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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: DECEMBER 22, 1998
GROUP MAINTENANCE AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 1-13565 76-0535259
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
8 GREENWAY PLAZA, SUITE 1500
HOUSTON, TEXAS 77046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 860-0100
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<PAGE>
ITEM 5. OTHER EVENTS
RISK FACTORS
You should carefully consider the following factors and other information
here before deciding to invest in our Company
RESTRICTIONS IN CREDIT AGREEMENT ON OUR OPERATIONS--WE MAY NOT BE ABLE TO
FINANCE FUTURE NEEDS OR ADAPT OUR BUSINESS PLANS TO CHANGES BECAUSE OF
RESTRICTIONS PLACED ON US BY OUR LENDERS.
The operating and financial restrictions and covenants in our Credit
Agreement adversely affect, and any future financing agreements may also
adversely affect, and in fact limit or prohibit, our ability to finance future
operations or capital needs, to respond to changes in our business or
competitive activities, or to engage in other business activities. See
"Description of Credit Agreement." A breach of any of these restrictions or
covenants could cause a default under the Credit Agreement and in some cases
acceleration of debt under other instruments that contain cross-default or
cross-acceleration provisions. A significant portion of our indebtedness then
may become immediately due and payable. We are not certain whether we would
have, or be able to obtain, sufficient funds to make these accelerated
payments.
INTEGRATION OF ACQUIRED COMPANIES--ANY DELAY OR INABILITY TO INTEGRATE
BUSINESSES WE ACQUIRE COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have grown, and plan to continue to grow, by acquiring other companies in
our industry. Our future success is dependent on our ability to integrate our
past and future acquisitions into one enterprise with a common operating plan.
We must also monitor the performance of our acquired companies. Many of these
acquired companies must change their past operating systems such as
accounting, employment, purchasing and marketing. We may not be successful in
our efforts to integrate acquired companies or monitor their performance. If
we are unable to do so, or if we experience delays or unusual expenses in
doing so, it could have a material adverse effect on our business, financial
condition and results of operations.
DEPENDENCE ON ACQUISITIONS FOR GROWTH--IF OUR ACQUISITION PROGRAM STRATEGY IS
NOT ACHIEVED, OUR GROWTH WILL BE DIMINISHED.
We plan to grow primarily by acquisitions. This strategy requires that we
identify acquisition targets and negotiate and close acquisitions without
disrupting our existing operations. The strategy may result in the diversion
of our time from operating matters, which may cause the loss of business and
personnel. There are also possible adverse effects on earnings resulting from
the possible loss of acquired customer bases, 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
business. Our success is dependent upon our ability to identify, acquire,
integrate and manage profitably acquired businesses. If we cannot do this, our
business and growth may be harmed.
CYCLICAL NATURE OF NEW INSTALLATION MARKET--DOWNTURNS IN THE CONSTRUCTION
INDUSTRY COULD CAUSE OUR REVENUES FROM INSTALLING EQUIPMENT TO DECREASE.
A substantial portion of our business involves installation of mechanical
and electrical systems in newly constructed residences and
commercial/industrial facilities. Our revenues from new installations services
in the residential market is dependent upon the level of housing starts in the
areas in which we operate. The housing industry is cyclical, and our revenues
from new residential installation will be affected by the factors that affect
the housing industry. These factors include changes in employment and income
levels, the availability and cost of financing for new home buyers and general
economic conditions. The level of new commercial/industrial installation
services is also affected by changes in economic conditions and interest
rates. General downturns in housing starts or new commercial/industrial
construction in the areas in which we operate could have a material adverse
effect on our business, including its financial condition and results of
operations. See "Management's Discussions and Analysis of Financial Condition
and Results of Operations--Seasonality and Cyclicality."
2
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AVAILABILITY OF TECHNICIANS--A SKILLED LABOR FORCE IS IMPORTANT TO OUR PLANNED
INTERNAL GROWTH.
Our ability to provide high-quality mechanical and electrical services on a
timely basis requires an adequate supply of skilled technicians. Shortages of
qualified technicians sometimes occur. We cannot assure you that we will be
able to maintain an adequate skilled labor force or that our labor expenses
will not increase. A shortage of skilled labor would require us to curtail our
planned internal growth.
WEATHER--OUR PROFITABILITY WILL BE AFFECTED BY PROLONGED BAD WEATHER OR
SEASONAL VARIATIONS.
Our business tends to be affected adversely by moderate weather patterns.
Comparatively warm winters and cool summers reduce the demand for our
maintenance, repair and replacement services. Additionally, our new
installation business is affected adversely by extremely cold weather and
large amounts of rain. As a result, we expect our revenues and operating
results to be lower in our first and fourth calendar quarters. Prolonged
weather conditions or seasonal variations may cause unpredictable fluctuations
in operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality and Cyclicality."
COMPETITION--WE FACE COMPETITION FROM OWNER-OPERATED COMPANIES AND LARGE
PUBLIC COMPANIES AND UTILITIES FOR THE SERVICES WE PROVIDE AND FOR COMPANIES
WE MAY WANT TO ACQUIRE.
The mechanical and electrical and plumbing service industries are very
competitive. These industries are served by small, owner-operated private
companies and by larger companies operating nationwide, including unregulated
affiliates of electric and gas public utilities and HVAC equipment
manufacturers, and there are few barriers to entry. Certain of the smaller
competitors have lower overhead cost structures and may be able to provide
their services at lower rates than us. Some of the larger competitors have
greater financial resources, name recognition or other competitive advantages
and may be willing to pay higher prices than we are willing to pay for the
same opportunities. Consequently, we may encounter significant competition in
our efforts to achieve our growth objectives.
DEPENDENCE ON KEY PERSONNEL--OUR BUSINESS MAY SUFFER IF WE DO NOT RETAIN OUR
MANAGEMENT AND THE MANAGEMENT OF ANY COMPANY WE ACQUIRE.
We depend on our executive officers and senior management personnel and on
the senior management of significant businesses we acquire. Our business could
be affected adversely if these persons do not continue in their roles and we
are unable to attract and retain qualified replacements.
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH--IF WE CANNOT USE OUR
COMMON STOCK OR RAISE CAPITAL FOR CONSIDERATION IN ACQUISITIONS, WE MAY NOT BE
ABLE TO GROW OUR BUSINESS BY ACQUISITIONS.
We have financed capital expenditures and acquisitions primarily through the
issuance of equity securities, secured bank borrowings and internally
generated cash flow. We currently intend to finance future acquisitions by
using shares of our common stock for a significant portion of the
consideration to be paid. If our common stock does not maintain a sufficient
market value, or if potential acquisition candidates are otherwise unwilling
to accept our common stock as part of the consideration for the sale of their
businesses, we may be required to utilize more of our cash resources, if
available, in order to initiate and maintain our acquisition program. We
cannot assure you that we will be able to raise the additional capital
required. If we cannot do so, our growth through acquisitions may be limited.
See "Management's Decision and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE ON SUBSIDIARIES FOR CASH FLOW--WE RELY ON OUR SUBSIDIARIES FOR OUR
OPERATING FUNDS AND OUR SUBSIDIARIES HAVE NO OBLIGATION TO SUPPLY US WITH ANY
FUNDS.
We conduct our operations through subsidiaries and are dependent upon our
subsidiaries to transfer to us the funds we need to operate. Each of our
subsidiaries is a distinct legal entity and has no obligation, contingent or
otherwise, to transfer funds to us. Our ability to pay obligations, and the
ability of our subsidiaries to transfer funds to us, could be restricted by
the terms of subsequent financings.
3
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OTHER FACTORS
In addition to the factors described above, we may be impacted by a number
of other matters and uncertainties, including:
. potential legislation or regulatory changes,
. resolution of the Year 2000 issue,
. increases in the cost of complying with regulations, including
environmental regulations, and
. the incurrences of losses for which we are not insured, or for which
our insurance is not adequate.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company derives revenues from providing maintenance, repair and
replacement and new installation services for mechanical, electrical and other
systems to residential and commercial customers. The Company's combined 1997
revenues consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
REVENUES PERCENTAGE
-------- ----------
<S> <C> <C>
Maintenance, repair and replacement......................... $587.5 60%
New installation............................................ 391.0 40%
------ ---
Total................................................... $978.5 100%
====== ===
</TABLE>
The Company recognizes maintenance, repair and replacement revenues as the
services are performed, except for service contract revenue, which we
recognize ratably over the life of the contract. We generally account for
revenues from fixed price installation and retrofit contracts on a percentage-
of-completion basis, using the cost-to-cost method.
The Company intends to make additional acquisitions across the three main
technical disciplines (HVAC, electrical and plumbing) within the residential
and commercial markets. The Company's long-term objective is to develop
maintenance, repair and replacement capabilities (both residential and
commercial) in the top 100 markets within the United States, while offering
new installation services across a more limited range of markets where new
construction in the residential and/or commercial sectors is expected to out-
pace the national average over the long term. Over time, this objective is
expected to shift revenues of the Company to an increased percentage of
service revenue.
Cost of services consists primarily of components, parts and supplies
related to the Company's new installation and maintenance, repair and
replacement services, salaries and benefits of service and installation
technicians, subcontracted services, depreciation, fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for prior owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
The Company's diversified business mix is reflected to varying degrees in
its gross margins. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
gross margins, averaging 32.4% for the combined twelve months ended
December 31, 1997. The combined gross margin for the GroupMAC Companies
providing primarily maintenance, repair and replacement services in the
commercial markets was 21.6% for the combined twelve months ended December 31,
1997. On average, the Company's residential new installation businesses have
lower gross margins. Such companies' combined gross margin was 21.0% for the
combined twelve months ended December 31, 1997. The companies primarily
providing HVAC services in the residential new installation market had an
average gross margin of 27.6%, which was somewhat offset by the companies
providing primarily plumbing service to this market at an average gross margin
of 12.9%. Future consolidated gross margins may vary depending on, among other
things, shifts in the business mix as well as the impact of future
acquisitions on the business mix.
The Company has begun to realize savings from (i) greater volume discounts
from suppliers of components, parts and supplies; (ii) consolidation of
insurance and bonding programs; (iii) other general and administrative
expenses such as training and advertising; and (iv) the Company's ability to
borrow at lower interest rates than most, if not all, of its subsidiaries.
These savings are [partially] offset by costs related to the Company's new
corporate management, costs associated with being a public company and
integration costs.
Please read the following discussion in conjunction with the historical
financial statements and related notes and "Selected Historical and Pro Forma
Financial Data" included or incorporated by reference herein.
5
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RESULTS OF OPERATIONS--GROUPMAC AND SUBSIDIARIES
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Agreement") with Airtron, in which $20.8 million in cash, 14.9
million shares of GroupMAC preferred stock and 4.7 million shares of GroupMAC
Common Stock were issued to shareholders of Airtron in exchange for all of the
then outstanding shares of Airtron. Although for legal purposes Airtron was
acquired by GroupMAC, for accounting purposes, the transaction was accounted
for as a reverse acquisition, as if Airtron acquired GroupMAC, due to the fact
that the former shareholders of Airtron then owned a majority of the
outstanding GroupMAC Common Stock. In connection with the purchase of
GroupMAC, the Company recorded the consideration paid to the shareholders of
GroupMAC as non-recurring compensation expense of $7.0 million in the
accompanying statements of operations for the ten months ended December 31,
1997. The consolidated financial statements included elsewhere herein for the
periods prior to the effective date of the acquisition only include the
accounts of Airtron. The consolidated statements of shareholders' equity have
been converted from Airtron's capital structure to GroupMAC's capital
structure to reflect the exchange of shares pursuant to the Agreement. During
1997, the Company changed its fiscal year end from February 28 to December 31.
During June and July 1997, the Company acquired in separate transactions 10
additional businesses through a combination of cash, preferred stock, common
stock and warrants to purchase shares of common stock of GroupMAC. During the
fourth quarter of 1997, the Company acquired, concurrently with the IPO, 13
additional businesses through a combination of cash and common stock of the
Company. During the first, second and third quarters of 1998 the Company
acquired 35 additional businesses through a combination of common stock,
options to purchase common stock and cash.
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TEN MONTHS NINE MONTHS ENDED SEPTEMBER
FEBRUARY 28 OR 29, ENDED 30,
---------------------------- DECEMBER 31, --------------------------------
1996 1997 1997 1997 1998
------------- ------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $73,765 100.0% $81,880 100.0% $138,479 100.0% $82,226 100.0% $477,944 100.0%
Cost of Services........ 52,674 71.4 58,506 71.5 101,762 73.5 59,211 72.0 364,225 76.2
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Gross Profit............ 21,091 28.6 23,374 28.5 36,717 26.5 23,015 28.0 113,719 23.8
Selling, General and
Administrative
Expenses............... 17,615 23.9 19,811 24.1 36,495 26.3 26,692 32.4 81,400 17.0
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income (Loss) from
Operations............. 3,476 4.7 3,563 4.4 222 0.2 (3,677) (4.4) 32,319 6.8
Interest, Net........... 68 0.1 89 0.1 (1,144) (0.8) (890) (1.1) (2,685) (0.6)
Other................... 246 0.3 256 0.3 112 -- 266 0.3 346 0.1
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income (Loss) Before
Income Tax Provision... 3,790 5.1 3,908 4.8 (810) (0.6) (4,301) (5.2) 29,980 6.3
Income Tax Provision
(Benefit).............. 1,651 2.2 1,572 1.9 2,832 2.0 1,156 1.4 13,243 2.8
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Net Income (Loss)....... $ 2,139 2.9% $ 2,336 2.9% $ (3,642) (2.6)% $(5,457) (6.6)% $ 16,737 3.5%
======= ===== ======= ===== ======== ===== ======= ===== ======== =====
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues. Revenues increased $395.7 million to $477.9 million for the nine
months ended September 30, 1998 from $82.2 million for the nine months ended
September 30, 1997. Such increase in revenues included $357.6 million
attributable to the acquisition of the IPO Companies during November 1997 and
the acquisitions of the Post-IPO Companies during the nine months ended
September 30, 1998. Also contributing to the increase was a $10.0 million
increase in revenues at Airtron, which related to strong housing starts
throughout the country, particularly in the Midwestern and South Central
United States. The remaining $28.1 million increase relates to the Pre-IPO
Companies that have nine months of activity in the current year versus two to
four months of activity in the prior year.
Gross Profit. Gross profit increased $90.7 million to $113.7 million for the
nine months ended September 30, 1998 from $23.0 million for the nine months
ended September 30, 1997. Such increase in gross profit included approximately
$1.5 million in materials purchases savings and $76.6 million attributable to
the
6
<PAGE>
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the nine months ended September 30, 1998. Gross
profit at Airtron increased by $3.5 million between periods. This increase
correlated favorably with the $10.0 million revenue increase as Airtron is
operating near full capacity to accommodate housing start demand in its
geographic markets and has deployed resources to further broaden its service
base. The remaining $9.1 million increase related to the Pre-IPO Companies
that have nine months of activity in the current year versus two to four
months of activity in the prior year. Gross profit margin decreased 4.2% to
23.8% for the nine months ended September 30, 1998 compared to 28.0% for the
nine months ended September 30, 1997. The overall decrease in gross margin was
attributable to the acquisition of primarily commercial/industrial companies
in 1998 which has shifted the Company's business mix toward the lower gross
margin commercial/industrial business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $54.7 million to $81.4 million for the nine
months ended September 30, 1998 from $26.7 million for the nine months ended
September 30, 1997. Such increase included $47.6 million attributable to the
acquisitions of the IPO Companies during November 1997 and the acquisitions of
the Post-IPO Companies during the nine months ended September 30, 1998 and
$6.7 million related to the Pre-IPO Companies that have nine months of
activity in the current year versus two to four months of activity in the
prior year. Also contributing to the increase was a $5.3 million increase in
corporate expenses representing the formation of the corporate management team
and infrastructure necessary to execute the Company's operating and
acquisition strategies and $3.4 million of goodwill amortization. Offsetting
the increases was a $7.0 million reduction in compensation expense recognized
in the prior year from the reverse acquisition of Airtron and a $1.3 million
reduction due primarily to the prospective reductions in compensation to the
former owners of Airtron. As a percentage of revenues, selling, general and
administrative expenses, excluding corporate expenses, goodwill amortization
and the 1997 non-recurring compensation expense, decreased to 14.8% for the
nine months ended September 30, 1998 from 21.4% for the nine months ended
September 30, 1997, respectively, due primarily to achieving lower selling and
administrative expense margins within the Founding Companies and acquiring a
higher mix of commercial companies which tend to have lower selling and
administrative expense structures. When including corporate expenses and
goodwill amortization, but excluding the non-recurring compensation expense of
$7.0 million related to the reverse acquisition, selling, general and
administrative expenses as a percentage of revenue decreased to 17.0% for the
nine months ended September 30, 1998 from 24.0% for the nine months ended
September 30, 1997.
Net Interest. Net interest increased $1.8 million during the nine months
ended September 30, 1998 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility to finance the Company's aggressive acquisition program during
1998. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $12.0 million to
$13.2 million for the nine months ended September 30, 1998 from $1.2 million
for the nine months ended September 30, 1997. This increase corresponds with
the pretax income increase of $27.3 million between periods after adding back
the $7.0 million of compensation expense related to the reverse acquisition of
Airtron. The effective tax rate for the nine months ended September 30, 1998
was 44.2% compared to 43.2% for the nine months ended September 30, 1997 after
adding back the $7.0 million of compensation expense related to the reverse
acquisition of Airtron. This increase results primarily from the increase in
non-deductible goodwill amortization of $3.4 million in the nine months ended
September 30, 1998.
