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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-13565
GROUP MAINTENANCE AMERICA CORP.
(Exact name of registrant as specified in its charter)
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TEXAS 76-0535259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8 GREENWAY PLAZA, SUITE 1500
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
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(713) 860-0100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common stock, par value $0.001 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17, 1999, (i) there were 35,438,090 shares of common stock, par
value $0.001 per share, of the registrant issued and outstanding and (ii) the
aggregate market value of the common stock held by non-affiliates of the
registrant (based on the closing price per share of the registrant's common
stock reported on the New York Stock Exchange on that date) was $357,911,994.
For purposes of the above statement only, all directors and executive officers
of the registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the registrant's 1999 Annual
Meeting of Shareholders (to be filed within 120 days after the end of the fiscal
year) are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Description of Business..................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers.......................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 56
Item 11. Executive Compensation...................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 56
Item 13. Certain Relationships and Related Transactions.............. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 57
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Group Maintenance America Corp. ("GroupMAC"), a Texas corporation
incorporated in 1997, is a leading nationwide provider of mechanical and
electrical services. Its operations are conducted through subsidiaries which
provide services to commercial/industrial and residential customers in 56 cities
across 26 states. As used herein, the "Company" refers to GroupMAC and its
subsidiaries.
During 1998, the Company acquired 39 mechanical and electrical contracting
companies with combined annual revenues of approximately $700 million. As a
result of these acquisitions, the portion of the Company's revenues derived from
maintenance, repair and replacement services shifted from 45% of total revenues
at December 31, 1997 to approximately 60% at December 31, 1998. These
acquisitions also resulted in an increase in the portion of the Company's
business derived from commercial/industrial customers as the Company focused its
acquisition program on contractors that could further the implementation of the
Company's national accounts and energy service provider initiatives. The Company
significantly expanded its electrical and cabling business with the acquisition
of eight electrical contractors. At December 31, 1998, the Company comprised 59
operating companies and had $1.08 billion in pro forma 1998 revenues. Since that
date, the Company has acquired three other businesses and currently comprises 62
operating companies in 57 cities in 26 states.
The Company intends to make additional acquisitions across the main
technical disciplines (mechanical and electrical) within the
commercial/industrial and residential markets. The Company's long term objective
is to develop maintenance, repair and replacement capabilities (both
commercial/industrial and residential) 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 commercial/industrial and/or residential
sectors is expected to out-pace the national average over the long term. Over
time, this objective is expected to shift the revenues of the Company to an
increased percentage of maintenance, repair and replacement revenue.
SEGMENT FINANCIAL INFORMATION
Information concerning the Company's principal business segments is set
forth in Note 16 to the Consolidated Financial Statements of Group Maintenance
America Corp. and Subsidiaries. The following tables summarize (i) revenues,
(ii) operating income and (iii) allocable assets of the business segments of the
Company for the periods indicated (in thousands):
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YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 FEBRUARY 28, 1997
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REVENUES
Commercial/Industrial................ $472,451 62.0% $ 23,305 16.8% $ -- --%
Residential.......................... 286,737 37.7 113,927 82.3 81,880 100.0
Other................................ 2,353 0.3 1,247 0.9 -- --
-------- ----- -------- ----- ------- -----
Total Revenues.................. $761,541 100.0% $138,479 100.0% $81,880 100.0%
======== ===== ======== ===== ======= =====
INCOME FROM OPERATIONS
Commercial/Industrial................ $ 33,890 55.4% $ 1,108 9.4% $ -- --%
Residential.......................... 27,168 44.4 10,559 90.0 3,563 100.0
Other................................ 98 0.2 71 0.6 -- --
-------- ----- -------- ----- ------- -----
Segment Operating Earnings...... 61,156 100.0% 11,738 100.0% 3,563 100.0%
===== ===== =====
Unallocated Net Corporate
Expenses(a)........................ (9,090) (11,516)(b) --
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Income From Operations.......... $ 52,066 $ 222 $ 3,563
======== ======== =======
ASSETS
Commercial/Industrial................ $542,998 77.4% $ 65,566 34.0% $ -- --%
Residential.......................... 123,775 17.7 96,237 50.0 27,153 100.0
Other................................ 34,308 4.9 30,884 16.0 -- --
-------- ----- -------- ----- ------- -----
Total Assets.................... $701,081 100.0% $192,687 100.0% $27,153 100.0%
======== ===== ======== ===== ======= =====
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(a) Unallocated net corporate expenses primarily include (i) corporate overhead,
(ii) corporate and operating company management bonuses, and (iii) savings
from national purchase agreements relating to materials and
property/casualty insurance.
