Company as
of September 30, 1997, giving effect to such acquisitions and related
financings, as adjusted to reflect the application of the net proceeds from
the IPO. 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.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
Short-Term Debt, Including Current Maturities.. $ 3,561 $ 13,510 $ 3,178
======== ======== ========
Long-Term Debt, Net of Current Maturities...... $ 28,510 $ 34,973 $ --
Preferred Stock: $1.00 par value, 50,000,000
shares authorized; 19,271,593 shares issued
and outstanding............................... 19,271 19,271 --
Shareholders' Equity:
Common Stock: $0.001 par value, 100,000,000
shares authorized; 9,486,395 shares issued and
outstanding; 14,386,741 shares issued and
outstanding, pro forma; and 22,726,741 shares
issued and outstanding, pro forma as
adjusted(1)................................... 9 14 23
Additional Paid-In Capital..................... 28,980 83,567 186,745
Retained Earnings (Deficit).................... (33,669) (33,669) (33,669)
-------- -------- --------
Total Shareholders' Equity..................... (4,680) 49,912 153,099
-------- -------- --------
Total Capitalization........................... $ 43,101 $104,156 $153,099
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) approximately 600,000 shares of Common Stock issuable upon
exercise of outstanding stock options and warrants issued in connection
with certain acquisitions, (ii) approximately 400,000 shares of Common
Stock issuable upon exercise of outstanding stock options held by
employees of the Company, and (iii) an aggregate of approximately 1.9
million shares of Common Stock subject to options granted upon
consummation of the IPO. 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."
14
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The Company previously acquired the Pre-Offering Companies, acquired the
Offering Acquisition Companies simultaneously with the closing of the IPO and
acquired the Post-Offering Companies after the IPO. The first and largest
acquisition made by the Company was that of Airtron. For accounting purposes,
this transaction was accounted for as a reverse acquisition, as if Airtron
acquired the GroupMAC Parent, because the former shareholders of Airtron owned
a majority of GroupMAC Parent's Common Stock upon consummation of the
transaction. As such, the selected 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 Parent and the Pre-Offering Companies are included in the Financial
Statements from their respective dates of acquisition. The selected historical
financial data set forth below as of and for each of the seven month periods
ended September 30, 1996 and 1997 were derived from the financial statements
of Airtron. In addition to reflecting the transaction discussed above, the
historical balance sheet data as of September 30, 1997 include A-ABC/A-1,
Hallmark and K&N, which were acquired effective June 1, 1997; Charlie's,
Costner, Jarrell and the assets of Way Residential, which were acquired
effective June 30, 1997; Callahan Roach and Sibley which were acquired as of
July 1, 1997; and USA which was acquired as of July 31, 1997. The operations
of all of these companies have been included in the historical income
statement data from their respective dates of acquisition. In the opinion of
the Company's management, the selected historical financial data of the
Company as of and for the seven months ended September 30, 1997 and 1996
include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the seven months ended September 30, 1997 should
not be regarded as indicative of the results that may be expected for the full
year.
The selected pro forma financial data of the Company as of and for the nine
months ended September 30, 1996 and 1997 and the year ended December 31, 1996
are derived from the Unaudited Pro Forma Combined Financial Statements of the
Company that appear elsewhere in this Prospectus. The pro forma financial data
listed below present certain information for the Company, as adjusted for (i)
the effects of the acquisitions of the GroupMAC Companies and (ii) the effects
of certain pro forma adjustments to the historical financial data statements
of the GroupMAC Companies directly related to those acquisitions. The pro
forma as adjusted financial data give effect to the consummation of the IPO
and the application of the net proceeds therefrom, as if they had all occurred
on the first day of each respective period. The 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 date or at the beginning of the period indicated, nor
are they intended to project the Company's results of operations or financial
position for any future date or period.
The data presented below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Unaudited Consolidated Condensed Financial Statements, the Financial
Statements and the related notes thereto and the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere herein.
15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA AS
PRO FORMA SEVEN MONTHS ADJUSTED NINE
AS ADJUSTED(2) ENDED MONTHS ENDED
FISCAL YEAR ENDED FEBRUARY 28 OR 29,(1) YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------ DECEMBER 31, --------------- -----------------
1993 1994 1995 1996 1997 1996 1996 1997(3) 1996(2) 1997(2)
------- ------- ------- ------- ------- -------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $54,552 $66,281 $72,226 $73,765 $81,880 $391,728 $48,826 $70,468 $296,737 $324,109
Gross Profit............ 15,565 18,977 21,766 21,091 23,374 89,978 13,434 19,491 67,912 73,321
Selling, General and
Administrative
Expenses(4)............ 12,648 15,760 20,282(5) 17,615 19,811 61,240(6) 10,003 21,617 46,133 52,480(7)
Goodwill Amortiza-
tion(8)................ -- -- -- -- -- 2,903 -- 204 2,178 2,178
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Income (Loss) from Oper-
ations ................ 2,917 3,217 1,484 3,476 3,563 25,835 3,431 (2,330) 19,601 18,663
Interest Income
(Expense), Net......... 152 127 76 68 89 246 18 (909) 220 390
Other Income, Net....... 114 33 140 246 256 462 22 41 418 701
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Income (Loss) Before In-
come Tax Provision..... 3,183 3,377 1,700 3,790 3,908 26,543 3,471 (3,198) 20,239 19,754
Income Tax Provision.... 1,332 1,300 911 1,651 1,572 11,778 1,396 1,602 8,931 8,744
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Net Income.............. $ 1,851 $ 2,077 $ 789 $ 2,139 $ 2,336 $ 14,765 $ 2,075 $(4,800) $ 11,308 $ 11,010
======= ======= ======= ======= ======= ======== ======= ======= ======== ========
Net Income Per Share.... $ 0.64 $ 0.49 $ 0.48
======== ======== ========
Weighted Average Shares
Outstanding(9)......... 22,930 22,930 22,930
======== ======== ========
OTHER DATA:
EBITDA(10).............. $ 3,074 $ 3,417 $ 1,853 $ 3,960 $ 4,027 $ 29,513 $ 4,592 $(1,555) $ 22,336 $ 21,712
======= ======= ======= ======= ======= ======== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29, SEPTEMBER 30, 1997
--------------------------------------- -----------------------------------
PRO PRO FORMA
1993 1994 1995 1996 1997 ACTUAL(3) FORMA(2) AS ADJUSTED(2)
------- ------- ------- ------- ------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equiva-
lents.................. $ 700 $ 186 $ 650 $ 1,774 $ 4,339 $ 7,801 $ (8,810) $ 1,785
Working Capital......... 3,633 3,473 4,561 3,285 6,337 3,334 (33,909) 19,274
Total Assets............ 12,438 15,221 23,528 28,282 27,153 81,156 220,097 226,446
Total Debt.............. -- -- -- -- 1,290 32,071 48,483 3,178
Preferred Stock......... -- -- -- -- -- 19,271 19,271 --
Shareholders' Equity
(Deficit).............. 3,257 2,175 5,955 6,373 5,990 (4,680) 49,912 153,099
</TABLE>
- -------
(1) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31.
(2) Pro forma financial data give effect to the acquisitions that are
described in the Unaudited Pro Forma Combined Financial Statements, as if
they had all occurred at the beginning of each period presented. Such
results are not necessarily indicative of the results the Company would
have obtained had these events actually occurred on January 1, 1996 for
the Income Statement Data or on September 30, 1997 for the Balance Sheet
Data. Pro forma as adjusted financial data give effect to a reduction in
interest expense as a result of reductions in indebtedness upon
application of a portion of the net proceeds to the Company from the IPO
and the redemption of preferred stock.
(3) The Company's acquisitions of the Pre-Offering Companies and Group
Maintenance America Corp. 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.
(4) Includes non-recurring, non-cash compensation expense of $7.0 million
related to the reverse acquisition of GroupMAC Parent during the nine
months ended September 30, 1997, which is excluded in the Pro Forma As
Adjusted nine months ended September 30, 1997. Reflects a decrease of
$14.1 million, $8.1 million and $8.3 million for the Pro Forma As Adjusted
year ended December 31, 1996, and the Pro Forma As Adjusted nine months
ended September 30, 1996 and 1997, respectively, for pro forma reductions
in salaries, bonuses and benefits to former owners of the GroupMAC
Companies to which they have agreed.
(5) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(6) Includes $0.5 million of expenses for the formation and build-up of
corporate management and infrastructure.
(7) Includes $2.8 million of expenses for the formation and build-up of
corporate management and infrastructure.
(8) 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 the Unaudited Pro Forma Combined
Financial Statements.
(9) Computed on a basis described in Note 4 of the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(10) Represents earnings before interest, taxes, depreciation and amortization
("EBITDA"). Based on its experience in the industry, the Company believes
that EBITDA is an important tool for measuring the performance of
companies in the industry (including potential acquisition targets) in
several areas such as liquidity, operating performance and leverage. In
addition, lenders use EBITDA as a criterion in evaluating companies in
the industry and the Company's financing arrangement contains covenants
in which EBITDA is used as a measure of financial performance. The EBITDA
measure for the Company may not be consistent with similarly titled
measures for other companies. EBITDA should not be considered as an
alternative to operating or net income (as determined in accordance with
GAAP) as an indicator of the Company's performance or to cash flow from
operations (as determined in accordance with GAAP) as a measure of
liquidity. See the comparative historical statements of cash flows
included herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "--Liquidity and Capital
Resources" for discussion of other measures of performance determined in
accordance with GAAP and the Company's sources and applications of cash
flow.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements and related notes of the Company, all financial
statements of the GroupMAC Companies presented herein and Selected Historical
and Pro Forma Financial Data included elsewhere in this Prospectus.
INTRODUCTION
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 53% of the company's pro forma combined 1996 revenues of $391.7
million were derived from new installation services and 47% 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.
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 owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees. Certain owners and certain key employees
of the GroupMAC Companies have agreed to reductions totaling $14.1 million in
fiscal 1996 in their compensation and related benefits in connection with
their acquisition by the Company, which have been reflected as a pro forma
adjustment in the Unaudited Pro Forma Combined Statement of Operations. Such
reductions in salaries, bonuses and benefits are in accordance with the terms
of employment agreements.
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 34.1% for fiscal 1996. The combined gross margin for
the GroupMAC Companies providing primarily maintenance, repair and replacement
services in the commercial markets during fiscal 1996 was 22.8%. On the
average, the GroupMAC Companies primarily engaged in residential new
installation services have lower gross margins. Such companies' combined gross
margin for fiscal 1996 was 21.3%. The three companies primarily providing HVAC
services in the residential new installation market had a gross margin of
28.0%, which was somewhat offset by the companies providing primarily plumbing
service to this market at gross margins ranging from 10.0% to 14.7%. Future
consolidated gross margins may vary depending on, among other things, shifts
in the business mix within the GroupMAC Companies as well as the impact of
future acquisitions on the business mix.
The Company believes that it will, and in certain cases has already begun
to, realize savings from (i) greater volume discounts from suppliers of
components, parts and supplies; (ii) consolidation of insurance and bonding
programs; (iii) other general and administrative expenses such as training and
advertising; and (iv) the Company's ability to borrow at lower interest rates
than most, if not all, of the GroupMAC Companies. Offsetting these savings
will be costs related to the Company's new corporate management, costs
associated with being a public company and integration costs.
The Company recorded a non-recurring, non-cash compensation charge of
$206,000 during the fourth quarter of 1996 relating to certain shares of
Common Stock sold to management, representing the difference between the
amount paid for the shares and the estimated fair value of the shares on the
date of sale. This non-recurring compensation charge is not included in the
Pro Forma Combined Financial Statements.
17
<PAGE>
As a result of the acquisition of the GroupMAC Companies, $116.1 million,
representing the excess of the fair value of the consideration paid over the
fair value of the net assets to be acquired, is recorded as goodwill on the
Company's balance sheet. Goodwill is amortized as a non-cash charge to the
income statement over a 40-year period. The pro forma impact of this
amortization expense, which is substantially non-deductible for tax purposes,
is $2.9 million per year on an after-tax basis.
GROUPMAC AND SUBSIDIARIES (FORMERLY AIRTRON)
Airtron was founded in 1970 and custom designs, installs, maintains and
repairs HVAC systems in new and existing homes and businesses from 14
locations in six states. Airtron's revenues for fiscal 1996 were $81.9 million
and income from operations was $3.6 million. Airtron derived 81% of its 1996
revenues from new installation services and 19% from maintenance, repair and
replacement services. Airtron is headquartered in Dayton, Ohio and has its
facilities in New Port Richey and Clearwater, Florida, Indianapolis, Indiana,
Wichita, Kansas, Louisville and Erlanger, Kentucky, Cincinnati, Cleveland,
Columbus and Dayton, Ohio, and Austin, Dallas, Houston and San Antonio, Texas.
Airtron acquired GroupMAC in May 1997; A-ABC/A-1, Charlie's, Costner,
Hallmark, Jarrell, K&N and the assets of Way Residential in June 1997;
Callahan Roach, Sibley and USA in July 1997; All Service, Arkansas Mechanical,
Central Carolina, Evans, Linford, MacDonald-Miller, Masters, Mechanical, Paul
E. Smith, Southeast Mechanical, Van's, Willis and Yale in November 1997; and
A-1 Mechanical of Lansing, Inc. ("A-1 Mechanical"), Air Conditioning
Engineers, Inc. ("AC Engineers"), Air Conditioning, Plumbing & Heating Service
Co., Inc. ("APH Service"), Chappell Air Conditioning, Inc. ("Chappell"),
Hungerford Mechanical Corporation ("Hungerford"), Mechanical Interiors, Inc.
("Mechanical Interiors"), Sterling Air Conditioning, Inc. ("Sterling"), Valley
Wide Plumbing & Heating, Inc. ("Valley Wide") and Wiegold & Sons, Inc.
("Wiegold") in January 1998.
RESULTS OF OPERATIONS--GROUPMAC AND SUBSIDIARIES (FORMERLY AIRTRON)
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
SEPTEMBER 30,
-----------------------------
FISCAL YEAR ENDED FEBRUARY 28 OR 29, HISTORICAL
------------------------------------------- -----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $72,226 100.0% $73,765 100.0% $81,880 100.0% $48,826 100.0% $70,468 100.0%
Cost of
Services....... 50,460 69.9 52,674 71.4 58,506 71.5 35,392 72.5 50,977 72.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit.... 21,766 30.1 21,091 28.6 23,374 28.5 13,434 27.5 19,491 27.7
Selling, General
and Administrative
Expenses....... 20,282 28.0 17,615 23.9 19,811 24.1 10,003 20.5 21,821 31.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (Loss)
from
Operations..... 1,484 2.1 3,476 4.7 3,563 4.4 3,431 7.0 (2,330) (3.3)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
PRO FORMA
-------------------------------
1996 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Revenues........ $296,737 100.0% $324,109 100.0%
Cost of
Services....... 228,825 77.1 250,788 77.4
-------- ------ -------- ------
Gross Profit.... 67,912 22.9 73,321 22.6
Selling, General
and Administrative
Expenses....... 48,311 16.3 54,658 16.8
-------- ------ -------- ------
Income (Loss)
from
Operations..... 19,601 6.6 18,663 5.8
</TABLE>
Historical Seven Months Ended September 30, 1997 Compared to Historical Seven
Months Ended September 30, 1996
Revenues. Revenues increased $21.7 million, or 44.5%, to $70.5 million for
the seven months ended September 30, 1997 from $48.8 million for the seven
months ended September 30, 1996. The majority of the increase was due to
revenues associated with the Pre-Offering Companies. The acquisitions of the
Pre-Offering Companies and GroupMAC Parent have been accounted for as
purchases and, accordingly, the operations of these acquired businesses are
included in the operating results of the Company from the effective date of
their respective acquisition.
Gross Profit. Gross profit increased $6.1 million, or 45.5%, to $19.5
million for the seven months ended September 30, 1997 from $13.4 million for
the seven months ended September 30, 1996. The majority of the increase was
due to gross profit associated with the Pre-Offering Companies. The
acquisitions of the Pre-Offering Companies and GroupMAC Parent have been
accounted for as purchases and, accordingly, the operations of these acquired
businesses are included in the operating results of the Company from the
effective date of their respective acquisition.
Income (Loss) from Operations. Operating income decreased $5.7 million, or
167.6%, to a loss of $2.3 million for the seven months ended September 30,
1997 from income of $3.4 million for the seven months ended September 30,
1996. The decrease was due to a non-recurring, non-cash compensation expense
of $7.0 million related
18
<PAGE>
to the reverse acquisition of GroupMAC Parent, partially offset by operating
income associated with the Pre-Offering Companies. The acquisitions of the
Pre-Offering Companies and GroupMAC Parent have been accounted for as
purchases and, accordingly, the operations of these acquired businesses are
included in the operating results of the Company from the effective date of
their respective acquisition.
Pro Forma Nine Months Ended September 30, 1997 Compared to Pro Forma Nine
Months Ended September 30, 1996
Revenues. Pro forma revenues increased $27.4 million, or 9.2%, to $324.1
million for the nine months ended September 30, 1997 from $296.7 million for
the nine months ended September 30, 1996. The increase in pro forma revenues
was primarily volume driven and was attributable to continuing strength in the
Seattle and Portland commercial markets including a $20.0 million contract
with a large software company substantially completed during 1997, increased
market penetration at Airtron's Columbus, Dayton, Austin, and Northern
Kentucky locations, obtaining a new supermarket chain as a client and
attaining increased pricing in the California commercial markets, incremental
construction business from existing customers and further market penetration
in the commercial service sector in Minnesota, incremental residential new
installation business from existing customers in the Washington, D.C. area, an
increase in construction revenues in the Dallas market and an increase in
commercial service revenues in the Virginia and North Carolina markets
including a $7.5 million contract with a large tobacco company.
Gross Profit. Pro forma gross profit increased $5.4 million, or 8.0%, to
$73.3 million for the nine months ended September 30, 1997 from $67.9 million
for the nine months ended September 30, 1996. Pro forma gross profit margin
decreased to 22.6% for the nine month period ended September 30, 1997 from
22.9% for the nine months ended September 30, 1996. The decrease in pro forma
gross profit margin was primarily attributable to an increase in construction
revenues in the Dallas market that traditionally produce lower margins. This
decrease was partially offset with lower material costs at Airtron, an
increase in higher margin special project and tenant improvement commercial
work in the Pacific Northwest, a higher mix of fire sprinkler installations in
the Washington, D.C. market that typically produce higher margins and overall
pricing increases experienced in California.
Income from Operations. Pro forma operating income decreased $0.9 million,
or 4.6%, to $18.7 million for the nine months ended September 30, 1997 from
$19.6 million for the nine months ended September 30, 1996. This decrease was
attributable to $2.8 million in corporate expenses representing the formation
of the corporate management team and infrastructure necessary to execute the
Company's operating and acquisition strategies. As the Company was formed in
October 1996, no such expenses were incurred during the corresponding period
of the prior year. Because of the $2.8 million in corporate expenses
highlighted above, operating income margin decreased to 5.8% for the nine
months ended September 30, 1997 from 6.6% from the nine month period ended
September 30, 1996.
Year Ended February 28, 1997 Compared to Year Ended February 29, 1996
Revenues. Revenues increased $8.1 million, or 11.0%, from $73.8 million for
the year ended February 29, 1996 to $81.9 million for the year ended February
28, 1997. 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%, from $21.1
million for the year ended February 29, 1996 to $23.4 million for the year
ended February 28, 1997. Gross margin remained relatively constant at 28.6%
and 28.5% for the years ending February 29, 1996 and February 28, 1997,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.2 million, or 12.5%, from $17.6 million
for the year ended February 29, 1996 to $19.8 million for the year ended
February 28, 1997. 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 23.9% and 24.1% for the years ending February 29, 1996
and February 28, 1997, respectively.
19
<PAGE>
Year Ended February 29, 1996 Compared to Year Ended February 28, 1995
Revenues. Revenues increased $1.6 million, or 2.2%, from $72.2 million for
the year ended February 28, 1995 to $73.8 million for the year ended February
29, 1996. The increase in revenues was attributable to increased sales volume
from new residential construction through the capture of additional market
share in the Indianapolis, Indiana and Dallas, Texas markets.
Gross Profit. Gross profit decreased $675,000, or 3.1%, from $21.8 million
for the year ended February 28, 1995 to $21.1 million for the year ended
February 29, 1996. Gross margin declined from 30.1% to 28.6%. The decrease in
gross profits was primarily attributable to higher material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $2.7 million, or 13.3%, from $20.3 million
for the year ended February 28, 1995 to $17.6 million for the year ended
February 29, 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 28.0% to 23.9% due to a significantly
higher non-cash compensation charge in fiscal 1995 to accrue for the change in
market value of stock appreciation rights and warrants.
SEASONAL AND CYCLICAL NATURE OF BUSINESS
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. See "Risk Factors--Exposure to
Downturns in Housing Starts or New Commercial Construction" and "--Fluctuation
in Quarterly Operating Results."
INFLATION
Inflation did not have a significant effect on the results of operations of
the GroupMAC Companies for 1994, 1995, 1996 or the nine months ended September
30, 1997.
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.
20
<PAGE>
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $39,534 100.0% $45,508 100.0% $66,059 100.0% $52,184 100.0% $54,560 100.0%
Cost of Services........ 32,256 81.6 36,927 81.1 56,373 85.3 45,192 86.6 46,400 85.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 7,278 18.4 8,581 18.9 9,686 14.7 6,992 13.4 8,160 15.0
Selling, General and
Administrative
Expenses............... 6,088 15.4 7,338 16.2 7,632 11.6 5,567 10.7 6,239 11.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,190 3.0 1,243 2.7 2,054 3.1 1,425 2.7 1,921 3.5
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased $2.4 million, or 4.6%, from $52.2 million for
the nine months ended September 30, 1996 to $54.6 million for the nine months
ended September 30, 1997. The increase in revenues was attributable to
continuing strength in the company's Northwest commercial markets, principally
Seattle, Washington and Portland, Oregon, including a $20 million contract
with a large software company to be completed in 1997, an increase in revenues
from the company's Special Projects and Tenant Improvement operations, and an
increase in revenues from the company's Commercial Service operations.
Gross Profit. Gross Profit increased $1.2 million, or 17.1%, from $7.0
million for the nine months ended September 30, 1996 to $8.2 million for the
nine months ended September 30, 1997. Gross margin increased from 13.4% for
the first nine months of 1996 to 15.0% for the same period of 1997. The gross
profit increase was attributable principally to higher volume and realized
gross margins in the MacDonald-Miller's Special Projects and Tenant
Improvement operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 10.7%, from $5.6 million
for the nine months ended September 30, 1996 to $6.2 million for the nine
months ended September 30, 1997. Both the dollar and percentage of revenue
changes were attributable to the higher revenue levels in 1997 compared to
1996. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.7% for the nine months of 1996 to 11.5%
for the same period of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $20.6 million, or 45.3%, from $45.5 million for
the year ended December 31, 1995 to $66.1 million for the year ended December
31, 1996. The increase in revenues was attributable to a 15%, or $1.6 million,
increase in revenues from Service and Maintenance operations, and a 23%, or
$2.0 million, increase in revenues from the company's Special Projects and
Tenant Improvement operations. The $17 million balance of the increase was
attributable to contracted design and build projects, HVAC system retrofits
and remodels, lighting energy retrofits and technical services, together
representing a revenue increase of 65.4% over 1995. This increase was
primarily volume driven and directly related to the company's effort to
increase its market presence in the Seattle, Washington and Portland, Oregon
metropolitan areas, fueled by continued strength of commercial activity in the
Northwest.