Ten Months Ended December 31, 1997 Compared to Twelve Months Ended February
28, 1997
Revenues. Revenues increased $56.6 million, or 69.1%, to $138.5 million for
the ten months ended December 31, 1997 from $81.9 million for the twelve
months ended February 28, 1997. The increase in revenues was attributable to
the acquisitions of the Pre-IPO Companies in June and July of 1997 and the
acquisitions of the IPO Companies during November 1997. The increase in
revenues was partially offset as the period ended December 31, 1997 included
ten months while the period ended February 28, 1997 included twelve months.
7
<PAGE>
Gross Profit. Gross profit increased $13.3 million, or 56.8%, to $36.7
million for the ten months ended December 31, 1997 from $23.4 million for the
twelve months ended February 28, 1997. The increase in gross profit was
primarily attributable to the acquisitions of the Pre-IPO Companies in June
and July of 1997, the acquisitions of the IPO Companies during November 1997
and lower material costs at Airtron. The increase in gross profit was
partially offset as the period ended December 31, 1997 included ten months
while the period ended February 28, 1997 included twelve months. Gross profit
margin decreased 2.0% for the ten months ended December 31, 1997 compared to
the twelve months ended February 28, 1997 because certain of the Founding
Companies' gross profit margins were considerably lower than those achieved at
Airtron.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.7 million, or 84.3%, to $36.5 million
for the ten months ended December 31, 1997 from $19.8 million for the twelve
months ended February 28, 1997. Such increase was primarily attributable to
(i) a $7.0 million non-recurring non-cash compensation charge related to the
reverse acquisition of GroupMAC in May 1997, (ii) a $0.2 million non-
recurring, non-cash compensation charge related to the issuance of management
shares and options, (iii) the aforementioned acquisitions and (iv) a $4.1
million increase in corporate expenses representing the formation of the
corporate management team and infrastructure necessary to execute the
Company's operating and acquisition strategies. As a percentage of revenues,
selling, general and administrative expenses, excluding the aforementioned
items, decreased to 17.5% for the ten months ended December 31, 1997 from
24.1% for the twelve months ended February 28, 1997, respectively, due
primarily to prospective reductions in compensation to former owners, to which
they agreed. These reductions in salaries are in accordance with the terms of
their employment agreements.
Net Interest. Net interest was an expense of $1.1 million for the ten months
ended December 31, 1997. For the twelve months ended February 28, 1997, net
interest income was $0.1 million. Interest charges increased during the ten
months ended December 31, 1997 due to borrowings under the Company's credit
facilities to fund the cash portion of the acquisition of Airtron and the Pre-
IPO Companies. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $1.2 million, or
75.0%, to $2.8 million for the ten months ended December 31, 1997 from $1.6
million for the twelve months ended February 28, 1997 while pre-tax income
decreased $4.7 million. Excluding the effect of the $7.0 million non-
deductible compensation charge discussed above, the effective tax rate for the
ten months ended December 31, 1997 was 44.2% compared to 40.2% for the twelve
months ended February 28, 1997, resulting primarily from the non-deductible
goodwill amortization of $0.6 million in the ten months ended December 31,
1997.
Twelve Months Ended February 28, 1997 Compared to Twelve Months Ended
February 29, 1996
Revenues. Revenues increased $8.1 million, or 11.0%, to $81.9 million for
the twelve months ended February 28, 1997 from $73.8 million for the twelve
months ended February 29, 1996. The increase in revenues was attributable to
increased market penetration in new residential construction in the
Indianapolis, Indiana and Dallas, Texas markets, resulting in a larger volume
of new home starts.
Gross Profit. Gross profit increased $2.3 million, or 10.9%, to $23.4
million for the twelve months ended February 28, 1997 from $21.1 million for
the twelve months ended February 29, 1996. Gross profit margin remained
relatively constant at 28.5% and 28.6% for the twelve months ended February
28, 1997 and February 29, 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.2 million, or 12.5%, to $19.8 million for
the twelve months ended February 28, 1997 from $17.6 million for the same
period ended February 29, 1996. Such increase was primarily attributable to an
increase in compensation, vehicle leases and professional fees of the Company.
As a percentage of revenues, selling, general and administrative expenses
remained relatively constant at 24.1% and 23.9% for the twelve months ended
February 28, 1997 and February 29, 1996, respectively.
8
<PAGE>
Income Tax Provision. The income tax provision decreased $0.1 million, or
5.9%, to $1.6 million for the twelve months ended February 28, 1997 from $1.7
million for the same period ended February 29, 1996. The effective tax rate
for the twelve months ended February 28, 1997 was 40.2% compared to 43.6% for
the same period ended February 29, 1996. The decrease in the effective tax
rate was due to a higher state income tax provision for the twelve months
ended February 29, 1996.
Additional required discussion of the results of operations of certain
individual and combined GroupMAC Companies accompanies the required financial
statements thereof which are incorporated by reference. See "Where You Can
Find More Information."
MACDONALD-MILLER
MacDonald-Miller was founded in 1965 and provides a full range of HVAC
services to commercial and industrial customers in the Northwestern United
States including design and engineering; fabrication and installation of sheet
metal, piping, plumbing and controls; and HVAC service and maintenance.
MacDonald-Miller's revenues for fiscal 1996 were $66.1 million and income from
operations was $2.1 million. MacDonald-Miller derived 59% of its 1996 revenues
from maintenance, repair and replacement services and 41% from new
installation services. MacDonald-Miller is headquartered in Seattle,
Washington and has facilities in Seattle and Portland, Oregon.
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $45,508 100.0% $66,059 100.0% $52,184 100.0% $54,560 100.0%
Cost of Services........ 36,927 81.1 56,373 85.3 45,192 86.6 46,400 85.0
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 8,581 18.9 9,686 14.7 6,992 13.4 8,160 15.0
Selling, General and
Administrative
Expenses............... 7,338 16.2 7,632 11.6 5,567 10.7 6,239 11.5
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,243 2.7 2,054 3.1 1,425 2.7 1,921 3.5
</TABLE>
For a discussion of periods subsequent to September 30, 1997, see "--Results
of Operations--GroupMAC and Subsidiaries."
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues. Revenues increased $2.4 million, or 4.6%, from $52.2 million for
the nine months ended September 30, 1996 to $54.6 million for the nine months
ended September 30, 1997. The increase in revenues was attributable to
continuing strength in the company's Northwest commercial markets, principally
Seattle, Washington and Portland, Oregon, including a $20 million contract
with a large software company to be completed in 1997, an increase in revenues
from the company's Special Projects and Tenant Improvement operations, and an
increase in revenues from the company's Commercial Service operations.
Gross Profit. Gross Profit increased $1.2 million, or 17.1%, from $7.0
million for the nine months ended September 30, 1996 to $8.2 million for the
nine months ended September 30, 1997. Gross margin increased from 13.4% for
the first nine months of 1996 to 15.0% for the same period of 1997. The gross
profit increase was attributable principally to higher volume and realized
gross margins in the MacDonald-Miller's Special Projects and Tenant
Improvement operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 10.7%, from $5.6 million
for the nine months ended September 30, 1996 to $6.2 million for the nine
months ended September 30, 1997. Both the dollar and percentage of revenue
changes were attributable to the higher revenue levels in 1997 compared to
1996. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.7% for the nine months of 1996 to 11.5%
for the same period of 1997.
9
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Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $20.6 million, or 45.3%, from $45.5 million for
the year ended December 31, 1995 to $66.1 million for the year ended December
31, 1996. The increase in revenues was attributable to a 15%, or $1.6 million,
increase in revenues from Service and Maintenance operations, and a 23%, or
$2.0 million, increase in revenues from the company's Special Projects and
Tenant Improvement operations. The $17 million balance of the increase was
attributable to contracted design and build projects, HVAC system retrofits
and remodels, lighting energy retrofits and technical services, together
representing a revenue increase of 65.4% over 1995. This increase was
primarily volume driven and directly related to the company's effort to
increase its market presence in the Seattle, Washington and Portland, Oregon
metropolitan areas, fueled by continued strength of commercial activity in the
Northwest.
Gross Profit. Gross profit increased $1.1 million, or 12.8%, from $8.6
million for the year ended December 31, 1995 to $9.7 million for the year
ended December 31, 1996. Gross margin decreased from 18.9% to 14.7% due to the
acceptance of certain lower margin projects and increased direct costs related
to the rapid revenue growth experienced in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 4.1%, from $7.3 million for
the year ended December 31, 1995 to $7.6 million for the year ended December
31, 1996. The increase in these expenses was directly attributable to
incremental costs incurred to implement a job cost and accounting software
conversion and other management information systems processes and
infrastructure. As a percentage of revenues, selling, general and
administrative expenses decreased from 16.2% to 11.6% due to the increased
revenue levels.
MASTERS
Masters, Inc. ("Masters") was founded in 1986 and provides HVAC and plumbing
services in the Washington, D.C. area. Masters' revenues for fiscal 1996 were
$39.8 million and income from operations for fiscal 1996 was $1.5 million.
Masters derived 100% of its 1996 revenues from new installation services.
Masters is headquartered in Gaithersburg, Maryland and has its facilities in
Gaithersburg and Chantilly, Virginia.
RESULTS OF OPERATIONS--MASTERS
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $35,160 100.0% $39,826 100.0% $29,088 100.0% $31,166 100.0%
Cost of Services........ 31,746 90.3 35,854 90.0 26,308 90.4 27,956 89.7
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 3,414 9.7 3,972 10.0 2,780 9.6 3,210 10.3
Selling, General and
Administrative
Expenses............... 2,373 6.7 2,484 6.3 1,739 6.0 2,015 6.5
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,041 3.0 1,488 3.7 1,041 3.6 1,195 3.8
</TABLE>
For a discussion of periods subsequent to September 30, 1997, see "--Results
of Operations--GroupMAC and Subsidiaries."
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues. Revenues increased $2.1 million, or 7.2%, from $29.1 million for
the nine months ended September 30, 1996 to $31.2 million for the nine months
ended September 30, 1997. The increase in revenues was primarily attributable
to an additional volume of housing starts generated from existing customers.
Gross Profit. Gross profit increased $0.4 million, or 14.3%, from $2.8
million for the nine months ended September 30, 1996 to $3.2 million for the
nine months ended September 30, 1997. Gross margin increased from 9.6% for the
nine months ended September 30, 1996 to 10.3% for the nine months ended
September 30, 1997. The increase was primarily attributable to a higher mix of
fire sprinkler installations that typically produce higher margins.
10
<PAGE>
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.
K&N
K&N Plumbing, Heating and Air Conditioning, Inc. ("K&N") was founded in 1978
and provides plumbing services to the residential new construction market in
the Dallas, Fort Worth and Austin, Texas and Las Vegas, Nevada markets. K&N
also designs, sells, installs and services HVAC systems in Dallas and Fort
Worth. K&N's revenues for fiscal 1996 were $24.3 million and income from
operations was $936,000. K&N derived 89% of its 1996 revenues from new
installation services and 11% from maintenance, repair and replacement
services. K&N is headquartered in Arlington, Texas and has facilities in
Arlington and Austin, Texas and Las Vegas, Nevada.
RESULTS OF OPERATIONS--K&N
The following table sets forth certain unaudited financial data for the
periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1995 1996 1997 1996 1997(1)
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $21,458 100.0% $22,709 100.0% $24,279 100.0% $11,893 100.0% $12,355 100.0%
Cost of Services........ 18,843 87.8 20,350 89.6 20,705 85.3 10,433 87.7 10,662 86.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,615 12.2 2,359 10.4 3,574 14.7 1,460 12.3 1,693 13.7
Selling, General and
Administrative
Expenses............... 2,275 10.6 2,478 10.9 2,638 10.8 1,349 11.4 1,605 13.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 340 1.6 (119) (0.5) 936 3.9 111 0.9 88 0.7
</TABLE>
- --------
(1) The operating results of K&N represent six months of activity, even though
K&N was acquired, for accounting purposes, by Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues. Revenues increased $462,000, or 3.9%, from $11.9 million for the
six months ended June 30, 1996 to $12.4 million for the six months ended June
30, 1997. The increase in revenues was attributable to a higher volume of new
home construction in the Austin and Las Vegas markets.
11
<PAGE>
Gross Profit. Gross profit increased $233,000, or 15.5%, from $1.5 million
for the six months ended June 30, 1996 to $1.7 million for the six months
ended June 30, 1997. Gross margin increased from 12.3% to 13.7% due to
increases in operational efficiency.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $256,000, or 19.7%, from $1.3 million for
the six months ended June 30, 1996 to $1.6 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to additional owners' compensation expense. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.4% to 13.0% for 1996 and 1997, respectively.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenues. Revenues increased $1.6 million, or 7.0%, from $22.7 million for
the year ended March 31, 1996 to $24.3 million for the year ended March 31,
1997. The increase in revenues was primarily volume driven and attributable to
the expansion of the Company's customer base to include several new home
builders in the Austin and Las Vegas markets.
Gross Profit. Gross profit increased $1.2 million, or 50.0%, from $2.4
million for the year ended March 31, 1996 to $3.6 million for the year ended
March 31, 1997. The increase was due to a decline in production labor and
material costs for start ups in Austin, Texas and Las Vegas, Nevada, and the
savings from the closing during fiscal 1996 of an unsuccessful operation in
Palmdale, California. Gross margin increased from 10.4% to 14.7% for the years
ending March 31, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $160,000, or 6.4%, from $2.5 million for the
year ended March 31, 1996 to $2.6 million for the year ended March 31, 1997.
As a percentage or revenues, selling, general and administrative expenses
remained relatively constant at 10.9% and 10.8% for the years ending March 31,
1996 and 1997, respectively.
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
Revenues. Revenues increased $1.2 million, or 5.6%, from $21.5 million for
the year ended March 31, 1995 to $22.7 million for the year ended March 31,
1996. The increase in revenues was primarily volume driven and attributable to
the new operating facilities in Austin, Texas and Las Vegas, Nevada and a
higher level of new home construction in the Dallas and Fort Worth
metropolitan area.
Gross Profit. Gross Profit decreased $256,000, or 9.8%, from $2.6 million
for the year ended March 31, 1995 to $2.4 million for the year ended March 31,
1996. Gross margin decreased from 12.2% to 10.4% for the years ended March 31,
1995 and 1996, respectively. The gross margin decline was primarily
attributable to aggressive pricing and start-up labor costs for the two new
divisions in Austin, Texas and Las Vegas, Nevada.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $203,000, or 8.8% from $2.3 million for the
year ended March 31, 1995 to $2.5 million for the year ended March 31, 1996.
The increase in selling, general and administrative expenses was primarily
attributable to incremental costs relating to the closing of the Palmdale,
California operation and the implementation of a new management information
system. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.6% to 10.9%.
OTHER RESIDENTIAL SERVICE COMPANIES
Pre-IPO Companies
A-ABC Appliance, Inc. and A-1 Appliance and Air Conditioning, Inc.
(collectively, "A-ABC"), founded in 1976 and 1994, respectively, provide
maintenance, repair and replacement services for HVAC equipment, as
12
<PAGE>
well as home appliances, to residential customers in the Dallas and Garland,
Texas areas. A-ABC also offers plumbing repair and replacement services.
Combined revenues for fiscal 1996 totaled $8.5 million and combined income
from operations totaled $333,000. A-ABC is headquartered in Dallas, Texas.
Callahan/Roach Products and Publications, Callahan/Roach and Associates and
their affiliates (collectively, "Callahan Roach") and its affiliates provide
marketing products and pricing programs nationally to over 1,300 independent
service companies, manufacturers and associations. Callahan Roach's revenues
for fiscal 1996 were $1.9 million and income from operations for fiscal 1996
was $8,257. Callahan Roach, founded in 1989, is headquartered in Englewood,
Colorado and has facilities in Dublin, Ohio and Englewood, Colorado.
Costner Brothers, Inc. ("Costner") was founded in 1985 and provides HVAC
maintenance, repair and replacement services to residential customers in the
Rock Hill, South Carolina and Charlotte, North Carolina areas. Costner's
revenues for fiscal 1996 were $3.0 million, and income from operations was
$7,487. Costner is headquartered in Rock Hill, South Carolina.
Hallmark Air Conditioning, Inc. ("Hallmark") was founded in 1951 and
provides HVAC maintenance, repair and replacement services to residential
customers in the Houston, Texas area. Hallmark's revenues for fiscal 1996 were
$6.5 million, and income from operations was $8,749. Hallmark is headquartered
in Houston, Texas and has facilities in Houston and San Antonio, Texas.
AA JARL, Inc. (d/b/a Jarrell Plumbing) ("Jarrell") was founded in 1959 and
provides plumbing repair services to residential customers in the Houston,
Texas area. Jarrell's revenues for the fiscal year ended February 28, 1997
were $1.2 million and it had income from operations of $34,547 during that
year. Jarrell is headquartered in Houston, Texas.
Way Residential (the residential service business formerly owned by Way
Service, Inc.) was founded in 1977 and provides HVAC services to residential
customers in Houston, Texas. Way Residential's revenues for fiscal 1996 were
$659,000 and income from operations was $123,000. Way Residential's operations
have been combined with Hallmark's operations.
IPO Companies
Central Carolina Air Conditioning Company ("Central Carolina") was founded
in 1967 and provides HVAC maintenance, repair and replacement services to
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas. Central Carolina's revenues for fiscal 1996 were $8.2
million and income from operations was $381,000. In addition, Central Carolina
has deferred $967,000 of service contract revenues due to five-year extended
service contracts. Other GroupMAC Companies typically do not have extended
service contracts in excess of one year. Central Carolina is headquartered in
Greensboro, North Carolina.