(b) Includes a $7.0 million non-recurring, non-cash compensation charge related
to the reverse acquisition of Airtron, Inc.
COMMERCIAL/INDUSTRIAL GROUP
Through its Commercial/Industrial Group, the Company provides mechanical
and electrical contracting services to commercial/industrial customers. The
following table shows the approximate percentages of the revenues of the
Commercial Group's revenue mix for the fiscal year ended December 31, 1998:
<TABLE>
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ELECTRICAL
MECHANICAL AND OTHER TOTAL
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Maintenance, Repair and Replacement..................... 51.4% 13.0% 64.4%
New Installation........................................ 30.5 5.1 35.6
---- ---- -----
Total Commercial/Industrial................... 81.9% 18.1% 100.0%
==== ==== =====
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SERVICES PROVIDED
Mechanical. The Company designs, installs, maintains, repairs and replaces
the heating, ventilating and air conditioning ("HVAC"), control and monitoring
and process piping systems of commercial and industrial facilities such as
manufacturing and processing facilities, power generation facilities, hospitals
and other critical care facilities, colleges and universities, hotels,
commercial office buildings, retail stores, and restaurants, supermarkets, and
convenience stores. The services provided include both maintenance, repair and
replacement ("MRR") services and new installation services for products such as
compressor-bearing HVAC equipment, boilers, chillers, central plants, process
piping and control systems. The MRR work includes preventative maintenance
(periodic checkups, cleaning and filter change-outs), emergency repairs and the
replacement (in conjunction with the retrofitting or remodeling of a commercial
building, or as a result of an emergency request) of HVAC systems and associated
parts, plumbing fixtures, pipes, water feed and sewer lines, water heaters,
softeners, filters and controls. The Commercial/Industrial Group also designs
and installs mechanical, electrical and other systems on behalf of owners or
general contractors in commercial buildings.
Electrical, Voice and Data. The Company installs, maintains and upgrades
the electrical systems of commercial/industrial facilities, including process
controls, lighting, power, lifesafety systems and energy management systems. The
Company also designs, installs, upgrades, maintains and repairs low energy
systems ("LES") including voice and data cabling, high speed data network
infrastructure systems, fiber optics, video, security and sound. LES is the
fastest growing segment of the electrical construction business. Additionally,
through its information technology unit, Total Site Solutions(SM), the Company
provides consulting services, turnkey design and installation work for various
mission critical facilities such as telecommunications facilities, call centers,
network control rooms, mainframe data centers, trading floors, laboratories and
medical facilities, which must remain on line 100% of the time. Total Site
Solutions(SM) also provides broad-based service agreements that include
provision and administration of bundled preventative maintenance and emergency
response services for these facilities.
CUSTOMERS
The Company's commercial/industrial customers include general contractors,
facility owners, facility managers, developers, utilities, energy service
companies, property managers, engineers, consultants, and architects. The
Company expects to perform an increasing amount of services for energy service
companies seeking to bundle their service and commodity product offerings. The
Company was recently selected by PG&E Energy Services as its preferred provider
of commercial HVAC services nationwide. As an unregulated
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subsidiary of the third largest utility in the United States, PG&E Energy
Services has a national presence and is likely to be a significant participant
in the rapidly growing energy services market.
The Company is seeking to expand the services it provides to building
owners and operators through a national accounts marketing effort focusing on
entities that are responsible for operating the mechanical and electrical
systems of buildings located throughout the United States. The Company's
customers include Microsoft, Lincoln Properties, Builders Square, Pep Boys,
Blockbuster and MCI Worldcom. No customer accounts for more than 2% of the
Commercial/Industrial Group's revenues.
RESIDENTIAL GROUP
Through its Residential Group, the Company provides mechanical and other
contracting services to home builders and home owners. The Residential Group
operates through 24 subsidiaries from 39 locations. Although most of the group's
locations perform MRR services, four of the operating companies emphasize new
construction work and represent 66.1% of the group's revenues.