Gross Profit. Gross profit increased $1.1 million, or 12.8%, from $8.6
million for the year ended December 31, 1995 to $9.7 million for the year
ended December 31, 1996. Gross margin decreased from 18.9% to 14.7% due to the
acceptance of certain lower margin projects and increased direct costs related
to the rapid revenue growth experienced in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 4.1%, from $7.3 million for
the year ended December 31, 1995 to $7.6 million for the year ended December
31, 1996. The increase in these expenses was directly attributable to
incremental costs incurred to
21
<PAGE>
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>
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.
22
<PAGE>
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.
K&N
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
23
<PAGE>
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 (formerly Airtron)".
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $462,000, or 3.9%, from $11.9 million for the
six months ended June 30, 1996 to $12.4 million for the six months ended June
30, 1997. The increase in revenues was attributable to a higher volume of new
home construction in the Austin and Las Vegas markets.
Gross Profit. Gross profit increased $233,000, or 15.5%, from $1.5 million
for the six months ended June 30, 1996 to $1.7 million for the six months
ended June 30, 1997. Gross margin increased from 12.3% to 13.7% due to
increases in operational efficiency.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $256,000, or 19.7%, from $1.3 million for
the six months ended June 30, 1996 to $1.6 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to additional owners' compensation expense. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.4% to 13.0% for 1996 and 1997, respectively.
Year Ended March 31, 1997 Compared to Unaudited Year Ended March 31, 1996
Revenues. Revenues increased $1.6 million, or 7.0%, from $22.7 million for
the year ended March 31, 1996 to $24.3 million for the year ended March 31,
1997. The increase in revenues was primarily volume driven and attributable to
the expansion of the Company's customer base to include several new home
builders in the Austin and Las Vegas markets.
Gross Profit. Gross profit increased $1.2 million, or 50.0%, from $2.4
million for the year ended March 31, 1996 to $3.6 million for the year ended
March 31, 1997. The increase was due to a decline in production labor and
material costs for start ups in Austin, Texas and Las Vegas, Nevada, and the
savings from the closing during fiscal 1996 of an unsuccessful operation in
Palmdale, California. Gross margin increased from 10.4% to 14.7% for the years
ending March 31, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $160,000, or 6.4%, from $2.5 million for the
year ended March 31, 1996 to $2.6 million for the year ended
24
<PAGE>
March 31, 1997. As a percentage or revenues, selling, general and
administrative expenses remained relatively constant at 10.9% and 10.8% for
the years ending March 31, 1996 and 1997, respectively.
Unaudited Year Ended March 31, 1996 Compared to Unaudited Year Ended March
31, 1995
Revenues. Revenues increased $1.2 million, or 5.6%, from $21.5 million for
the year ended March 31, 1995 to $22.7 million for the year ended March 31,
1996. The increase in revenues was primarily volume driven and attributable to
the new operating facilities in Austin, Texas and Las Vegas, Nevada and a
higher level of new home construction in the Dallas and Fort Worth
metropolitan area.
Gross Profit. Gross Profit decreased $256,000, or 9.8%, from $2.6 million
for the year ended March 31, 1995 to $2.4 million for the year ended March 31,
1996. Gross margin decreased from 12.2% to 10.4% for the years ended March 31,
1995 and 1996, respectively. The gross margin decline was primarily
attributable to aggressive pricing and start-up labor costs for the two new
divisions in Austin, Texas and Las Vegas, Nevada.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $203,000, or 8.8% from $2.3 million for the
year ended March 31, 1995 to $2.5 million for the year ended March 31, 1996.
The increase in selling, general and administrative expenses was primarily
attributable to incremental costs relating to the closing of the Palmdale,
California operation and the implementation of a new management information
system. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.6% to 10.9%.
OTHER RESIDENTIAL SERVICE COMPANIES
Pre-Offering Companies
A-ABC and A-1, 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 and A-1 are headquartered in Dallas, Texas.
Callahan Roach and its affiliates provide training and consulting services,
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 Colorado
Springs, Colorado and has facilities in Atlanta, Georgia, Dublin, Ohio and
Colorado Springs, Colorado.
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 was founded in 1951 and provides HVAC maintenance, repair and
replacement services to residential customers in the Houston and San Antonio,
Texas areas. 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.
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.
25
<PAGE>
Way Residential 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.
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 have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the IPO.
26
<PAGE>
(2) The operating results of the Other Residential Service Companies,
including Hallmark and A-ABC/A-1, represent six months of activity, even
though Hallmark and A-ABC/A-1 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 (formerly Airtron)".
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Month
Ended June 30, 1996
Revenues. Revenues increased $1.6 million, or 6.9%, from $23.3 million for
the six months ended June 30, 1996 to $24.9 million for the six months ended
June 30, 1997. The increase in revenues was primarily volume driven and
attributable to expansion of Central Carolina's commercial service and
replacement business, an increase in replacement sales at Willis and the
occurrence of a significant light commercial job at Jarrell.
Gross Profit. Gross profit increased $1.6 million, or 18.8%, from $8.5
million for the six months ended June 30, 1996 to $10.1 million for the six
months ended June 30, 1997. Gross margin increased from 36.5% to 40.5% from
the six month period ended June 30, 1996 to the corresponding period in 1997.
The increase in gross margin was attributable to higher margins at Central
Carolina from operational efficiencies and from increased higher margin
replacement sales at Willis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $195,000, or 2.4%, from $8.1 million for the
six months ended June 30, 1996 to $8.3 million for the six months ended June
30, 1997. As a percentage of revenues, selling, general and administrative
expenses decreased from 34.7% to 33.2% for the six month period ended June 30,
1996 compared to the corresponding period in 1997.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $5.8 million, or 13.4%, from $43.2 million in
fiscal 1995 to $49.0 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to the continued internal expansion
of HVAC services to an appliance company acquired by A-ABC in late 1994, an
acquisition made during early 1996 by Hallmark of an operation in San Antonio
and an aggressive advertising campaign at Costner. Also, revenues increased
significantly at Van's and Willis due to a higher level of replacement sales.
Gross Profit. Gross profit increased $2.6 million, or 16.6%, from $15.7
million in fiscal 1995 to $18.3 million in fiscal 1996. The increase in gross
profit was attributable to the continued internal expansion of HVAC services
at A-1, which was acquired by A-ABC in 1994, an acquisition by Hallmark of a
high margin operation in San Antonio and revenue increases at Costner and
other higher margin companies. Gross margin increased from 36.3% to 37.4% for
fiscal 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 16.2%, from $14.2 million
in fiscal 1995 to $16.5 million in fiscal 1996. The increase in selling,
general and administrative expenses was mainly due to the acquisition of an
operation in San Antonio by Hallmark during the period, a higher level of
spending on advertising at Costner and an increase in owner compensation among
all of the residential service companies of $116,000. As a percentage of
revenues, selling, general and administrative expenses increased from 32.9% to
33.7% for fiscal 1995 and 1996, respectively.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $4.7 million, or 12.2%, from $38.5 million in
fiscal 1994 to $43.2 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to incremental revenues from an
acquisition made by A-ABC in late 1994, the expansion of the customer base at
Central Carolina to include the commercial sector and an increased emphasis on
the selling of service agreements and a higher level of replacement revenues
at Van's.
27
<PAGE>
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's 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.
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 Lakewood, 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 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 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.
28
<PAGE>
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 have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the IPO.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries (formerly Airtron)".
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues declined $590,000, or 2.4%, from $24.5 million for the
six months ended June 30, 1996 to $23.9 million for the six months ended June
30, 1997. The decrease in revenues was primarily volume driven and
attributable to a $2.0 million decline in revenues at Sibley which resulted
from an internal decision to discontinue a large, low margin customer
relationship. Such decline was offset by growth at Linford from incremental
service agreements and at Mechanical Services from incremental "design and
build" project work.
Gross Profit. Gross profit declined $192,000, or 2.9%, from $6.9 million for
the six months ended June 30, 1996 to $6.7 million for the six months ended
June 30, 1997. The decline in gross profit primarily resulted from the
discontinuance of the customer relationship discussed above. Gross margin
remained consistent at 28.1% and 28.0% for the six month periods ended June
30, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $494,000, or 10.6%, from $4.7 million for
the six months ended June 30, 1996 to $5.2 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to incremental owners' compensation and additional
personnel to support the growth in sales at Linford and an intentional shift
in business mix at Yale toward higher margin service contract work. As a
percentage of
29
<PAGE>
revenues, selling, general and administrative expenses increased from 19.2% to
21.7% over the six month periods ended June 30, 1996 and 1997, respectively.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $8.0 million, or 20.8%, from $38.5 million in
fiscal 1995 to $46.5 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to incremental service agreements at
Linford, incremental design and build projects at Mechanical Services and an
increase in maintenance, repair and replacement sales at Southeast Mechanical
and Sibley Services.
Gross Profit. Gross profit increased $1.8 million, or 16.5%, from $10.9
million in fiscal 1995 to $12.7 million in fiscal 1996. The largest factor
impacting the increase in gross profit was volume growth in revenues at
Linford, although the growth was at slightly lower margins. Additionally,
significant increases in gross profit were due to rapid service revenue growth
combined with margin expansion at All Service and Yale. Gross margin decreased
slightly from 28.2% to 27.2% between fiscal 1995 and fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 14.3%, from $9.1 million in
fiscal 1995 to $10.4 million in fiscal 1996. The overall increase in selling,
general and administrative expenses was due to the expansion and relocation of
facilities as well as an increase in administrative and sales personnel at
Linford. As a percentage of revenues, selling, general and administrative
expenses decreased slightly from 23.7% to 22.3% in fiscal 1996.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $5.3 million, or 16.0%, from $33.2 million in
fiscal 1994 to $38.5 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to an increase in design and build
jobs at Yale and Mechanical and an increase in service agreement volumes at
Linford.
Gross Profit. Gross profit increased $1.5 million, or 16.0%, from $9.4
million in fiscal 1994 to $10.9 million in fiscal 1995. The increase in gross
profit was primarily attributable to a $2.0 million increase in revenues at
Linford at slightly higher margins, volume increases at Yale and Mechanical
and gross margin expansion at Charlie's and Arkansas Mechanical. As a
percentage of revenues, gross margin declined slightly from 28.4% in fiscal
1994 to 28.2% in fiscal 1995.
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the operations and growth of the GroupMAC Companies 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 respective GroupMAC Companies, as well
as personal guarantees of the respective owners. With respect to the Pre-
Offering Companies, a substantial portion of their existing indebtedness was
repaid and refinanced through the Company's borrowing facility immediately
following the closing of each of the transactions. With respect to the
Offering Acquisition Companies, the Company used $12.5 million of the net
proceeds of the IPO to repay debt assumed and certain obligations resulting
from the respective acquisitions. With respect to the Post-Offering Companies,
the Company borrowed $11.1 million under the Bank Credit Agreement with the
remaining portion of the cash consideration funded from the net proceeds of
the IPO. The Company may also utilize the Bank Credit Agreement to pay
additional amounts, if any, due to the former owners of the Offering
Acquisition Companies and the Post-Offering Companies under working capital
adjustments to the purchase prices.
30
<PAGE>
The Company has entered into the Bank Credit Agreement with an initial
borrowing capacity of $75 million which replaced a $35 million credit
agreement (the "Original Credit Agreement"). Under the Bank 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
Bank Credit Agreement) and (iv) a minimum Consolidated Net Worth (as defined
in the Bank Credit Agreement). The Company is in compliance with such
covenants.
Prior to the closing of the IPO, certain of the Offering Acquisition
Companies that were S corporations distributed cash and certain non-operating
assets to their shareholders in an amount not in excess of the balances of
their respective accumulated adjustment accounts. In addition, 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,
contingent upon the occurrence of future events. The Company's best estimate
of this amount is approximately $5 million, payable in a combination of cash
and shares of Common Stock.
For the seven months ended September 30, 1996 and 1997, the Company
generated $0.1 million and $5.2 million in cash from operating activities,
respectively. For the seven months ended September 30, 1996, net income and
depreciation generated $2.1 million and changes in assets and liability
accounts utilized a net $2.0 million. During the seven months ended September
30, 1997, net income, depreciation, deferred taxes and non cash compensation
generated $2.9 million and changes in asset and liability accounts generated a
net $2.2 million.
Cash used in investing activities by the Company was $34,000 and $10.6
million for the seven months ended September 30, 1996 and 1997, respectively.
The cash expended during the seven months ended September 30, 1997 consisted
of $8.9 million for acquisitions and $1.5 million for capital expenditures.
During the seven months ended September 30, 1997, the Company generated $8.9
million from its financing activities. These activities principally consisted
of proceeds of long-term debt of $32.5 million and issuances of common stock
of $6.2 million, less distributions to shareholders of $20.4 million, payments
of long-term debt of $5.1 million and payment of deferred offering costs of
$4.2 million.
The Company intends to aggressively pursue acquisition opportunities and to
fund future acquisitions through a combination of operating cash flow,
borrowings under the Bank Credit Agreement and the issuance of Common Stock.
31
<PAGE>
BUSINESS
GENERAL
The Company was founded in 1996 to create the leading nationwide provider of
heating, ventilation and air conditioning, plumbing and electrical services to
residential and commercial customers. Since inception, the Company has
acquired 33 companies totaling $391.7 million in combined 1996 revenues. Nine
of the companies were acquired after the IPO, 13 of the companies were
acquired on November 13, 1997 concurrently with the closing of the IPO and 11
of the companies had been acquired previously. The Company believes it is one
of the largest diversified providers of HVAC, plumbing and electrical services
in the United States.
The Company offers a comprehensive range of services to residential and
commercial customers in both the new installation and the maintenance, repair
and replacement segments of the HVAC, plumbing and electrical service
industries. The Company's services include installing and maintaining,
repairing and replacing central air conditioning systems, furnaces, heat pumps
and plumbing and electrical systems. Through Callahan Roach and USA, the
Company also provides consulting services and sells products to over 1,300
independent HVAC and plumbing service companies. The Company believes that its
broad service offering and geographic diversity provide several advantages,
including the ability to offer its commercial and residential customers a
single source for a range of services, to consolidate purchasing power with
vendors, to capture business from customers that operate on a regional and
national basis, to mitigate the effects of seasonality and to balance local or
regional economic cycles.
The Company believes that it can maximize its long-term growth and
profitability by participating in both the new installation and the
maintenance, repair and replacement segments of the HVAC, plumbing and
electrical service industries. The new installation business is generally
characterized by higher volume sales to homebuilders, commercial developers
and other large customers. The maintenance, repair and replacement business
generally produces higher margins from services provided to a broader customer
base. The Company intends to focus on growing its maintenance, repair and
replacement business, to capitalize on the higher margins and the more
predictable nature of revenues associated with this segment and to target a
revenue mix of approximately 60% maintenance, repair and replacement and 40%
new installation over time. The Company derives considerable profits and
strategic value from its new installation business, as this segment generates
a database of potential customers for maintenance, repair and replacement
services. The higher volumes associated with consolidating a number of new
installation firms provide purchasing economies of scale that increase the
competitiveness of both the new installation and the maintenance, repair and
replacement segments.
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, four publicly traded
consolidators have emerged in these markets. The combined revenues of these
consolidators and the Company represent less than 2% of the revenues for the
HVAC, plumbing and electrical markets.
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 (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
32
<PAGE>
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 markets, 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 segment and the maintenance, repair and replacement
segment. The new installation segment 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 segment includes the maintenance, repair, replacement and
reconfiguration of existing systems in residential homes and commercial
buildings. In the HVAC industry, the new installation segment represents
approximately 34% of industry revenues, while the maintenance, repair and
replacement segment 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.
OPERATING STRATEGY
The goal of the Company's operating strategy is to increase the revenues and
profitability of the GroupMAC Companies and subsequently acquired businesses,
while maintaining the highest level of service to its customers. The key
elements of the Company's operating strategy are as follows:
ACHIEVE OPERATING EFFICIENCIES. The Company intends to pursue significant
cost savings through the consolidation of purchasing power and to obtain
additional operating efficiencies through the implementation of a variety
of "best practices." It expects to achieve substantial purchasing economies
in the areas of equipment and supplies, service vehicles (including fuel
and maintenance), insurance and benefits, marketing and advertising, long
distance services and a variety of professional services. Callahan Roach
and USA, leading providers of integration, training and business consulting
services to the HVAC industry, will assist the Company in identifying and
refining its best practices and implementing such practices across the
GroupMAC Companies and future acquisitions through a systematic program of
training and consulting. In addition, the Company has established a Council
of Presidents consisting of the key operating management of acquired
companies that meets regularly to facilitate the sharing of operating
practices, synergies and strategies across the Company.
OPERATE ON A DECENTRALIZED BASIS. The Company intends to retain the
managers of the businesses it acquires, allow them to maintain substantial
responsibility for the day-to-day operations, profitability and growth of
those businesses and provide them with incentives based upon performance.
This will allow the Company to capitalize on the local market knowledge and
customer relationships at each acquired company. The Company believes that
the operating autonomy provided by this decentralized structure, together
with the implementation of reporting systems and financial controls at the
corporate level, will give it a competitive advantage in growing market
share and in attracting additional acquisition candidates.
ATTRACT, DEVELOP AND RETAIN HIGH QUALITY TECHNICIANS. The Company
believes operational success in this industry results from attracting and
retaining a highly trained and motivated workforce in order to deliver
consistently high-quality service at a fair price and to reduce re-work and
other costs. The Company's strategy is to become the employer of choice in
its industry by offering to its employees and
33
<PAGE>
managers a market-leading combination of training, compensation and
employee benefits, career development opportunities and an equity
participation in the Company's success. Over time, the Company intends to
develop an internal technical training program to enhance the skill level
of its employees.
ESTABLISH NATIONAL MARKET COVERAGE. The Company intends to expand its
existing relationships with home builders, commercial real estate
developers and property managers and other enterprises by offering
comprehensive HVAC, plumbing and electrical new installation and
maintenance, repair and replacement services on a national and regional
basis. The Company believes that significant demand exists from these
customers to utilize the services of a single company capable of providing
these services and that the GroupMAC Companies' many geographic locations
allow it to respond to this demand. Many of the GroupMAC Companies already
provide local or regional coverage to companies with nationwide operations.
In addition, the Company plans to utilize the customer bases of Callahan
Roach and USA, which are nationwide in scope, to establish an affiliate
network to market services on a national basis.
The Company began to implement its operating strategy following its
acquisition of the Pre-Offering Companies and has already entered into
negotiations with vendors in the areas of equipment and supplies, service
vehicles, casualty insurance, employee benefits, fuel supply arrangements,
Yellow Pages advertising, business forms and uniforms. Callahan Roach
personnel have conducted field visits with the GroupMAC Companies to assess
each company's operating strengths and weaknesses and to identify operating
best practices for use throughout the organization and are currently
developing customized training programs for the management and staff personnel
of these companies. Based on a study of the GroupMAC Companies' existing
benefit plans, the Company intends to implement a program that will preserve
or enhance the overall level of benefits while resulting in projected cost
savings to the Company. The Company issued options to purchase approximately
1.9 million shares to eligible employees. In preparation for creation of a
national account marketing program, the Company is conducting a study of the
national and regional companies currently serviced by one or more of the
GroupMAC Companies.
ACQUISITION STRATEGY
The Company's acquisition program is designed to enhance its position in
existing markets and to expand its operations into new markets. The key
elements of the Company's acquisition strategy are as follows:
ACQUIRE COMPANIES ACROSS MULTIPLE MARKET SEGMENTS. The Company intends to
acquire profitable businesses with well-developed market positions that are
engaged in the new installation and the maintenance, repair and replacement
segments of the HVAC, plumbing and electrical service industries in order
to develop synergies from the combined operations. For example, the Company
believes that new installation companies can be successfully teamed with
companies providing maintenance, repair and replacement services in the
same geographical markets, providing the latter with a new source of
service customers (purchasers of new homes) before these customers have a
chance to develop service relationships with other competitors. Likewise,
the combination of two or more companies providing complementary services
within a geographical market will enable the Company to offer to the
combined customer bases a wider range of services from a single supplier.
EXPAND GEOGRAPHIC PRESENCE. In new geographic markets, the Company will
target for acquisition one or more of the leading local or regional
companies in each market segment. Important criteria for these acquisition
candidates will be a reputation as a high quality provider and superior
operational management and systems. Once the Company has entered a market
it will seek to acquire other high quality service providers operating
within the region in order to expand its market penetration and the range
of services it offers in that market. The Company will also pursue "tuck
in" acquisitions of smaller companies whose customer bases, operating
assets and service personnel can be incorporated into the Company's
existing operations without a significant increase in selling, general and
administrative costs.
34
<PAGE>
RETAIN AND PROVIDE INCENTIVES TO EXISTING MANAGEMENT. The Company will
seek acquisitions of successful companies whose senior managers will remain
as employees of the Company and continue to operate their respective
businesses on a local level. The Company intends to motivate these managers
and align their interests with those of the Company by utilizing Common
Stock as a significant portion of the purchase consideration, by issuing to
them stock options and by implementing a cash bonus plan that rewards
managers and key employees for improvement in after-tax earnings that
exceeds the cost of capital employed.
LEVERAGE INDUSTRY REPUTATION AND CONTACTS. The Company intends to utilize
existing industry relationships established by its acquired companies and
Company management, as well as the industry-wide contacts of Callahan Roach
and USA, to develop a broad base of potential acquisitions. The Company
believes that its ability to acquire additional high quality companies will
be influenced by the level of success enjoyed by companies that have
previously joined with the Company, as well as the continuing efforts of
the Company and its operating subsidiaries to maintain a high profile in
the industry. The Company intends to remain actively involved in industry
organizations on the local and national level, working with independent
companies to support issues of interest to the Company and its operating
subsidiaries.
The Company began implementing the above strategies with the acquisition of
Airtron in May 1997 and has since acquired other companies providing both new
installation and maintenance, repair and replacement services in the
residential and commercial HVAC, plumbing and electrical markets. The Company
has operations in 43 cities in 22 states with combined 1996 revenues of $391.7
million.
BEST PRACTICES
The Company believes that one of the most significant competitive advantages
of a consolidation company is its ability to identify the best marketing,
sales and operating practices within individual acquired companies and to
spread those best practices across all of its operating locations. The key to
successful implementation is having a disciplined approach to identifying the
desired practices, developing the procedures and related training to ensure
these practices are understood and implemented properly in the field
locations, and measuring systematically the operating performance of the
companies against benchmarks or standards to ensure that the practices are
effective.