Evans Services, Inc. ("Evans") was founded in 1901 and provides plumbing and
HVAC services to residential customers in the Birmingham, Alabama area. Evans'
revenues for fiscal 1996 were $2.3 million and income from operations was
$86,000. Evans is headquartered in Birmingham, Alabama.
Paul E. Smith Co., Inc. ("Paul E. Smith") was founded in 1967 and installs
and maintains, repairs and replaces plumbing systems in new and existing
residences in the Indianapolis, Indiana area. Paul E. Smith's revenues for
fiscal 1996 were $5.6 million and income from operations was $297,000. Paul E.
Smith is headquartered in Indianapolis, Indiana.
Van's Comfortemp Air Conditioning, Inc. ("Van's") was founded in 1965 and
provides HVAC services to residential and light commercial customers in the
Palm Beach-Ft. Lauderdale, Florida area. Van's revenues for fiscal 1996 were
$4.3 million and income from operations was $7,000. Van's is headquartered in
Delray Beach, Florida.
13
<PAGE>
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,
---------------------------- ----------------------------
1995 1996 1996 1997(2)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $43,216 100.0% $48,964 100.0% $23,255 100.0% $24,886 100.0%
Cost of Services ....... 27,537 63.7 30,628 62.6 14,762 63.5 14,799 59.5
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 15,679 36.3 18,336 37.4 8,493 36.5 10,087 40.5
Selling, General and Ad-
ministrative
Expenses................ 14,210 32.9 16,506 33.7 8,082 34.7 8,277 33.2
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,469 3.4 1,830 3.7 411 1.8 1,810 7.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
(2) The operating results of the Other Residential Service Companies,
including Hallmark and A-ABC, represent six months of activity, even
though Hallmark and A-ABC were acquired, for accounting purposes, by
Airtron on June 1, 1997.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues. Revenues increased $1.6 million, or 6.9%, from $23.3 million for
the six months ended June 30, 1996 to $24.9 million for the six months ended
June 30, 1997. The increase in revenues was primarily volume driven and
attributable to expansion of Central Carolina's commercial service and
replacement business, an increase in replacement sales at Willis and the
occurrence of a significant light commercial job at Jarrell.
Gross Profit. Gross profit increased $1.6 million, or 18.8%, from $8.5
million for the six months ended June 30, 1996 to $10.1 million for the six
months ended June 30, 1997. Gross margin increased from 36.5% to 40.5% from
the six month period ended June 30, 1996 to the corresponding period in 1997.
The increase in gross margin was attributable to higher margins at Central
Carolina from operational efficiencies and from increased higher margin
replacement sales at Willis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $195,000, or 2.4%, from $8.1 million for the
six months ended June 30, 1996 to $8.3 million for the six months ended June
30, 1997. As a percentage of revenues, selling, general and administrative
expenses decreased from 34.7% to 33.2% for the six month period ended June 30,
1996 compared to the corresponding period in 1997.
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues increased $5.8 million, or 13.4%, from $43.2 million in
fiscal 1995 to $49.0 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to the continued internal
14
<PAGE>
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-ABC, an acquisition by Hallmark of a high margin operation in San Antonio
and revenue increases at Costner and other higher margin companies. Gross
margin increased from 36.3% to 37.4% for fiscal 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 16.2%, from $14.2 million
in fiscal 1995 to $16.5 million in fiscal 1996. The increase in selling,
general and administrative expenses was mainly due to the acquisition of an
operation in San Antonio by Hallmark during the period, a higher level of
spending on advertising at Costner and an increase in owner compensation among
all of the residential service companies of $116,000. As a percentage of
revenues, selling, general and administrative expenses increased from 32.9% to
33.7% for fiscal 1995 and 1996, respectively.
OTHER COMMERCIAL SERVICE COMPANIES
Pre-IPO Companies
Charlie Crawford, Inc. (d/b/a Charlie's Plumbing) ("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.
United Service Alliance, L.C. ("USA") was founded in 1988 and provides
marketing products and training materials to over 100 member companies across
the country. USA's revenues for fiscal 1996 were $763,000 and income from
operations was $33,000. USA is headquartered in Englewood, Colorado.
IPO Companies
All Service Electric, Inc. ("All Service") was founded in 1990 and provides
electrical contracting services (including new installation and repair
services) primarily to commercial customers in the Jacksonville, Florida area.
All Service's revenues for fiscal 1996 were $2.8 million and income from
operations was $687,000. All Service is headquartered in Jacksonville,
Florida.
Arkansas Mechanical Services, Inc. ("Arkansas Mechanical") was founded in
1988 and provides HVAC maintenance, repair and replacement services to
commercial and industrial customers in the greater Little Rock and
Fayetteville, Arkansas areas. Arkansas Mechanical also provides engineering
services for retrofit upgrades and replacements. Arkansas Mechanical's
revenues were $3.3 million and income from operations was $325,000. Arkansas
Mechanical is headquartered in North Little Rock, Arkansas and has facilities
in the North Little Rock and Fayetteville, Arkansas areas.
Linford Service Company ("Linford") was founded in 1960 and provides HVAC
maintenance, repair and replacement services to commercial customers
throughout California. Linford's revenues for fiscal 1996 were $11.3 million
and the loss from operations was $267. Linford is headquartered in Oakland,
California and has facilities in Oakland, Ontario, Sacramento, San Diego and
San Jose, California.
15
<PAGE>
Mechanical Services, Inc. ("Mechanical") was founded in 1993 and provides
design and build, engineering and installation services in the mechanical
trades industry in the Little Rock and Fayetteville, Arkansas areas.
Mechanical Services' revenues for fiscal 1996 were $2.9 million and income
from operations was $56,000. Mechanical Services is headquartered in North
Little Rock, Arkansas and has facilities in North Little Rock and
Fayetteville, Arkansas.
Southeast Mechanical Service, Inc. ("Southeast Mechanical") was founded in
1979 and provides HVAC maintenance, repair and replacement services in the
Miami and Fort Lauderdale, Florida areas. Southeast Mechanical's revenues for
fiscal 1996 were $5.3 million and income from operations was $585,000.
Southeast Mechanical is headquartered in Hollywood, Florida.
Yale Incorporated ("Yale") was founded in 1939 and provides HVAC services to
commercial customers throughout Minnesota. Yale's revenues for fiscal 1996
were $10.1 million and income from operations was $405,000. Yale is
headquartered in Minneapolis, Minnesota.
RESULTS OF OPERATIONS--OTHER COMMERCIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Commercial Services Companies
derive a majority of their revenues from commercial new installation and
maintenance, repair and replacement services. In the aggregate, these nine
companies derive 96% of their revenue from commercial services and 4% of their
revenues from residential services. The following table sets forth certain
unaudited financial data for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $38,476 100.0% $46,499 100.0% $24,460 100.0% $23,870 100.0%
Cost of Services........ 27,613 71.8 33,845 72.8 17,575 71.9 17,177 72.0
------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 10,863 28.2 12,654 27.2 6,885 28.1 6,693 28.0
Selling, General and
Administrative
Expenses............... 9,129 23.7 10,367 22.3 4,703 19.2 5,198 21.7
------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,734 4.5 2,287 4.9 2,182 8.9 1,495 6.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies had fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies use subsequent to the IPO.
For a discussion of periods subsequent to June 30, 1997, see "--Results of
Operations--GroupMAC and Subsidiaries."
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues. Revenues declined $590,000, or 2.4%, from $24.5 million for the
six months ended June 30, 1996 to $23.9 million for the six months ended June
30, 1997. The decrease in revenues was primarily volume driven and
attributable to a $2.0 million decline in revenues at Sibley which resulted
from an internal decision to discontinue a large, low margin customer
relationship. Such decline was offset by growth at Linford from incremental
service agreements and at Mechanical Services from incremental "design and
build" project work.
Gross Profit. Gross profit declined $192,000, or 2.9%, from $6.9 million for
the six months ended June 30, 1996 to $6.7 million for the six months ended
June 30, 1997. The decline in gross profit primarily resulted from the
discontinuance of the customer relationship discussed above. Gross margin
remained consistent at 28.1% and 28.0% for the six month periods ended June
30, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $494,000, or 10.6%, from $4.7 million for
the six months ended June 30, 1996 to $5.2 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to incremental owners' compensation and additional
personnel to support the growth in sales at Linford and an
16
<PAGE>
intentional shift in business mix at Yale toward higher margin service
contract work. As a percentage of revenues, selling, general and
administrative expenses increased from 19.2% to 21.7% over the six month
periods ended June 30, 1996 and 1997, respectively.
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues increased $8.0 million, or 20.8%, from $38.5 million in
fiscal 1995 to $46.5 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to incremental service agreements at
Linford, incremental design and build projects at Mechanical Services and an
increase in maintenance, repair and replacement sales at Southeast Mechanical
and Sibley Services.
Gross Profit. Gross profit increased $1.8 million, or 16.5%, from $10.9
million in fiscal 1995 to $12.7 million in fiscal 1996. The largest factor
impacting the increase in gross profit was volume growth in revenues at
Linford, although the growth was at slightly lower margins. Additionally,
significant increases in gross profit were due to rapid service revenue growth
combined with margin expansion at All Service and Yale. Gross margin decreased
slightly from 28.2% to 27.2% between fiscal 1995 and fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 14.3%, from $9.1 million in
fiscal 1995 to $10.4 million in fiscal 1996. The overall increase in selling,
general and administrative expenses was due to the expansion and relocation of
facilities as well as an increase in administrative and sales personnel at
Linford. As a percentage of revenues, selling, general and administrative
expenses decreased slightly from 23.7% to 22.3% in fiscal 1996.
RESULTS OF OPERATIONS--PRO FORMA COMBINED
The following table sets forth certain combined financial data of the
GroupMAC Companies for the twelve month period ended December 31, 1997 and for
the nine month periods ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
TWELVE MONTHS 30,
ENDED ------------------------------
DECEMBER 31, 1997 1997 1998
------------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 978,480 100.0% $723,605 100.0% $783,814 100.0%
Cost of Services............ 756,770 77.3 560,149 77.4 605,059 77.2
---------- ------- -------- ----- -------- -----
Gross Profit................ $ 221,710 22.7% $163,456 22.6% $178,755 22.8%
========== ======= ======== ===== ======== =====
</TABLE>
DECEMBER 31, 1997:
The acquisition of the Post-IPO Companies added $649.5 million of revenues
for the twelve months ended December 31, 1997, bringing the total combined
revenues for the GroupMAC Companies to $978.5 million. This resulted in the
Company decreasing its dependence on new installation business from 55% of
total revenues with respect to the Founding Companies to 40%. The Post-IPO
Companies' revenue mix changed the revenue mix of the GroupMAC Companies as
follows:
<TABLE>
<CAPTION>
GROUPMAC
COMPANIES
---------
<S> <C>
Residential Services:
New Installation.................................................... 16%
Maintenance, Repair and Replacement................................. 10%
----
Total Residential................................................. 26%
----
Commercial Services:
New Installation.................................................... 24%
Maintenance, Repair and Replacement................................. 50%
----
Total Commercial.................................................. 74%
----
Total........................................................... 100%
====
</TABLE>
17
<PAGE>
SEPTEMBER 30, 1997 AND 1998:
Combined Nine Months Ended September 30, 1998 Compared to Combined Nine
Months Ended September 30, 1997
Revenues. Combined revenues increased $60.2 million, or 8.3%, to $783.8
million for the nine months ended September 30, 1998 from $723.6 million for
the nine months ended September 30, 1997. The increase in combined revenues
was attributable to (i) the companies that primarily provide residential new
installation services which experienced a $19.3 million increase, or 16.0%,
due to an increase in new home starts in the markets they serve, (ii)
companies that primarily provide residential maintenance, repair and
replacement services which experienced a $10.0 million increase, or 14.6%, due
to favorable weather patterns in the markets they serve and (iii) an increase
of $31.4 million, or $5.9%, from the companies that provide
commercial/industrial services primarily in the Seattle, Salt Lake City,
Baltimore, Philadelphia and Dallas markets partially offset by economic
softening in the Company's Richmond, Virginia market.
Gross Profit. Combined gross profit increased $15.3 million, or 9.4%, to
$178.8 million for the nine months ended September 30, 1998 from $163.5
million for the nine months ended September 30, 1997. The increase in gross
profit was primarily attributable to the increase in combined revenues
described above. Gross profit margin increased to 22.8% for the nine months
ended September 30, 1998 compared to 22.6% for the nine months ended September
30, 1997. The increase in gross profit margin was a result of (i) overall
margin improvement at the companies that primarily provide residential new
installation services as these companies have operated near full capacity to
accommodate housing start demand in the geographic markets they serve, (ii) a
slightly higher mix of higher margin maintenance, repair and replacement
business in the residential sector from the favorable weather patterns
discussed above, and (iii) purchasing materials savings experienced in the
current year.
YEAR 2000
Background. The Year 2000 issue refers to the inability of certain date-
sensitive computer chips, software and systems to recognize a two-digit date
field as belonging to the 21st century. Many computer software programs, as
well as certain hardware and equipment containing date sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which
could result in significant system and equipment failures. This is a
significant issue for most if not all companies, with far reaching
implications, some of which cannot be anticipated or predicted with any degree
of certainty. The Company recognizes that it must take action to ensure that
its operations will not be adversely impacted by Year 2000 software failures.
The Company's State of Readiness. An initial systems survey of the GroupMAC
Companies was completed in March 1998 and revealed that several of the
Company's core business applications possess Year 2000 problems. The Company
retained an outside consulting firm to evaluate more thoroughly the extent of
the problem and to assist the Company in preparing an action plan to address
the issues in a timely manner. The evaluation project began in early July
1998.
With the exception of eight recent acquisitions, the evaluation project is
substantially complete. The Company estimates that the cost of bringing the
evaluated systems into compliance is between $130,000 and $175,000, including
all software upgrade fees and implementation and expects to expense
substantially all of these costs. These costs are independent of any costs
associated with the common information system discussed below. The projected
effort for the majority of the systems includes an upgrade to recent vendor
software releases that are fully Year 2000 compliant. Management is working
with the consultant to finalize implementation planning and to develop
tracking mechanisms to ensure upgrades are completed in a timely manner.
Additionally, the Company has engaged an outside consulting firm to evaluate
and estimate the impact of Year 2000 problems on potential future acquisitions
as part of the due diligence process. As of September 30, 1998, the Company
has incurred expenses of approximately $75,000 related to the evaluation phase
of this project.
18
<PAGE>
Independent of its Year 2000 activities discussed in the previous paragraph,
the Company continues to develop a common information system throughout the
organization for its overall information needs that will be free of any Year
2000 limitations. While the Company is not dependent on the implementation of
the common information system to remedy its Year 2000 problem, it will give
priority for implementation of the common information systems to those
GroupMAC Companies where correction of the Year 2000 problem is an issue. The
Company expects to commence user-acceptance testing of the new information
system during the second quarter of 1999 with implementation to follow
immediately thereafter.
The Company is completing a plan to evaluate the effect of the Year 2000
problem on the Company's most significant customers and suppliers, and thus
indirectly on the Company. This evaluation is expected to be complete by
December 31, 1998. At this time, the Company has not assessed the potential
adverse effect on the Company of the failure by any of its customers and
suppliers to be Year 2000 compliant.
Embedded Technology. The Company has focused its assessments to date on the
information technology systems. These assessments indicate that, due to the
nature of the Company's operations, the non-information technology systems
(i.e. embedded technology such as microcontrollers) do not represent a
significant area of risk relative to Year 2000 readiness. The Company's
operations do not include capital intensive equipment with embedded
microcontrollers.
Contingency Plan. The Company has not implemented a Year 2000 contingency
plan. As explained above, the Company has initiated action to identify and
resolve Year 2000 problems. The Company intends to develop and implement a
contingency plan in the event the Company's present course of action to solve
the Year 2000 problem should fall behind schedule.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due
to reduced construction activities during inclement weather and less use of
air conditioning during the colder months. Demand for HVAC services is
generally higher in the second and third quarters. Accordingly, the Company
expects its revenues and operating results generally will be lower in the
first and fourth quarters. Historically, the construction industry has been
highly cyclical. As a result, the Company's volume of business may be
adversely affected by declines in new installation projects in various
geographic regions of the United States.
INFLATION
Inflation did not have a significant effect on the results of operations of
the GroupMAC Companies for the years ended February 29, 1996 or February 28,
1997, the ten months ended December 31, 1997 or the nine months ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of Common Stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to the acquisitions of 14 businesses, $42.6
million to repay corporate indebtedness and debt assumed in connection with
the acquisition of 24 businesses, $19.3 million to retire all of the then
outstanding preferred stock and $11.9 million for general corporate purposes
including working capital and final consideration settlements related to
previous acquisitions.
Historically, the Company has financed its operations and growth with
internally generated working capital and borrowings from commercial banks or
other lenders. These borrowings were generally secured by the accounts
receivable and inventory of the Company.