The following table shows the revenue mix of the Residential Group for the
fiscal year ended December 31, 1998:
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New Installation............................................ 66.9%
Maintenance, Repair and Replacement......................... 33.1
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Total Residential................................. 100.0%
=====
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SERVICES
The Residential Group installs HVAC and plumbing systems in homes,
apartment and condominium complexes and small commercial buildings. It also
provides maintenance services for these systems, such as inspections, cleaning,
repair and replacement of HVAC systems and associated parts; repair and
replacement of bathroom fixtures, water filters and water heaters; and cleaning,
repair and replacement of pipes, sewer lines and residential sanitary systems.
In connection with its maintenance, repair and replacement services, the Company
sells a wide range of HVAC, plumbing and other equipment, including complete
HVAC systems and a variety of parts and components.
CUSTOMERS
The Company markets its residential new installation contracting services
to local, regional and national home builders, including U.S. Home Corporation,
Pulte Home Corporation, Centex Corporation, and Beazer Homes Corporation, or to
general contractors working for builders. The Company targets its growth in the
residential new installation market in those areas of the United States that
have growth rates above the national average. Through strong existing
relationships with major national homebuilders, the Company is marketing its
capabilities to provide consistent, reliable installation services on a regional
basis. No customer accounts for more than 4% of the Residential Group's
revenues.
The Company's customers for residential maintenance repair and replacement
services consist primarily of homeowners. The Company advertises its maintenance
services in the yellow pages, on billboards, on television and radio, and
through direct mail. It also relies upon service contracts to attract and retain
customers.
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OPERATIONS
In providing maintenance, repair and replacement services, the Company uses
specialized systems to log service orders, schedule service calls, identify and
ready the necessary parts and equipment, track the work order, provide
information for communication with the service technicians and customers, and
prepare accurate invoices. Service histories and specific product information
are generally accessible to the dispatcher in a database that may be searched by
customer name or address. Maintenance, repair and replacement calls are
initiated when a customer requests emergency repair service or the Company calls
the client to schedule periodic service agreement maintenance. Service
technicians are scheduled for the call or routed to the customer's business or
residence by the dispatcher via a scheduling board or daily work sheet (for non-
emergency service) or through cellular telephone, pager or radio. Service
personnel work out of the Company's service vehicles, which carry an inventory
of equipment, tools, parts and supplies needed to complete the typical variety
of jobs. The technician assigned to a service call travels to the business or
residence, interviews the customer, diagnoses the problem, presents the
solution, obtains agreement from the customer and performs the work.
A portion of the Company's service work is done to satisfy manufacturers'
equipment warranties. For such services, the Company is generally compensated by
the manufacturer responsible for the defective equipment under warranty. The
Company attempts to enter into service contracts whereby the customer pays an
annual or semiannual fee for periodic diagnostic and preventive services. The
customers under service contracts receive specific discounts from standard
prices for repair and replacement services.
Commercial new installation work begins with a design request from the
owner or general contractor. Initial meetings with the parties allow the
contractor to prepare preliminary and then more detailed design specifications,
engineering drawings and cost estimates. Once a project is awarded, it is
conducted in pre-agreed phases and progress billings are rendered to the owner
for payment, less a retainage. Actual field work (ordering of equipment and
materials, fabrication or assembly of certain components, delivery of materials
to the job sites, scheduling of work crews with the necessary skills, and
inspection and quality control) is coordinated in these same phases. The Company
has established a policy to review and approve any new installation project by
an operating unit that exceeds 5% of the projected annual revenue of that unit.
The Company will generally perform work contracted by it using its
personnel who work from one of the Commercial/Industrial Group's 47 locations.
However, the Company may subcontract with other contractors to perform work in
locations where the Company does not have a facility or where the Company's
backlog requires additional resources. The Company generally subcontracts with
members of United Service Alliance when possible. United Service Alliance is a
member organization owned by the Company which provides industry training
programs and national account opportunities to independent service contractors.
Residential service technicians may carry a Customer Assurance Pricing
manual developed by the Company which specifies the labor, equipment and parts
required to fulfill certain tasks and the associated flat rate prices for those
tasks. This manual is custom generated for each company from a database
containing over 15,000 different repair operations and is regularly updated for
price changes. This "flat rate pricing" strategy allows the Company to monitor
margins and labor productivity at the point of sale, while increasing the level
of customer satisfaction by demonstrating greater fairness and objectivity in
pricing. Payment for maintenance, repair and replacement services not covered by
a warranty or service contract is generally requested in cash, check or credit
card at the service location.