The Company believes it enjoys a distinct competitive advantage in this area
resulting from its purchase of Callahan Roach and USA in July 1997. These two
organizations provide the Company with professional level capabilities in the
areas of integration, training and management development for both the
residential and commercial segments of its business. The Company is utilizing
the expertise of these two industry-recognized GroupMAC Companies in
developing, implementing and monitoring its best practices. Both of these
organizations have extensive industry-wide experience from which to draw best
practices, in addition to the ideas and procedures that come from existing
GroupMAC Companies and future acquisitions. The Company believes that this
expertise, and the exploitation of best practices in this manner, will enable
the Company to accelerate the integration of acquired companies.
Callahan Roach serves HVAC and plumbing contractors across the United States
in such areas as advertising, marketing, business valuation, pricing
strategies, management information services, acquisition planning and
integration and general consulting. It provides the Customer Assurance
Pricing(TM) models to over 1,300 HVAC and plumbing service companies. Callahan
Roach has been an industry leader in the development and commercialization of
this flat rate pricing best practice known as Customer Assurance Pricing(TM),
successfully marketing it to over 2,800 independent contractors across the
United States. Callahan Roach has developed and is currently field testing a
flat rate pricing software product (derived from its manual Customer Assurance
Pricing(TM) systems) that will run on hand-held computers for use by sales and
service personnel in the field. USA provides training and other products and
services to a network of over 90 independent service companies focused on
maintenance, repair and replacement of commercial HVAC systems. The Company
believes that its
35
<PAGE>
acquisition of USA adds significant commercial HVAC expertise to complement
the residential HVAC and plumbing expertise provided by Callahan Roach.
In order to ensure that best practices are shared among each of the
individual GroupMAC Companies, the Company has created a Council of Presidents
composed of the president or executives of the GroupMAC Companies. The Council
will meet on a regular basis, as well as divide into smaller working
committees, to share operating practices and develop additional means to
improve the overall performance of the Company and the individual GroupMAC
Companies. Best practices that result from the work of the Council will be
included in the training and monitoring programs developed and disseminated
through Callahan Roach and USA.
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.
The following tables shows the approximate percentages of the revenues of
the GroupMAC Companies during fiscal 1996 represented by new installation
services and maintenance, repair and replacement services, respectively.
<TABLE>
<CAPTION>
ELECTRICAL
HVAC PLUMBING & OTHER TOTAL
---- -------- ---------- -----
<S> <C> <C> <C> <C>
Residential Services:
New Installation............................... 21% 12% --% 33%
Maintenance, Repair and Replacement............ 14% 1% 2% 17%
--- --- --- ---
Total Residential............................ 35% 13% 2% 50%
Commercial Services:
New Installation............................... 17% 3% --% 20%
Maintenance, Repair and Replacement............ 25% 4% 1% 30%
--- --- --- ---
Total Commercial............................. 42% 7% 1% 50%
</TABLE>
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. See "--Operating Strategy" and "--Acquisition Strategy."
36
<PAGE>
FIELD OPERATIONS
The Company's field operations are conducted out of the individual operating
locations of the various GroupMAC Companies. Typically, the GroupMAC Companies
specialize in one of the technical disciplines in either the residential or
commercial market. However, a few of the GroupMAC Companies 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). In
addition, six of the GroupMAC Companies offer services in more than one
technical discipline. The Company permits the GroupMAC Companies 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 control) is coordinated in these
same phases. The Company has established a policy to review and approve any
new installation project by a GroupMAC Company which exceeds 5% of the
projected annual revenue of that GroupMAC Company.
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 GroupMAC Companies 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-
37
<PAGE>
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 payments
from the customer. Service technicians of GroupMAC Companies that are existing
clients of Callahan Roach carry a Customer Assurance Pricing(TM) manual 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 all of the GroupMAC Companies, including the
following:
Purchasing
The Company believes it will be able to structure volume purchasing
arrangements or otherwise achieve purchasing economies of scale in 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 or suppliers of the products sold by the
Company include Carrier Air Conditioning, Inc., The Trane Company, Lennox
Industries, Inc., Goodman Manufacturing Corp. and Ferguson Enterprises, Inc.
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 GroupMAC Companies. The Company will, however, cause each
of the GroupMAC Companies to adopt a uniform chart of accounts and to
standardize their budgeting process and reports so that results among the
GroupMAC Companies more easily can be compared and integrated. In addition,
where a GroupMAC Company or a future acquired company 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
GroupMAC Companies 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
38
<PAGE>
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 acquired
company'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 within the GroupMAC Companies.
Advertising and Marketing
The Company intends to capitalize on cross-marketing and business
development opportunities that it believes will be available to the Company as
a national provider of comprehensive residential and commercial HVAC, plumbing
and electrical services. The Company will leverage the diverse technical and
marketing strengths of individual GroupMAC Companies to expand the overall
penetration of services within those local markets in which two or more
GroupMAC Companies are located. Eventually, the Company intends to offer
comprehensive services from all of its operating locations.
The Company uses both general advertising and a direct sales force to market
their residential and commercial services (both new installation and repair
services) in their respective geographic markets. The Company is developing a
marketing and advertising program to establish a national brand identity while
preserving and enhancing the value of the unique and long-standing trade names
and customer identification enjoyed by the individual GroupMAC Companies. The
GroupMAC logo and identifying marks will be featured on service trucks,
marketing materials and advertising of the GroupMAC Companies, but in a manner
that does not detract from the local brand. The Company proposes to develop
(initially for the GroupMAC Companies, but ultimately for delivery to the
market 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.
PROPERTIES AND VEHICLES
The Company operates a fleet of approximately 1,900 owned or leased service
trucks, vans and support vehicles. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the
Company's current operations.
The Company has a total of 83 facilities, one of which is owned and 82 of
which are under leases with remaining terms ranging from four months to 15
years from the date hereof on terms the Company believes to be commercially
reasonable. A majority of the Company's facilities are leased from certain
former shareholders (or entities controlled by certain former shareholders) of
the GroupMAC Companies. None of these leases expire prior to 2000. The
provisions of the leases are on terms the Company believes to be at least as
favorable to the Company as could have been negotiated by the Company with
unaffiliated third parties. The Company believes the owned and leased
facilities are adequate to serve its current level of operations.
The Company believes that it has generally satisfactory title to the
property owned by it, subject to the liens for current taxes, liens incident
to minor encumbrances and easements and restrictions that do not materially
detract from the value of such property or the interests therein or the use of
such property in its business.
39
<PAGE>
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 a stock option plan for all employees. Service quality
should be enhanced by the implementation and continuous reinforcement of best
practices across the GroupMAC Companies. 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 is 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 service areas. Certain of the Company's competitors and
potential competitors have greater financial resources than the Company to
finance residential services acquisition and development opportunities, to pay
higher prices for the same opportunities or to develop and support their own
residential service operations if they decide to enter the field.
EMPLOYEES
The Company has approximately 4,000 full and part-time employees,
approximately 2,600 of which are installation/service technicians. In the
course of performing installation work, the Company may utilize the services
of subcontractors. Approximately 500 employees (in five of the commercial
GroupMAC Companies) are members of the Bridge, Structural and Ornamental Iron
Workers, Construction Building Material, Ice and Coal Drivers, Helpers and
Inside Employees, Mechanical Contractors, Mechanical Services, Pipe-fitters,
Plumbing and Pipe-fitters and Sheet Metal Workers, Air Conditioning 42
Contractors, Stationary Engineers and Electrical Contractors unions and work
under collective bargaining agreements. Two of such agreements recently
expired and are now on a year-to-year basis and may be renegotiated after
either side gives the requisite notice (90 days in one case and 120 days in
the other). The other collective bargaining agreements have expiration dates
between April 30, 1998 and August 16, 2000. Employees at K&N's operations in
Las Vegas, Nevada, were recently solicited to join a union, and from time to
time other operating locations of the Company may experience union organizing
efforts. The Company believes its relationship with its employees is
satisfactory.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various legal proceedings,
most of which pertain to contract installation, service and employee matters
arising in the ordinary course of business. Although no assurance can be
given, the Company believes that the outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
its financial condition or results of operations.
40
<PAGE>
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 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. 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 the
GroupMAC Companies, 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
41
<PAGE>
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 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 fiscal 1996
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.
42
<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....................... 60 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. ................ 53 Executive Vice President-Marketing,
Sales and Product Support
Richard S. Rouse..................... 51 Executive Vice President-Corporate
Development and Administration;
Director
Randolph W. Bryant................... 47 Senior Vice President, General
Counsel and Secretary
Darren B. Miller..................... 38 Senior Vice President and Chief
Financial Officer
James D. Jennings.................... 55 President and Chief Executive
Officer of Airtron; Director
Timothy Johnston..................... 41 Senior Vice President of Airtron;
Director
John M. Sullivan..................... 61 Director
James D. Weaver...................... 48 Director
Ronald D. Bryant..................... 50 President of Masters; Director
David L. Henninger................... 53 President of Van's; Director
Andrew Jeffrey Kelly................. 43 President of K&N; Director
Thomas B. McDade..................... 74 Director
Lucian Morrison...................... 60 Director
Fredric Sigmund...................... 56 President of MacDonald-Miller;
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. became a Director and Chief Executive Officer of
the Company upon its formation in 1997. From April 1997 to August 1997, he
served as President of the Company. From October 1996 through April 1997, he
served as Chief Executive Officer of the Company's predecessor, GroupMAC
Management Co. ("Management Co."). 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. From 1991 to 1992, he served as Chief Financial Officer of
Lifeco Travel Services, a travel management company. From 1986 to 1991, Mr.
Millinor served as Chief Operating Officer and Senior Vice President,
respectively, of Commonwealth Savings Association and Bank United. From 1979
to 1986, Mr. Millinor was a partner with KPMG Peat Marwick LLP. 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. From September 1996 to August 1997, he served as 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 Batteries, Inc. From 1991 to 1995, Mr. Luke served as
President and Chief Executive
43
<PAGE>
Officer of Miracle Ear New York City. From 1989 to 1991, he served as
President and Chief Executive Officer of Senior Service Corporation. From 1988
to 1989, he served as Chairman and Chief Executive Officer of Cuisinarts, Inc.
From 1987 to 1988, he served as President and Chief Operating Officer of
Actmedia, Inc. From 1981 to 1987, he served as President and Chief Operating
Officer and a Director of Chemlawn Services Corporation. He is currently a
partner in McFarland Grossman Capital Ventures, L.C., a consolidator of
fastener distribution companies.
WILLIAM MICHAEL CALLAHAN became Executive Vice President-Training,
Technology and Field Support 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 became a Director and Executive Vice President-
Acquisitions of the Company upon its formation in 1997. From October 1996 to
April 1997, he served as Executive Vice President-Acquisitions at the
Company's predecessor, Management Co. 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-Marketing, Sales and
Product Support 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 became a Director and Executive Vice President-Corporate
Development and Administration of the Company upon its formation in 1997. From
October 1996 to April 1997, he served as Executive Vice President-Corporate
Development and Administration of the Company's predecessor, Management Co.
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. From 1990 to 1991, he was a co-founder and Senior
Vice President-Corporate Development for Republic Waste Industries, Inc. From
1984 to 1990, he was Marketing Manager of Lubripac, a blender and packager of
lubricants and specialty chemicals. Prior to 1984, Mr. Rouse served in various
marketing and management capacities with the Exxon Chemical Company.
RANDOLPH W. BRYANT became Senior Vice President, General Counsel and
Secretary of the Company upon its formation in 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 became Senior Vice President and Chief Financial Officer of
the Company upon its formation in 1997. From October 1996 to April 1997, he
served as Senior Vice President and Chief Financial Officer of the Company's
predecessor, Management Co. From 1989 to 1996, Mr. Miller served in several
capacities at Allwaste, Inc., a consolidator of industrial service companies,
including Vice President-Treasurer and Controller from 1995 to 1996. Prior to
1989, he was employed in the audit practice of Arthur Andersen LLP.
JAMES D. JENNINGS became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1985, Mr. Jennings has served as
President, Chief Executive Officer and a director of Airtron. Prior to 1985,
Mr. Jennings was employed by Airtron in various other capacities.
TIMOTHY JOHNSTON became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1995, Mr. Johnston has served as a
Senior Vice President of Airtron. Mr. Johnston has served as
44
<PAGE>
Secretary/Treasurer of Airtron since 1991 and as Chief Financial Officer of
Airtron since 1988. Prior to 1987, Mr. Johnston was employed by Airtron in
various other capacities.
JOHN M. SULLIVAN became a Director of the Company upon its formation in
1997. From October 1996 to April 1997, he served as a Director of the
Company's predecessor, Management Co. Since 1994, Mr. Sullivan has been
engaged as an independent financial and tax consultant. 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.
From October 1996 to April 1997, he served as a Director at the Company's
predecessor, Management Co. Mr. Weaver has been the President of the Gordon
and Mary Cain Foundation, a nonprofit organization, since 1988 and the
Director of the Good Samaritan Foundation, a nonprofit organization, since
1986.
RONALD D. BRYANT became a Director of the Company in November 1997. He
founded Masters 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 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 in 1979 and has served as its president since that time.
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 has been Chairman of the Board of
TransTexas Gas Corp. since 1993. He served as a director and trustee of eleven
registered investment companies from 1985 to 1995 for which John Hancock Funds
serves as investment advisor in Boston, Massachusetts. He currently serves as
a director of Bankers Trust Co. of the Southwest, TransAmerican Energy Corp.
and TransAmerican Refining Corp.
LUCIAN 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 1991, he
served as Chief Fiduciary Officer of Northern Trust Company. From 1979 until
1990, he served as Chief Executive Officer of Heritage Trust Company.
FREDRIC SIGMUND became a Director of the Company in November 1997. Since
1986, he has served as Chief Executive Officer of MacDonald-Miller. From 1967
to 1986, he served in various positions with MacDonald-Miller.
The Board of Directors of the Company consists of 15 members divided into
three classes of five directors serving staggered three-year terms expiring at
the annual meeting 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 Acquisition 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
45
<PAGE>
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 and (v) reviewing with the Company litigation and other
legal matters that may affect the Company's financial condition, and
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 Acquisition 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
Acquisition Committee are Messrs. Millinor (Chair), Jachimiec and Rouse.
The Company's Board may also establish other committees.
COMPENSATION OF DIRECTORS
In December 1997, the Company granted to each director of the Company who is
not an employee of the Company or any 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 800 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.
EXECUTIVE COMPENSATION
The following table sets forth the remuneration paid by the Company to the
Chief Executive Officer of the Company and the four other most highly
compensated key executive officers of the Company (the "Named Executive
Officers") 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(1) BONUS OPTIONS COMPENSATION(2)
- --------------------------- ---- --------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Patrick Millinor, Jr.... 1997 $150,000 $87,500 56,500 1,080
Chief Executive Officer
Chester J. Jachimiec....... 1997 140,000 73,500 53,300 860
Executive Vice President
Richard S. Rouse........... 1997 140,000 73,500 53,300 2,446
Executive Vice President
Randolph W. Bryant......... 1997 94,949 44,000 73,300 --
Senior Vice President,
General
Counsel and Secretary
Darren B. Miller........... 1997 132,417 73,500 53,300 262
Senior Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) Messrs. Millinor, Jachimiec, Rouse and Miller commenced their employment
with Management Co. in October 1996. Mr. Bryant commenced his employment
with the Company in April 1997.
(2) Represents amounts paid by the Company for life insurance coverage.
46
<PAGE>
STOCK OPTION GRANTS IN 1997
The following table sets forth the number of stock options that were granted
during 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------- AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
OPTIONS GRANTED TO EXERCISE APPRECIATION FOR
GRANTED EMPLOYEES OR BASE OPTION TERM(3)
(NO. OF IN FISCAL PRICE PER EXPIRATION ----------------
NAME SHARES)(1) YEAR SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
J. Patrick Millinor,
Jr..................... 56,500 2.7% $14.00 11-06-2002 $218,542 482,906
Chester J. Jachimiec.... 53,300 2.6 14.00 11-06-2002 206,164 455,555
Richard S. Rouse........ 53,300 2.6 14.00 11-06-2002 206,164 455,555
Randolph W. Bryant...... 20,000(2) .9 3.08 4-28-2008 176,100 446,240
53,300 2.6 14.00 11-06-2002 206,164 455,555
Darren B. Miller........ 53,300 2.6 14.00 11-06-2002 206,164 455,555
</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) The options granted to Mr. Bryant were granted on April 28, 1997, at the
time he commenced employment with the Company. These options have a ten-
year term and become exercisable with respect to 33 1/3% of the shares
subject to the option on each anniversary of the date of 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 Named Executive Officers. 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>
J. Patrick Millinor, Jr..... 16,666 89,834 228,908 616,748
Chester J. Jachimiec........ 15,333 83,967 210,599 537,016
Richard S. Rouse............ 13,333 69,967 183,129 482,076
Randolph W. Bryant.......... -- 73,300 -- 390,505
Darren B. Miller............ 9,333 71,967 210,599 372,196
</TABLE>
- --------
(1) The closing price for the Common Stock on the New York Stock Exchange on
December 31, 1997, was $16.8125. Value is calculated on the basis of the
difference between the option exercise price and $16.8125, multiplied by
the number of shares of Common Stock underlying the options.
47
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
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
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 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 1996, Mr. Bryant 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. Bryant's annual base salary depending on the actual
annual performance of the Company. The agreement expires on April 28, 2000. In
the event of Mr. Bryant's death, the agreement will terminate. In the event of
Mr. Bryant'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. Bryant will receive compensation for the periods described in
the agreement. In addition, Mr. Bryant has agreed not to compete with the
Company during the six-month period following his termination of employment.
In 1996, Mr. Miller entered into an employment agreement with the Company
which was amended in 1997 and now provides for an annual base salary of
$140,000 and an annual cash bonus of up to 100% of Mr. Miller'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. Miller's death, the
agreement will terminate. In the event of Mr. Miller'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. Miller will receive
compensation for the periods described in the agreement. In addition, Mr.
Miller has agreed not to compete with the Company during the six-month period
following his termination of employment.
Each of the foregoing employment agreements grants the executive certain
rights in the event of a change in control of the Company. Under the 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
48
<PAGE>
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.
STOCK AWARDS PLAN
The Group Maintenance America Corp. 1997 Stock Awards Plan (the "Stock
Awards Plan") was adopted by the Company's Board of Directors 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, the Company
granted options to purchase approximately 1.9 million shares of Common Stock
in November 1997 at an exercise price equal to $14.00 per share (the IPO
price).
Purpose. The purpose of the Stock Awards Plan is to promote the long-term
success of the Company and its subsidiaries for the benefit of the Company's
shareholders by encouraging its officers, employees, Directors and consultants
to have meaningful investments in the Company so that, as shareholders
themselves, those individuals will be more likely to represent the views and
interests of other shareholders and by providing incentives to such
individuals for continued services. The Company believes that the possibility
of participation under the Stock Awards Plan will provide this group of
individuals with an incentive to perform more effectively and will assist the
Company and its subsidiaries in attracting and retaining people of outstanding
training, experience and ability.
Term. The Stock Awards Plan will expire on June 30, 2007.
Administration. The Stock Awards Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"), which has exclusive
authority to make all interpretations and determinations affecting the Stock
Awards Plan. The Committee has the power to determine which officers,
employees, Directors and consultants will receive an award, the time or times
when such award will be made, the type of award and the number of shares of
Common Stock to be issued under an award or the value of an award.
Participation. All officers, key employees, Directors and consultants of the
Company and its subsidiaries are eligible to participate in the Stock Awards
Plan, subject to the discretion of the Committee. Participants in the Stock
Awards Plan are also eligible to participate in other incentive plans of the
Company.
Shares Available for Awards. The number of shares of Common Stock that may
be issued under the Stock Awards Plan may not exceed 9% of the number of
shares outstanding (determined quarterly), subject to adjustment for corporate
transactions and changes that affect the Company, its shares or share status.
The number of shares of Common Stock that may be issued to employees of the
GroupMAC Companies and companies acquired in the future under the Stock Awards
Plan and the stock option plan for non-management employees will equal 12% of
the number of shares outstanding (determined quarterly), subject to adjustment
for corporate transactions and changes that affect the Company, its shares or
share status. Such shares may consist in whole or in part of authorized and
unissued shares or treasury shares. If an award lapses or is terminated or
settled in cash in lieu of Common Stock, the shares of Common Stock previously
covered by such awards will be available for future awards under the Stock
Awards Plan.
Awards. The Stock Awards Plan permits grants of the following types of
awards: (i) options, including incentive stock options ("ISOs"), non-qualified
stock options, and reload stock options; (ii) stock appreciation rights
("SARs"); (iii) restricted stock; (iv) performance awards; (v) phantom stock
awards; or (vi) any combination thereof. Under the Stock Awards Plan, ISOs,
non-qualified stock options and SARs may not vest in less than six months from
the award date; provided, however, that the Committee may, in its sole
discretion, shorten or terminate restrictions with respect to an award. Upon
the occurrence of a change of control of the Company, all outstanding awards
under the Stock Awards Plan shall immediately vest and become exercisable.
49
<PAGE>
Stock Options. The Stock Awards Plan provides that the option price pursuant
to which Common Stock may be purchased will be determined by the Committee,
provided that the option price of an ISO will not be less than 100% of the
fair market value of a share of Common Stock on the date of grant. The term of
each option will be fixed by the Committee. Payment of the option price may be
made in cash, through the delivery of shares of Common Stock having a fair
market value on the exercise date equal to the option exercise price or such
other method as may be permitted by the Committee.
In conjunction with non-qualified stock options awarded under the Stock
Awards Plan or otherwise, the Committee may award an additional option to
purchase a number of shares of Common Stock as determined by the Committee if
a holder exercises all or part of an original option within five years of the
date of grant of the original option. The additional option is deemed to be
granted upon delivery of payment upon exercise of the original option without
further action by the Committee (a "Reload Option"). Reload Options are
subject to all of the terms and conditions of stock options generally, except
that their term ends upon termination of the stock options with respect to
which they are granted.
Stock Appreciation Rights. The Committee may award SARs either separately as
an additional right (the "Additional Right SAR") or in conjunction with a
stock option as an alternative right (the "Alternative Right SAR"). The
exercise of a stock option granted in conjunction with an Alternative Right
SAR terminates the Alternative Right SAR to the extent of the shares acquired
upon exercise of the award. Conversely, the exercise of an Alternative Right
SAR terminates the associated stock option to the extent of the shares with
respect to which such right is exercised. The exercise of an Additional Right
SAR has no effect on the exercisability of any other award and the exercise of
any other award has no effect on the exercisability of an Additional Right
SAR.
Upon the exercise of an SAR, the participant will receive an amount equal to
the excess of the fair market value of a share of Common Stock on the date the
SAR is exercised over the award price. The award price for SARs will be
determined by the Committee, provided that the award price will not be less
than 100% of the fair market value of a share of Common Stock on the date such
award was made. For purposes of the limitation on the aggregate number of
shares of Common Stock that may be issued under the Stock Award Plan, only the
number of shares actually issued in connection with the exercise of an SAR is
to be considered.
Restricted Stock. The Committee may make awards of restricted Common Stock
on such terms, conditions and restrictions (which may include, but are not
limited to, continuous employment with the Company, achievement of specific
business objectives, and other measurements of individual, business unit or
Company performance), as it determines. Such terms and conditions may include
the manner in which such restricted stock is held, the extent to which the
holder of such stock has rights of a shareholder and the circumstances under
which such shares will be forfeited. None of the shares subject to a
restricted stock award may be assigned, transferred, pledged or sold by the
participant until the termination or earlier lapse of restrictions relating
thereto.