19
<PAGE>
On June 12, 1998, the Company amended and restated its revolving credit
facility (the "Credit Agreement") to increase its borrowing capacity from
$75.0 million to $125.0 million. On October 15, 1998, the Company amended and
restated the Credit Agreement to increase its borrowing capacity from $125.0
million to $230.0 million. Under this Credit Agreement, the Company is
required to maintain (i) a minimum fixed charge coverage ratio; (ii) a maximum
ratio of total indebtedness for borrowed money to capitalization (as defined
in the Credit Agreement); (iii) a maximum ratio of debt to pro forma earnings
before interest, taxes, depreciation and amortization; (iv) a maximum amount
of other indebtedness in relation to consolidated shareholders' equity and (v)
a minimum amount of consolidated net worth. The Company is presently in
compliance with those covenants. The Credit Agreement matures on October 13,
2001.
The Company entered into agreements to lock in the ten year U.S. Treasury
rates to be used to price an anticipated debt offering ("the Offering") of at
least $100 million. The Company has locked in $100 million at 5.5212%, which
the Company believes is an attractive long-term base rate. This agreement
expires on January 31, 1999.
As of December 21, 1998, the ten year Treasury yield was 4.626%,
representing a potential additional pre-tax financing cost of approximately
$6.9 million if the agreements were settled as of this date. In accordance
with Statement of Financial Accounting Standards No. 80, Accounting for
Futures Contracts, this agreement is considered a hedge against rising
interest rates for an anticipated transaction considered probable that should
be recorded as deferred costs associated with the offering and amortized into
interest expense over the term of the related debt. However, if the Offering
at some point does not meet the probable of occurrence standard, a gain or
loss would be reorganized in earnings for the fair value of the instrument at
that date. It should be noted that a decline in interest rates will generally
have a positive impact on the Company's operations.
The Company intends to aggressively pursue acquisition opportunities.
Management believes that the Company has viable financing alternatives to meet
the Company's anticipated requirements for acquisitions. Estimates as to
capital needs and other expenditures may be materially affected if the
foregoing sources are not available or do not otherwise provide sufficient
funds to meet the Company's obligations.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing vehicles, inventory and supplies used in
the operation of the business. During the ten months ended December 31, 1997
and the nine months ended September 30, 1998, capital expenditures aggregated
$2.0 million and $6.6 million, respectively. The Company anticipates that its
cash flow from operations will provide cash in excess of the Company's normal
working capital needs, debt service requirements and planned capital
expenditures for property and equipment.
For the years ended February 29, 1996 and February 28, 1997, the ten months
ended December 31, 1997 and the nine months ended September 30, 1998, the
Company generated $4.0 million, $3.7 million, $4.4 million and $8.4 million in
cash from operating activities, respectively. For the year ended February 29,
1996, net income, depreciation, amortization and deferred taxes generated $1.0
million, and changes in asset and liability accounts generated a net $3.0
million. For the year ended February 28, 1997, net income, depreciation,
amortization and deferred taxes generated $4.9 million, and changes in asset
and liability accounts utilized a net $1.2 million. For the ten months ended
December 31, 1997, net income, depreciation, amortization, deferred taxes and
non-cash compensation generated $7.5 million and changes in asset and
liability accounts utilized a net $3.1 million. For the nine months ended
September 30, 1998, net income, depreciation, amortization gain from sale of
property and equipment and deferred taxes generated $24.7 million, and changes
in asset and liability accounts utilized a net of $16.3 million.
The cash impact of investing activities for the years ended February 29,
1996 and February 28, 1997 was not significant. For the ten months ended
December 31, 1997, the Company used $37.9 million in investing activities. The
cash expended during the ten months ended December 31, 1997 consisted of $35.8
million for acquisitions and $2.0 million for capital expenditures. For the
nine months ended September 30, 1998, the Company used $118.7 million in
investing activities. The cash expended during the nine months ended September
30, 1998 consisted of $111.1 million for acquisitions and $6.4 million for net
capital expenditures and $1.2 million for deferred acquisition costs.
20
<PAGE>
The cash impact of financing activities for the years ended February 29,
1996 and February 28, 1997 was not significant. For the ten months ended
December 31, 1997, the Company generated $54.9 million in cash from its
financing activities. These activities principally consisted of issuance of
common stock for $109.7 million and proceeds from long-term debt of $32.5
million less distributions to shareholders of $20.4 million, payments of long-
term debt of $47.7 million and retirement of preferred stock of $19.3 million.
For the nine months ended September 30, 1998, the Company generated $86.8
million in cash from its financing activities. These activities principally
consisted of proceeds from the Credit Agreement of $142.1 million, less
payments of long-term debt of $55.3 million.
During the first nine months of 1998, the Company completed the acquisition
of 35 companies, which were accounted for as purchases, for approximately
$237.8 million, which includes cash payments of $126.8 million, $0.8 million
of subordinated convertible debt, $4.0 million of notes payable, 7.8 million
shares of common stock and options to purchase 0.3 million shares of common
stock. Of the total consideration, approximately $9.3 million of cash and 0.1
million shares of common stock is due to former shareholders at September 30,
1998. The Company financed the cash portion of the purchase price using (i)
remaining funds from the IPO, (ii) cash borrowed under the Credit Agreement
and (iii) internally generated funds. The combined 1997 annual revenues of
these companies were $453.2 million.
From October 1, 1998 through December 31, 1998, the Company acquired four
additional platform companies with combined annual revenues of $196.3 million.
Total consideration paid or to be paid was approximately $136.8 million
consisting of cash payments of $77.6 million, $16.0 million of subordinated
debt, 4.2 million shares of common stock, options to purchase 0.1 million
shares of common stock and warrants to purchase 0.8 million shares of common
stock. These acquisitions will be accounted for as purchases. The Company
financed the cash portion of the purchase price with borrowings under the
Credit Agreement. As of December 4, 1998, the funds available under the Credit
Agreement totaled $45.1 million, subject to the maintenance of financial
ratios and covenants.
The Company has registered under the Securities Act of 1933, as amended, and
has available for issuance in connection with future acquisitions
approximately 3.3 million shares of common stock.
In connection with the acquisition of Trinity Contractors, Inc. ("Trinity"),
the Company paid cash and issued common stock, warrants to purchase common
stock and subordinated notes (the "Trinity Notes"). The Trinity Notes are the
direct, unsecured subordinated obligations of GroupMAC and are junior to all
other indebtedness of GroupMAC or any of its subsidiaries. The Trinity Notes
do not contain financial covenants binding on the Company or its subsidiaries,
nor will they limit the amount of indebtedness, whether senior or
subordinated, that the Company or its subsidiaries can incur. Unless prepaid
in whole or part at any time by the Company, the balance of the Trinity Notes
is due five years from the date of issuance. The Trinity Notes bear interest
at 6% per annum with an interest penalty of 3% per annum after December 31,
1999 if the Company fails to register under the Securities Act certain shares
of common stock issued in connection with the acquisition. Holders of the
Trinity Notes have a one-time option to require the Company to repurchase the
Trinity Notes (the "Put Option") in the event the Company issues $50,000,000
or more in principal amount of debt that is either (1) registered under the
Securities Act and sold to the public or (2) sold to qualified institutional
buyers. An event of default under the Trinity Notes will occur if (1) the
Company fails to pay principal or interest on the Trinity Notes when due, (2)
the Company fails to comply with the Put Option or (3) certain events occur
relating to the bankruptcy, insolvency or reorganization of the Company. A
default under other indebtedness of the Company is not an event of default
under the Trinity Notes. If an event of default occurs under the Trinity
Notes, the holders of Trinity Notes may only accelerate payment after
receiving the consent of holders of the Company's debt that is senior to the
Trinity Notes. The Company has the right to set-off any amounts owed to it by
the former owners of the acquired business against any amount the Company owes
under the Trinity Notes. The Company expects to issue subordinated notes
similar to the Trinity Notes, along with other forms of consideration, in
connection with future acquisitions.
21
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which the Company is
required to adopt for annual periods beginning after December 15, 1997 and
interim periods beginning in fiscal year 1999. SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires that those companies
report information about segments in interim financial reports issued to
shareholders. The Company will begin publishing the required segment
information in its 1998 annual report on Form 10-K.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which
establishes new accounting and reporting standards for the costs of computer
software developed or obtained for internal use. This statement will be
applied prospectively and is effective for fiscal years beginning after
December 15, 1998. The Company believes that implementation of this new
standard will not have a significant effect on the Company's financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires capitalized costs related to start-
up activities to be expensed as a cumulative effect of a change in accounting
principle when the statement is adopted. The Company believes that the
adoption of this new standard will not have a significant effect on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new accounting
and reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This statement is
effective for all fiscal years beginning after June 15, 1999. The Company has
not yet determined the impact this standard will have on its financial
position or results of operations.
22
<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
GENERAL
The lenders under the Company's Credit Agreement are committed to provide
the Company, subject to certain terms and conditions, the entire $230 million
principal amount of the revolving credit facility described below. The
following description summarizes the material provisions of the Credit
Agreement. The following description does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions
of the Credit Agreement a copy of which is available from the Company.
AMORTIZATION; PREPAYMENTS
Loans under the Credit Agreement may be prepaid at any time without premium
or penalty in reasonable minimum amounts. Prepayments of Eurodollar borrowings
on any day other than the last day of an interest period must be accompanied
by a payment to the Lenders of various costs, expenses or losses, if any,
incurred as a result of such prepayment. Any loans under the Credit Agreement
are payable in full on October 13, 2001.
SECURITY; GUARANTEES
Borrowings under the Credit Agreement are guaranteed by the Company's
domestic Subsidiaries (as defined in the Credit Agreement), including future
domestic Subsidiaries. The obligations of the Company under the Credit
Agreement and the obligations under the guarantees are secured by a first
priority lien on the accounts receivable and inventory of the domestic
Subsidiaries, and by a pledge of stock of its domestic Subsidiaries.
INTEREST RATES
Loans under the Credit Agreement bear interest at a rate per annum, at the
Company's option, of either (i) the Alternate Base Rate which is equal to the
greater of the Federal Funds Effective Rate (as defined in the Credit
Agreement) plus 0.5% or the Prime Rate (as defined in the Credit Agreement)
plus a margin depending on the ratio of indebtedness for borrowed money to
Adjusted EBITDA (as defined in the Credit Agreement), or (ii) the Eurodollar
Rate (as defined in the Credit Agreement) plus a margin depending on the ratio
of indebtedness for borrowed money to Adjusted EBITDA.
FEES, EXPENSES AND COSTS; CREDIT FACILITIES
The terms of the Credit Agreement require the Company to pay the following
fees in connection with the maintenance of loans under the Credit Agreement:
(i) commitment fees to be paid to the Lenders in amounts between 0.25% and
0.375% per annum with respect to the unused commitments under the Credit
Agreement depending on the ratio of indebtedness for borrowed money to
Adjusted EBITDA, payable quarterly in arrears until such time as such facility
is terminated; and (ii) administration fees payable annually to the Agent. In
addition, the Company paid various underwriting and arrangement fees and
closing costs in connection with the origination and syndication of the Credit
Agreement.
The Company is required to reimburse the Agent for all reasonable out-of-
pocket costs and expenses incurred in the preparation, documentation and
administration of the Credit Agreement and to reimburse the Lenders for all
reasonable costs and expenses incurred in connection with the enforcement of
their rights in connection with a default or the enforcement of the Credit
Agreement. The Company must indemnify the Agent and the Lenders and their
respective officers, directors, shareholders, employees, agents and attorneys
against certain costs, expenses (including fees and reimbursements of counsel)
and liabilities arising out of or relating to the Credit Agreement and the
transactions contemplated thereby. The Lenders also are entitled to be
reimbursed for certain reserve requirements and increases therein, changes in
law and circumstances, taxes (other than on overall net income), capital
adequacy, and consequential costs. Further, the inability to determine
Eurodollar Rates or the possible future illegality of the Eurodollar Rate
option will result in such rate option being unavailable.
23
<PAGE>
COVENANTS
The Credit Agreement contains substantial restrictive covenants limiting the
ability of the Company and its subsidiaries to: (i) incur Indebtedness (as
defined in the Credit Agreement), including contractual contingent
obligations; (ii) pay certain debt after default; (iii) create or allow to
exist liens or other encumbrances; (iv) transfer assets except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business; (v) enter into mergers, consolidations and asset
dispositions of all or substantially all of its properties; (vi) make
investments; (vii) extend credit to any entity; (viii) sell, transfer or
otherwise dispose of any class of stock or the voting rights of any subsidiary
of the Company; (ix) enter into transactions with related parties other than
on an arm's-length basis on terms no less favorable to the Company than those
available from third parties; (x) amend certain agreements; (xi) make any
material change in the nature of the business conducted by the Company; (xii)
pay dividends or redeem shares of capital stock; and (xiii) make capital
expenditures.
In addition, the Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company and its subsidiaries
to: (i) maintain the existence, qualification and good standing of the Company
and its subsidiaries; (ii) comply in all material respects with all material
applicable laws; (iii) maintain material properties, rights and franchises;
(iv) deliver certain financial and other information; (v) maintain specified
insurance; (vi) pay taxes; and (vii) notify the Lenders of any default under
the Loan Documents (as defined in the Credit Agreement) and of certain other
material events.
Under the Credit Agreement, the Company is required to satisfy certain
financial covenants and tests, including (i) a minimum fixed charge coverage
ratio; (ii) a maximum ratio of total indebtedness for borrowed money to
Capitalization (as defined in the Credit Agreement); and (iii) a minimum
Consolidated Net Worth (as defined in the Credit Agreement).
EVENTS OF DEFAULT
Events of Default under the Credit Agreement include, subject to certain
applicable notice and grace periods, the following: (i) a default in the
payment when due of any principal, interest, fees or other amount under the
Credit Agreement; (ii) a default by the Company under any debt instrument in
excess of $5,000,000, or the occurrence of any event or condition that enables
the holder of such debt to accelerate the maturity thereof; (iii) any material
breach of any representation, warranty or statement in, or failure to perform
any duty or covenant under the Credit Agreement or any of the Loan Documents;
(iv) commencement of voluntary or involuntary bankruptcy, insolvency or
similar proceedings by or against the Company or any Material Subsidiary; (v)
any judgment or order in excess of $5,000,000 net of confirmed insurance
remaining undischarged or unstayed for longer than certain periods; and (vi) a
Change of Control (as defined in the Credit Agreement).
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of businesses acquired.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. 28
Consolidated Balance Sheets.............................................. 29
Consolidated Statements of Income........................................ 30
Consolidated Statements of Shareholders' Equity.......................... 31
Consolidated Statements of Cash Flows.................................... 32
Notes to Consolidated Financial Statements............................... 33
MASTERS, INC.
Report of Independent Public Accountants................................. 43
Balance Sheets........................................................... 44
Statements of Operations................................................. 45
Statements of Shareholder's Equity....................................... 46
Statements of Cash Flows................................................. 47
Notes to Financial Statements............................................ 48
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. 55
Balance Sheet............................................................ 56
Statement of Operations.................................................. 57
Statement of Shareholders' Equity........................................ 58
Statement of Cash Flows.................................................. 59
Notes to Financial Statements............................................ 60
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................. 65
Combined Balance Sheets.................................................. 66
Combined Statements of Operations........................................ 67
Combined Statements of Shareholders' Equity.............................. 68
Combined Statements of Cash Flows........................................ 69
Notes to Combined Financial Statements................................... 70
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................. 75
Combined Balance Sheets.................................................. 76
Combined Statements of Operations........................................ 77
Combined Statements of Shareholders' Equity.............................. 78
Combined Statements of Cash Flows........................................ 79
Notes to Combined Financial Statements................................... 80
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................. 86
Balance Sheets........................................................... 87
Statements of Operations................................................. 88
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Shareholders' Equity....................................... 89
Statements of Cash Flows................................................. 90
Notes to Financial Statements............................................ 91
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................. 94
Balance Sheets........................................................... 95
Statements of Operations................................................. 96
Statements of Shareholders' Equity....................................... 97
Statements of Cash Flows................................................. 98
Notes to Financial Statements............................................ 99
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................. 104
Consolidated Balance Sheets.............................................. 105
Consolidated Statements of Operations.................................... 106
Consolidated Statements of Shareholders' Equity.......................... 107
Consolidated Statements of Cash Flows.................................... 108
Notes to Consolidated Financial Statements............................... 109
SIBLEY SERVICES, INCORPORATED
Report of Independent Public Accountants................................. 115
Balance Sheets........................................................... 116
Statements of Operations................................................. 117
Statements of Shareholders' Equity....................................... 118
Statements of Cash Flows................................................. 119
Notes to Financial Statements............................................ 120
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants................................. 126
Balance Sheets........................................................... 127
Statements of Operations................................................. 128
Statements of Shareholders' Equity....................................... 129
Statements of Cash Flows................................................. 130
Notes to Financial Statements............................................ 131
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants................................. 135
Balance Sheets........................................................... 136
Statements of Operations................................................. 137
Statements of Shareholders' Equity....................................... 138
Statements of Cash Flows................................................. 139
Notes to Financial Statements............................................ 140
YALE, INCORPORATED
Report of Independent Public Accountants................................. 145
Balance Sheets........................................................... 146
Statements of Operations................................................. 147
Statements of Shareholders' Equity....................................... 148
Statements of Cash Flows................................................. 149
Notes to Financial Statements............................................ 150
HUNGERFORD MECHANICAL CORPORATION
Report of Independent Public Accountants................................. 155
Balance Sheet............................................................ 156
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statement of Operations.................................................. 157
Statement of Shareholder's Equity........................................ 158
Statement of Cash Flows.................................................. 159
Notes to Financial Statements............................................ 160
MECHANICAL INTERIORS, INC.