SOURCES OF SUPPLY
The raw materials and components used by the Company include HVAC system
components, ductwork, steel sheet metal and copper tubing and piping. These raw
materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand,
may extend to a month or more. Chillers for large units typically have the
longest delivery time and generally have lead times of up to three to four
months. The major components of HVAC systems are compressors and chillers that
are manufactured primarily by Trane Air Conditioning Company, Carrier
Corporation, and York Heating and Air Conditioning
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Company. The major suppliers of control systems are Honeywell Inc., Johnson
Controls, Inc. and Andover Control Corporation. The Company is not materially
dependent on any of these outside sources.
EMPLOYEES
As of December 31, 1998, the Company had approximately 9,000 full and
part-time employees, of whom approximately 6,900 are installation/service
technicians. In the course of performing installation work, the Company may
utilize the services of subcontractors. Approximately 1,600 employees (in 13 of
the Company's subsidiaries) are members of unions and work under collective
bargaining agreements. The collective bargaining agreements have expiration
dates between April 1999 and June 2003. The Company believes that its
relationship with its employees is generally satisfactory.
SEASONALITY
The Company's business tends to be affected adversely by moderate weather
patterns. Comparatively warm winters and cool summers reduce the demand for its
maintenance, repair and replacement services. Additionally, its new installation
business is affected adversely by extremely cold weather and large amounts of
rain. As a result, the Company expects that its revenues and operating results
will be lower in the first and, to a lesser degree, fourth calendar quarters.
Prolonged weather conditions or seasonal variations may cause unpredictable
fluctuations in operating results.
BACKLOG
At December 31, 1998, the Company's backlog of work was approximately
$420.7 million. Of the backlog, approximately $382.6 million related to the
Company's commercial/industrial operations and the remaining $38.1 million
related to the Company's residential operations.
COMPETITION
The market for mechanical and electrical services is highly competitive.
The Company believes that the principal competitive factors in the
commercial/industrial and residential services industry are (i) timeliness,
reliability and quality of services provided, (ii) range of services offered,
(iii) market share and visibility and (iv) price. The Company believes its
strategy of creating a leading national provider of comprehensive services
directly addresses these factors. The ability of the Company to employ, train
and retain highly motivated service technicians to provide quality services
should be enhanced by its ability to utilize professionally managed recruiting
and training programs. In addition, the Company expects to offer compensation,
health and savings benefits that are more comprehensive than most offered in the
industry. Competitive pricing is possible through purchasing economies and other
cost saving opportunities that exist across each of the service lines offered
and from productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single market. Certain of these smaller competitors may
have lower overhead cost structures and may be able to provide their services at
lower rates. Moreover, many homeowners have traditionally relied on individual
persons or small repair service firms with whom they have long-established
relationships for a variety of home repairs. There are currently a limited
number of public companies focused on providing commercial/industrial or
residential services in some of the same service lines provided by the Company.
In addition, there are a number of national retail chains that sell a
variety of plumbing fixtures and equipment and HVAC equipment for residential
use and offer, either directly or through various subcontractors, installation,
warranty and repair services. Other companies or trade groups engage in
franchising their names and marketing programs in some service lines. In the
future, competition may be encountered from, among others, HVAC equipment
manufacturers, the unregulated business segments of regulated gas and electric
utilities or from newly deregulated utilities entering into various
commercial/industrial or residential service areas. Certain of the Company's
competitors and potential competitors have greater financial resources than the
Company to finance acquisition and development opportunities, to pay higher
prices for the same
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opportunities or to develop and support their own commercial/industrial or
residential service operations if they decide to enter the field.
GOVERNMENTAL REGULATION
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (1) permitting
and licensing requirements applicable to service technicians in their respective
trades, (2) building, mechanical and electrical codes and zoning ordinances, (3)
laws and regulations relating to consumer protection, including laws and
regulations governing service contracts for residential services, and (4) laws
and regulations relating to worker safety and protection of human health. In
Florida, warranties provided for in the Company's service agreements subject the
Company and such agreements to some aspects of that state's insurance laws and
regulations. Specifically, the Company is required to maintain funds on deposit
with the Florida Office of Insurance Commissioner and Treasurer, the amount of
which is not material to the Company's business. The Company is in compliance
with these deposit requirements.