Performance Awards. The Committee may make awards of performance awards,
which are based on future performance of the officer, employee, Director or
consultant, the Company or any business unit in which he is employed or to
which he is providing services during the performance period. The Committee
will establish the performance measures applicable to such performance prior
to the beginning of the performance period but subject to such later revisions
as the Committee may deem appropriate to reflect significant unforeseen events
or changes.
Phantom Stock. Phantom stock awards are awards of rights to receive amounts
equal to the appreciation in the price of a share of Common Stock over a
specified period of time. The Committee may make awards of phantom stock on
such terms, conditions and restrictions as it determines. Such terms and
conditions may include the manner in which such phantom stock is held and the
circumstances under which such units will be forfeited. Phantom stock is an
award unit having a value equivalent to the fair market value of one share of
Common Stock, the value of which fluctuates with that of the Common Stock from
which such unit derives its value. Each phantom stock award will have a
maximum value established by the Committee at the time of the award.
50
<PAGE>
Settlement of Awards. At the Committee's discretion, awards may be settled
in cash, shares of Common Stock, other awards, or in combinations thereof. The
Committee may also require or permit participants to defer the issuance or
vesting of shares or the settlement of awards in cash. The Committee may also
provide that deferred settlements include the payment or crediting of interest
on the deferral amounts or the payment or crediting of dividend equivalents on
deferred settlements denominated in shares of Common Stock. The Committee may
determine the manner in which federal, state or local tax withholding
obligations of the Company will be satisfied including, but not limited to,
the reduction in the amount of stock or cash to be delivered or paid to the
participant or reimbursement by the participant in cash or with shares of
Common Stock, at the fair market value on the settlement date.
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 participate in such program in 1997. Messrs. Bryant,
Henninger, Kelly and Sigmund will participate in 1998.
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 $678,500 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 848,074 shares of Common Stock and 2,711,344 shares of Series A
Preferred Stock and Mr. Johnston received $1,393,474, together with 330,764
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 out of the net proceeds of the IPO.
In the Company's acquisition of CRPP, each of Messrs. Callahan and Roach
received consideration in the form of 18,400 shares of Common Stock and
230,000 shares of Series H Preferred Stock. In the Company's acquisition of
CRA, each of Messrs. Callahan and Roach received $500,000, together with
250,000 shares of Series H Preferred Stock. All of such shares of preferred
stock were redeemed at a redemption price of $1.00 per share out of the net
proceeds of the IPO. Each of them will receive additional cash of $500,000,
25,629 shares of Common Stock and warrants to purchase 257,000 shares of
Common Stock at $17.50 per share as a result of the occurrence of certain
events.
In the Company's acquisition of K&N, Andrew Jeffrey Kelly received
$1,568,000, together with 403,111 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 out of the net proceeds of
the IPO. Mr. Kelly may receive contingent consideration based on the operating
results of K&N for the 15 month period ending June 30, 1998. The Company
estimates that such payments will be $640,000. K&N entered into a five year
renewable lease with Sigma Management, a company owned by Mr. Kelly, to
replace the prior lease for the Company's Arlington, Texas facility. The
annual base rent payable 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.
51
<PAGE>
In the Company's acquisition of MacDonald-Miller, Fredric J. Sigmund
received or will receive $1,923,881 and 206,120 shares of Common Stock
(subject to a post-closing adjustment). Mr. Sigmund may receive a portion of
the contingent consideration payable to the former shareholders of MacDonald-
Miller based on the operating results of MacDonald-Miller for the 12 month
period ended December 31, 1997. The Company estimates that such payments will
be approximately $425,000. MacDonald-Miller entered into a new ten year
renewable lease with F&V Investments, a company owned by Mr. Sigmund, to
replace the prior lease for MacDonald-Miller's Seattle, Washington facility.
The annual base rent payable 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 or will
receive $7,483,850 and 466,806 shares of Common Stock (subject to a post-
closing adjustment). Additionally, Masters entered into a new six year
renewable lease with Mr. Bryant to replace the prior lease for Masters'
Gaithersburg, Maryland facility. The initial annual base rent payable under
this lease is approximately $233,700, 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 or will
receive, together with his spouse, $1,568,034 and 112,203 shares of Common
Stock (subject to a post-closing adjustment). Additionally, Van's entered into
a new five-year renewable lease with Mr. Henninger to replace the prior lease
for Van's Delray Beach, Florida facility. The initial annual base rent payable
under this lease is approximately $69,000 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.
In 1997, Mr. Sullivan, a director of the Company, exercised options to
purchase 10,000 shares at a price of $3.08 per share.
52
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus, 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>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
OWNERSHIP OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK(1)(2) COMMON STOCK
- ------------------------------------ ------------------ ------------
<S> <C> <C>
Gordon Cain.................................... 2,417,950 10.6%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Ronald D. Bryant............................... 466,806 2.1%
David L. Henninger............................. 100,982(3) *
Chester J. Jachimiec........................... 145,933(4) *
James D. Jennings.............................. 653,866(5) 2.9%
Timothy Johnston............................... 330,762(5) 1.5%
Andrew J. Kelly................................ 362,800 1.6%
Donald L. Luke................................. 100 *
Thomas B. McDade............................... 8,000 *
J. Patrick Millinor, Jr........................ 237,111(6) 1.0%
Lucian A. Morrison............................. 5,500 *
James P. Norris................................ 500 *
Richard S. Rouse............................... 132,183 *
Fredric J. Sigmund............................. 185,534(7) *
John M. Sullivan............................... 109,550(8) *
James D. Weaver................................ 86,500 *
Randolph W. Bryant............................. 1,000 *
W. Michael Callahan............................ 301,029(9) 1.3%
Darren B. Miller............................... 63,333 *
Alfred R. Roach, Jr............................ 301,029(9) 1.3%
All executive officers and directors as a group
(20 persons).................................. 3,492,518(10) 15.3%
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise noted, each 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 January 31, 1998, or within 60 days thereafter, for Messrs.
Millinor, Jachimiec, Rouse and Miller to purchase 16,666, 15,333, 13,333
and 9,333, respectively.
(3) Includes 49,501 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.
(5) Includes 195,728 and 285,334 shares beneficially owned by Messrs. Jennings
and Johnston through the Airtron, Inc. Savings and Profit Sharing Plan.
(6) Includes 200 shares held by Mr. Millinor's children.
(7) Includes 30,163 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 received by
the actual owners.
(9) Includes warrants to purchase 257,000 shares of Common Stock at $17.50 per
share and 44,029 shares to be issued.
(10) Includes 54,665 shares that are subject to options that are exercisable
by all executive officers and directors as a group.
53
<PAGE>
THE ACQUISITIONS
The following table sets forth for each GroupMAC Company, as of the date of
its acquisition, the consideration paid or to be paid to its shareholders in
(i) cash, (ii) Common Stock, (iii) preferred stock and (iv) assumed debt.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON PREFERRED
CASH(1)(3) STOCK(1)(3) STOCK(4) ASSUMED DEBT
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
PRE-OFFERING COMPANIES:
Airtron.................... $20,848,637 4,652,140 14,873,131 $ 1,289,927
A-ABC/A-1.................. 1,886,000 359,302 -- 947,937
Charlie's.................. 1,502,502 157,256 -- 112,741
CRPP....................... 450,000 192,123 550,000(2) 78,236
CRA (asset purchase)....... 2,000,000 -- 500,000 --
Costner(2)................. 501,290 65,536 100,000 193,755
Hallmark................... 2,080,794 105,687 580,000 338,398
Jarrell.................... 150,000 12,698 -- 26,654
K&N(2)..................... 1,568,000 403,111 1,568,000 1,498,995
Sibley(2).................. 1,201,873 62,001 664,691 376,368
USA (asset purchase)....... 435,779 49,804 435,771 100,000
Way Residential (asset pur-
chase)(2)................. 16,500 6,428 -- --
----------- ---------- ---------- -----------
32,641,375 6,066,086 19,271,593 4,963,011
----------- ---------- ---------- -----------
OFFERING ACQUISITION COMPA-
NIES:
All Service................ 2,405,491 210,001 -- --
Arkansas Mechanical........ 2,299,330 164,236 -- 566,623
Central Carolina........... 3,751,176 290,268 -- --
Evans...................... 1,164,531 103,937 -- --
Linford(2)................. 655,448 120,750 -- 1,470,000
MacDonald-Miller(2)........ 6,588,632 705,890 -- 2,860,008
Masters.................... 7,483,850 466,806 -- 1,969,140
Mechanical................. 240,913 17,205 -- --
Paul E. Smith.............. -- 233,829 -- 401,133
Southeast Mechanical....... 2,875,872 178,911 -- 243,783
Van's...................... 1,568,034 112,203 -- 278,810
Willis..................... 2,604,934 279,096 -- --
Yale....................... 2,436,659 174,044 -- 268,519
----------- ---------- ---------- -----------
34,074,870 3,057,176 -- 8,058,016
----------- ---------- ---------- -----------
POST-OFFERING COMPANIES.... 23,313,107 1,709,418 -- 5,090,825
----------- ---------- ---------- -----------
S Corporation Distribu-
tions..................... (3,505,213) (76,190) -- --
----------- ---------- ---------- -----------
Total................ $86,524,139 10,756,490 19,271,593 $18,111,852
=========== ========== ========== ===========
</TABLE>
- --------
(1) Subject to post-closing adjustments.
(2) The former shareholders of these GroupMAC Companies may receive additional
consideration in the form of cash, Common Stock or warrants for Common
Stock based on the occurance of future events.
(3) The cash and Common Stock consideration is presented before anticipated
Subchapter S distributions.
(4) Includes 1,713,622 warrants for preferred stock. The warrants were
exercised, and all shares of preferred stock were redeemed for $1 per
share, in connection with the closing of the IPO.
54
<PAGE>
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 February 5, 1998, the Company had outstanding
22,148,723 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 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."
55
<PAGE>
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 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.
56
<PAGE>
DESCRIPTION OF BANK CREDIT AGREEMENT
GENERAL
The Company has entered into a credit agreement (the "Bank Credit
Agreement") with certain lenders (the "Lenders") and Texas Commerce Bank
National Association, as Agent (the "Agent"). The Lenders are committed to
provide the Company, subject to certain terms and conditions, the entire $75
million principal amount of the revolving credit facility described below. The
following description summarizes the material provisions of the Bank 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 Bank Credit Agreement, filed as an exhibit to the registration
statement relating to this Prospectus.
AMORTIZATION; PREPAYMENTS
Loans under the Bank 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. The amount available under
the Bank Credit Agreement is payable in full on December 9, 2000.
SECURITY; GUARANTEES
Borrowings under the Bank Credit Agreement are guaranteed by the Company's
Material Subsidiaries (as defined in the Bank Credit Agreement), including
future Material Subsidiaries. The obligations of the Company under the Bank
Credit Agreement and the obligations under the guarantees are secured by a
first priority lien on the accounts receivable and inventory of the Company
and its Material Subsidiaries, including any future subsidiaries, and by a
pledge of stock of its domestic subsidiaries.
INTEREST RATES
Loans under the Bank 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 Bank 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 Bank Credit Agreement), or (ii)
the Eurodollar Rate (as defined in the Bank 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 Bank Credit Agreement require the Company to pay the
following fees in connection with the maintenance of loans under the Bank
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 Bank 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 Bank Credit Agreement.
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 Bank 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 Bank
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
57
<PAGE>
relating to the Bank 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 an 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 Bank Credit Agreement contains substantial restrictive covenants
limiting the ability of the Company and its subsidiaries to: (i) incur
Indebtedness (as defined in the Bank 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 Bank 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 Bank Credit Agreement) and of certain
other material events.
Under the Bank Credit Agreement, the Company is required to satisfy certain
financial covenants and tests, including (i) a minimum fixed charge coverage
ratio; (ii) a minimum tangible net worth that is positive; (iii) a maximum
ratio of total indebtedness for borrowed money to Capitalization (as defined
in the Bank Credit Agreement); and (iv) a minimum Consolidated Net Worth (as
defined in the Bank Credit Agreement). Changes in generally accepted
accounting principles that materially affect financial covenants may result in
modifications to the financial covenants with the view to placing the
covenants on the same economic basis as before the change in generally
accepted accounting principles.
EVENTS OF DEFAULT
Events of Default under the Bank 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 Bank 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 Bank 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 Bank Credit
Agreement).
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of February 5, 1998, the Company had outstanding 22,148,723 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. The approximately 9.5 million shares of
Common Stock held by existing shareholders of the Company immediately prior to
the IPO and the 3.2 million shares of Common Stock which have or will be
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
700,000 shares of Common Stock registered under the Securities Act in
connection with the acquisition of MacDonald-Miller. The 1,702,022 shares to
be issued in connection with the acquisition of the Post-Offering Companies
are registered and freely tradeable under the Securities Act, but are subject
to contractual restrictions on resale during the two years from the date of
issuance. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares issued by
the Company to affiliates of any of the Post-Offering Companies for a period
of one year from the date of issuance.
In addition, certain of the Company's directors, executive officers and
principal shareholders, who hold an aggregate of approximately 3.0 million
shares of Common Stock, have entered into lock-up agreements with the
Representatives of the Underwriters. These persons have agreed not to offer,
sell, contract to sell, grant any option with respect to, pledge, hypothecate
or otherwise dispose of, any shares of Common Stock owned by them until May 6,
1998 without the prior written consent of The Robinson-Humphrey Company, LLC.
All such approximately 3.0 million shares will become available for sale on
May 6, 1998 upon expiration of these lock-up agreements, subject to compliance
with Rule 144 promulgated under the Securities Act. Furthermore, the former
shareholders of the Pre-Offering Companies and most of the shareholders of the
Offering Acquisition Companies, who collectively will hold approximately 9
million shares of Common Stock, have entered into Stock Transfer Restriction
Agreements that impose restrictions on the transferability of their shares.
See "--Transfer Restrictions."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock that does not exceed the greater of (i) one percent of the number of the
then outstanding shares or (ii) the average weekly reported trading volume of
the Common Stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain notice requirements and to the
availability of current public information about the Company and must be made
in unsolicited brokers' transactions or to a market maker. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company
under the Securities Act during the three months preceding a sale and who has
beneficially owned such shares for at least two years is entitled to sell such
shares under Rule 144(k) without regard to the information, volume, manner of
sale and notice provisions of such Rule. At the date of this Prospectus,
approximately 1.2 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. 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 to
purchase approximately 2.3 million shares of Common Stock, approximately
100,000 of which are vested. Options to purchase 20,000 shares of Common Stock
have been exercised. 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
59
<PAGE>
Stock, as well as impair the ability of the Company to raise capital through
the issuance of additional equity securities.
TRANSFER RESTRICTIONS
Purchasers of Common Stock in the acquisitions of the GroupMAC Companies
entered into substantially similar Stock Transfer Restrictions Agreements,
which generally require that, at any time that the Company is engaged in an
underwritten public offering of its securities, each shareholder who is a
party thereto shall refrain from making any disposition of Common Stock on a
securities exchange, in the over-the-counter or any other public trading
market for the period of time requested by the Company; provided, however,
that (i) the restrictions on the transfer of Common Stock shall not limit any
shareholder's right to sell Common Stock pursuant to any piggyback
registration right that such shareholder may have pursuant to any registration
rights or similar agreement binding upon the Company and (ii) such
restrictions are no more restrictive than those imposed on the management of
the Company. Additionally, each Stock Transfer Restriction Agreement provides
that, during the one-year period following the date of such agreement (the
"First Holding Period"), the shareholder will not dispose of his or her shares
of Common Stock (subject to certain limited exceptions generally involving
transfers to family members and trusts or pursuant to an effective
registration statement). In addition to the foregoing restrictions, during the
one year period following the First Holding Period (the "Second Holding
Period"), no shareholder who is a party thereto may dispose of any Common
Stock in any calendar month in an amount greater than 3% of the number of
shares of Common Stock issued to such shareholder increasing cumulatively for
months in which less than 3% was sold. After expiration of the Second Holding
Period, all such restrictions under the Stock Transfer Restriction Agreements
lapse. Finally, any shareholder who is a party thereto shall provide five
business days' notice to the Company prior to any proposed disposition until
the later of (i) the end of the one-year period following the Second Holding
Period, (ii) for as long as such shareholder is an officer or director of the
Company or any of its subsidiaries or (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
60
<PAGE>
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 as described below, each of them has agreed
not to exercise their respective demand rights for the two year period
following the IPO except for Mr. Cain who has agreed to not exercise his
demand rights for one year.
The Registration Rights Agreements contain customary provisions whereby the
Company and the shareholders party thereto agree to indemnify and contribute
to the other with regard to losses caused by the misstatement of any
information or the omission of any information required to be provided in a
registration statement filed under the Securities Act. The Registration Rights
Agreements require the Company to pay the expenses associated with any
registration other than sales discounts, commissions, transfer taxes and
amounts to be borne by underwriters or as otherwise required by law.
The summary herein of certain provisions of the Registration Rights
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions of the forms of
Registration Rights Agreements, copies of which are filed as exhibits to the
Registration Statement.
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 financial statements of Group Maintenance America Corp. (GroupMAC
Parent), Group Maintenance America Corp. and Subsidiaries (formerly Airtron,
Inc.), 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., and Yale,
Incorporated, 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 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.
61
<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.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GROUP MAINTENANCE AMERICA CORP. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements........ F-4
Unaudited Pro Forma Combined Balance Sheet............................... F-6
Unaudited Pro Forma Combined Statements of Operations.................... F-8
Notes to Unaudited Pro Forma Combined Financial Statements............... F-14
HISTORICAL FINANCIAL STATEMENTS
GROUP MAINTENANCE AMERICA CORP. (GROUPMAC PARENT)
Report of Independent Public Accountants................................. F-19
Balance Sheets........................................................... F-20
Statements of Operations................................................. F-21
Statements of Shareholders' Equity....................................... F-22
Statements of Cash Flows................................................. F-23
Notes to Financial Statements............................................ F-24
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
UNAUDITED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets.................................... F-29
Consolidated Condensed Statements of Operations.......................... F-30
Consolidated Condensed Statements of Cash Flows.......................... F-31
Notes to Unaudited Consolidated Condensed Financial Statements........... F-32
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-33
Consolidated Balance Sheets.............................................. F-34
Consolidated Statements of Operations.................................... F-35
Consolidated Statements of Shareholders' Equity.......................... F-36
Consolidated Statements of Cash Flows.................................... F-37
Notes to Consolidated Financial Statements............................... F-38
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-51
Consolidated Balance Sheets.............................................. F-52
Consolidated Statements of Operations.................................... F-53
Consolidated Statements of Shareholders' Equity.......................... F-54
Consolidated Statements of Cash Flows.................................... F-55
Notes to Consolidated Financial Statements............................... F-56
MASTERS, INC.
Report of Independent Public Accountants................................. F-66
Balance Sheets........................................................... F-67
Statements of Operations................................................. F-68
Statements of Shareholder's Equity....................................... F-69
Statements of Cash Flows................................................. F-70
Notes to Financial Statements............................................ F-71
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. F-78
Balance Sheet............................................................ F-79
Statement of Operations.................................................. F-80
Statement of Shareholders' Equity........................................ F-81
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Cash Flows................................................. F-82
Notes to Financial Statements........................................... F-83
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................ F-88
Combined Balance Sheets................................................. F-89
Combined Statements of Operations....................................... F-90
Combined Statements of Shareholders' Equity............................. F-91
Combined Statements of Cash Flows....................................... F-92
Notes to Combined Financial Statements.................................. F-93
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................ F-98
Combined Balance Sheets................................................. F-99
Combined Statements of Operations....................................... F-100
Combined Statements of Shareholders' Equity............................. F-101
Combined Statements of Cash Flows....................................... F-102
Notes to Combined Financial Statements.................................. F-103
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................ F-109
Balance Sheets.......................................................... F-110
Statements of Operations................................................ F-111
Statements of Shareholders' Equity...................................... F-112
Statements of Cash Flows................................................ F-113
Notes to Financial Statements........................................... F-114
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................ F-117
Balance Sheets.......................................................... F-118
Statements of Operations................................................ F-119
Statements of Shareholders' Equity...................................... F-120
Statements of Cash Flows................................................ F-121
Notes to Financial Statements........................................... F-122
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-127
Consolidated Balance Sheets............................................. F-128
Consolidated Statements of Operations................................... F-129
Consolidated Statements of Shareholders' Equity......................... F-130
Consolidated Statements of Cash Flows................................... F-131
Notes to Consolidated Financial Statements.............................. F-132
SIBLEY SERVICES, INCORPORATED
Report of Independent Public Accountants................................ F-138
Balance Sheets.......................................................... F-139
Statements of Operations................................................ F-140
Statements of Shareholders' Equity...................................... F-141
Statements of Cash Flows................................................ F-142
Notes to Financial Statements........................................... F-143
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants................................ F-149
Balance Sheets.......................................................... F-150
Statements of Operations................................................ F-151
Statements of Shareholders' Equity...................................... F-152
Statements of Cash Flows................................................ F-153
Notes to Financial Statements........................................... F-154
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants................................ F-158
Balance Sheets.......................................................... F-159
Statements of Operations................................................ F-160
Statements of Shareholders' Equity...................................... F-161
Statements of Cash Flows................................................ F-162
Notes to Financial Statements........................................... F-163
YALE, INCORPORATED
Report of Independent Public Accountants................................ F-168
Balance Sheets.......................................................... F-169
Statements of Operations................................................ F-170
Statements of Shareholders' Equity...................................... F-171
Statements of Cash Flows................................................ F-172
Notes to Financial Statements........................................... F-173
</TABLE>
F-3
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Group Maintenance America Corp. ("GroupMAC"), of 11
companies acquired through September 30, 1997 ("the Pre-Offering Companies"),
13 companies which were acquired in connection with the IPO (the "Offering
Acquisition Companies", and 9 companies acquired after the IPO (the "Post-
Offering Acquisition Companies" and together with the Pre-Offering Companies
and the Offering Acquisition Companies, the "GroupMAC Companies") as follows:
<TABLE>
<CAPTION>
DATE
COMPANY ACQUIRED
- ------- --------
<S> <C>
Airtron, Inc.......................................................... 5/2/97
A-ABC Appliance, Inc. and A-1 Appliance & Air Conditioning, Inc....... 6/1/97
Hallmark Air Conditioning, Inc........................................ 6/1/97
K&N Plumbing, Heating and Air Conditioning, Inc....................... 6/1/97
Way Residential....................................................... 6/30/97
AA JARL, Inc. (d/b/a "Jarrell Plumbing").............................. 6/30/97
Charlie Crawford, Inc. (d/b/a "Charlie's Plumbing")................... 6/30/97
Costner Brothers, Inc................................................. 6/30/97
Callahan Roach Products & Publications, Inc. & Callahan Roach &
Associates........................................................... 7/1/97
Sibley Services, Incorporated......................................... 7/1/97
United Service Alliance, L.C.......................................... 7/31/97
All Service Electric, Inc............................................. 11/13/97
Arkansas Mechanical Services, Inc..................................... 11/13/97
Central Carolina Air Conditioning Company............................. 11/13/97
Evans Services, Inc................................................... 11/13/97
Linford Service Company............................................... 11/13/97
MacDonald-Miller Industries, Inc...................................... 11/13/97
Masters, Inc.......................................................... 11/13/97
Mechanical Services, Inc.............................................. 11/13/97
Paul E. Smith Co., Inc................................................ 11/13/97
Southeast Mechanical Service, Inc..................................... 11/13/97
Van's Comfortemp Air Conditioning, Inc................................ 11/13/97
Willis Refrigeration, Air Conditioning & Heating, Inc................. 11/13/97
Yale Incorporated..................................................... 11/13/97
Sterling Air Conditioning, Inc........................................ 1/6/98
Chappell Air Conditioning and Heating, Inc............................ 1/7/98
A-1 Mechanical of Lansing, Inc........................................ 1/15/98
Air Conditioning Engineers, Inc....................................... 1/15/98
Air Conditioning, Plumbing & Heating Company, Inc..................... 1/15/98
Hungerford Mechanical Corporation..................................... 1/15/98
Mechanical Interiors, Inc............................................. 1/15/98
Valley Wide Plumbing & Heating, Inc................................... 1/15/98
Weigold & Sons, Inc................................................... 1/15/98
</TABLE>
All of the acquisitions are accounted for utilizing the purchase method of
accounting. The acquisitions subsequent to September 30, 1997 occurred
concurrently with the closing of the Company's initial public offering, with
Airtron, Inc. ("Airtron") as the acquirer for financial accounting purposes.