Report of Independent Public Accountants................................. 164
Balance Sheet............................................................ 165
Statement of Operations.................................................. 166
Statement of Shareholders' Equity........................................ 167
Statement of Cash Flows.................................................. 168
Notes to Financial Statements............................................ 169
CLARK CONVERSE ELECTRIC SERVICE, INC.
Report of Independent Public Accountants................................. 173
Balance Sheets........................................................... 174
Statements of Operations................................................. 175
Statements of Shareholder's Equity....................................... 176
Statements of Cash Flows................................................. 177
Notes to Financial Statements............................................ 178
HPS PLUMBING SERVICES, INC.
Report of Independent Public Accountants................................. 182
Balance Sheets........................................................... 183
Statement of Operations.................................................. 184
Statement of Shareholders' Equity........................................ 185
Statement of Cash Flows.................................................. 186
Notes to Financial Statements............................................ 187
RAY & CLAUDE GOODWIN, INC.
Report of Independent Public Accountants................................. 193
Balance Sheets........................................................... 194
Statement of Operations.................................................. 195
Statement of Shareholders' Equity........................................ 196
Statement of Cash Flows.................................................. 197
Notes to Financial Statements............................................ 198
RELIABLE MECHANICAL, INC.
Report of Independent Accountants........................................ 203
Balance Sheet............................................................ 204
Statements of Operations................................................. 205
Statements of Shareholders' Equity....................................... 206
Statements of Cash Flows................................................. 207
Notes to Financial Statements............................................ 208
</TABLE>
27
<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
28
<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.
29
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ------------------------ ------------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $39,534,230 $45,508,339 $66,058,958 $36,382,305 $38,835,662 $52,184,305 $54,560,008
COST OF SERVICES........ 32,256,651 36,927,012 56,372,933 31,590,195 33,451,024 45,192,195 46,400,433
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......... 7,277,579 8,581,327 9,686,025 4,792,110 5,384,638 6,992,110 8,159,575
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 6,088,076 7,338,381 7,631,851 3,705,694 3,787,822 5,566,694 6,239,243
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from
operations.......... 1,189,503 1,242,946 2,054,174 1,086,416 1,596,816 1,425,416 1,920,332
OTHER INCOME (EXPENSE):
Interest expense....... (275,490) (370,603) (519,842) (244,135) (214,381) (386,135) (333,334)
Other.................. (25,865) (42,527) 7,926 66,751 167,209 23,751 183,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
(301,355) (413,130) (511,916) (177,384) (47,172) (362,384) (149,824)
Income before income
tax provision....... 888,148 829,816 1,542,258 909,032 1,549,644 1,063,032 1,770,508
INCOME TAX PROVISION.... 325,730 344,238 574,000 347,059 569,001 402,059 649,600
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643 $ 660,973 $ 1,120,908
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<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.
31
<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.
32
<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>
33
<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.
34
<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.
35
<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>
36
<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.
37
<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>
38
<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>
39
<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.
40
<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.
41
<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).
42
<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
43
<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.
44
<PAGE>
MASTERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------------------- ----------------------- -----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $30,327,333 $35,160,419 $39,825,843 $18,278,841 $19,318,196 $29,088,014 $31,166,233
COST OF SERVICES........ 28,018,280 31,746,287 35,854,155 16,639,076 17,457,471 26,308,282 27,955,896
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 2,309,053 3,414,132 3,971,688 1,639,765 1,860,725 2,779,732 3,210,337
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,664,069 2,373,300 2,483,875 1,008,650 1,196,777 1,738,751 2,014,689
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations. 644,984 1,040,832 1,487,813 631,115 663,948 1,040,981 1,195,648
INTEREST EXPENSE........ 86,940 102,428 134,718 58,888 64,672 100,546 90,934
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 558,044 $ 938,404 $ 1,353,095 $ 572,227 $ 599,276 $ 940,435 $ 1,104,714
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<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.
46
<PAGE>
MASTERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------- ----------------------- ----------------------
1994 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income............. $ 558,044 $ 938,404 $ 1,353,095 $572,227 $ 599,276 $ 940,435 $ 1,104,714
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation........... 227,572 236,131 258,079 144,065 139,740 189,589 210,017
Loss(Gain) on disposal
of assets............. 20,576 8,480 2,223 -- (305) 2,223 1,601
Bad debt expense....... 425,602 626,625 434,250 100,000 169,741 223,250 279,241
Changes in operating
assets and
liabilities:
(Increase) decrease
in--
Notes and accounts
receivable.......... (517,095) (1,881,816) (1,035,935) (701,119) (170,055) (910,274) (885,037)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... (104,401) (278,186) (359,379) (667,721) 446,342 (825,871) 262,473
Inventories.......... 116,978 9,039 (99,652) 31,423 (33,197) 86,925 171,651
Prepaid expenses and
other assets........ (16,255) (17,607) 1,337 9,945 (21,989) 16,862 (41,974)
Increase (decrease)
in--
Accounts payable..... 380,925 120,221 (20,018) 326,793 391,192 435,238 403,551
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... 43,624 209,499 (94,107) 26,087 223,635 (6,538) 164,983
Accrued salaries and
wages............... 2,662 16,042 17,360 58,963 40,363 93,177 70,593
Accrued profit
sharing and bonus... 143,148 256,752 189,431 (43,433) (162,176) 86,425 (150,903)
Accrued vacation
benefits............ 53,589 40,105 61,561 29,600 35,858 68,284 66,769
Payroll taxes and
withholding......... 22,291 (5,665) (69,252) 57,517 4,356 61,390 22,021
Other current
liabilities......... 238,406 80,814 (86,259) (52,484) 75,371 (29,779) (1,774)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............. 1,595,666 358,838 552,734 (108,137) 1,738,152 431,336 1,677,926
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM
INVESTING
ACTIVITIES:
Purchases of property
and equipment......... (284,326) (1,045,919) (295,198) (169,080) (130,357) (226,027) (188,846)
Proceeds from sale of
equipment............. 18,208 566 -- -- 6,327 -- 6,327
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash used in
investing activities.. (266,118) (1,045,353) (295,198) (169,080) (124,030) (226,027) (182,519)
----------- ----------- ----------- -------- ----------- --------- -----------
CASH FLOWS FROM
FINANCING
ACTIVITIES:
Proceeds from long-term
debt.................. 160,000 1,604,746 659,234 944,234 -- 659,234 --
Payments of long-term
debt.................. (1,237,110) (345,617) (113,506) (51,018) (945,145) (83,925) (810,714)
Dividends paid......... (219,912) (489,345) (667,743) (567,324) (702,423) (609,348) (720,273)
----------- ----------- ----------- -------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ (1,297,022) 769,784 (122,015) 325,892 (1,647,568) (34,039) (1,530,987)
----------- ----------- ----------- -------- ----------- --------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 32,526 83,269 135,521 48,675 (33,446) 171,270 (35,580)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 419,460 451,986 535,255 535,255 670,776 535,255 670,776
----------- ----------- ----------- -------- ----------- --------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 451,986 $ 535,255 $ 670,776 $583,930 $ 637,330 $ 706,525 $ 635,196
=========== =========== =========== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<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.
48
<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.
49
<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>
50
<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.
51
<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>
52
<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.
53
<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.
54
<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
55
<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.
56
<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.
57
<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.
58
<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.
59
<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.
60
<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>
61
<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>
62
<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.
63
<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.
64
<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
65
<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.
66
<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.
67
<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.
68
<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.
69
<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.
70
<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>
71
<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>
72
<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.
73
<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.
74
<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
75
<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.
76
<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.
77
<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.
78
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
DECEMBER 31, -------------------- ------------------
1996 1996 1997 1996 1997
------------ --------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 359,941 $ 266,268 $ 247,078 $322,268 $542,206
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and
amortization........ 109,624 65,735 89,354 100,008 114,932
Gain on sale of
property and
equipment........... -- -- -- -- (5,627)
Changes in operating
assets and
liabilities:
(Increase) decrease
in--
Accounts receivable. (368,388) (366,932) (376,997) (81,715) (192,725)
Inventories......... (10,142) (34) (20,826) (10,117) (25,027)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.......... (27,750) (52,223) 16,107 12,542 112,313
Due from related
parties............ 69,661 85,066 3,738 90,952 (20,149)
Prepaid expenses and
other current
assets............. (5,009) (20,847) (2,879) (23,044) (17,678)
Increase (decrease)
in--
Accounts payable.... 215,954 367,492 195,680 75,850 (142,147)
Accrued expenses.... 43,524 10,842 (88,240) 4,933 (104,452)
Billings in excess
of costs and
estimated earnings
on uncompleted
contracts.......... 23,641 (71,807) (17,836) (89,241) (82,258)
Due to related
parties............ (41,609) (41,609) 35,150 (41,609) 98,780
Other long-term
liabilities........ -- -- -- (55,000) --
--------- --------- --------- -------- --------
Net cash provided
by operating
activities....... 369,447 241,951 80,329 305,827 278,168
--------- --------- --------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (237,113) (130,895) (86,563) (31,898) (95,525)
Proceeds from sales of
property and
equipment............ 15,000 -- -- -- 12,000
--------- --------- --------- -------- --------
Net cash used in
investing
activities....... (222,113) (130,895) (86,563) (31,898) (83,525)
--------- --------- --------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from short-
term borrowings...... 590,000 440,000 110,000 -- 110,000
Payments of short-term
borrowings........... (410,000) (260,000) (100,000) -- (191,454)
Proceeds from long-
term debt............ 194,326 98,775 37,499 120,764 39,750
Payments of long-term
debt................. (145,389) (39,145) (72,829) -- (110,000)
Distributions to
shareholders......... (295,714) (155,000) (73,000) (370,715) (73,000)
--------- --------- --------- -------- --------
Net cash provided
by (used in)
financing
activities....... (66,777) 84,630 (98,330) (249,951) (224,704)
--------- --------- --------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 80,557 195,686 (104,564) 23,978 (30,061)
CASH AND CASH
EQUIVALENTS, beginning
of period............. 44,130 44,130 124,687 44,130 124,687
--------- --------- --------- -------- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 124,687 $ 239,816 $ 20,123 $ 68,108 $ 94,626
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
79
<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.
80
<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>
81
<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.
82
<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>
83
<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.
84
<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.
85
<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
86
<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.
87
<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.
88
<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.
89
<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.
90
<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.
91
<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.
92
<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.
93
<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
94
<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.
95
<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.
96
<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.
97
<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.
98
<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.
99
<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>
100
<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>
101
<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.
102
<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.
103
<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
104
<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.
105
<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> <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.
106
<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.
107
<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.
108
<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.
109
<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>
110
<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>
111
<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>
112
<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.
113
<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.
114
<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
115
<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.
116
<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.
117
<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.
118
<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.
119
<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.
120
<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>
121
<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>
122
<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>
123
<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.
124
<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.
125
<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
126
<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.
127
<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.
128
<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.
129
<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.
130
<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.
131
<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>
132
<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>
133
<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).
134
<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
135
<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.
136
<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.
137
<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.
138
<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.
139
<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.
140
<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.
141
<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>
142
<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
143
<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).
144
<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
145
<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.
146
<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.
147
<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.
148
<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.
149
<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.
150
<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>
151
<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>
152
<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.
153
<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.
154
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hungerford Mechanical Corporation:
We have audited the accompanying balance sheet of Hungerford Mechanical
Corporation (the Company) as of December 31, 1997 and the related statements
of operations, shareholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hungerford Mechanical
Corporation as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 2, 1998
155
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash............................................................. $ 1,123,210
Accounts receivable.............................................. 6,885,008
Inventories...................................................... 67,916
Costs and estimated earnings in excess of billings on uncompleted
contracts (note 3).............................................. 410,944
Due from--related parties........................................ 1,195,503
Cash value of life insurance (net of loans of $58,229)........... 341,746
Prepaid expenses and other current assets........................ 142,291
-----------
Total current assets........................................... 10,166,618
PROPERTY AND EQUIPMENT, net........................................ 1,053,123
-----------
Total assets................................................... $11,219,741
===========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings............................................ $ 820,790
Notes payable.................................................... 475,165
Accounts payable................................................. 1,702,699
Accrued expenses................................................. 490,347
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... 2,343,210
-----------
Total current liabilities...................................... 5,832,211
DEFERRED COMPENSATION LIABILITY.................................... 254,461
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock--$10 par value; 20,000 shares authorized, 10,000
shares issued and outstanding................................... 100,000
Additional paid-in capital....................................... 692,597
Retained earnings................................................ 4,340,472
-----------
Total shareholder's equity..................................... 5,133,069
-----------
Total liabilities and shareholder's equity..................... $11,219,741
===========
</TABLE>
See accompanying notes to the financial statements.
156
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES........................................................... $32,849,988
COST OF SERVICES................................................... 24,602,502
-----------
Gross profit..................................................... 8,247,486
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,591,040
-----------
Income from operations......................................... 2,656,446
OTHER INCOME (EXPENSE):
Interest expense................................................. (120,846)
Interest income.................................................. 89,210
Other, net....................................................... 41,710
-----------
NET INCOME......................................................... $ 2,666,520
===========
</TABLE>
See accompanying notes to the financial statements.
157
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996....... $100,000 $692,597 $ 2,867,149 $ 3,659,746
Net income..................... -- -- 2,666,520 2,666,520
Distributions to shareholder... -- -- (1,193,197) (1,193,197)
-------- -------- ----------- -----------
BALANCE, December 31, 1997....... $100,000 $692,597 $ 4,340,472 $ 5,133,069
======== ======== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
158
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 2,666,520
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 387,102
Gain on sale of property and equipment.......................... (8,367)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable............................................ (1,550,250)
Inventories.................................................... (17,509)
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... 486,600
Cash value of life insurance................................... (18,317)
Prepaid expenses and other current assets...................... (84,587)
Increase (decrease) in--
Accounts payable............................................... (938,546)
Accrued expenses............................................... 144,564
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 1,541,726
Deferred compensation liability................................ 94,446
-----------
Net cash provided by operating activities..................... 2,703,382
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (728,675)
Increase in due from related parties............................. (344,244)
Proceeds from sales of property and equipment.................... 8,367
-----------
Net cash used in investing activities......................... (1,064,552)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net................................ 170,790
Proceeds from notes payable...................................... 377,239
Payments of notes payable........................................ (151,763)
Distributions to shareholder..................................... (1,193,197)
-----------
Net cash used in financing activities......................... (796,931)
-----------
NET INCREASE IN CASH.............................................. 841,899
CASH, beginning of period......................................... 281,311
-----------
CASH, end of period............................................... $ 1,123,210
===========
</TABLE>
See accompanying notes to the financial statements.
159
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Hungerford Mechanical Corporation (the Company) operates as a mechanical
contractor specializing in the installation and servicing of plumbing,
sprinkler, heating and air conditioning systems. The Company markets its
services within the Richmond, Virginia metropolitan area. Revenues are
generated primarily from individual contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage of completion method. The completed
percentage is measured by the percentage of cost incurred to date as compared
to the estimated total cost for each contract.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as labor, supplies,
tools, repairs and depreciation. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined.
INVENTORIES
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
CASH VALUE OF LIFE INSURANCE
Cash value of life insurance represents the cash value of life insurance
policies for key employees of the Company net of loans taken against the
policies.
160
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The shareholder of the Company has elected to be taxed for federal and
Virginia tax purposes as an S Corporation whereby the taxable income of the
Company is reportable on the shareholder's individual tax returns. In
connection with the Company's election to be taxed as an S Corporation, the
Company is potentially subject to tax on certain "built-in gains" as defined
by the Internal Revenue Code.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $120,846 for the year ended December 31,
1997.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<S> <C>
Costs incurred.................................................... $37,676,902
Estimated earnings recognized..................................... 7,540,003
-----------
45,216,905
Less billings on contracts........................................ 47,149,171
-----------
$(1,932,266)
===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ $ 410,944
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ (2,343,210)
-----------
$(1,932,266)
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1997
----------- -----------
<S> <C> <C>
Service and other vehicles............................. 3-7 years $ 1,201,530
Machinery and tools.................................... 3-10 years 820,329
Office equipment, furniture and fixtures............... 5-10 years 669,317
Leasehold improvements................................. 10-39 years 197,318
----------- -----------
2,888,494
Less accumulated depreciation.......................... (1,835,371)
-----------
$ 1,053,123
===========
</TABLE>
5. SHORT-TERM BORROWINGS
The Company has a line of credit with up to $2,000,000 available through May
31, 1999, subject to renewal. Interest accrues at LIBOR plus 2.50%, which was
8.19% at December 31, 1997. The balance outstanding on the line is
collateralized by a lien on corporate assets, by a life insurance policy on
the shareholder and by a personal guarantee by the shareholder.
161
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE
Notes payable consist of various payables to banks, secured by automobiles
and trucks of the Company, due in various monthly payments including interest
at rates varying from 7.25% to 9.07% and have stated maturity dates through
November 2000. All such notes payable were repaid concurrent with the
acquisition of the Company (note 10).
7. RELATED PARTY TRANSACTIONS
The assets and stock of the Company are pledged as collateral for a loan of
the shareholder. Provisions of the debt instrument restrict dividends which
may be paid by the Company and also restrict salary which may be paid to the
Company's president. This loan was repaid by the shareholder concurrent with
the acquisition of the Company (note 10).
The sole shareholder is a general partner in a partnership that transacts
business with the Company. The Company has receivables and advances of $26,931
outstanding at December 31, 1997 for advances made to the partnership. There
were no partnership billings in 1997.