The Company believes it has all required permits and licenses to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services trades require various permits and licenses to be held by individuals.
In some cases, a required permit or license held by a single individual may be
sufficient to authorize specified activities for all the Company's service
technicians who work in the geographic area covered by the permit or licenses.
ENVIRONMENTAL REGULATION
The Company's operations are subject to numerous federal, state and local
environmental laws and regulations, including those governing the remediation of
contaminated soil and groundwater, vehicle emissions and the use and handling of
refrigerants. These laws and regulations are administered by the United States
Environmental Protection Agency, the Coast Guard, the Department of
Transportation and various state and local governmental agencies. The technical
requirements of these laws and regulations are becoming increasingly complex and
stringent, and meeting these requirements can be expensive. The nature of the
Company's operations and its ownership or operation of property expose it to the
risk of claims with respect to such matters, and there can be no assurance that
material costs or liabilities will not be incurred in connection with such
claims. Federal and state environmental laws include statutes intended to
allocate the cost of remedying contamination among specifically identified
parties. For example, the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") can impose strict,
joint and several liability on past and present owners or operators of
facilities at, from or to which a release of hazardous substances has occurred,
on parties who generated hazardous substances that were released at such
facilities and on parties who arranged for the transportation of hazardous
substances to such facilities. A majority of states have adopted "Superfund"
statutes comparable to, and in some cases more stringent than, CERCLA. If the
Company were to be found to be a responsible party under CERCLA or a similar
state statute, the Company could be held liable for all investigative and
remedial costs associated with addressing such contamination, even though the
releases were caused by a prior owner or operator or third party. In addition,
claims alleging personal injury or property damage may be brought against the
Company as a result of alleged exposure to hazardous substances resulting from
the Company's operations.
Prior to entering into the agreements relating to the acquisition of
businesses, the Company evaluated the properties owned or leased by those
businesses and in some cases engaged an independent environmental consulting
firm to conduct or review assessments of environmental conditions at certain of
those properties. No material environmental problems were discovered in these
reviews, and the Company is not otherwise aware of any actual or potential
environmental liabilities that would be material to the Company. There can be no
assurance that all such liabilities have been identified, that such liabilities
will not occur in the future, that a
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party could not assert a material claim against the Company with respect to such
liabilities, or that the Company would be required or able to answer for such
claim.
The Company's operations are subject to the Clean Air Act, Title VI of
which governs air emissions and imposes specific requirements on the use and
handling of substances known or suspected to cause or contribute significantly
to harmful effects on the stratospherical ozone layer, such as
chlorofluorocarbons and certain other refrigerants ("CFCs"). Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of systems, equipment and appliances containing these
refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased the Company's training expenses
and expenditures for containment and recycling equipment. The Clean Air Act is
intended ultimately to eliminate the use of CFCs in the United States and
require alternative refrigerants to be used in replacement HVAC systems. The
implementation of the Clean Air Act restrictions has also increased the cost of
CFCs in recent years and is expected to continue to increase such costs in the
future. As a result, the number of conversions of existing HVAC systems that use
CFCs to systems using alternative refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles in
large vehicle fleets to use "alternative" fuels, such as compressed natural gas
or propane, and meet reduced emissions standards. The Company does not
anticipate that the cost of fleet conversion that may be required under current
laws will be material. Future costs of compliance with these laws will be
dependent upon the number of vehicles purchased in the future for use in the
covered geographic regions, as well as the number and size of future business
acquisitions by the Company in these regions. The Company cannot determine to
what extent its future operations and earnings may be affected by new
regulations or changes in existing regulations relating to vehicle emissions.
Capital expenditures related to environmental matters during the fiscal
year ended December 31, 1998, were not material. The Company does not currently
anticipate any material adverse effect on its business or consolidated financial
position as a result of future compliance with existing environmental laws and
regulations controlling the discharge of materials into the environment. Future
events, however, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies or
stricter or different interpretations of existing laws and regulations may
require additional expenditures by the Company which may be material.
ITEM 2. PROPERTIES.
The Company's executive offices are located in leased office space at 8
Greenway Plaza, Suite 1500, Houston, Texas 77046.
The Company operates a fleet of approximately 3,550 owned or leased service
trucks, vans and support vehicles. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the Company's
current operations.