These unaudited pro forma combined financial statements are based on the
historical financial statements of the acquired companies
F-4
<PAGE>
and estimates and assumptions set forth below and in the notes to the
unaudited pro forma combined financial statements.
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheet of the Company and the balance sheets of the
acquisitions completed subsequent to September 30, 1997, as if these
acquisitions had occurred on September 30, 1997. The accompanying unaudited
pro forma statements of operations of the Company combine the historical
statements of operations of GroupMAC and the statements of operations of the
acquisitions as if such acquisitions had occurred on January 1, 1996.
GroupMAC has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and certain benefits to the owners. To the extent
the owners of the GroupMAC 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 new 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 preliminary estimates, available
information and certain assumptions that management deems appropriate and may
be revised as additional information becomes available. Certain acquisitions
are subject to working capital and long-term debt adjustments, of which an
estimate is reflected in the pro forma adjustments. The pro forma combined
financial data do not purport to represent what GroupMAC's financial position
or results of operations would actually have been if such transactions had in
fact occurred on those dates and are not necessarily representative of
GroupMAC's financial position or results of operations for any future period.
Since the acquisitions have not historically been under common control or
management, historical pro forma combined results may not be indicative of or
comparable to future performance. The unaudited pro forma combined financial
statements should be read in conjunction with other financial statements and
notes thereto included elsewhere in this prospectus. See "Risk Factors"
included elsewhere herein.
F-5
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
POST-OFFERING
GROUPMAC AND MACDONALD- OTHER RESIDENTIAL OTHER COMMERCIAL ACQUISITION PRO FORMA
ASSETS SUBSIDIARIES MILLER MASTERS SERVICE COMPANIES SERVICE COMPANIES COMPANIES COMBINED ADJUSTMENTS
- ------ ------------ ---------- ------- ----------------- ----------------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ 7,801 $ -- $ 635 $3,049 $ 312 $ 2,822 $ 14,619 $(23,429)
Accounts receiv-
able--
Trade, net of al-
lowance.......... 14,567 10,692 6,988 2,339 7,229 18,322 60,137 --
Other............ 258 85 478 54 25 138 1,038 --
Due from related
parties.......... 233 389 -- 82 41 1,204 1,949 (1,714)
Inventories...... 5,344 986 417 989 988 1,890 10,614 --
Costs and esti-
mated earnings in
excess of bill-
ings on uncom-
pleted contracts. 119 927 1,604 31 608 1,415 4,704 --
Refundable income
taxes............ -- -- -- 15 73 -- 88 --
Deferred tax as-
set.............. 1,575 -- -- -- -- -- 1,575 --
Prepaid expenses
and other current
assets........... 859 145 90 155 74 284 1,607 --
------- ------- ------- ------ ------- ------- -------- --------
Total current
assets.......... 30,756 13,224 10,212 6,714 9,350 26,075 96,331 (25,143)
PROPERTY AND
EQUIPMENT, net.... 5,658 1,497 596 1,714 1,901 4,009 15,375 (211)
GOODWILL, net..... 27,992 -- -- -- 14 761 28,767 87,360
DEFERRED TAX AS-
SETS.............. 10,095 196 -- -- -- -- 10,291 --
OTHER NONCURRENT
ASSETS............ 6,655 67 673 18 3 454 7,870 (543)
------- ------- ------- ------ ------- ------- -------- --------
Total assets.... $81,156 $14,984 $11,481 $8,446 $11,268 $31,299 $158,634 $ 61,463
======= ======= ======= ====== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY:
- -----------------------------
CURRENT
LIABILITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounts payable
and accrued ex-
penses........... $15,032 $ 5,212 $ 3,541 $1,186 $ 3,426 $10,154 $ 38,551 $ 1,162
Short-term debt,
including current
maturities....... 3,561 2,552 1,222 34 775 2,203 10,347 3,163
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ 1,757 1,829 792 8 142 5,053 9,581 --
Liability for
warranty costs... 710 103 192 141 -- 146 1,292 --
Deferred service
revenue.......... 1,779 -- -- 1,371 -- 87 3,237 --
Income taxes
payable.......... 1,580 279 -- 66 -- 725 2,650 --
Deferred tax
liabilities...... -- -- -- 26 -- 37 63 1,390
Other current
liabilities...... 1,316 27 -- 25 -- 37 1,405 --
Due to
shareholders/affiliates. 1,687 -- -- 41 470 104 2,302 29,954
------- ------- ------- ------ ------- ------- -------- --------
Total current
liabilities..... 27,422 10,002 5,747 2,898 4,813 18,546 69,428 35,669
LONG-TERM DEBT,
net of current
maturities........ 28,482 288 747 770 1,849 2,888 35,024 (101)
LEASE OBLIGATIONS. 28 -- -- 4 18 -- 50 --
DEFERRED SERVICE
REVENUE........... 145 -- -- -- -- -- 145 --
DEFERRED TAX LIA-
BILITY............ -- -- -- 40 -- -- 40 171
DEFERRED COMPENSA-
TION.............. -- 190 -- 30 -- -- 220 (220)
DUE TO SHAREHOLD-
ERS............... 9,745 -- -- -- -- -- 9,745 --
OTHER LONG-TERM
LIABILITIES....... 743 -- -- -- -- -- 743 --
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. 19,271 -- -- -- -- -- 19,271 --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock..... 9 356 5 53 481 309 1,213 (1,199)
Additional paid-
in capital....... 28,980 -- -- 37 107 909 30,033 53,534
Retained earnings
(deficit)........ (33,669) 4,148 4,982 4,615 4,047 9,204 (6,673) (26,996)
Treasury stock... -- -- -- (1) (47) (557) (605) 605
------- ------- ------- ------ ------- ------- -------- --------
Total sharehold-
ers' equity
(deficit)....... (4,680) 4,504 4,987 4,704 4,588 9,865 23,968 25,944
------- ------- ------- ------ ------- ------- -------- --------
Total liabili-
ties and share-
holders' equity
(deficit)....... $81,156 $14,984 $11,481 $8,446 $11,268 $31,299 $158,634 $ 61,463
======= ======= ======= ====== ======= ======= ======== ========
<CAPTION>
PRO FORMA IPO PRO FORMA
ASSETS COMBINED ADJUSTMENTS AS ADJUSTED
- ------ ---------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ (8,810) $ 10,595 $ 1,785
Accounts receiv-
able--
Trade, net of al-
lowance.......... 60,137 -- 60,137
Other............ 1,038 -- 1,038
Due from related
parties.......... 235 -- 235
Inventories...... 10,614 -- 10,614
Costs and esti-
mated earnings in
excess of bill-
ings on uncom-
pleted contracts. 4,704 -- 4,704
Refundable income
taxes............ 88 -- 88
Deferred tax as-
set.............. 1,575 -- 1,575
Prepaid expenses
and other current
assets........... 1,607 -- 1,607
---------- ----------- -----------
Total current
assets.......... 71,188 10,595 81,783
PROPERTY AND
EQUIPMENT, net.... 15,164 -- 15,164
GOODWILL, net..... 116,127 -- 116,127
DEFERRED TAX AS-
SETS.............. 10,291 -- 10,291
OTHER NONCURRENT
ASSETS............ 7,327 (4,246) 3,081
---------- ----------- -----------
Total assets.... $220,097 $ 6,349 $226,446
========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY:
- -----------------------------
CURRENT
LIABILITIES:
<S> <C> <C> <C>
Accounts payable
and accrued ex-
penses........... $ 39,713 $ -- $ 39,713
Short-term debt,
including current
maturities....... 13,510 (10,332) 3,178
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ 9,581 -- 9,581
Liability for
warranty costs... 1,292 -- 1,292
Deferred service
revenue.......... 3,237 -- 3,237
Income taxes
payable.......... 2,650 -- 2,650
Deferred tax
liabilities...... 1,453 -- 1,453
Other current
liabilities...... 1,405 -- 1,405
Due to
shareholders/affiliates. 32,256 (32,256) --
---------- ----------- -----------
Total current
liabilities..... 105,097 (42,588) 62,509
LONG-TERM DEBT,
net of current
maturities........ 34,923 (34,923) --
LEASE OBLIGATIONS. 50 (50) --
DEFERRED SERVICE
REVENUE........... 145 -- 145
DEFERRED TAX LIA-
BILITY............ 211 -- 211
DEFERRED COMPENSA-
TION.............. -- -- --
DUE TO SHAREHOLD-
ERS............... 9,745 -- 9,745
OTHER LONG-TERM
LIABILITIES....... 743 (6) 737
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. 19,271 (19,271) --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock..... 14 9 23
Additional paid-
in capital....... 83,567 103,178 186,745
Retained earnings
(deficit)........ (33,669) -- (33,669)
Treasury stock... -- -- --
---------- ----------- -----------
Total sharehold-
ers' equity
(deficit)....... 49,912 103,187 153,099
---------- ----------- -----------
Total liabili-
ties and share-
holders' equity
(deficit)....... $220,097 $ 6,349 $226,446
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-6
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES OTHER COMMERCIAL SERVICE COMPANIES
------------------------------------------------ -----------------------------------------------------------
CENTRAL OTHER TOTAL OTHER ARKANSAS SOUTHEAST OTHER TOTAL OTHER
ASSETS CAROLINA WILLIS COMPANIES RESIDENTIAL COMPANIES YALE MECHANICAL MECHANICAL COMPANIES COMMERCIAL COMPANIES
------ -------- ------ --------- --------------------- ------ ---------- ---------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents....... $1,107 $1,470 $ 472 $3,049 $ -- $ 95 $ 5 $ 212 $ 312
Accounts receiv-
able--
Trade, net of
allowance........ 578 1,012 749 2,339 2,218 1,144 747 3,120 7,229
Other............ 20 1 33 54 -- 9 1 15 25
Due from related
parties........... 7 -- 75 82 -- 41 -- -- 41
Inventories....... 231 170 588 989 95 80 64 749 988
Costs and esti-
mated earnings in
excess of bill-
ings on
uncompleted con-
tracts............ -- -- 31 31 97 -- 1 510 608
Refundable income
taxes............. -- -- 15 15 34 -- 6 33 73
Deferred tax as-
set............... -- -- -- -- -- -- -- -- --
Prepaid expenses
and other current
assets............ 56 22 77 155 11 28 26 9 74
------ ------ ------ ------ ------ ------ ------ ------ -------
Total current
assets.......... 1,999 2,675 2,040 6,714 2,455 1,397 850 4,648 9,350
PROPERTY AND
EQUIPMENT, net.... 615 170 929 1,714 645 610 403 243 1,901
GOODWILL, net..... -- -- -- -- -- 14 -- -- 14
DEFERRED TAX AS-
SETS.............. -- -- -- -- -- -- -- -- --
OTHER NONCURRENT
ASSETS............ -- -- 18 18 -- -- -- 3 3
------ ------ ------ ------ ------ ------ ------ ------ -------
Total assets.... $2,614 $2,845 $2,987 $8,446 $3,100 $2,021 $1,253 $4,894 $11,268
====== ====== ====== ====== ====== ====== ====== ====== =======
<CAPTION>
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILI-
TIES:
Accounts payable
and accrued ex-
penses............ $ 254 $ 315 $ 617 $1,186 $1,144 $ 440 $ 80 $1,762 $ 3,426
Short-term debt,
including current
maturities........ -- -- 34 34 -- 322 113 340 775
Billings in ex-
cess of costs and
estimated earn-
ings on
uncompleted con-
tracts............ 8 -- -- 8 6 95 41 -- 142
Liability for
warranty costs.... 114 27 -- 141 -- -- -- -- --
Deferred service
revenue........... 844 268 259 1,371 -- -- -- -- --
Income taxes pay-
able.............. 2 41 23 66 -- -- -- -- --
Deferred tax lia-
bilities.......... -- -- 26 26 -- -- -- -- --
Other current li-
abilities......... -- -- 25 25 -- -- -- -- --
Due to related
parties........... -- -- 41 41 -- 99 371 -- 470
------ ------ ------ ------ ------ ------ ------ ------ -------
Total current
liabilities..... 1,222 651 1,025 2,898 1,150 956 605 2,102 4,813
LONG-TERM DEBT,
net of current ma-
turities.......... -- -- 770 770 279 245 194 1,131 1,849
LEASE OBLIGATIONS. -- -- 4 4 -- -- -- 18 18
DEFERRED SERVICE
REVENUE........... -- -- -- -- -- -- -- -- --
DEFERRED TAX LIA-
BILITY............ -- 28 12 40 -- -- -- -- --
DEFERRED COMPENSA-
TION.............. 30 -- -- 30 -- -- -- -- --
DUE TO SHAREHOLD-
ERS............... -- -- -- -- -- -- -- -- --
OTHER LONG-TERM
LIABILITIES....... -- -- -- -- -- -- -- -- --
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. -- -- -- -- -- -- -- -- --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock...... 20 4 29 53 1 26 -- 454 481
Additional paid-
in capital........ 23 -- 14 37 101 -- 6 -- 107
Retained earnings
(deficit)......... 1,319 2,163 1,133 4,615 1,569 841 448 1,189 4,047
Treasury stock.... -- (1) -- (1) -- (47) -- -- (47)
------ ------ ------ ------ ------ ------ ------ ------ -------
Total sharehold-
ers' equity
(deficit)....... 1,362 2,166 1,176 4,704 1,671 820 454 1,643 4,588
------ ------ ------ ------ ------ ------ ------ ------ -------
Total liabili-
ties and share-
holders' equity
(deficit)....... $2,614 $2,845 $2,987 $8,446 $3,100 $2,021 $1,253 $4,894 $11,268
====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-7
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL POST
GROUPMAC AND MACDONALD- SERVICE SERVICE OFFERING GROUPMAC PRO FORMA
SUBSIDIARIES MILLER MASTERS K&N COMPANIES COMPANIES ACQUISITIONS PARENT ADJUSTMENTS
------------ ---------- ------- ------- ----------- ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $81,880 $66,059 $39,826 $24,279 $48,964 $46,499 $84,221 $ -- $ --
COST OF SERVICES. 58,506 56,373 35,854 20,705 30,628 33,845 65,839 -- --
------- ------- ------- ------- ------- ------- ------- ----- --------
Gross profit.... 23,374 9,686 3,972 3,574 18,336 12,654 18,382 -- --
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 19,811 7,632 2,484 2,638 16,375 10,367 15,350 724 (14,141)(a)
GOODWILL AMORTI-
ZATION........... -- -- -- -- 131 -- -- -- 2,772 (b)
------- ------- ------- ------- ------- ------- ------- ----- --------
Income (loss)
from operations. 3,563 2,054 1,488 936 1,830 2,287 3,032 (724) 11,369
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (82) (520) (135) (97) (295) (210) (282) (1) 1,431 (c)
Interest income. 171 -- -- -- 86 22 156 2 --
Other........... 256 8 -- (3) 231 (1) 165 -- (194)(d)
------- ------- ------- ------- ------- ------- ------- ----- --------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 3,908 1,542 1,353 836 1,852 2,098 3,071 (723) 12,606
INCOME TAX PROVI-
SION............. 1,572 574 -- 315 275 46 264 -- 8,732 (e)
------- ------- ------- ------- ------- ------- ------- ----- --------
NET INCOME
(LOSS)........... $ 2,336 $ 968 $ 1,353 $ 521 $ 1,577 $ 2,052 $ 2,807 $(723) $ 3,874
======= ======= ======= ======= ======= ======= ======= ===== ========
PRO FORMA NET IN-
COME PER SHARE...
SHARES USED IN
COMPUTING PRO
FORMA NET INCOME
PER SHARE........ (f)
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
REVENUES......... $391,728
COST OF SERVICES. 301,750
-----------
Gross profit.... 89,978
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 61,240
GOODWILL AMORTI-
ZATION........... 2,903
-----------
Income (loss)
from operations. 25,835
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (191)
Interest income. 437
Other........... 462
-----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 26,543
INCOME TAX PROVI-
SION............. 11,778
-----------
NET INCOME
(LOSS)........... $ 14,765
===========
PRO FORMA NET IN-
COME PER SHARE... $ 0.64
===========
SHARES USED IN
COMPUTING PRO
FORMA NET INCOME
PER SHARE........ 22,930
===========
</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, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
---------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $8,161 $8,546 $6,781 $6,516 $1,553 $17,407 $48,964
COST OF SERVICES. 5,182 5,447 5,033 3,461 311 11,194 30,628
------ ------ ------ ------ ------ ------- -------
Gross profit.... 2,979 3,099 1,748 3,055 1,242 6,213 18,336
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 2,598 2,652 1,206 3,029 1,238 5,652 16,375
GOODWILL AMORTI-
ZATION........... -- 114 -- 17 -- -- 131
------ ------ ------ ------ ------ ------- -------
Income from op-
erations........ 381 333 542 9 4 561 1,830
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (10) (95) (25) (31) (9) (125) (295)
Interest income. 30 11 8 16 -- 21 86
Other........... (40) 1 48 3 (7) 226 231
------ ------ ------ ------ ------ ------- -------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 361 250 573 (3) (12) 683 1,852
INCOME TAX PROVI-
SION............. -- -- 238 18 -- 19 275
------ ------ ------ ------ ------ ------- -------
NET INCOME
(LOSS)........... $ 361 $ 250 $ 335 $ (21) $ (12) $ 664 $ 1,577
====== ====== ====== ====== ====== ======= =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
-----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
-------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $10,065 $6,962 $6,237 $5,282 $17,953 $46,499
COST OF SERVICES. 7,931 5,335 4,773 3,831 11,975 33,845
-------- ------- ---------- ---------- --------- ----------
Gross profit.... 2,134 1,627 1,464 1,451 5,978 12,654
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 1,729 1,498 1,083 866 5,191 10,367
GOODWILL AMORTI-
ZATION........... -- -- -- -- -- --
-------- ------- ---------- ---------- --------- ----------
Income from op-
erations........ 405 129 381 585 787 2,287
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (30) (31) (51) (55) (43) (210)
Interest income. -- -- -- -- 22 22
Other........... (50) 16 30 (15) 18 (1)
-------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 325 114 360 515 784 2,098
INCOME TAX PROVI-
SION............. -- 42 -- -- 4 46
-------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 325 $ 72 $ 360 $ 515 $ 780 $ 2,052
======== ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-9
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL POST
MACDONALD- SERVICE SERVICE OFFERING PRO FORMA PRO FORMA
AIRTRON MILLER MASTERS K&N COMPANIES COMPANIES ACQUISITIONS GROUPMAC ADJUSTMENTS AS ADJUSTED
------- ---------- ------- ------- ----------- ---------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $59,996 $52,184 $29,088 $18,708 $36,828 $35,891 $64,042 $-- $ -- $296,737
COST OF SERVICES. 43,384 45,192 26,308 16,100 22,911 25,741 49,189 -- -- 228,825
------- ------- ------- ------- ------- ------- ------- --- ------- --------
Gross profit.... 16,612 6,992 2,780 2,608 13,917 10,150 14,853 -- -- 67,912
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 14,012 5,567 1,739 2,073 12,494 7,687 10,701 -- (8,140)(a) 46,133
GOODWILL AMORTI-
ZATION........... -- -- -- -- 61 27 -- -- 2,090 (b) 2,178
------- ------- ------- ------- ------- ------- ------- --- ------- --------
Income from op-
erations........ 2,600 1,425 1,041 535 1,362 2,436 4,152 -- 6,050 19,601
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (40) (386) (116) (68) (219) (158) (213) -- 1,104 (c) (96)
Interest income. 80 -- 15 2 55 17 147 -- -- 316
Other........... 199 24 -- (3) 31 41 115 -- 11 (d) 418
------- ------- ------- ------- ------- ------- ------- --- ------- --------
INCOME BEFORE IN-
COME TAX PROVI-
SION ............ 2,839 1,063 940 466 1,229 2,336 4,201 -- 7,165 20,239
INCOME TAX PROVI-
SION............. 1,130 402 -- 75 42 315 615 -- 6,352 (e) 8,931
------- ------- ------- ------- ------- ------- ------- --- ------- --------
NET INCOME
(LOSS)........... $ 1,709 $ 661 $ 940 $ 391 $ 1,187 $ 2,021 $ 3,586 $-- $ 813 $ 11,308
======= ======= ======= ======= ======= ======= ======= === ======= ========
PRO FORMA NET IN-
COME PER SHARE... $ 0.49
========
SHARES USED IN
COMPUTING PRO
FORMA NET INCOME
PER SHARE........ (f) 22,930
========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-10
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
---------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $6,114 $6,758 $4,898 $5,045 $1,145 $12,868 $36,828
COST OF SERVICES. 3,584 4,265 3,935 2,327 256 8,544 22,911
------ ------ ------ ------ ------ ------- -------
Gross profit.... 2,530 2,493 963 2,718 889 4,324 13,917
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 2,167 1,892 1,017 2,571 876 3,971 12,494
GOODWILL AMORTI-
ZATION........... -- 58 -- 3 -- -- 61
------ ------ ------ ------ ------ ------- -------
Income (loss)
from operations. 363 543 (54) 144 13 353 1,362
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (8) (97) (12) (27) (7) (68) (219)
Interest income. 11 2 11 15 -- 16 55
Other........... 25 34 17 (48) -- 3 31
------ ------ ------ ------ ------ ------- -------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 391 482 (38) 84 6 304 1,229
INCOME TAX PROVI-
SION............. -- -- (16) 46 -- 12 42
------ ------ ------ ------ ------ ------- -------
NET INCOME
(LOSS)........... $ 391 $ 482 $ (22) $ 38 $ 6 $ 292 $ 1,187
====== ====== ====== ====== ====== ======= =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $8,179 $5,715 $4,755 $4,092 $13,150 $35,891
COST OF SERVICES. 6,361 4,439 3,639 2,911 8,391 25,741
------- ------- ---------- ---------- --------- ----------
Gross profit.... 1,818 1,276 1,116 1,181 4,759 10,150
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,423 1,017 783 675 3,789 7,687
GOODWILL AMORTI-
ZATION........... -- -- -- -- 27 27
------- ------- ---------- ---------- --------- ----------
Income (loss)
from operations. 395 259 333 506 943 2,436
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (22) (23) (38) (41) (34) (158)
Interest income. -- 1 -- -- 16 17
Other........... (21) 20 27 (3) 18 41
------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 352 257 322 462 943 2,336
INCOME TAX PROVI-
SION............. -- 242 -- -- 73 315
------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 352 $ 15 $ 322 $ 462 $ 870 $ 2,021
======= ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-11
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL POST
GROUPMAC AND MACDONALD- SERVICE SERVICE OFFERING GROUPMAC PRO FORMA
SUBSIDIARIES MILLER MASTERS K&N COMPANIES COMPANIES ACQUISITIONS PARENT ADJUSTMENTS
------------ ---------- ------- ------- ----------- ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $82,226 $54,560 $31,166 $10,061 $30,359 $35,949 $79,788 $ -- $ --
COST OF SERVICES. 59,210 46,400 27,955 8,670 18,858 25,947 63,748 -- --
------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit.... 23,016 8,160 3,211 1,391 11,501 10,002 16,040 -- --
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 26,507 6,239 2,015 1,376 9,643 7,827 12,388 1,783 (15,298)(a)
GOODWILL AMORTI-
ZATION........... 204 -- -- -- 55 27 9 -- 1,883 (b)
------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss)
from operations. (3,695) 1,921 1,196 15 1,803 2,148 3,643 (1,783) 13,415
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (1,135) (333) (102) (40) (158) (199) (305) (2) 2,177 (c)
Interest income. 244 1 11 1 80 16 130 4 --
Other........... 266 182 -- (9) 161 63 60 -- (22)(d)
------- ------- ------- ------- ------- ------- ------- ------- --------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ (4,320) 1,771 1,105 (33) 1,886 2,028 3,528 (1,781) 15,570
INCOME TAX PROVI-
SION............. 1,151 650 -- (55) 228 24 752 -- 5,994 (e)
------- ------- ------- ------- ------- ------- ------- ------- --------
NET INCOME
(LOSS)........... $(5,471) $ 1,121 $ 1,105 $ 22 $ 1,658 $ 2,004 $ 2,776 $(1,781) $ 9,576
======= ======= ======= ======= ======= ======= ======= ======= ========
PRO FORMA NET IN-
COME PER SHARE...