The sole shareholder is a 100% member in each of two limited liability
companies which were formed during 1995. Advances and receivables from these
limited liability companies was $1,168,572 at December 31, 1997. In addition,
the Company had accrued interest receivable on these receivables totaling
approximately $58,000, which is included in prepaid expenses and other current
assets in the accompanying balance sheet at December 31, 1997. These amounts
were repaid concurrent with the acquisition of the Company (note 10).
The Company leases operating facilities from interests controlled by an
affiliated entity. Rent expense was $50,880 for the year ended December 31,
1997 and included in selling, general and administrative expenses in the
accompanying statement of income. The Company is also required to pay
insurance, maintenance and taxes on the facilities. The lease is renewable
annually.
The Company pays for management services provided by another company owned
by its sole shareholder. Service fees paid under this agreement were $150,000
in 1997 and is included in selling, general and administrative expenses in the
accompanying statement of income.
8. BENEFIT PLANS
The Company has a deferred compensation agreement with an officer of the
Company. Under the terms of the agreement, accumulated benefits will be based
upon the current year-end book value of the Company's stock in excess of the
initial predetermined value. The officer, or his beneficiary, will be entitled
to these benefits should involuntary termination of employment occur and
benefits will become immediately payable upon such termination. Benefits will
be paid in twenty equal quarterly installments beginning approximately ninety
days after termination of employment. The amount due under this agreement was
$254,461 at December 31, 1997.
The Company maintains a discretionary 401(k) and profit sharing plan (the
Plan) covering its qualified employees. Employees are eligible to participate
after completing 1 year of service and after attaining the age of 21.
Employees may choose to defer up to 10% of their compensation during the Plan
year, not to exceed Internal Revenue Service limitations, by contributing to
the Plan. The Company matches 100% of each employee's contributions. The
Company may also elect to make additional profit sharing contributions.
Contributions made by the Company of $20,402 were charged to operations in the
year ended December 31, 1997.
162
<PAGE>
HUNGERFORD MECHANICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
10. SUBSEQUENT EVENT
Effective January 1, 1998 Group Maintenance America Corp. ("GroupMAC")
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
163
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mechanical Interiors, Inc.:
We have audited the accompanying balance sheet of Mechanical Interiors, Inc.
(the Company) as of December 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mechanical Interiors, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
February 27, 1998
164
<PAGE>
MECHANICAL INTERIORS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 253,149
Accounts receivable, net of allowance of $73,533................. 8,516,098
Inventories...................................................... 107,898
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... 851,591
Deferred income taxes............................................ 70,789
Prepaid expenses and other current assets........................ 84,536
-----------
Total current assets........................................... 9,884,061
PROPERTY AND EQUIPMENT, net........................................ 1,711,020
OTHER NONCURRENT ASSETS............................................ 52,135
-----------
Total assets................................................... $11,647,216
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 197,449
Current obligations under capital leases......................... 395,424
Accounts payable................................................. 4,423,315
Accrued expenses................................................. 1,100,576
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... 1,675,548
Income taxes payable............................................. 422,298
-----------
Total current liabilities...................................... 8,214,610
LONG-TERM DEBT, net of current maturities.......................... 363,474
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$0.001 par value; 10,000,000 shares authorized,
1,111,000 shares issued and outstanding......................... 1,111
Additional paid-in capital....................................... 200,250
Retained earnings................................................ 2,867,771
-----------
Total shareholders' equity..................................... 3,069,132
-----------
Total liabilities and shareholders' equity..................... $11,647,216
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
165
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES........................................................... $42,283,071
COST OF SERVICES................................................... 35,908,553
-----------
Gross profit................................................... 6,374,518
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,360,113
-----------
Income from operations......................................... 1,014,405
OTHER INCOME (EXPENSE):
Interest expense................................................. (73,067)
Interest income.................................................. 21,013
-----------
Income before income tax provision............................. 962,351
INCOME TAX PROVISION............................................... 409,128
-----------
NET INCOME......................................................... $ 553,223
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
166
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996........... $1,111 $200,250 $2,314,548 $2,515,909
Net income........................... -- -- 553,223 553,223
------ -------- ---------- ----------
BALANCE, December 31, 1997........... $1,111 $200,250 $2,867,771 $3,069,132
====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
167
<PAGE>
MECHANICAL INTERIORS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 553,223
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 280,026
Deferred tax expense........................................... 27,745
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.......................................... (2,944,841)
Inventories.................................................. 48,138
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... (432,464)
Notes receivable............................................. 200,361
Prepaid expenses and other current assets.................... (4,266)
Other noncurrent assets...................................... (38,141)
Increase (decrease) in:
Accounts payable............................................. 1,276,404
Accrued expenses............................................. (43,127)
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 1,181,386
Income taxes payable......................................... 158,743
----------
Net cast provided by operating activities.................. 263,187
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (1,149,411)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt.......................... 430,000
Payments of short- and long-term debt............................ (61,893)
Payments of obligations under capital leases..................... (119,740)
----------
Net cash provided by financing activities.................. 248,367
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................... (637,857)
CASH AND CASH EQUIVALENTS, beginning of year....................... 891,006
----------
CASH AND CASH EQUIVALENTS, end of year............................. $ 253,149
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
168
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
Mechanical Interiors, Inc. (the Company) is primarily engaged in the
installation and servicing of heating and air conditioning systems for
commercial customers in the areas in and around Dallas and Austin, Texas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents. Cash payments for interest and income taxes were
$73,067 and $222,640, respectively, for the year ended December 31, 1997.
Inventories
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
The Company reviews the carrying value of its property and equipment for
impairment. Accordingly, in the event that facts and circumstances indicate
that property and equipment may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary. The
Company recorded no impairment of its property and equipment during the year
ended December 31, 1997.
169
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(3) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<S> <C>
Accrued payroll costs and benefits............................... $ 271,717
Accrued bonus and profit sharing................................. 404,171
Warranty reserve................................................. 264,132
Other accrued expenses........................................... 160,556
----------
$1,100,576
==========
</TABLE>
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<S> <C>
Costs incurred................................................. $22,766,565
Estimated earnings recognized.................................. 2,793,209
-----------
25,559,774
Less billings on contracts..................................... 26,383,731
-----------
$ (823,957)
===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ $ 851,591
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ (1,675,548)
-----------
$ (823,957)
===========
</TABLE>
(5) PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1997
---------- ----------
<S> <C> <C>
Service and other vehicles............................... 4-7 years $ 776,728
Machinery and equipment.................................. 5-10 years 765,723
Office equipment, fixtures and fixtures.................. 5-10 years 286,109
Leasehold improvements................................... 5-15 years 781,427
---------- ----------
2,609,987
Less accumulated depreciation............................ (898,967)
----------
$1,711,020
==========
</TABLE>
170
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to bank, due in monthly installments of $10,000, plus
interest of 8.50% per annum and secured by property and equipment;
due July 2001...................................................... $ 430,000
Note payable to bank, due in monthly installments of $6,624,
including interest at 8.75%; matures in 1999; secured by property
and equipment...................................................... 130,923
---------
Total long-term debt.............................................. 560,923
Less current maturities............................................. (197,449)
---------
$ 363,474
=========
</TABLE>
(7) INCOME TAXES
Income tax expense for the year ended December 31, 1997 consists of:
<TABLE>
<S> <C>
Current................................................................ $381,383
Deferred............................................................... 27,745
--------
Income tax provision................................................... $409,128
========
</TABLE>
Total income tax for the year ended December 31, 1997 differed from the
amount computed by applying the U.S. federal statutory income tax rate of 34%
to income before income tax provision as a result of the following:
<TABLE>
<S> <C>
Expense at the statutory rate......................................... $327,199
Increase (reduction) resulting from:
State income taxes.................................................. 33,174
Disallowed meals and entertainment.................................. 54,664
Tax-exempt interest................................................. (5,909)
--------
$409,128
========
</TABLE>
The components of the deferred income tax assets and liabilities as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Allowance for doubtful accounts...................................... $30,093
Warranty reserves.................................................... 46,646
-------
Total deferred income tax asset.................................... 76,739
Deferred income tax liability:
Depreciation......................................................... (5,950)
-------
Net deferred income tax asset........................................ $70,789
=======
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the net deferred income tax asset recorded at December
31, 1997.
(8) LEASES
The Company is obligated under various capital leases, for service and other
vehicles, that expire at various dates through September 2002. At December 31,
1997, the gross amount of property and equipment and related
171
<PAGE>
MECHANICAL INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
accumulated depreciation recorded under capital leases were as follows:
<TABLE>
<S> <C>
Service and other vehicles........................................ $ 704,750
Less accumulated depreciation..................................... (323,862)
---------
$ 380,888
=========
</TABLE>
All the capital lease obligations were repaid concurrent with the
acquisition of the Company (note 12).
The Company also leases its office building and warehouse under a non-
cancelable operating lease expiring in August 2007. For the year ended
December 31, 1997 the Company recorded rent expense of $191,685.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.............................. $ 221,422
1999.............................. 274,096
2000.............................. 274,096
2001.............................. 274,096
2002.............................. 274,096
Thereafter........................ 1,279,113
----------
$2,596,919
==========
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company obtains contract labor services from an affiliated company,
which is substantially owned by the Company's shareholders. During the year
ended December 31, 1997, the Company incurred expenses of $1,920,259 related
to these services. The Company owes $722,233 to this affiliated company as of
December 31, 1997, which are included in accounts payable in the accompanying
balance sheet. This arrangement was terminated concurrent with the acquisition
of the Company (note 13).
(10) EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) plan (the Plan) covering its
qualified employees. Employees may choose to defer up to 10% of their
compensation during the Plan year, not to exceed Internal Revenue Service
limitations, by contributing to the Plan. The Company makes voluntary
contributions equal to 0.50% of total revenues. Contributions made by the
Company of $212,384 were charged to operations in the year ended December 31,
1997.
(11) COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(12) SUBSEQUENT EVENTS
Effective January 1, 1998 Group Maintenance America Corp. ("GroupMAC")
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
172
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Clark Converse Electric Service, Inc.:
We have audited the accompanying balance sheet of Clark Converse Electric
Service, Inc. as of December 31, 1997, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that out audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clark Converse Electric
Service, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 28, 1998
173
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................... $1,073,380 $ 914,971
Accounts receivable-trade........................... 982,973 1,217,181
Other current assets................................ 145,957 145,754
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 5,920 96,375
---------- ----------
Total current assets.............................. 2,208,230 2,374,281
PROPERTY AND EQUIPMENT, NET........................... 303,883 286,120
OTHER LONG-TERM ASSETS................................ 5,385 5,385
---------- ----------
Total assets...................................... $2,517,498 $2,665,786
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.................................... $ 261,542 $ 252,280
Accrued expenses.................................... 174,865 166,992
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 125,461 52,858
---------- ----------
Total current liabilities......................... 561,868 472,130
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock--no par value; 1,000 shares authorized,
100 issued and outstanding......................... 2,300 2,300
Retained earnings................................... 1,953,330 2,191,356
---------- ----------
Total shareholder's equity........................ 1,955,630 2,193,656
---------- ----------
Total liabilities and shareholder's equity........ $2,517,498 $2,665,786
========== ==========
</TABLE>
See accompanying notes to financial statements.
174
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $7,291,852 $3,692,532 $3,524,432
COST OF SERVICES............................ 5,263,570 2,728,362 2,379,052
---------- ---------- ----------
Gross profit............................ 2,028,282 964,170 1,145,380
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 840,431 458,410 454,104
---------- ---------- ----------
Income from operations.................. 1,187,851 505,760 691,276
OTHER INCOME:
Interest income........................... 36,106 14,060 21,321
Other, net................................ 1,847 -- 11,474
---------- ---------- ----------
Income before income tax provision...... 1,225,804 519,820 724,071
INCOME TAX PROVISION........................ 26,000 5,000 8,778
---------- ---------- ----------
NET INCOME.................................. $1,199,804 $ 514,820 $ 715,293
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
175
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996..................... $2,300 $1,673,609 $1,675,909
Net income................................... -- 1,199,804 1,199,804
Distributions to shareholder................. -- (920,083) (920,083)
------ ---------- ----------
Balance, December 31, 1997..................... 2,300 1,953,330 1,955,630
Net income (unaudited)....................... -- 715,293 715,293
Distributions to shareholder (unaudited)..... -- (477,267) (477,267)
------ ---------- ----------
Balance, June 30, 1998 (unaudited)............. $2,300 $2,191,356 $2,193,656
====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
176
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1998
------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $1,199,804 $ 514,820 $ 715,293
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation................................ 84,947 31,900 41,556
Loss on sale of property and equipment...... 133 133 --
Change in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable........................ 2,610 (224,711) (234,208)
Other...................................... (24,726) (3,781) 203
Costs and estimated earnings in excess of
billings on uncompleted
contracts................................. 98,207 214,857 (163,058)
Increase (decrease) in -
Accounts payable........................... (51,949) (47,519) (9,262)
Accrued expenses........................... (39,036) (3,384) (7,873)
---------- --------- ----------
Net cash provided by operating activities. 1,269,990 482,315 342,651
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (138,210) (125,147) (23,793)
Other........................................ 2,115 2,115 --
---------- --------- ----------
Net cash used in investing activities..... (136,095) (123,032) (23,793)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholder................. (920,083) (364,117) (477,267)
---------- --------- ----------
Net cash used in financing activities..... (920,083) (364,117) (477,267)
---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 213,812 (4,834) (158,409)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 859,568 859,568 1,073,380
---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period...... $1,073,380 $ 854,734 $ 914,971
========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
177
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO THE INTERIM PERIODS ENDED JUNE 30, 1997 AND
1998 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
Clark Converse Electric Service, Inc. (the "Company") is an electrical
contractor involved in the construction and renovation on projects primarily
for general contractors and other companies in northwest Ohio and southeast
Michigan. The work is typically performed under fixed-price and cost-plus
contracts, or time-and-material purchase requisitions. The length of the
Company's contracts vary, but is typically less than one year.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1997 and
1998 and as of June 30, 1998 are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed price contracts are recognized on the percentage of
completion method. The completed percentage is measured by the percentage of
cost incurred to date as compared to the estimated total cost for each
contract, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man-hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and revenues and are recognized in the period in which the revisions are
determined.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
investments in money market accounts and certificate of deposits purchased
with an original maturity of three months or less to be cash equivalents. Cash
payments for taxes were $19,881, $10,600 and $19,606 for the year ended
December 31, 1997 and six months ended June 30, 1997 and 1998, respectively.
178
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable-trade consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed...................................... $877,374
Retainage receivables............................................ 105,599
--------
$982,973
========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Income Taxes
The shareholder of the Company has elected to be taxed for federal and state
tax purposes as an S Corporation whereby the shareholder's respective
equitable share in the taxable income of the Company is reportable on his
individual tax return. The Company has made distributions to the shareholder
each year at least in the amounts necessary to pay personal income taxes
payable on the Company's taxable income. The Company is subject to local
income taxes. As of December 31, 1997, deferred income taxes are
insignificant.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted
contracts.
The Company maintains its cash balances in one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company generally has funds deposited in excess of $100,000.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in northwest Ohio and southeast
Michigan. Credit is extended to customers after an evaluation for credit
worthiness; however, the Company does not require collateral or other security
from customers.
The Company's three largest customers accounted for 22%, 19% and 13%,
respectively, of total revenues for the year ended December 31, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets by class are as follows:
<TABLE>
<S> <C>
Machinery and equipment........................................ 5-10 years
Vehicles....................................................... 5 years
Office equipment............................................... 5-7 years
Leasehold improvements......................................... 10 years
</TABLE>
179
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of operations.
3. EMPLOYEE BENEFIT PLANS
The Company maintains a salary reduction 401(k) plan covering all employees
meeting certain age and service requirements. Annual contributions are
committed to an independent trustee to be held for the exclusive benefit of
the employees. Annual contributions to the plan by the Company include a
matching contribution, up to 4%, for eligible compensation of participants
electing voluntary salary reduction deferrals and a discretionary amount
determined each year by the Board of Directors of the Company. The Company's
contribution expense amounted to $10,399 for the year ended December 31, 1997.
4. LEASES
The Company leases its offices and warehouse space from an affiliated
partnership consisting of its shareholder and another tenant. The Company's
lease is for a one-year term and management intends and has the ability to
annually renew the lease. The current lease requires a monthly rental of
$5,658 and rent expense was $66,816 for the year ended December 31, 1997.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred................................................ $ 344,519
Estimated earnings recognized................................. 44,219
---------
388,738
Less billings on contracts.................................... 508,279
---------
$(119,541)
=========
These cost and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings............ 5,920
Billings in excess of costs and estimated earnings............ (125,461)
---------
$(119,541)
=========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Machinery and Equipment.......................................... $233,113
Vehicles......................................................... 214,576
Office Equipment................................................. 99,728
Leasehold Improvements........................................... 54,549
--------
601,966
Less: Accumulated depreciation................................... 298,083
--------
Total Property and Equipment, net.............................. $303,883
========
</TABLE>
180
<PAGE>
CLARK CONVERSE ELECTRIC SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. CONTINGENCIES
In the normal course of business the Company experiences various claims and
lawsuits from third parties. During 1997, the Company was named a defendant in
a claim from a former employee on a Workers' Compensation dispute. The Company
received a favorable ruling from the Ohio Bureau of Workers' Compensation and
does not believe the ultimate resolution of this matter will have a material
adverse effect on results of operations, financial condition or liquidity.