The Company has a total of 112 facilities, six of which it owns and 106 of
which are under leases with remaining terms up to 12 years from the date hereof
on terms the Company believes to be commercially reasonable. The aggregate of
the leased or owned space at the Company's facilities is approximately 1.6
million square feet. A majority of the Company's facilities are leased from
certain former shareholders (or entities controlled by certain former
shareholders) of its subsidiaries. None of these leases expire prior to 2000.
The provisions of the leases are on terms the Company believes to be at least as
favorable to the Company as could have been negotiated by the Company with
unaffiliated third parties. The Company believes the owned and leased facilities
are adequate to serve its current level of operations.
The Company believes that it has generally satisfactory title to the
property owned by it, subject to the liens for current taxes, liens incident to
minor encumbrances and easements and restrictions that do not materially detract
from the value of such property or the interests therein or the use of such
property in its business. Additionally, the inventory and accounts receivable of
the Company are subject to a lien under its credit facility.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings. It is not possible to
predict the outcome of these matters. However, in the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1998.
ITEM 4A. EXECUTIVE OFFICERS.
The following table sets forth certain information concerning the executive
officers of the Company:
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NAME AGE POSITION
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James P. Norris........................... 60 Chairman of the Board; Director
J. Patrick Millinor, Jr................... 53 Chief Executive Officer; Director
Donald L. Luke............................ 62 President and Chief Operating Officer; Director
William Michael Callahan.................. 53 Executive Vice President -- Training and
Development
Chester J. Jachimiec...................... 44 Executive Vice President -- Acquisitions; Director
Darren B. Miller.......................... 39 Executive Vice President and Chief Financial
Officer
Alfred R. Roach, Jr....................... 54 Executive Vice President -- Commercial/Industrial
Group
Richard S. Rouse.......................... 52 Executive Vice President -- Corporate Development
and Administration
Randolph W. Bryant........................ 48 Senior Vice President, General Counsel and
Secretary
Daniel W. Kipp............................ 39 Senior Vice President and Corporate Controller
Robert Tyler.............................. 49 Senior Vice President -- Residential Group
David L. Henninger........................ 54 President of Van's Comfortemp Air Conditioning,
Inc.; Director
Timothy Johnston.......................... 43 Senior Vice President of Airtron, Inc.; Director
Andrew Jeffrey Kelly...................... 44 Chief Executive Officer of K&N Plumbing, Heating &
Air Conditioning, Inc.; Director
Robert Munson, III........................ 52 President of Trinity Contractors, Inc.; Director
Fredric J. Sigmund........................ 57 President and Chief Executive Officer of MacDonald-
Miller Industries, Inc.; Director
William M. Witz........................... 59 Chief Executive Officer of Continental Electrical
Construction Co.; Director
</TABLE>
JAMES P. NORRIS became a Director and Chairman of the Board of the Company
in June 1997. From 1969 to May 1997, he served as Executive Vice President of
Air Conditioning Contractors of America ("ACCA"), an industry trade association
based in Washington, D.C.
J. PATRICK MILLINOR, JR. is a Director and Chief Executive Officer of the
Company and has served in such capacities with the Company and its predecessor
since October 1996. He also served as President of the Company and its
predecessor from October 1996 to August 1997. From September 1994 to October
1996, Mr. Millinor worked directly for Gordon Cain, a major stockholder in the
Company, assisting in the formation and management of Agennix Incorporated and
Lexicon Genetics, two biotechnology companies. From March 1993 to September
1994, he served as Chief Executive Officer of UltrAir, Inc., a start-up
passenger airline. From October 1992 to March 1993, he served as Chief Financial
Officer of UltrAir, Inc. He currently serves as a director of Agennix
Incorporated and Haelan Health(R) Corporation.
DONALD L. LUKE became a Director and President and Chief Operating Officer
of the Company in August 1997. From November 1996 to July 1997, he served as
Chairman of Arriva Air International, Inc. a start-up commercial air cargo
business, and a partner in McFarland Grossman Capital Ventures, L.C., a
consolidator
8
<PAGE> 11
of fastener distribution companies. From September 1996 to August 1997, he
served as the Chief Executive Officer of CTW, Inc. a privately held acquisitions
and management company, and a consultant to Batteries Batteries, Inc., a
consolidator of specialty battery distribution companies which completed its
initial public offering in April 1996. From 1995 to September 1996, he served as
President, Chief Executive Officer and Director of Batteries Batteries, Inc.