SHARES USED IN
COMPUTING PRO
FORMA NET INCOME
PER SHARE........ (f)
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
REVENUES......... $324,109
COST OF SERVICES. 250,788
-----------
Gross profit.... 73,321
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 52,480
GOODWILL AMORTI-
ZATION........... 2,178
-----------
Income (loss)
from operations. 18,663
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (97)
Interest income. 487
Other........... 701
-----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 19,754
INCOME TAX PROVI-
SION............. 8,744
-----------
NET INCOME
(LOSS)........... $ 11,010
===========
PRO FORMA NET IN-
COME PER SHARE... $ 0.48
===========
SHARES USED IN
COMPUTING PRO
FORMA NET INCOME
PER SHARE........ 22,930
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-12
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
-------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $6,259 $3,419 $5,144 $2,168 $844 $12,525 $30,359
COST OF SERVICES. 3,603 2,227 3,805 1,005 184 8,034 18,858
------ ------ ------ ------ ---- ------- -------
Gross profit.... 2,656 1,192 1,339 1,163 660 4,491 11,501
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 2,021 949 714 1,455 532 3,972 9,643
GOODWILL AMORTI-
ZATION........... -- 48 -- 7 -- -- 55
------ ------ ------ ------ ---- ------- -------
Income (loss)
from operations. 635 195 625 (299) 128 519 1,803
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (2) (34) (13) (11) (8) (90) (158)
Interest income. 34 4 29 4 -- 9 80
Other........... 8 (8) 30 63 (1) 69 161
------ ------ ------ ------ ---- ------- -------
INCOME (LOSS) BE-
FORE INCOME
TAX PROVISION.... 675 157 671 (243) 119 507 1,886
INCOME TAX PROVI-
SION............. -- -- 225 (21) 22 2 228
------ ------ ------ ------ ---- ------- -------
NET INCOME
(LOSS)........... $ 675 $ 157 $ 446 $ (222) $ 97 $ 505 $ 1,658
====== ====== ====== ====== ==== ======= =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $9,229 $2,259 $5,963 $3,731 $14,767 $35,949
COST OF SERVICES. 6,938 1,679 4,497 2,780 10,053 25,947
------- ------- ---------- ---------- --------- ----------
Gross profit.... 2,291 580 1,466 951 4,714 10,002
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,627 627 890 629 4,054 7,827
GOODWILL AMORTI-
ZATION........... -- -- -- -- 27 27
------- ------- ---------- ---------- --------- ----------
Income (loss)
from operations. 664 (47) 576 322 633 2,148
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (30) (10) (41) (63) (55) (199)
Interest income. -- -- -- -- 16 16
Other........... (10) -- 8 -- 65 63
------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME
TAX PROVISION.... 624 (57) 543 259 659 2,028
INCOME TAX PROVI-
SION............. -- (4) -- -- 28 24
------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 624 $ (53) $ 543 $ 259 $ 631 $ 2,004
======= ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-13
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
Group Maintenance America Corp. ("GroupMAC") was founded in 1996 to create
the leading nationwide provider of heating, ventilation and air conditioning
("HVAC"), plumbing and electrical services to residential and commercial
customers. GroupMAC acquired 11 companies through September 30, 1997 (the
"Pre-Offering Companies"), 13 companies (the "Offering Acquisition Companies")
concurrently with the IPO and acquired 9 companies after the IPO (the "Post-
Offering Companies").
The unaudited pro forma combined statements of operations for the year ended
December 31, 1996 utilize the fiscal years of the companies, all of which
approximate GroupMAC's fiscal year end. For the nine months ended September
30, 1996 and 1997, the respective companies' actual financial statements for
the nine month periods ended September 30, 1996 and 1997 are utilized. The
respective results of operations for the Pre-Offering Companies from January
1, 1997 to the dates of the acquisitions were combined with GroupMAC, the
Offering Acquisition Companies' and the Post-Offering Companies' actual
results of operations for the nine months ended September 30, 1997 to
determine the pro forma results of operations for the nine months ended
September 30, 1997.
2. ACQUISITIONS:
The acquisitions of the Pre-Offering Companies were financed by borrowings
under a credit agreement dated May 2, 1997 (the "Credit Agreement"). The
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 Credit
Agreement (the "Acquisition Credit Facility"). The Credit Agreement is more
fully described in Note 7 to the GroupMAC and Subsidiaries Consolidated
Financial Statements contained herein. Borrowings under this facility were
repaid with proceeds from the IPO.
The results of operations of the transactions are included in the actual
results of operations of the Company from the date of acquisition and the
historical balance sheet at September 30, 1997 includes the acquisitions
completed as of that date. In addition, the Company acquired the Offering
Acquisition Companies concurrently with the IPO. 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 primarily by proceeds from the IPO.
The following table sets forth the consideration paid or to be paid in (a)
cash, (b) shares of non-convertible, non-voting Preferred Stock to the
shareholders of the Pre-Offering Companies and (c) 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, the value of the Preferred Stock is based on the liquidation value
of $1.00 per share. The value of the Common Stock is determined using an
estimated weighted average fair value of $11.33 per share, which represents a
discount rate of 21.1% from the weighted average stock price of $14.37 at the
respective dates of acquisition (i.e. the initial public offering price of
$14.00 for the Pre-Offering and Offering Acquisition Companies and $15.32 for
the Post-Offering Companies) due primarily to restrictions on the sale and
transferability of both the privately issued shares and shares issued
simultaneous with the IPO. The restrictions are created by the limitations on
future sales caused by existing securities laws, and an additional contractual
restriction imposed on the shares issued in connection with the acquisition of
the GroupMAC Companies. 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-14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The total estimated purchase price of $139.3 million for the Pre-Offering and
Offering Acquisition Companies (excluding Airtron, the accounting acquirer) is
comprised of (a) cash of $65.7 million, (b) Preferred Stock of $4.4 million
and (c) Common Stock of $69.2 million, based on the estimated fair values per
share discussed in this paragraph.
The estimated purchase price and related allocations of the excess purchase
price 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 acquired companies (representing $23.2
million) will approximate fair value. This results in an allocation to
goodwill of approximately $116.1 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. The total consideration
specified below has been reduced by distributions totaling $4.6 million
representing substantially all of the previously taxed undistributed earnings
of such acquired companies from the acquired companies that are S
corporations. The total consideration specified below does not reflect $0.3
million of other distributions of real estate and non operating assets offset
by related liabilities of $0.3 million. However, these amounts are reflected
in the pro forma adjustments as further described in Note 3.
<TABLE>
<CAPTION>
SHARES OF SHARES OF TOTAL
CASH PREFERRED STOCK(1) COMMON STOCK CONSIDERATION
------- ------------------ ------------ -------------
<S> <C> <C> <C> <C>
PRE-OFFERING COMPANIES
Airtron............... $20,849 14,873 4,652 $ 58,192
A-ABC/A-1............. 1,886 -- 359 5,659
Charlie's............. 1,503 -- 157 3,154
Costner............... 501 100 66 1,289
Hallmark.............. 2,081 580 106 3,770
Jarrell............... 150 -- 13 283
K&N................... 1,568 1,568 403 7,369
Way Residential (asset
purchase)............ 16 -- 6 84
Callahan Roach........ 2,450 1,050 192 5,517
Sibley................ 1,202 665 62 2,518
USA (asset purchase).. 436 436 50 1,395
------- ------ ------ --------
Total Pre-Offering
Acquisitions........... 32,642 19,272 6,066 89,230
------- ------ ------ --------
OFFERING ACQUISITION
COMPANIES
All Service........... 2,406 -- 210 4,578
Arkansas Mechanical... 2,299 -- 164 3,449
Central Carolina...... 3,751 -- 290 6,588
Evans ................ 1,165 -- 104 2,328
Linford .............. 655 -- 121 2,008
MacDonald-Miller...... 6,589 -- 706 14,494
Masters............... 7,484 -- 467 11,038
Mechanical............ 240 -- 17 297
Paul E. Smith......... -- -- 234 2,414
Southeast Mechanical.. 2,876 -- 179 4,880
Van's................. 1,568 -- 112 2,825
Willis................ 2,605 -- 279 5,731
Yale.................. 2,437 -- 174 3,327
------- ------ ------ --------
34,075 -- 3,057 63,957
------- ------ ------ --------
POST-OFFERING COMPANIES. 23,313 -- 1,709 44,267
------- ------ ------ --------
Sub S Corp
Distributions.......... (3,505) -- (76) --
------- ------ ------ --------
Totals.............. $86,525 19,272 10,756 $197,454
======= ====== ====== ========
</TABLE>
- --------
(1) The preferred stock is valued at $1 per share. This stock was redeemed for
$1 per share in connection with the IPO.
F-15
<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 $4.6 million of which $1.4
million is paid using cash on hand of the applicable company and $3.2 million
is satisfied with a note 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 acquired
companies that are specifically excluded as part of the purchase transaction.
d) Records the elimination of the historical equity accounts of the 13
Offering Acquisition Companies and the 9 Post-Offering Acquisition Companies.
e) Records the purchase of the 13 Offering Acquisition Companies and the 9
Post-Offering Acquisition Companies, including the cash and common stock
consideration due to these companies. In connection with the acquisitions of
certain of the GroupMAC Companies, the Company has agreed to make contingent
payments, if earned, to the former owners over periods up to two years based
on formulas in their respective acquisition agreements. These payments will be
made through a combination of cash and shares of Common Stock. Amounts earned
under the terms of the agreements will be recorded as additional goodwill and
amortized over the remaining amortization period.
f) Records the proceeds from the issuance of 8,340,000 shares of GroupMAC
Common Stock, net of estimated offering costs of $13,575,000. Offering costs
primarily consist of underwriting discounts and commissions, accounting fees,
legal fees and printing expenses.
g) Records the repayment of the Revolving Credit Facility, the Airtron Term
Loan and the Acquisition Line of Credit with proceeds from the IPO.
h) Records the cash portion paid or to be paid to the Offering Acquisition
Companies in connection with the acquisition of such companies.
i) Records the retirement of GroupMAC preferred stock.
j) Records the retirement of debt assumed in connection with the acquisition
of the GroupMAC Companies.
F-16
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
------- ------- ----- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $(1,394) $ 1,099 $ 178 (23,312) $(23,429)
Due from related
parties................ (1,714) (1,714)
Property and equipment,
net.................... (211) (211)
Goodwill................ 1,617 (154) (24,075) 109,972 87,360
Other noncurrent assets. (149) (394) (543)
Accounts payable and
accrued expenses....... (1,162) (1,162)
Short-term debt,
including current
maturities............. (3,178) 15 (3,163)
Deferred tax
liabilities, current... (1,506) 116 (1,390)
Due to
shareholder/affiliates. 615 (30,569) (29,954)
Long-term debt, net of
current maturities..... 101 101
Deferred tax
liabilities, long-term. (111) (60) (171)
Deferred compensation... 220 220
Common stock............ 1,204 (5) 1,199
Additional paid-in
capital................ 1,052 (54,586) (53,534)
Retained earnings
(deficit).............. 4,572 22,424 26,996
Treasury stock.......... (605) (605)
------- ------- ----- ------- ------- --------
Total................. $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ===== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
IPO
(F) (G) (H) (I) (J) ADJUSTMENTS
--------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 107,433 $(31,167) $(32,256) $(19,271) $(14,144) $ 10,595
Other noncurrent assets. (4,246) (4,246)
Short-term debt,
including current
maturities............. 3,333 6,999 10,332
Due to
shareholder/affiliates. 32,256 32,256
Long-term debt, net of
current maturities..... 27,834 7,089 34,923
Lease obligations....... 50 50
Other long-term
liabilities............ 6 6
Preferred stock......... 19,271 19,271
Common stock............ (9) (9)
Additional paid-in
capital................ (103,178) (103,178)
--------- -------- -------- -------- -------- ---------
Total................. $ -- $ -- $ -- $ -- $ -- $ --
========= ======== ======== ======== ======== =========
</TABLE>
F-17
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the GroupMAC Companies to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the terms
of the employment agreements. Such employment agreements are primarily for
three years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
The salaries, bonuses, benefits and other compensation items recorded in the
individual financial statements of each of the acquired companies amounted to
$19.2 million, $11.9 million and 12.1 million for the twelve month period
ended at or around December 31, 1996 and the nine month periods ended
September 30, 1996 and 1997, respectively. The contractually agreed upon
compensation and benefits for these same companies, on a going forward basis,
amount to $5.1 million, $3.8 million and $3.8 million for the twelve month
period ended at or around December 31, 1996 and the nine month periods ended
September 30, 1996 and 1997, respectively. The differences between these
amounts for the periods noted herein equate to $14.1 million, $8.1 million and
$8.3 million, respectively and are reflected as pro forma adjustments.
Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $7.0 million recorded by the
Company in the second quarter of 1997 related to the reverse acquisition of
GroupMAC Parent.
b) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40-year estimated life.
c) Reflects the elimination of historical interest expense related to the
Credit Agreement and the assumed debt of the GroupMAC Companies resulting from
the payoff of such debt with the proceeds of the IPO. Offsetting this
reduction is interest expense related to the notes issued to fund the S
Corporation Distributions discussed in Note 3a.
d) Reflects the elimination of income and expenses related to a management
benefit plan in effect at one of the GroupMAC Companies. This plan was
liquidated in connection with the acquisition of the company.
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) The number of shares outstanding on completion of the IPO include the
following:
<TABLE>
<S> <C>
Shares issued in Initial Public Offering............................. 8,340,000
Shares issued under Subscription Agreement dated October 24, 1996.... 2,600,000
Shares issued to Pre-Offering Companies.............................. 6,066,086
Shares issued to Offering Acquisition Companies...................... 2,980,986
Shares issued to Post-Offering Acquisition Companies................. 1,709,418
Shares issued to Founding Management and Directors................... 1,037,638
Incremental effect of options and warrants on shares outstanding..... 195,643
----------
Shares estimated to be outstanding................................... 22,929,771
==========
</TABLE>
F-18
<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-19
<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, $.001 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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
FEBRUARY 28, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 4,339 $ 7,801
Accounts receivable............................... 7,811 15,058
Inventories....................................... 3,354 5,344
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 13 119
Prepaid expenses and other current assets......... 359 859
Deferred tax assets............................... 765 1,575
Refundable income taxes........................... 3,236 --
------- -------
Total current assets............................. 19,877 30,756
PROPERTY AND EQUIPMENT, net......................... 1,289 5,658
GOODWILL, net....................................... -- 27,992
DEFERRED TAX ASSET.................................. 3,195 10,095
OTHER NONCURRENT ASSETS............................. 2,792 6,655
------- -------
Total assets..................................... $27,153 $81,156
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt................................... $ 149 $ 3,561
Accounts payable and accrued expenses............. 10,647 15,032
Due to related parties............................ -- 1,687
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 1,469 1,757
Deferred service contract revenue................. 739 1,779
Income taxes payable.............................. 536 1,580
Other current liabilities......................... -- 2,026
------- -------
Total current liabilities........................ 13,540 27,422
LONG-TERM DEBT, net of current maturities........... 1,141 28,482
COMPENSATION AND BENEFITS PAYABLE................... 5,831 --
DUE TO SHAREHOLDERS................................. -- 9,745
OTHER LONG-TERM LIABILITIES......................... 650 916
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND RELATED WARRANTS..... -- 19,271
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; 100,000 shares au-
thorized; 4,652 and 9,486 shares issued and out-
standing, respectively........................... 5 9
Additional paid-in capital........................ 2,646 28,980
Retained earnings (deficit)....................... 3,340 (33,669)
------- -------
Total shareholders' equity (deficit)............. 5,991 (4,680)
------- -------
Total liabilities and shareholders' equity....... $27,153 $81,156
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-29
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
------- --------
<S> <C> <C>
REVENUES ............................. $48,826 $70,468
COST OF SERVICES ..................... 35,392 50,977
------- -------
Gross profit ....................... 13,434 19,491
SELLING, GENERAL AND ADMIN-
ISTRATIVE EXPENSES .................. 10,003 14,639
AMORTIZATION OF GOODWILL.............. -- 204
COMPENSATION EXPENSE FROM
REVERSE ACQUISITION.................. -- 6,978
------- -------
Income from operations ........... 3,431 (2,330)
OTHER INCOME (EXPENSE):
Interest expense ................... (40) (1,093)
Interest income .................... 58 184
Other .............................. 22 41
------- -------
Income before income tax
provision........................ 3,471 (3,198)
INCOME TAX PROVISION ................. 1,396 1,602
------- -------
NET INCOME (LOSS)..................... $ 2,075 $(4,800)
======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 5,172 9,086
======= =======
NET INCOME PER COMMON
SHARE.............................. $ 0.40 $ (0.53)
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-30
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 2,075 $ (4,800)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 60 724
Deferred income taxes................................. -- 64
Non-cash compensation expense from reverse acquisi-
tion................................................. -- 6,978
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as purchases:
(Increase) decrease in -
Accounts receivable................................. (3,073) (905)
Inventories......................................... 1,184 (207)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 36 (51)
Prepaid expenses and other current assets........... 25 367
Refundable income taxes............................. -- 3,324
Other noncurrent assets............................. 12 (2,228)
Increase (decrease) in -
Accounts payable.................................... 429 907
Accrued expenses.................................... 975 (1,906)
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 427 215
Deferred service contract revenue................... 27 124
Income tax payable.................................. (1,000) 850
Other current liabilities........................... 35 1,628
Compensation and benefits payable................... (1,082) (9)
Other long-term liabilities......................... -- 120
-------- ----------
Net cash provided by operating activities........... 130 5,195
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired of
$1,787................................................. -- (8,852)
Deferred acquisition costs.............................. -- (261)
Purchases of property and equipment..................... (34) (1,536)
-------- ----------
Net cash used in investing activities............... (34) (10,649)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................ -- 32,500
Payments of long-term debt.............................. -- (5,155)
Deferred offering costs................................. -- (4,248)
Proceeds from issuance of stock......................... -- 6,186
Distributions to shareholders........................... -- (20,367)
-------- ----------
Net cash provided by financing activities........... -- 8,916
-------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 96 3,462
CASH AND CASH EQUIVALENTS, beginning of period........... 1,774 4,339
-------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 1,870 $ 7,801
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-31
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
(FORMERLY AIRTRON, INC.)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated condensed financial statements of
Group Maintenance America Corp., ("the Company") have been prepared in
accordance with Rule 10-01 of Regulation S-X and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Those adjustments, which include only
normal recurring adjustments, that are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods have
been made. 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
contained elsewhere herein.
2. Net income (loss) per share is calculated by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents. Stock options are regarded as common stock equivalents and are
therefore considered in net income per share calculations, if dilutive. Common
stock equivalents are computed using the treasury stock method. Primary and
fully diluted shares are the same.
The following table summarizes weighted average shares outstanding for each
of the historical periods presented (in thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
SEPTEMBER 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Shares issued in the acquisition of Airtron...................... 5,172 4,652
Group Maintenance America Corp. shares outstanding, excluding
acquisitions.................................................... -- 3,126
Shares issued for the acquisition of the Pre-Offering Companies.. -- 1,142
Stock options, net of assumed repurchase of common shares as
treasury stock.................................................. -- 166
------ ------
5,172 9,086
====== ======
</TABLE>
3. On November 13, 1997, the Company completed the IPO, which involved the
sale of 7,500,000 shares of Common Stock at a price to the public of $14.00
per share. The net proceeds from the Offering (after deducting underwriting
discounts and commissions and offering expenses) were approximately $92.2
million. Of this amount, $31.6 million has been used to pay the cash portion
of the purchase prices relating to the acquisitions of the Pre-Offering and
Offering Acquisition Companies, $41.0 million to repay corporate indebtedness
and debt assumed in connection with the acquisition of the Offering
Acquisition Companies and $19.3 million to retire all of the then outstanding
preferred stock. On December 5, 1997, the underwriters gave notice of the
exercise of their overallotment option for 840,000 shares of Common Stock at
$14.00 per share (representing net proceeds to the Company of $10.9 million
after underwriting discounts and commissions).
4. On August 16, 1997, the Company's Board of Directors approved a 1-for-2.5
reverse stock split on the Company's common stock. All share and per share
data included in the accompanying unaudited consolidated condensed financial
statements have been restated to reflect the stock split. The Group
Maintenance America Corp. 1997 Stock Awards Plan (the "Stock Awards Plan") was
adopted by the Company's Board of Directors 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, the Company intends to grant options
to purchase approximately 1.9 million shares of Common Stock at an exercise
price equal to the initial public offering price of $14.00 per share.