8. BANK LINE OF CREDIT
The Company has a revolving line of credit with a bank in the amount of
$1,000,000 with no amount outstanding at December 31, 1997. The credit
agreement provided for revolving credit through March 1998 and is secured by
accounts receivable and the guarantee of the sole stockholder/president of the
Company. Interest is computed at the bank's prime rate (8.5% at December 31,
1997).
9. SUBSEQUENT EVENT
Effective August 28, 1998, Group Maintenance America Corp. (GroupMAC)
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
181
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HPS Plumbing Services, Inc.:
We have audited the accompanying balance sheet of HPS Plumbing Services,
Inc. as of March 31, 1998, and the related statements of operations,
shareholders' equity and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that out audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HPS Plumbing Services,
Inc. as of March 31, 1998, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 14, 1998
182
<PAGE>
HPS PLUMBING SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
ASSETS 1998
------ ----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ --
Accounts receivable, net of allowance for doubtful accounts of
$56,269.......................................................... 3,221,450
Accounts receivable, other........................................ 14,511
Due from related parties and employees............................ 339,813
Inventories....................................................... 154,912
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ 700,095
Prepaid expenses and other current assets......................... 25,560
----------
Total current assets............................................ 4,456,341
PROPERTY AND EQUIPMENT, net....................................... 1,628,808
OTHER LONG-TERM ASSETS............................................ 72,242
----------
Total assets.................................................... $6,157,391
==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt.... $ 656,920
Accounts payable.................................................. 1,479,575
Accrued expenses.................................................. 172,425
Income taxes payable.............................................. 223,793
Deferred tax liability............................................ 396,321
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ 406,297
----------
Total current liabilities....................................... 3,335,331
LONG-TERM DEBT, net of current maturities........................... 259,336
DEFERRED TAX LIABILITY.............................................. 8,787
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated par value of $10 per share;
50,000 shares authorized, 2,000 issued and outstanding........... 20,000
Retained earnings................................................. 2,533,937
----------
Total shareholders' equity...................................... 2,553,937
----------
Total liabilities and shareholders' equity...................... $6,157,391
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
183
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1998
---------------
<S> <C>
REVENUES........................................................ $14,160,255
COST OF SERVICES................................................ 11,444,202
-----------
Gross profit................................................ 2,716,053
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 2,005,857
-----------
Income from operations...................................... 710,196
OTHER INCOME (EXPENSE):
Interest income............................................... 31,549
Interest expense.............................................. (49,740)
Other, net.................................................... (73,344)
-----------
Income before income tax provision.......................... 618,661
INCOME TAX PROVISION............................................ 268,346
-----------
NET INCOME...................................................... $ 350,315
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
184
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
BALANCE, June 30, 1997......................... $20,000 $2,183,622 $2,203,622
Net income................................... -- 350,315 350,315
------- ---------- ----------
BALANCE, March 31, 1998........................ $20,000 $2,533,937 $2,553,937
======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
185
<PAGE>
HPS PLUMBING SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1998
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 350,315
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 215,944
Loss on sale of property and equipment..................... 45,568
Deferred income taxes...................................... (188,104)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable.................................... 74,246
Accounts receivable, other............................. (2,892)
Inventories............................................ (23,732)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (200,586)
Prepaid expenses and other current assets.............. (20,928)
Other long-term assets................................. (54,579)
Increase (decrease) in--
Accounts payable....................................... 233,163
Income taxes payable................................... (62,385)
Accrued expenses....................................... (14,115)
-----------
Net cash provided by operating activities............ 351,915
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (1,051,701)
Proceeds from sale of property and equipment................. 4,284
Increase in due from related parties and employees........... (323,727)
-----------
Net cash used in investing activities................ (1,371,144)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, net............................ 408,474
Proceeds from long-term debt................................. 85,276
Principal payments on long-term debt......................... (186,515)
-----------
Net cash provided by financing activities............ 307,235
-----------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ (711,994)
CASH AND CASH EQUIVALENTS, beginning of period................. 711,994
-----------
CASH AND CASH EQUIVALENTS, end of period....................... $ --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
186
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
HPS Plumbing Services, Inc. (the "Company") provides plumbing and piping
services in California and Nevada, primarily for governmental entities and
general contractors. This work is performed under fixed price contracts
subject to modification based on approved change orders, cost-plus-fee
contracts and time and material contracts. The Company grants credit on terms
it establishes for individual customers in these areas.
2. SUMMARY OF SIGNIFICANT POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed price contracts are recognized on the percentage of
completion method. The completed percentage is measured by the percentage of
cost incurred to date as compared to the estimated total cost for each
contract, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and revenues and are recognized in the period in which the revisions are
determined.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $38,800 and
$518,835, respectively, for the nine months ended March 31, 1998.
Accounts Receivable
Accounts receivable consists of the following at March 31, 1998:
<TABLE>
<S> <C>
Accounts receivable--billed................................... $2,174,227
Retainage receivable.......................................... 1,103,492
Allowance for doubtful accounts............................... (56,269)
----------
$3,221,450
==========
</TABLE>
Inventories
Inventories consist of parts and supplies for general use and items for
specific jobs. Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
187
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Service and other vehicles.......................................... 3-5
Machinery and equipment............................................. 5-7
Furniture and fixtures.............................................. 5-7
Computer equipment.................................................. 3-5
Leasehold improvements.............................................. 5-10
</TABLE>
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of operations.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of March 31, 1998 is as
follows:
<TABLE>
<S> <C>
Costs incurred............................................... $14,095,474
Estimated earnings recognized................................ 1,273,663
-----------
15,369,137
Less billings on contracts................................... 15,075,339
-----------
$ 293,798
===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings.............. 700,095
Billings in excess of costs and estimated earnings.............. (406,297)
--------
$293,798
========
</TABLE>
188
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of March 31, 1998 are
as follows:
<TABLE>
<S> <C>
Service and other vehicles.................................... $1,297,302
Machinery and equipment....................................... 584,845
Furniture and fixtures........................................ 62,136
Computer equipment............................................ 162,410
Leasehold improvements........................................ 848,717
----------
2,955,410
Less accumulated depreciation................................. (1,326,602)
----------
$1,628,808
==========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
The Company has a $1,300,000 revolving credit agreement with a bank. The
credit agreement provides for revolving credit through November 5, 1998 and is
secured by accounts receivable and equipment, and guaranteed by the majority
stockholder. As of March 31, 1998, $408,474 was drawn under the agreement.
Borrowings under the revolving credit agreement bear interest at the bank's
prime rate (8.5% as of March 31, 1998).
Short- and long-term debt consists of the following as of March 31, 1998:
<TABLE>
<S> <C>
Borrowings under revolving credit agreement...................... $408,474
Home Savings of America, secured by equipment, payable in monthly
installments ranging from $330 to $1,459 including interest
ranging from 8.5% to 10.5%, due dates ranging from November 1998
to October 2000................................................. 206,037
GMAC, secured by equipment, payable in monthly installments
ranging from $289 to $563 including interest ranging from 4.8%
to 7.9%, due dates ranging from June 2000 to October 2002....... 131,828
Caterpillar Financial Service Corporation, secured by equipment,
payable in monthly installments ranging from $184 to $3,058
including interest ranging from 6.9% to 9.1%, due dates ranging
from August 1998 to January 2002; includes obligations due under
capital leases.................................................. 169,917
--------
Total short- and long-term debt.............................. 916,256
Less short-term borrowings and current maturities................ (656,920)
--------
$259,336
========
</TABLE>
The aggregate maturities of the short- and long-term debt as of March 31,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $656,920
2000............................................................. 149,868
2001............................................................. 66,123
2002............................................................. 34,688
2003............................................................. 8,657
--------
$916,256
========
</TABLE>
189
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES
The Company leases its building space and office equipment from its
president. The Company moved into this building in November 1997. The building
rental agreement provides that the Company pay all property taxes, insurance
and maintenance. The building agreement has an annual rental of $120,000 and
the equipment agreement has an annual rental of $25,800. Rent expense for the
lease of office and warehouse space during the nine months ended March 31,
1998 was $58,520. The primary term of the building lease is 5 years with 5
options to extend of one year each. The equipment lease agreement is on a
monthly basis.
The building lease agreement provides that an adjacent tenant may move into
the Company's space during a period beginning on October 1, 2001 and ending on
October 1, 2003. If this option is exercised, the Company would be forced to
move and would be reimbursed for its costs by the lessor in the amount of
$350,928. This amount decreases by $14,622 per month, beginning November 1,
2001.
In addition, the Company leases various trucks, trailers and office
equipment with lease terms expiring through 2002. The rental expense recorded
under operating leases for equipment for the nine months ended March 31, 1998
was $94,259.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
1999........................................................... $159,824
2000........................................................... 151,439
2001........................................................... 146,023
2002........................................................... 140,708
2003........................................................... 50,000
--------
$647,994
========
</TABLE>
The Company is obligated under three capital leases, for service and other
vehicles, which expire at various dates through February 2002. At March 31,
1998 the gross amount of property and equipment and related accumulated
amortization recorded under capital leases were as follows:
<TABLE>
<S> <C>
Service and other vehicles...................................... $239,787
Less accumulated amortization................................... (138,569)
--------
$101,218
========
</TABLE>
Future minimum rental payments due under capital leases, classified as long-
term debt, as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
1999.......................................................... $ 56,496
2000.......................................................... 35,090
2001.......................................................... 27,718
2002.......................................................... 15,948
--------
Total minimum lease payments.................................. 135,252
Less current obligations under capital leases................... (17,103)
--------
Obligations under capital leases, net......................... $118,149
========
</TABLE>
190
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
As of March 31, 1998, the Company has unsecured, non-interest bearing
advances to its president totaling $320,634 and an unsecured demand note
receivable from its president in the amount of $15,380, which bears interest
at 9.25%. These amounts are included in the amounts due from related parties
and employees in the accompanying balance sheet and were repaid subsequent to
March 31, 1998. Also see note 6.
8. INCOME TAXES
The components of the income tax provision for the nine months ended March
31, 1998 are as follows:
<TABLE>
<S> <C>
Current Expense:
Federal...................................................... $ 360,914
State........................................................ 95,536
---------
456,450
---------
Deferred Benefit:
Federal...................................................... (148,733)
State........................................................ (39,371)
---------
(188,104)
---------
$ 268,346
=========
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31, 1998
--------------
<S> <C>
Tax provision at statutory rate............................ $210,345
Increase resulting from:
State income taxes....................................... 37,069
Other.................................................... 20,932
--------
$268,346
========
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
Deferred income tax assets:
Allowance for doubtful accounts............................... $ 24,196
Vacation accrual.............................................. 21,825
Legal reserve................................................. 10,750
Other......................................................... 22,067
--------
Total deferred income tax asset............................. 78,838
Deferred income tax liabilities:
Net retention receivable...................................... 415,027
Depreciation.................................................. 68,919
--------
Total deferred income tax liability......................... 483,946
--------
Net deferred income tax liability........................... $405,108
========
</TABLE>
191
<PAGE>
HPS PLUMBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These deferred income tax assets and liabilities are included in the
accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Deferred tax liability--current................................. $396,321
Deferred tax liability--long-term............................... 8,787
--------
$405,108
========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the deferred income tax assets recorded at March 31,
1998.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan covering employees
who meet eligibility requirements set forth in the plan. Contributions to the
plan are based on specific project rates, contributed for the benefit of
individual employees for work performed on public works projects. Employees
are vested 100% in the Company's contributions. Contributions to the plan for
the nine months ended March 31, 1998 were $286,959.
10. SALES TO SIGNIFICANT CUSTOMERS
During the nine months ended March 31, 1998, sales to three customers
accounted for 15%, 13% and 12%, respectively, of the Company's revenues.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheet approximates their fair
value. Additionally, amounts due from related parties and employees represent
financial instruments, the fair value of which it is impracticable to
estimate.
13. SUBSEQUENT EVENT
Effective April 1, 1998 Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash and
common stock of GroupMAC.
192
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ray & Claude Goodwin,Inc.
We have audited the accompanying balance sheet of Ray & Claude Goodwin,Inc.
as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that out audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ray & Claude Goodwin,Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
August 14, 1998
193
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents....................................... $1,367,241
Accounts receivable-trade....................................... 2,782,678
Accounts receivable, Other...................................... 28,436
Inventories..................................................... 81,793
Costs and estimated earnings in excess of billings on uncom-
pleted contracts............................................... 1,356,823
Deferred tax assets............................................. 98,280
Prepaid expenses and other current assets....................... 22,315
----------
Total current assets.......................................... 5,737,566
PROPERTY AND EQUIPMENT, net....................................... 1,008,849
OTHER LONG-TERM ASSETS............................................ 170,333
----------
Total assets.................................................. $6,916,748
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................ $ 748,993
Accrued expenses................................................ 615,124
Current maturities of long term debt............................ 123,213
Billings in excess of costs and estimated earnings on uncom-
pleted contracts............................................... 680,341
Income taxes payable............................................ 263,093
----------
Total current liabilities..................................... 2,430,764
LONG-TERM DEBT, net of current maturities......................... 163,404
DEFERRED TAX LIABILITY............................................ 68,413
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--$10 par value; 1,000 shares authorized, 500 issued
and outstanding................................................ 5,000
Additional Paid In Capital...................................... 23,266
Retained earnings............................................... 4,225,901
----------
Total stockholders' equity.................................... 4,254,167
----------
Total liabilities and stockholders' equity.................... $6,916,748
==========
</TABLE>
See accompanying notes to financial statements.
194
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
REVENUES.......................................................... $15,402,775
COST OF SERVICES.................................................. 10,585,169
-----------
Gross profit.................................................. 4,817,606
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 3,976,371
-----------
Income from operations........................................ 841,235
OTHER INCOME (EXPENSE):
Interest income................................................. 68,411
Interest expense................................................ (30,411)
Other, net...................................................... 25,257
-----------
Income before income tax provision............................ 904,492
INCOME TAX EXPENSE................................................ 352,467
-----------
NET INCOME........................................................ $ 552,025
===========
</TABLE>
See accompanying notes to financial statements.
195
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 .......... $5,000 $23,266 $3,673,876 $3,702,142
Net income......................... -- -- 552,025 552,025
------ ------- ---------- ----------
Balance, December 31, 1997........... $5,000 $23,266 $4,225,901 $4,254,167
====== ======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
196
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 552,025
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Depreciation.................................................. 272,127
Loss on sale of machinery and equipment....................... (27,321)
Deferred tax expense (benefit)................................ (48,479)
Increase in cash surrender value of life insurance policy..... (41,804)
Change in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable--Trade.................................. (568,270)
Accounts receivable--Other.................................. 1,800
Inventories................................................. 8,587
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... (668,513)
Prepaid expenses and other current assets................... 3,867
Increase in--
Accounts payable............................................ 537,109
Accrued expenses............................................ 156,375
Income Taxes Payable........................................ 115,151
Other....................................................... 29,273
----------
Net cash provided by operating activities................. 321,927
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment............................ (393,581)
Proceeds from sale of equipment................................. 39,921
----------
Net cash used in investing activities..................... (353,660)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings.................................................. 32,525
----------
Net cash provided by financing activities................. 32,525
----------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................... 792
CASH AND CASH EQUIVALENTS, beginning of year...................... 1,366,449
----------
CASH AND CASH EQUIVALENTS, end of year............................ $1,367,241
==========
</TABLE>
See accompanying notes to financial statements.
197
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Ray and Claude Goodwin, Inc., doing business as Ray's Plumbing Contractors,
Inc., (the "Company") provides plumbing and piping services in the
Jacksonville, Florida area, primarily for governmental entities and general
contractors. This work is performed under fixed price contracts subject to
modification based on approved change orders and time and material contracts.
The Company grants credit on terms it establishes for individual customers in
these areas.
2. SUMMARY OF SIGNIFICANT POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed price contracts are recognized on the percentage of
completion method. The completed percentage is measured by the percentage of
cost incurred to date as compared to the estimated total cost for each
contract, including work for approved change orders. Revenue from time and
material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and revenues and are recognized in the period in which the revisions are
determined.
Cash and cash equivalents
The Company considers investments in money market accounts and certificates
of deposits purchased with an original maturity of three months or less to be
cash equivalents. Cash payments for interest and taxes were $30,411 and
$283,216, respectively, for the year ended December 31, 1997.
Accounts Receivable
Accounts receivable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed................................... $2,175,051
Retainage receivable.......................................... 607,627
----------
$2,782,678
==========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
198
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist of parts and supplies for general use and items for
specific jobs. Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Service vehicles and shop and field equipment....................... 5-7
Office equipment.................................................... 5-7
Leasehold improvements.............................................. 10
Other............................................................... 19
</TABLE>
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of operations.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted
contracts.
The Company maintains its cash balances in one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company generally has funds deposited in excess of $100,000.
Accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in Jacksonville, Florida. Credit is
extended to customers after an evaluation for credit worthiness; however, the
Company does not require collateral or other security from customers.
The Company's three largest customers accounted for 14%, 8% and 5%,
respectively, of total revenues for the year ended December 31, 1997.
199
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. EMPLOYEE BENEFIT PLANS
The Company has a qualified noncontributory defined contribution plan
covering employees who have had one year of continuous service and meet
certain other eligibility requirements set forth in the plan. Contributions to
the plan are at the discretion of management. There were no contributions to
the plan for the year ended December 31, 1997.