F-32
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
(FORMERLY AIRTRON, INC.)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
5. During January 1998, the Company completed the acquisition of nine
companies (the "Post-Offering Companies"). The Post-Offering Companies
combined 1996 revenues were $84.2 million. Total consideration paid was $43.0
million, which included cash payments of $23.3 million. The Company utilized
$11.1 million of the Bank Credit Agreement with the remaining portion of the
cash consideration funded from the net proceeds of the IPO.
6. The Company entered into a new credit facility with an initial borrowing
capacity of $75 million (the "New Credit Facility") which replaced a $35
million credit agreement. Under the New Credit Facility, the Company is
required to maintain (ii) 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 New
Credit Facility); and (iv) a minimum consolidated net worth (as defined in the
New Credit Facility).
7. The acquisition of the GroupMAC Companies included in the accompanying
financial statements are accounted for under the purchase method. 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 value and may be
revised as additional information becomes available.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp. and Subsidiaries (formerly Airtron, Inc.):
We have audited the accompanying consolidated balance sheets of Group
Maintenance America Corp. and Subsidiaries (formerly Airtron, Inc.) (the
Company) as of February 29, 1996, February 28, 1997 and June 30, 1997 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended February 28, 1995, February 29, 1996 and
February 28, 1997, and the four months ended June 30, 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 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 (formerly Airtron, Inc.) as of
February 29, 1996, February 28, 1997 and June 30, 1997 and the results of its
operations and its cash flows for the years ended February 28, 1995, February
29, 1996 and February 28, 1997, and the four months ended June 30, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 1, 1997
F-34
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
----------- ----------- ------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 1,773,643 $ 4,339,406 $ 5,875,027
Accounts receivable, net of allowance
for doubtful accounts of $568,327,
$479,905 and $528,769, respectively... 7,409,168 7,811,108 14,939,516
Inventories............................ 3,686,094 3,354,054 4,934,852
Costs and estimated earnings in excess
of billings on uncompleted contracts.. 36,123 13,229 43,274
Prepaid expenses and other current
assets................................ 351,783 359,427 1,136,436
Deferred tax assets.................... 1,338,000 764,500 1,607,450
Refundable income taxes................ -- 3,235,500 576,467
----------- ----------- ------------
Total current assets................. 14,594,811 19,877,224 29,113,022
PROPERTY AND EQUIPMENT, net.............. 1,387,456 1,289,242 4,721,461
GOODWILL, net of accumulated amortization
of $30,795.............................. -- -- 18,317,831
DEFERRED TAX ASSET....................... 4,957,700 3,195,100 10,120,000
OTHER NONCURRENT ASSETS.................. 7,342,260 2,791,491 2,669,975
----------- ----------- ------------
Total assets......................... $28,282,227 $27,153,057 $ 64,942,289
=========== =========== ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt.......... $ -- $ 148,994 $ 4,577,200
Accounts payable....................... 2,958,771 2,882,012 7,089,459
Accrued expenses....................... 5,231,529 7,765,355 5,315,951
Due to related parties................. -- -- 537,421
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 1,554,948 1,469,002 1,780,467
Deferred service contract revenue...... 732,655 738,559 1,153,186
Income taxes payable................... 832,023 536,498 494,479
Other current liabilities.............. -- -- 740,000
----------- ----------- ------------
Total current liabilities............ 11,309,926 13,540,420 21,688,163
LONG-TERM DEBT, net of current
maturities.............................. -- 1,140,933 26,467,994
COMPENSATION AND BENEFITS PAYABLE........ 9,909,809 5,831,263 --
DUE TO SHAREHOLDERS...................... -- -- 9,744,500
OTHER LONG-TERM LIABILITIES.............. 689,100 650,000 918,479
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND RELATED
WARRANTS................................ -- -- 17,121,131
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value;
100,000,000 shares authorized;
5,692,261, 4,652,140 and 8,707,998
shares issued and outstanding,
respectively.......................... 5,692 4,652 8,708
Additional paid-in capital............. 2,701,116 2,646,093 25,740,895
Retained earnings (deficit)............ 3,666,584 3,339,696 (34,693,811)
Subscriptions receivable............... -- -- (2,053,770)
----------- ----------- ------------
Total shareholders' equity (deficit). 6,373,392 5,990,441 (10,997,978)
----------- ----------- ------------
Total liabilities and shareholders'
equity (deficit).................... $28,282,227 $27,153,057 $ 64,942,289
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED JUNE
YEAR ENDED YEAR ENDED YEAR ENDED 30,
FEBRUARY FEBRUARY FEBRUARY ------------------------
28, 1995 29, 1996 28, 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $72,225,889 $73,764,643 $81,879,819 $25,956,840 $31,085,514
COST OF SERVICES........ 50,459,914 52,673,935 58,505,888 18,925,670 22,686,136
----------- ----------- ----------- ----------- -----------
Gross profit.......... 21,765,975 21,090,708 23,373,931 7,031,170 8,399,378
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 17,882,164 17,614,854 19,811,136 5,461,278 6,189,127
COMPENSATION EXPENSE
FROM REVERSE
ACQUISITION............ -- -- -- -- 6,978,300
WARRANT COMPENSATION.... 2,400,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........... 1,483,811 3,475,854 3,562,795 1,569,892 (4,768,049)
OTHER INCOME (EXPENSE):
Interest expense...... -- -- (82,211) (37,768) (352,666)
Interest income....... 75,835 67,744 170,918 20,100 93,212
Other................. 140,078 246,219 256,249 23,535 2,821
----------- ----------- ----------- ----------- -----------
Income (loss) before
income tax
provision.......... 1,699,724 3,789,817 3,907,751 1,575,759 (5,024,682)
INCOME TAX PROVISION.... 910,664 1,650,956 1,571,680 633,614 800,000
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....... $ 789,060 $ 2,138,861 $ 2,336,071 $ 942,145 $(5,824,682)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 8,008,122 6,190,337 5,172,201 5,172,201 8,875,295
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER
SHARE.................. $ 0.10 $ 0.35 $ 0.45 $ 0.18 $ (0.66)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK RECEIVABLE EQUITY (DEFICIT)
---------- -------- ----------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28,
1994................... 502,767 $502,767 $ -- $ 7,305,936 $(5,633,300) $ -- $ 2,175,403
Adjustment to convert
number and par value
of Airtron shares to
shares of GroupMAC
Parent ............... 8,825,065 (493,439) 493,439 -- -- -- --
---------- -------- ----------- ------------ ----------- ----------- ------------
RESTATED BALANCE, Febru-
ary 28, 1994........... 9,327,832 9,328 493,439 7,305,936 (5,633,300) -- 2,175,403
Purchases of stock..... -- -- -- -- (1,534,896) -- (1,534,896)
Cancellation of trea-
sury stock............ (2,639,420) (2,640) (139,626) (4,618,714) 4,760,980 -- --
Contributions of bene-
fit trust............. -- -- -- -- 2,125,866 -- 2,125,866
Compensation on war-
rants................. -- -- 2,400,000 -- -- -- 2,400,000
Net income............. -- -- -- 789,060 -- -- 789,060
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 28,
1995................... 6,688,412 6,688 2,753,813 3,476,282 (281,350) -- 5,955,433
Purchases of stock..... -- -- -- -- (2,657,565) -- (2,657,565)
Cancellation of trea-
sury stock............ (996,151) (996) (52,697) (1,948,559) 2,002,252 -- --
Contributions to bene-
fit trust............. -- -- -- -- 936,663 -- 936,663
Net income............. -- -- -- 2,138,861 -- -- 2,138,861
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 29,
1996................... 5,692,261 5,692 2,701,116 3,666,584 -- -- 6,373,392
Purchases of stock..... -- -- -- -- (2,112,474) -- (2,112,474)
Repurchase of warrants. -- -- -- (600,000) -- -- (600,000)
Cancellation of trea-
sury stock............ (1,040,121) (1,040) (55,023) (2,056,411) 2,112,474 -- --
Distributions to share-
holders............... -- -- -- (6,548) -- -- (6,548)
Net income............. -- -- -- 2,336,071 -- -- 2,336,071
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 28,
1997................... 4,652,140 4,652 2,646,093 3,339,696 -- -- 5,990,441
Purchase of Acquired
Companies............. 2,713,858 2,714 23,065,369 -- -- (6,153,000) 16,915,083
Preferred Stock issued
to Airtron sharehold-
ers in reverse acqui-
sition................ -- -- -- (14,873,133) -- -- (14,873,133)
Distribution to Airtron
shareholders in
reverse acquisition... -- -- -- (17,335,692) -- -- (17,335,692)
Shares issued under
subscription agree-
ment.................. 1,332,000 1,332 (1,332) -- -- 4,099,230 4,099,230
Exercise of options.... 10,000 10 30,765 -- -- -- 30,775
Net (loss)............. -- -- -- (5,824,682) -- -- (5,824,682)
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, June 30, 1997.. 8,707,998 $ 8,708 $25,740,895 $(34,693,811) $ -- $(2,053,770) $(10,997,978)
========== ======== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 789,060 $ 2,138,861 $ 2,336,071 $ 942,145 $ (5,824,682)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 228,759 238,338 208,037 71,836 194,477
Gain from sale of
property and
equipment............. 6,993 (9,222) (223,593) (5,521) --
Deferred income taxes.. (2,295,336) (1,400,500) 2,336,100 1,204,700 2,338,223
Non-cash compensation
expense from reverse
acquisition........... -- -- -- -- 6,978,300
Warrant compensation... 2,400,000 -- -- -- --
Changes in operating
assets and
liabilities, net of
effect of
acquisitions
accounted for as
purchases:
(Increase) decrease
in -
Accounts receivable.. (571,196) (403,499) (401,940) (1,756,106) (2,078,958)
Inventories.......... (177,969) 171,699 332,040 456,037 29,553
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... (174,216) 163,218 22,894 -- (30,045)
Prepaid expenses and
other current
assets.............. 2,718 (33,805) (7,644) (1,068,085) 71,952
Refundable income
taxes............... -- -- (3,235,500) -- 431,378
Other noncurrent
assets.............. -- -- -- -- 4,821
Increase (decrease)
in -
Accounts payable..... (2,464) 425,430 (76,759) 1,400,875 461,236
Accrued expenses..... 417,434 667,499 2,533,826 (435,002) (5,848,590)
Due to related
parties............. -- -- -- -- (10,395)
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... 248,316 (143,888) (85,946) 340,007 311,465
Deferred service
contract revenue.... 46,264 23,516 5,904 27,844 (104,989)
Income tax payable... (77,096) 590,661 (295,525) (1,597,897) (221,172)
Other current
liabilities......... -- -- -- -- 619,120
Compensation and
benefits payable.... 1,498,152 1,579,127 254,920 (1,086,957) (8,513)
Other long-term
liabilities......... -- -- -- -- 121,405
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities......... 2,339,419 4,007,435 3,702,885 (1,506,124) (2,565,414)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Cash paid for
acquisitions, net of
cash acquired of
$2,011,220............ -- -- -- -- (5,342,855)
Deferred offering
costs................. -- -- -- -- (545,690)
Purchases of property
and equipment......... (370,289) (246,009) (182,256) (49,048) (364,955)
Proceeds from sale of
property and
equipment............. -- 56,909 296,026 -- --
Proceeds from note
receivable............ 29,396 -- 155,803 -- --
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities......... (340,893) (189,100) 269,573 (49,048) (6,253,500)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Purchases of stock..... (1,534,896) (2,657,565) (787,174) (205,471) --
Repurchase of warrants. -- -- (538,500) -- --
Proceeds from long-term
debt.................. -- -- -- -- 29,600,000
Payments of long-term
debt.................. -- -- (35,373) -- (2,976,681)
Payments of other long-
term obligations...... -- (37,000) (39,100) (13,000) --
Deferred offering
costs................. -- -- -- -- (31,838)
Issuance of stock...... -- -- -- -- 4,099,230
Exercise of options.... -- -- -- -- 30,775
Distributions to
shareholders.......... -- -- (6,548) -- (20,366,951)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities......... (1,534,896) (2,694,565) (1,406,695) (218,471) 10,354,535
----------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 463,630 1,123,770 2,565,763 (1,773,643) 1,535,621
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 186,243 649,873 1,773,643 1,773,643 4,339,406
----------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 649,873 $ 1,773,643 $ 4,339,406 $ -- $ 5,875,027
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. (GroupMAC Parent) was incorporated as a
Texas corporation in October, 1996 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, 14,873,131 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.
Although for legal purposes Airtron was acquired by GroupMAC Parent, for
accounting purposes, the transaction was accounted for as a reverse
acquisition, as if Airtron acquired GroupMAC Parent, due to the fact that the
former shareholders of Airtron then owned a majority of GroupMAC Parent's
common stock. In connection with the purchase of GroupMAC Parent, the
consideration paid to the shareholders of GroupMAC Parent was recorded as a
nonrecurring compensation expense of $6,978,300 in the accompanying statements
of operations for the four month period ended June 30, 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
stock structure to GroupMAC Parent's capital stock structure to reflect the
exchange of shares pursuant to the Agreement. The cash 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 the Company's common stock, the
Company intends to change its fiscal year end from February 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, Kentucky, Florida and
Texas.
In May and June 1997, the Company acquired in separate transactions seven
additional residential or commercial service companies (the Acquired
Companies), through a combination of cash and preferred and common stock of
the Company. Subsequent to June 30, 1997 the Company acquired three additional
companies (together with the Acquired Companies, the Pre-Offering Companies)
and has signed definitive agreements to acquire 13 others.
The acquisitions of the Acquired Companies 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
Interim Financial Information
The interim consolidated financial statements for the four 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.
F-39
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
from service and maintenance contracts are recognized over the life of the
contracts. 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
Cash equivalents of approximately $911,000, $2,189,000 and $3,823,000 at
February 29, 1996, February 28, 1997 and June 30, 1997, respectively, consist
of short-term investments in money market funds. 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 income taxes were approximately $2,946,000, $2,452,000,
$2,586,000 and $456,000 for the years ended February 28, 1995, February 29,
1996 and February 28, 1997 and the four months ended June 30, 1997,
respectively.
Investments
The Company classifies all investments held for the deferred compensation
plan with readily determinable fair values as trading securities. These
securities are recorded at fair value with unrealized holding gains and losses
reported in earnings. Where readily determinable fair values are not
available, investments are recorded at cost.
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 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 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.
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
F-40
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Stock-Based Compensation
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 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 the Company's stock at the date of the grant over the
amount an employee must pay to acquire the 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.
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.
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
Earnings Per Share, which the Company is required to adopt for both interim
and annual periods ending after December 15, 1997. SFAS 128 simplifies the
earnings per share calculation by replacing primary earnings per share with
basic earnings per share, as well as requiring the presentation of fully
diluted earnings per share. Basic earnings per share is computed by dividing
reported earnings available to common shareholders by the weighted average
shares outstanding. The Company's current presentation of net income per share
is the same as the fully diluted earnings per share presentation required by
SFAS 128.
F-41
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share is calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents. Stock
options are regarded as common stock equivalents and are therefore considered
in net income per share calculations if dilutive. Common stock equivalents are
computed using the treasury stock method. All stock options are dilutive and,
accordingly, primary and fully diluted net income per share are the same.
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, ---------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issued in the
acquisition of Airtron. 8,008,122 6,190,337 5,172,201 5,172,201 4,652,140
Group Maintenance
America Corp. shares
outstanding, excluding
acquisitions........... -- -- -- -- 2,953,345
Shares issued for the
acquisition of the
Acquired Companies..... -- -- -- -- 1,102,513
Stock options, net of
assumed repurchase of
common shares as
treasury stock......... -- -- -- -- 167,297
--------- --------- --------- --------- ---------
8,008,122 6,190,337 5,172,201 5,172,201 8,875,295
========= ========= ========= ========= =========
</TABLE>
3. BUSINESS COMBINATIONS
During May and June 1997, the Company acquired the Acquired Companies for an
aggregate consideration of approximately $21,608,000. This consisted of
$7,705,000 in cash and payables to the former shareholders of the Acquired
Companies, and 2,248,000 and 1,110,019 shares of preferred and common stock,
respectively. The preferred stock was valued at its redemption value of $1 per
share. The common stock was valued at its estimated fair value at the time of
the respective acquisition. The Company financed the cash portion of the
purchase consideration through borrowings under its credit agreement. 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 value and may be
revised as additional information becomes available.
F-42
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC Parent, Airtron and the Acquired Companies as if
the acquisitions were effective on the first day of the period being reported
(in thousands, except for per share amounts) (unaudited).
<TABLE>
<CAPTION>
FISCAL FOUR MONTHS
YEAR ENDED
1996 JUNE 30, 1997
-------- -------------
<S> <C> <C>
Revenues.......................................... $128,500 $43,900
======== =======
Net income........................................ $ 6,000 $ 1,000
======== =======
Net income per share.............................. $ 0.68 $ 0.11
======== =======
</TABLE>
The above pro forma amounts for 1996 include the historical information for
each of the companies using their historical year end, rather than the year
end of the Company, as the Acquired Companies year end approximates the
Company's. The pro forma amounts for 1997 include the results of operations
for each of the companies for the four months ended June 30, 1997. 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, the addition
of interest expense on borrowed funds used to finance the acquisition of
Airtron and the Acquired Companies, and adjustment to the federal and state
income tax provisions based on pro forma operating results. Net income per
share for 1996 and 1997 assumes all shares issued for the acquisitions of
Airtron and the Acquired Companies had been outstanding for the periods
presented.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Investments restricted for benefit of
employees:
Recorded at fair value..................... $4,033,097 $ -- $ --
Recorded at cost........................... 3,153,360 2,791,491 --
Note receivable.............................. 155,803 -- --
Refundable income taxes...................... -- -- 2,183,883
Other noncurrent assets...................... -- -- 486,092
---------- ---------- ----------
$7,342,260 $2,791,491 $2,669,975
========== ========== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C> <C>
Accrued payroll costs and benefits............ $4,423,249 $7,006,790 $3,063,446
Warranties.................................... 494,506 544,031 853,592
Other accrued expenses........................ 313,774 214,534 1,398,913
---------- ---------- ----------
$5,231,529 $7,765,355 $5,315,951
========== ========== ==========
</TABLE>
F-43
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs incurred....................... $ 14,613,066 $ 13,125,649 $ 16,489,091
Estimated earnings recognized........ 2,983,612 2,275,287 3,129,035
------------ ------------ ------------
17,596,678 15,400,936 19,618,126
Less billings on contracts........... (19,115,503) (16,856,709) (21,355,319)
------------ ------------ ------------
$ (1,518,825) $ (1,455,773) $ (1,737,193)
============ ============ ============
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY JUNE 30,
1996 28, 1997 1997
------------ ----------- -----------
<S> <C> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts... $ 36,123 $ 13,229 $ 43,274
Billings in excess of costs and
estimated earnings on uncompleted
contracts.............................. (1,554,948) (1,469,002) (1,780,467)
----------- ----------- -----------
$(1,518,825) $(1,455,773) $(1,737,193)
=========== =========== ===========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
were as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL FEBRUARY FEBRUARY JUNE 30,
LIVES 29, 1996 28, 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land........................ -- $ 244,813 $ 217,551 $ 217,551
Building and improvements... 20-30 years 927,631 639,903 639,903
Service and other vehicles.. 4-7 years 114,837 134,795 2,533,669
Machinery and equipment..... 5-10 years 679,748 686,319 1,156,245
Office equipment, furniture
and fixtures............... 5-10 years 667,220 724,013 1,313,933
Leasehold improvements...... -- 542,422 550,033 687,214
----------- ----------- -----------
3,176,671 2,952,614 6,548,515
Less accumulated
depreciation............... (1,789,215) (1,663,372) (1,827,054)
----------- ----------- -----------
$ 1,387,456 $ 1,289,242 $ 4,721,461
=========== =========== ===========
</TABLE>
F-44
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT-AND LONG-TERM DEBT
Short-and long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY JUNE 30,
28, 1997 1997
---------- -----------
<S> <C> <C>
Note payable to former shareholder at 8.25%, due in
monthly installments of $20,822 including interest,
repaid in May 1997 with proceeds from the Company's
Credit Agreement.................................... $1,289,927 $ --
Credit Agreement:
Revolving credit loan.............................. -- 500,000
Advancing acquisition line of credit loan.......... -- 9,100,000
Term loan.......................................... -- 20,000,000
Equipment installment loans payable to banks and
other financial institutions, interest varying from
7.5% to 10.25%, payable in monthly installments
including interest, final installment due January
1998................................................ -- 450,230
Equipment installment loans payable to banks,
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................................... -- 471,295
Notes payable to the former shareholders of an
Acquired Company at 8%, payable in monthly
installments through November 2004.................. -- 523,669
---------- -----------
Total short- and long-term debt.................. 1,289,927 31,045,194
Less short-term borrowings and current maturities.... (148,994) (4,577,200)
---------- -----------
$1,140,933 $26,467,994
========== ===========
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the Credit
Agreement) with a total commitment of $35 million. The Credit Agreement
consists of three portions: (a) a revolving credit agreement up to $3 million
for use as working capital, (b) a $12 million advancing acquisition line of
credit to finance the acquisitions, and (c) a $20 million term loan to finance
the acquisition of Airtron. Borrowings under the Credit Agreement bear
interest through October 1998 at the prime rate. Beginning in November 1998,
the interest rate is adjusted for margins ranging from 0% to 0.5%, depending
on the ratio of the Company's funded debt to its historical earnings before
interest, taxes, depreciation and amortization, subject to certain
adjustments, as approved by the lender. The Company is subject to commitment
fees of 0.25% per annum for the unutilized portion of the revolving credit
agreement and the advancing acquisition line of credit. The Credit Agreement
prohibits the Company from incurring additional indebtedness, except for
indebtedness existing at the time of execution of the Credit Agreement,
letters of credit up to $750,000, earn-out obligations and other limitations.
The Company may not pay any dividends or repurchase outstanding shares of the
Company's stock, except for the purchase of stock of departing officers and
employees. The Credit Agreement also requires the Company to maintain certain
levels of consolidated net worth and comply with certain other financial
covenants. The Company's subsidiaries have guaranteed all borrowings under the
Credit Agreement. All outstanding borrowings under the revolving credit
agreement are due on or before October 31, 1998, and the advancing acquisition
line of credit and the term loan mature on April 30, 2003. At June 30, 1997,
the applicable interest rate is 8.5%.
F-45
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the long-term debt as of June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING
JUNE
30,
------
<S> <C>
1998..................................... $ 4,577,200
1999..................................... 5,168,487
2000..................................... 5,498,520
2001..................................... 5,450,153
2002..................................... 5,450,153
Thereafter............................... 4,900,681
-----------
$31,045,194
===========
</TABLE>
8. DUE TO SHAREHOLDERS
Under the Agreement, part of the cash purchase price paid to 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 and deferred tax asset of
$9,744,500 have been recognized in the accompanying consolidated financial
statements for an estimate of these amounts as of June 30, 1997.
9. STOCK-BASED COMPENSATION PLANS
Prior to the Agreement, under an option agreement dated October 24, 1996,
GroupMAC Parent granted stock options to directors and senior management to
purchase an aggregate of 360,800 shares at an exercise price of $3.08.
Subsequent to the Agreement the Company did not grant any stock options
through June 30, 1997. Under this option agreement, options representing
350,800 shares of common stock were outstanding at June 30, 1997 and there
were options representing 28,000 shares of common stock available for grant.
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, date of Agreement.......... 360,800
Exercised............................................. $3.08 (10,000)
-------
Balance at June 30, 1997.............................. 350,800
=======
</TABLE>
F-46
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Accordingly, compensation cost has been recognized only for the
options which have an exercise price less 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 income and net income per share would have been decreased by the
following pro forma amounts:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1997
-----------
<S> <C>
Net Loss:
As Reported...................................................... $(5,824,682)
Pro forma........................................................ $(5,853,682)
Net Loss Per Share:
As Reported...................................................... $ (0.66)
Pro forma........................................................ $ (0.66)
</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 used for fiscal 1996 for the plan: 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 prior
to the Agreement is estimated to be $1.425.
In July 1994, Airtron extended 60,000 warrants to purchase common shares at
$1 each until August 1, 2011. The appraisal for market value of Airtron's
stock at that time, was $40 per share, resulting in a charge of $2,400,000 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 $538,500,
resulting in a reduction in retained earnings for the original recorded value
of the warrants of $600,000 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 Parent.
Airtron had deferred compensation arrangements for certain members of
management and the 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
COMMON STOCK
The Company is authorized to issue 100 million shares of common stock, $.001
par value. There are 8,707,998 shares of common stock outstanding at June 30,
1997.
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,
0.2 million in April, 1997, 880,000 on May 5, 1997, 452,000 on June 12, 1997,
326,000 on July 14, 1997 and additional shares are required to be purchased
upon written notice from the Company, but in no event later than October 24,
1998.
F-47
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PREFERRED STOCK
The Company is authorized to issue up to 50 million shares of preferred
stock, par value of $.001 per share, in one or more series. The non-
convertible, non-voting preferred stock is 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. In the event that an initial public offering (IPO) has not
occurred by June 30, 1999, cumulative dividends accrue commencing July 1, 1999
at an annual rate of $.08 per whole share. Redemption of all outstanding
preferred stock is mandatory upon an IPO.
In connection with certain acquisitions, the Company has issued 15,407,509
shares of preferred stock and warrants to purchase 1,713,622 shares of
preferred stock. Subsequent to June 30, 1997, an additional 2,150,462 shares
of preferred stock were issued in connection with other acquisitions (see Note
16).
11. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY JUNE 30,
28, 1995 29, 1996 28, 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal................... $ 2,590,000 $ 2,529,500 $(1,020,024) $(1,656,723)
State and local........... 616,000 536,456 384,338 118,500
----------- ----------- ----------- -----------
3,206,000 3,065,956 (635,686) (1,538,223)
Deferred:
Federal................... (2,295,336) (1,415,000) 2,207,366 2,338,223
State and local........... -- -- -- --
----------- ----------- ----------- -----------
$ 910,664 $ 1,650,956 $ 1,571,680 $ 800,000
=========== =========== =========== ===========
</TABLE>
Total income tax expense differs from the amounts 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>
FOUR MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate............ $577,906 $1,288,538 $1,328,635 $(1,708,392)
Increase (decrease)
resulting from:
State income taxes, net
of federal benefit...... 406,560 354,061 253,663 78,210
Compensation expense from
reverse acquisition..... -- -- -- 2,372,622
Other.................... (73,802) 8,357 (10,618) 57,560
-------- ---------- ---------- -----------
$910,664 $1,650,956 $1,571,680 $ 800,000
======== ========== ========== ===========
</TABLE>
F-48
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Allowance for doubtful
accounts................. $ 221,600 $ 187,200 $ 201,660
Inventories............... 222,800 245,600 245,590
Accrued expenses.......... 611,200 577,300 1,213,640
Compensation and benefits. 5,430,000 2,986,600 10,076,080
Other..................... -- -- 473,360
---------- ---------- -----------
Total deferred income
tax assets............. 6,485,600 3,996,700 12,210,330
---------- ---------- -----------
Deferred income tax
liabilities:
Depreciation.............. (2,000) (37,100) (313,580)
State franchise tax....... (163,300) -- (35,300)
Other..................... (24,600) -- (134,000)
---------- ---------- -----------
Total deferred income
tax liabilities........ (189,900) (37,100) (482,880)
---------- ---------- -----------
Net deferred income tax
assets................. $6,295,700 $3,959,600 $11,727,450
========== ========== ===========
</TABLE>
These deferred income tax assets and liabilities are included in the
accompanying consolidated balance sheets under the following captions:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets--current................. $1,338,000 $ 764,500 $ 1,607,450
Deferred tax assets--long-term............... 4,957,700 3,195,100 10,120,000
---------- ---------- -----------
$6,295,700 $3,959,600 $11,727,450
========== ========== ===========
</TABLE>
Management believes it is more likely than not the Company will realize the
benefits of the net deferred tax assets.
12. LEASES
Operating leases for certain facilities and transportation equipment expire
at various dates through 2009. Certain leases contain renewal options.
Approximate minimum future rental payments as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................... $ 2,141,000
1999....................................... 1,705,000
2000....................................... 1,341,000
2001....................................... 1,129,000
2002....................................... 1,018,000
Thereafter................................. 5,569,000
-----------
$12,903,000
===========
</TABLE>
Total rental expense for the years ended February 28, 1995, February 29,
1996 and February 28, 1997 and the four months ended June 30, 1997 was
approximately $1,223,000, $1,970,000, $1,726,000 and $584,000, respectively,
(including $328,000, $445,000, $605,000 and $245,000, respectively, to related
parties).
F-49
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS
Airtron maintains a Profit Sharing and Stock Ownership Plan (the Plan).
Substantially all Airtron employees are eligible to participate in the Plan.
Airtron's contribution, as determined by the Board of Directors, is based upon
the participant's gross pay and amounted to approximately $222,000 in fiscal
years ending in 1995, 1996 and 1997 and $74,000 in the four months ended June
30, 1997. In connection with the Agreement (see Note 1) all Airtron shares
held by the Plan were exchanged for cash and preferred and common shares of
Group MAC Parent.
Certain of the Acquired Companies maintain defined contribution plans
covering substantially all employees.
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 disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
15. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
restricted investments (carried at cost or fair value--see Note 4) and long-
term debt. The Company believes that the carrying value of these instruments
on the accompanying balance sheets approximate their fair value.
16. SUBSEQUENT EVENTS
During July 1997, the Company acquired three companies for an aggregate of
approximately $4,088,000 in cash and payables to the former shareholders of
the companies, and 2,150,000 and 304,000 shares of preferred and common stock,
respectively, along with warrants to purchase 514,000 shares of common stock.
The Company financed the cash portion of the purchase consideration through
borrowings under its Credit Agreement. The acquisitions will be accounted for
under the purchase method. 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 value and may be revised as additional
information becomes available.
The Company has signed definitive agreements to acquire 13 companies with
combined annual revenues of approximately $168.7 million for which the
closings will occur simultaneously with the IPO. Such companies provide HVAC,
plumbing and/or electrical services to residential and/or commercial
customers. Such services include both new installations and service, repair
and replacement work. See Note 17.
On August 16, 1997, the Company's Board of Directors approved a 1-for-2.5
reverse stock split on the Company's common stock. All share and per share
data have been restated to reflect the stock split.
17. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS REPORT (UNAUDITED)
The Group Maintenance America Corp. 1997 Stock Awards Plan (the "Stock
Awards Plan") was adopted by the Company's Board of Directors 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
F-50
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock option plan for non-management employees, the Company granted options to
purchase approximately 1.9 million shares of Common Stock at an exercise price
equal to the initial public offering price of $14.00 per share.
On November 13, 1997, the Company completed the IPO, which involved the sale
of 7,500,000 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 $92.2 million. Of
this amount, $31.6 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the GroupMAC Companies, $41.0 million
to repay corporate indebtedness and debt assumed in connection with the
acquisition of the Offering Acquisition Companies and $19.3 million to retire
all of the then outstanding preferred stock. On December 5, 1997 the
underwriters gave notice of the exercise of their overallotment option for
840,000 shares of Common Stock at $14.00 per share (which represents net
proceeds to the Company of approximately $10.9 million after underwriting
discounts and commissions).
The Company has entered into a new credit facility with an initial borrowing
capacity of $75 million (the "New Credit Facility") which replaced a $35
million credit agreement. Under the New Credit Facility, 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 New
Credit Facility); and (iv) a minimum consolidated net worth (as defined in the
New Credit Facility).
During January 1998, the Company completed the acquisition of nine companies
(the "Post-Offering Companies"). The Post-Offering Companies combined 1996
revenues were $84.2 million. Total consideration paid was $43.0 million, which
included cash payments of $23.3 million. The Company utilized $11.1 million of
the New Credit Facility with the remaining portion of the cash consideration
funded from the net proceeds of the IPO.
F-51
<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-52
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------- ----------- -------------
1995 1996 1997 1997
----------- ----------- ----------- -------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ -- $ -- $ -- $ --
Receivables, less allowance for
doubtful accounts of $145,000,
$137,378 and $149,653,
respectively:
Trade......................... 9,771,993 13,287,714 14,728,290 10,691,894
Related parties and employees. 108,840 341,186 672,407 85,169
Unconsolidated affiliate...... 279,000 321,000 388,000 388,000
Inventories..................... 651,442 713,726 814,093 986,467
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 1,356,980 1,342,213 1,015,468 926,113
Prepaid expenses................ 45,835 117,368 63,403 144,991
Income taxes refundable......... -- 114,396 -- --
----------- ----------- ----------- -----------
Total current assets........ 12,214,090 16,237,603 17,681,661 13,222,634
PROPERTY AND EQUIPMENT, net....... 1,159,820 1,436,293 1,555,323 1,496,919
OTHER NONCURRENT ASSETS
Real estate held for investment. 510,000 508,066 411,066 --
Other assets.................... 106,610 145,861 107,523 66,668
Deferred income taxes........... 148,000 105,000 196,000 196,000
----------- ----------- ----------- -----------
764,610 758,927 714,589 262,668
----------- ----------- ----------- -----------
Total assets................ $14,138,520 $18,432,823 $19,951,573 $14,982,221
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 100,136 $ 96,000 $ 96,000 $ 96,000
Accounts payable................ 4,525,382 5,148,905 5,241,881 3,139,915
Notes payable:
Bank.......................... 2,199,134 5,395,816 4,790,113 2,476,008
Shareholders and related
parties...................... 673,523 30,000 35,340 --
Accrued expenses................ 1,915,968 1,840,699 2,416,748 2,182,373
Income taxes payable............ 28,764 -- 396,001 278,880
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 1,076,700 1,660,159 1,715,783 1,828,520
----------- ----------- ----------- -----------
Total current liabilities... 10,519,607 14,171,579 14,691,866 10,001,696
LONG-TERM DEBT, net of current
maturities....................... 699,098 758,149 708,285 288,000
DEFERRED COMPENSATION............. 355,085 189,848 189,848 189,848
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
150,000 shares authorized...... 198,473 291,539 355,133 355,971
Retained earnings............... 2,366,257 3,021,708 4,006,441 4,146,706
----------- ----------- ----------- -----------
Total shareholders' equity.. 2,564,730 3,313,247 4,361,574 4,502,677
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity....... $14,138,520 $18,432,823 $19,951,573 $14,982,221
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02A of the TBCA provides, in relevant part, as follows:
Subject to the provisions of Sections B and C of this Article, each
corporation shall have power:
(16) to indemnify directors, officers, employees, and agents of the
corporation and to purchase and maintain liability insurance for those
persons.
Article IX of the Articles of Incorporation of the Company (therein referred
to as the "Corporation") provides as follows:
1. Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such
action, suit or proceeding, and any inquiry or investigation that would
lead to such action, suit or proceeding (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director or
officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to any employee benefit
plan (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any
other capacity while serving as a director or officer, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by
the TBCA, as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all judgments, fines, penalties (including excise tax and
similar taxes), settlements, and reasonable expenses actually incurred by
such indemnitee in connection therewith. The right to indemnification
conferred in this Article shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the TBCA requires, an advancement
of expenses incurred by an indemnitee shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such indemnitee, to
repay all amounts so advanced if it shall ultimately be determined that
such indemnitee is not entitled to be indemnified for such expenses under
this Article or otherwise.
2. Insurance. The Corporation may purchase and maintain insurance, at its
expense, on behalf of any indemnitee against any liability asserted against
him and incurred by him in such a capacity or arising out of his status as
a representative of the Corporation, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or
loss under the TBCA.
3. Indemnity of Employees and Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the board of directors,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the
provisions of this Article or as otherwise permitted under the TBCA with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
The Company has entered into indemnity agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
TBCA as described above.
The Company has purchased liability insurance policies covering the
directors and officers of the Company, including, to provide protection where
the Company cannot legally indemnify a director or officer and where a claim
arises under the Employee Retirement Income Security Act of 1974 against a
director or officer based on an alleged breach of fiduciary duty or other
wrongful act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1* Articles of Incorporation of the Company, as amended.
3.2* Bylaws of the Company, as amended.
4.1* Form of Certificate representing the Common Stock, par value $0.001
per share, of the Company.
5 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
Common Stock being offered.
10.1* Form of Stock Awards Plan.
10.2* Form Option Agreement of Stock Awards Plan.
10.3* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of a Majority of the Outstanding Common Stock of
Airtron, Inc., dated April 30, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.4* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of K & N
Plumbing, Heating and Air Conditioning, Inc., dated
June 20, 1997. (Confidential information has been omitted from this
document and has been filed separately with the Commission.)
10.5* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Costner
Brothers, Inc., dated June 21, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.6* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Hallmark Air
Conditioning, Inc., dated June 24, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.7* Agreement and Plan of Merger among Group Maintenance America Corp.,
JARL Acquisition Corp., AA JARL, Inc., and James Wilburn, dated March
17, 1997.
10.8* Asset Purchase Agreement among Hallmark Air Conditioning, Inc., and Way
Service, Inc., dated June 24, 1997. (Confidential information has been
omitted from this document and has been filed separately with the
Commission.)
10.9* Agreement and Plan Exchange by and among Group Maintenance America
Corp, and the Holders of the Outstanding Capital Stock Charlie
Crawford, Inc., dated June 25, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.10* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of A-ABC
Appliance, Inc. and A-1 Appliance & Air Conditioning, Inc., dated July
3, 1997. (Confidential information has been omitted from this document
and has been filed separately with the Commission.)
10.11* Agreement and Plan of Exchange by and among Group Maintenance America
Corp. and the Holders of the Outstanding Capital Stock of Sibley
Services, Inc., dated July 15, 1997. (Confidential information has
been omitted from this document and has been filed separately with the
Commission.)
10.12* Agreement and Plan of Merger by and among Group Maintenance America
Corp., CRP Acquisition Corp., Callahan Roach Products & Publications,
Inc. and the Holders of the Outstanding Capital Stock of Callahan
Roach Products & Publications, Inc., dated July 16, 1997.
10.13* Agreement and Plan of Merger by and among Group Maintenance America
Corp, CRP Acquisition Corp, Callahan Roach & Associates and all of the
Partners of Callahan Roach & Associates, dated
July 16, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14* Asset Purchase Agreement among United Acquisition Corp, Group
Maintenance America Corp, United Service Alliance, L.C. and the
Members of United Service Alliance, L.C., Inc., dated July 1, 1997.
(Confidential information has been omitted from this document and has
been filed separately with the Commission.)
10.15* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., All Service Acquisition Corp., All Service Electric,
Inc. and the Holder of the Outstanding Capital Stock of All Service
Electric, Inc., dated as of August 18, 1997.
10.16* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Arkansas Mechanical Services,
Inc. and the Holders of the Outstanding Capital Stock of Arkansas
Mechanical Services, Inc., dated as of August 18, 1997.
10.17* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Central Carolina Acquisition Corp., Central Carolina
Air Conditioning Company and the Holders of the Outstanding Capital
Stock of Central Carolina Air Conditioning Company, dated as of August
18, 1997.
10.18* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Evans Acquisition Corp, Evans Services, Inc., the Holder
of the Outstanding Capital Stock of Evans Services, Inc., dated as of
August 18, 1997.
10.19* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Linford Acquisition Corp., Linford Service Company and
the Holders of the Outstanding Common Stock of Linford Service
Company, dated as of August 18, 1997.
10.20* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., MacDonald-Miller Acquisition Corp., MacDonald-Miller
Industries, Inc., the Principal Holders of the Outstanding Capital
Stock of MacDonald-Miller Industries, Inc. and the Trustee of the
MacDonald-Miller Stock Ownership Plan and Trust, dated as of August
18, 1997.
10.21* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., Masters Accusation Corp., Masters, Inc. and the Holder
of the Outstanding Capital Stock of Masters, Inc., dated as of August
18, 1997.
10.22* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp., AMS Acquisition Corp., Mechanical Services, Inc. and
the Holders of the Outstanding Capital Stock of Mechanical Services,
Inc., dated as of August 18, 1997.
10.23* Form of Agreement and Plan of Exchange by and among Group Maintenance
America Corp., Paul E. Smith Co., Inc. and the Holders of the
Outstanding Capital Stock of Paul E. Smith Co., Inc., dated as of
August 18, 1997.
10.24* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Southeast Mechanical Service, Inc. and the Holders of
the Outstanding Capital Stock of Southeast Mechanical Service, Inc.,
dated as of August 18, 1997.
10.25* Form of Agreement and Plan of Merger by and among Group Maintenance
Corp, Van's Acquisition Corp., Van's Comfortemp Air Conditioning, Inc.
and the Holders of the Outstanding Capital Stock of Van's Comfortemp
Air Conditioning, Inc., dated as of August 18, 1997.
10.26* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Willis Acquisition Corp., Willis Refrigeration, Heating
& Air Conditioning, Inc. and the Holders of the Outstanding Capital
Stock of Willis Refrigeration, Heating & Air Conditioning, Inc., dated
as of August 18, 1997.
10.27* Form of Agreement and Plan of Merger by and among Group Maintenance
America Corp, Yale Acquisition Corp., Yale Incorporated and the
Holders of the Outstanding Capital Stock of Yale Incorporated, dated
as of August 18, 1997.
10.28* Form of Employment Agreement by and between Group Maintenance America
Corp. and James P. Norris.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.29* Form of Employment Agreement by and between Group Maintenance America
Corp. and J. Patrick Millinor, Jr.
10.30* Form of Employment Agreement by and between Group Maintenance America
Corp. and Donald L. Luke.
10.31* Form of Employment Agreement by and between Group Maintenance America
Corp. and James D. Jennings.
10.32* Form of Employment Agreement by and between Group Maintenance America
Corp. and Timothy Johnston.
10.33* Form of Employment Agreement by and between Group Maintenance America
Corp. and William Michael Callahan.
10.34* Form of Employment Agreement by and between Group Maintenance America
Corp. and Alfred R. Roach, Jr.
10.35 Airtron, Inc. 1997 Corporate Staff Bonus Plan (filed as Exhibit 10.36
to the Company's Form S-1 (Registration No. 33-34067)).
10.36 Form of Credit Agreement by and among Group Maintenance America Corp.,
the Subsidiaries listed as guarantors, Texas Commerce Bank National
Association and the signatory banks, dated as of
December 9, 1997.
10.37 Form of Group Maintenance America Corp. 1997 Stock Option Plan (filed
as Exhibit 10.38 to the Company's Form S-1 (Registration No. 33-
34067)).
21** Subsidiaries of the Company.
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 February 5, 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 FEBRUARY 5, 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 and accounting
officer)
Donald L. Luke* Director, President and Chief
------------------------------------- Operating Officer
Donald L. Luke*
Ronald D. Bryant* Director
-------------------------------------
Ronald D. Bryant
David L. Henninger* Director
-------------------------------------
David L. Henninger
Chester J. Jachimiec* Director
-------------------------------------
Chester J. Jachimiec
James D. Jennings* Director
-------------------------------------
James D. Jennings
Timothy Johnston* Director
-------------------------------------
Timothy Johnston
Andrew Jeffrey Kelly* Director
-------------------------------------
Andrew Jeffrey Kelly
Thomas B. McDade* Director
-------------------------------------
Thomas B. McDade
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE
Lucian Morrison* Director
-------------------------------------
Lucian Morrison
Richard S. Rouse* Director
-------------------------------------
Richard S. Rouse
Fredric Sigmund* Director
-------------------------------------
Fredric Sigmund
John M. Sullivan* Director
-------------------------------------
John M. Sullivan
James D. Weaver* Director
-------------------------------------
James D. Weaver
</TABLE>
/s/ Randolph W. Bryant
*By: ________________________________
Randolph W. Bryant
(Attorney-in-fact for persons
indicated)
II-8
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF
GROUP MAINTENANCE AMERICA CORP.
AS OF JANUARY 31, 1997
A-ABC Appliance, Inc. (Texas)
A-1 Appliance & Air Conditioning, Inc. (Texas)
A-1 Mechanical of Lansing, Inc. (Michigan)
AA JARL, Inc. (Texas)
Air Conditioning Engineers, Inc. (Michigan)
Air Conditioning, Plumbing and Heating Service Co., Inc. (Colorado)
Airtron, Inc. (Delaware)
Airtron of Central Florida, Inc. (Florida)
All Service Electric, Inc. (Florida)
Arkansas Mechanical Services, Inc. (Arkansas)
Callahan Roach Products & Publications, Inc. (Colorado)
Central Carolina Air Conditioning Company (North Carolina)
Charlie Crawford, Inc. (Texas)
Costner Brothers, Inc. (South Carolina)
Dynamic Software Corporation (Maryland)
Evans Services, Inc. (Alabama)
GroupMAC Holding Corp. (Delaware)
GroupMAC Management Co. (Delaware)
Hallmark Air Conditioning, Inc. (Texas)
Hungerford Mechanical Corporation (Virginia)
Jerry Albert Air Conditioning, Inc. (Texas)
K & N Plumbing, Heating and Air Conditioning, Inc. (Texas)
Linford Service Company (California)
MacDonald-Miller Industries, Inc. (Washington)
Masters, Inc. (Maryland)
Mechanical Interiors, Inc. (Texas)
Paul E. Smith Co., Inc. (Indiana)
Southeast Mechanical Service, Inc. (Florida)
Sibley Services, Incorporated (Tennessee)
Sterling Air Conditioning, Inc. (Texas)
Suburban Acquisition Corp. (Delaware)
United Acquisition Corp. (Iowa)
Valley Wide Plumbing and Heating, Inc. (Colorado)
Van's Comfortemp Air Conditioning, Inc. (Florida)
Wiegold & Sons, Inc. (Florida)
Willis Refrigeration, Air Conditioning & Heating, Inc. (Ohio)
Yale Incorporated (Minnesota)
<PAGE>
EXHIBIT 23.2
The Board of Directors
Group Maintenance America Corp.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
February 5, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 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.
February 4, 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. 1 (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.
/s/ Moss Adams L.L.P.
Seattle, Washington
February 5, 1998