4. LEASES
The Company leases its building space on a verbal, month-to-month lease from
the shareholders at $4,700 per month. Management intends and has the ability
to continue to renew its lease with related parties. The Company pays all
property taxes, insurance and maintenance. Rent expense for the lease of
building space during the year ended December 31, 1997 was $42,000.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred................................................ $8,080,025
Estimated earnings recognized................................. 643,352
----------
8,723,377
Less billings on contracts.................................... 8,046,895
----------
$ 676,482
==========
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings............ 1,356,823
Billings in excess of costs and estimated earnings............ (680,341)
----------
$ 676,482
==========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Land.......................................................... $ 52,913
Vehicles and shop and field equipment......................... 1,881,345
Office equipment.............................................. 79,439
Leasehold Improvements........................................ 293,904
Other......................................................... 158,448
----------
2,466,049
Less: Accumulated depreciation................................ 1,457,200
----------
Total Property and Equipment, net........................... $1,008,849
==========
</TABLE>
7. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
200
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt as of December 31, 1997 includes 23 notes payable to a local
bank of 36 months in duration with maturities ranging from February 1998
through December 2000 and with interest rates ranging from 6.5% to 10.44%
(weighted average of 9.3%). These notes are secured by specific vehicles and
heavy equipment. The balance of these notes at December 31, 1997 is $257,318
including current maturities of $115,707. The remaining debt consists of a
note payable to a local bank secured by real property of the Company the
balance payable of which is $29,299 at December 31, 1997 including current
maturities of $7,506. The interest rate on this note is 9.0% at December 31,
1997.
Aggregate maturities of long-term debt as of December 31, 1997 are due in
future years as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998........................................................... $123,213
1999........................................................... 112,631
2000........................................................... 43,892
2001........................................................... 6,881
--------
$286,617
========
</TABLE>
9. INCOME TAXES
The components of the income tax provision for the year ended December 31,
1997 are as follows:
<TABLE>
<S> <C>
Current Expenses:
Federal....................................................... $344,416
State......................................................... 56,530
--------
400,946
--------
Deferred Expense (Benefit):
Federal....................................................... (42,264)
State......................................................... (6,215)
--------
(48,479)
--------
$352,467
========
</TABLE>
The income tax expense differs from the amount computed by applying the U.
S. federal statutory income tax rate of 34% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Tax Provision at statutory rate......................... $307,527
Increase resulting from:
State income taxes, net of federal benefit............ 33,207
Nondeductible expenses................................ 11,733
--------
$352,467
========
</TABLE>
201
<PAGE>
RAY AND CLAUDE GOODWIN, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Deferred income tax assets:
Vacation accrual............................................ $11,700
Warranty reserve............................................ 28,080
Accrued Bonus............................................... 58,500
--------
Total deferred income tax asset........................... $ 98,280
========
Deferred income tax liabilities:
Other....................................................... $ (8,764)
Depreciation................................................ (59,649)
--------
Total deferred income tax liability....................... $(68,413)
========
</TABLE>
These deferred tax assets and liabilities are included in the accompanying
balance sheet under the following captions:
<TABLE>
<S> <C>
Deferred tax asset--current................................................. $ 98,280
Deferred tax liability--noncurrent.......................................... (68,413)
--------
$ 29,867
========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the deferred income tax assets recorded at December
31, 1997.
10. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying balance sheet approximate their fair value.
11. SUBSEQUENT EVENT
Effective March 13, 1998, Group Maintenance America Corp. (GroupMAC)
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
202
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reliable Mechanical, Inc.:
We have audited the accompanying balance sheet of Reliable Mechanical, Inc.
as of December 31, 1997, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that out audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Reliable Mechanical, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
August 21, 1998
203
<PAGE>
RELIABLE MECHANICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 2,204,174 $ 792,694
Short-term Investments............................. 988,805 695,890
Accounts receivable--trade......................... 6,786,939 6,231,711
Accounts receivable, other......................... 13,164 --
Due from related parties........................... 336,912 603,508
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 502,847 5,214,092
Prepaid expenses................................... -- 21,132
----------- -----------
Total current assets............................. 10,832,841 13,559,027
PROPERTY AND EQUIPMENT, NET.......................... 430,955 369,026
NOTES RECEIVABLE--EMPLOYEES.......................... 143,778 168,430
MARKETABLE SECURITIES................................ 635,728 617,191
OTHER LONG-TERM ASSETS............................... 24,158 18,577
----------- -----------
Total assets..................................... $12,067,460 $14,732,251
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 2,858,341 $ 6,520,821
Accrued expenses................................... 786,294 599,052
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 3,278,744 1,626,390
----------- -----------
Total current liabilities........................ 6,923,379 8,746,263
DEFERRED COMPENSATION LIABILITY...................... 385,383 295,882
COMMON STOCK, SUBJECT TO PUT......................... 1,047,122 1,252,072
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value; 1,000 shares autho-
rized, 841.56 issued and outstanding.............. 310,439 310,439
Retained earnings.................................. 4,235,352 5,235,297
Net unrealized gain on marketable securities....... 212,907 144,370
Common stock, subject to put....................... (1,047,122) (1,252,072)
----------- -----------
Total shareholders' equity....................... 3,711,576 4,438,034
----------- -----------
Total liabilities and shareholders' equity....... $12,067,460 $14,732,251
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
204
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $37,282,292 $18,874,521 $16,218,582
COST OF SERVICES.......................... 33,850,553 16,198,374 14,174,126
----------- ----------- -----------
Gross profit.......................... 3,431,739 2,676,147 2,044,456
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 2,071,457 1,436,831 552,353
----------- ----------- -----------
Income from operations................ 1,360,282 1,239,316 1,492,103
OTHER INCOME (EXPENSE):
Interest income......................... 204,045 82,909 76,124
Other, net.............................. 10,624 2,914 9,488
----------- ----------- -----------
Income before income tax provision.... 1,574,951 1,325,139 1,577,715
INCOME TAX PROVISION...................... 48,060 36,980 12,840
----------- ----------- -----------
NET INCOME................................ $ 1,526,891 $ 1,288,159 $ 1,564,875
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
205
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON COMMON TOTAL
COMMON RETAINED MARKETABLE STOCK, SUBJECT SHAREHOLDERS'
STOCK EARNINGS SECURITIES TO PUT EQUITY
-------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996 $227,496 $5,265,239 $ 68,853 $(1,165,284) $ 4,396,304
Net income............ -- 1,526,891 -- -- 1,526,891
Issuance of 11.20
shares of common
stock................ 82,943 -- -- (82,943) --
Net unrealized gain on
marketable
securities........... -- -- 144,054 -- 144,054
Change in value of
common stock subject
to put............... 201,105 201,105
Distributions to
shareholders......... -- (2,556,778) -- -- (2,556,778)
-------- ---------- -------- ----------- -----------
BALANCE, December 31,
1997................... 310,439 4,235,352 212,907 (1,047,122) 3,711,576
-------- ---------- -------- ----------- -----------
Net income
(unaudited).......... -- 1,564,875 -- -- 1,564,875
Net unrealized loss on
marketable securities
(unaudited).......... -- -- (68,537) -- (68,537)
Change in value of
common stock subject
to put (unaudited)... -- -- -- (204,950) (204,950)
Distributions to
shareholders
(unaudited).......... -- (564,930) -- -- (564,930)
-------- ---------- -------- ----------- -----------
BALANCE, June 30, 1998
(unaudited)............ $310,439 $5,235,297 $144,370 $(1,252,072) $ 4,438,034
======== ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
206
<PAGE>
RELIABLE MECHANICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,526,891 $ 1,288,159 $ 1,564,875
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................ 134,013 67,007 61,929
Gain on sale of property and
equipment.......................... (11,273) -- (10,144)
Change in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable--trade...... (690,218) 4,384,950 555,228
Accounts receivable--other...... (13,164) -- 13,164
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 2,736,339 (3,524,546) (6,363,599)
Prepaid expenses................ -- (27,500) (21,132)
Other assets.................... 2,114 (284,905) 5,581
Increase (decrease) in--
Accounts payable................ (2,955,859) (3,069,555) 3,662,480
Accrued expenses................ 442,861 211,610 (276,743)
----------- ----------- -----------
Net cash provided by (used in)
operating activities....... 1,171,704 (954,780) (808,361)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases of) proceeds from short-
term investments, net................ (166,836) (151,057) 292,915
Purchases of marketable securities.... (75,000) -- (50,000)
(Increase) decrease in due from
related parties...................... (16,657) 176,477 (266,596)
Decrease (increase) in notes
receivable--employees................ 86,395 (398,239) (24,652)
Purchases of property and equipment... (266,199) (129,127) --
Proceeds from sale of property and
equipment............................ 21,600 -- 10,144
----------- ----------- -----------
Net cash used in investing
activities................. (416,697) (501,946) (38,189)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders......... (2,556,778) (1,360,405) (564,930)
Proceeds from issuance of common
stock................................ 82,943 -- --
----------- ----------- -----------
Net cash used in financing
activities................. (2,473,835) (1,360,405) (564,930)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS. (1,718,828) (2,817,131) (1,411,480)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 3,923,002 3,923,002 2,204,174
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 2,204,174 $ 1,105,871 $ 792,694
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
207
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(All information with respect to the interim periods ended June 30, 1997 and
1998 is unaudited)
1. BUSINESS AND ORGANIZATION
Reliable Mechanical, Inc. (the "Company") is a construction contractor
involved in the construction and renovation of mechanical systems on projects
throughout the central and eastern United States and in Puerto Rico. The
Company performs certain construction contracts as a prime contractor and also
acts as a subcontractor on other projects. The work is typically performed
under fixed-price and cost-plus contracts, or time-and-material purchase
requisitions. The length of the Company's contracts vary, but is typically one
to one and a half years in duration.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
Interim financial statements as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed price contracts are recognized on the percentage of
completion method. The completed percentage is measured by the percentage of
cost incurred to date as compared to the estimated total cost for each
contract, including work for approved change orders. Revenue from cost-plus-
fee contracts are recognized on the basis of costs incurred during the period
plus the fee earned, measured by the cost-to-cost method. Revenue from time
and material contracts is accrued at the end of each month based on chargeable
costs incurred through month end. Time and material contracts are billed for
the number of man hours and costs incurred.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor and equipment costs.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and revenues and are recognized in the period in which the revisions are
determined.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months of less to
be cash equivalents. Cash payments for taxes were $108,558 for the year ended
December 31, 1997 and $36,980 and $12,840 for the six months ended June 30,
1997 and 1998, respectively.
208
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable--trade consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable--billed.................................... $6,266,885
Retainage receivable........................................... 520,054
----------
$6,786,939
==========
</TABLE>
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Notes Receivable
The notes receivable, including amounts due from related parties, consist of
loans to certain employees and stockholders. Management considers the balances
due from stockholders as current due to the ability of the stockholders to
repay the loans on demand. Interest is accrued on an annual basis at 7%. Non-
stockholder notes receivable are payable in monthly installments and accrue
interest at rates ranging from 7% to 9%.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. The estimated useful lives of
assets are 5 years for all classes of assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of operations.
Short-term Investments and Marketable Securities
Short-term investments are carried at cost, which approximates fair value.
The Company accounts for marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. All of
the Company's marketable securities (all of which are equity securities and
investments in mutual funds) have been classified as available for sale with
unrealized gains or losses recorded as a separate component of shareholders'
equity. As of December 31, 1997 the cost of the marketable securities was
$422,821 and unrealized gains were $212,907, with no unrealized losses.
Income Taxes
The shareholders of the Company elected to be taxed for federal tax purposes
as an S Corporation whereby the shareholders' respective equitable shares in
the taxable income of the Company are reportable on their individual tax
returns. The Company has made distributions to the shareholders each year at
least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
Due to its operations in Puerto Rico, the Company is required to pay
corporate income taxes in Puerto Rico. These amounts are recorded as income
tax expense. The total tax expense for the year ended December 31, 1997 was
$48,060. As of December 31, 1997, deferred income taxes are insignificant.
New Accounting Pronouncement
In June 1997, SFAS No. 130, Reporting Comprehensive Income was issued. This
statement establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is
209
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
displayed with the same prominence as other financial statements.
Reclassification of the financial statements for
earlier periods, provided for comparative purposes, is required. The statement
also requires the accumulated balance of other comprehensive income to be
displayed separately in the equity section of the balance sheet. This
statement is effective for fiscal years beginning after December 15, 1997.
Total comprehensive income for the six months ended June 30, 1997 and 1998 was
$1,379,095 and $1,496,338, respectively.
3. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing and a 401(k) plan covering all employees
meeting certain age and service requirements. The contribution to the plans,
which is determined at the discretion of management and is charged to expense
and funded on a current basis, was $99,086 for the year ended December 31,
1997.
The Company has a deferred compensation arrangement covering certain key
employees. The contribution to the plan, which is determined at the discretion
of management and is charged to expense was $73,750 for the year ended
December 31, 1997. These amounts are included on the balance sheets as
deferred compensation. At the end of a specified period of service (10 years),
if still employed by the Company, the employee is entitled to the vested
amount. Vesting under the plan occurs beginning in the tenth year of
employment at which time the employee is vested in contributions of the first
year of service. In each successive year, the employee vests in the
contributions of the next succeeding year.
4. LEASES
The Company leases its offices and sheet metal shop from certain
shareholders under an operating lease that expires December 31, 1998. The
lease requires monthly rent of $4,000 and rent expense of $48,000 was recorded
for the year ended December 31, 1997.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Costs incurred............................................. $119,795,513
Estimated earnings recognized.............................. 9,324,859
------------
129,120,372
Less billings on contracts................................. 131,896,269
------------
$ (2,775,897)
============
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings......... $ 502,847
Billings in excess of costs and estimated earnings......... (3,278,744)
------------
$ (2,775,897)
============
</TABLE>
210
<PAGE>
RELIABLE MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Vehicles....................................................... $ 887,882
Office equipment............................................... 258,726
Machinery and equipment........................................ 17,702
---------
1,164,310
Less accumulated depreciation.................................. 733,355
---------
$ 430,955
=========
</TABLE>
7. CONTINGENCIES
In the normal course of business the Company experiences various claims and
lawsuits from third parties. During 1997, the Company was a named defendant in
a claim from a subcontractor alleging non-performance under a contract.
Management believes that adequate provision has been made in the accompanying
financial statements to cover any potential exposure related to this lawsuit.
8. BANK LINE OF CREDIT
The Company has a revolving line of credit with a bank in the amount of
$2,000,000 with no amount outstanding at December 31, 1997. The credit
agreement provides for revolving credit through September 1, 1998 and is
secured by all business assets. Interest is computed at the bank's prime rate
(8.5% at December 31, 1997).
9. STOCK PURCHASE AGREEMENT
The Company is obligated to purchase up to 185.18 shares of common stock of
the Company from certain shareholders upon written request by the
shareholders. The purchase price is to be based on the book value of the
Company, which was $5,655 per share at December 31, 1997. These shares of the
Company's common stock are classified outside of shareholders' equity because
of this put feature. Such shares are valued based on the book value of the
shares at the balance sheet date. Changes in book value are recorded directly
to shareholders' equity.
10. CONCENTRATIONS OF RISK
During the year ended December 31, 1997, 17% of the Company's revenues were
derived from work performed in Puerto Rico. In addition, the Company's largest
customer, the U. S. government, accounted for 84% of total revenues for the
year ended December 31, 1997 and 92% of the balance of accounts receivable-
trade at December 31, 1997.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, notes receivable (including due from related parties)
and marketable securities (carried at fair value). The Company believes the
carrying value of these instruments on the accompanying balance sheet at
December 31, 1997 approximates their fair value.
12. SUBSEQUENT EVENT
Effective August 14, 1998, Group Maintenance America Corp. (GroupMAC)
acquired all of the outstanding shares of the Company for a combination of
cash and common stock of GroupMAC.
211
<PAGE>
(c) Exhibits
The following exhibits are filed with this report:
<TABLE>
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Moss Adams LLP
23.3 Consent of Deloitte & Touche LLP
</TABLE>
212
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GROUP MAINTENANCE AMERICA CORP.
By: /s/ Randolph W. Bryant
----------------------------------
Randolph W. Bryant
Senior Vice President
and General Counsel
Date: December 22, 1998
213
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Moss Adams LLP
23.3 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Group Maintenance America Corp. and Subsidiaries
We consent to incorporation by reference in the registration statements (No.
333-41749, No. 333-41751, No. 333-58651, No. 333-60537 and No. 333-69421) on
Form S-8 of Group Maintenance America Corp. of our reports included herein.
KPMG PEAT MARWICK LLP
Houston, Texas
December 22, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Group Maintenance America Corp.
We consent to the incorporation by reference in the registration statements
(No. 333-41749, No. 333-41751, No. 333-58651 and No. 333-60537 and GroupMAC
Savings Plan) on Form S-8 of Group Maintenance America Corp. of our report
dated August 7, 1997, except for Notes 2 and 11, as to which the date is
August 18, 1997 with respect to the consolidated financial statements of
MacDonald-Miller Industries, Inc. as of December 31, 1995, 1996, and June 30,
1997, and for each of the three years ended December 31, 1996 and the six
month period ended June 30, 1997, appearing in this Form 8-K of Group
Maintenance America Corp.
MOSS-ADAMS LLP
Seattle, Washington
December 22, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(No. 333-41749, No. 333-41751, No. 333-58651 and No. 333-60537) and in the
Registration Statement dated December 22, 1998 for GROUPMAC Savings Plan on
Form S-8 of Group Maintenance America Corporation of our report on the
financial statements of Masters, Inc., dated July 24, 1997, appearing in this
Form 8-K of Group Maintenance America Corp.
DELOITTE & TOUCHE LLP
Washington, D.C.
December 22, 1998