From 1991 to 1995, Mr. Luke served as President and Chief Executive Officer of
Miracle Ear New York City.
WILLIAM MICHAEL CALLAHAN became Executive Vice President -- Training and
Development of the Company in August 1997. From 1989 to July 1997, Mr. Callahan
was a partner in Callahan Roach & Associates, a firm which provided consulting
services to residential HVAC contractors nationwide prior to its acquisition by
the Company. From 1972 to 1989, Mr. Callahan served as President of Capital City
Heating & Cooling, a company he founded. In 1988, Mr. Callahan served as
President of ACCA.
CHESTER J. JACHIMIEC is a Director and Executive Vice
President -- Acquisitions of the Company, having served in such capacities with
the Company and its predecessor since October 1996. From February 1994 to
October 1996, Mr. Jachimiec served as the Director of Acquisitions & Investments
for Tenneco Energy. From 1990 to 1994, he was an investor in or consultant to
various private ventures engaged in natural gas gathering, processing and
exploration as well as computer software development. Prior to 1990, Mr.
Jachimiec practiced securities law and public accounting with several
professional firms.
DARREN B. MILLER has been an Executive Vice President of the Company since
July 1998 and has been Chief Financial Officer of the Company and its
predecessor since October 1996. He was also a Senior Vice President from October
1996 until July 1998. From 1989 to 1996, Mr. Miller served in several capacities
at Allwaste, Inc., a consolidator of industrial service companies, including
Vice President -- Treasurer and Controller from 1995 to 1996. Prior to 1989, he
was employed in the audit practice of Arthur Andersen LLP.
ALFRED R. ROACH, JR. became Executive Vice
President -- Commercial/Industrial Group of the Company in January 1998 and
previously served as Executive Vice President -- Marketing, Sales and Product
Support from August 1997 until January 1998. From 1989 to July 1997, Mr. Roach
was a partner in Callahan Roach & Associates. From 1986 to 1989, he served as
President and General Counsel of Service America Corporation, an HVAC franchise
company. From 1970 to 1986, Mr. Roach engaged in the private practice of law.
RICHARD S. ROUSE is Executive Vice President -- Corporate Development and
Administration of the Company, having served in such capacity with the Company
and its predecessor since October 1996. From July 1994 to July 1996, Mr. Rouse
was Vice President and General Manager of Southcoast Services, a privately held
landfill operating company. From 1992 to 1994, he served as Vice President and
General Manager of SWS, an industrial services company.
RANDOLPH W. BRYANT became Senior Vice President, General Counsel and
Secretary of the Company upon its formation in 1997. From December 1996 to April
1997, Mr. Bryant served as Associate General Counsel of El Paso Natural Gas
Company. From 1984 to 1996, he was an attorney with Tenneco Inc. and Tenneco
Energy Inc., last serving as Associate General Counsel.
DANIEL W. KIPP has been a Senior Vice President of the Company since July
1998 and its Corporate Controller since February 1997. He also served as a Vice
President of the Company from February 1997 through July 1998. From February
1994 until February 1997, Mr. Kipp was a sales executive with American Sterling,
a provider of hazard insurance outsourcing services to the mortgage banking
industry, and from July 1990 until February 1994 he was Vice President and
Controller of Allwaste Recycling, Inc., a glass recycler and powdered glass
processor. Prior to July 1990, he was employed in the audit practice of Arthur
Andersen LLP.
ROBERT TYLER has been Senior Vice President -- Residential Group of the
Company since June 1998. From February 1994 until June 1998, he was Vice
President, Sales, for Amana Heating and Air Conditioning, a manufacturer of HVAC
equipment. He previously served as National Sales Manager for Friedrich Air
Conditioning, a manufacturer of HVAC equipment, from January 1990 until February
1994.
9
<PAGE> 12
DAVID L. HENNINGER became a Director of the Company in November 1997. He is
President of Van's Comfortemp Air Conditioning, Inc., a subsidiary of the
Company providing HVAC services to residential and light commercial customers in
the Palm Beach-Ft. Lauderdale, Florida, area. He acquired Van's in 1975 and has
served as its President since that time.
TIMOTHY JOHNSTON became a Director of the Company in May 1997 in connection
with the acquisition of Airtron, which installs HVAC systems in new residences.
Mr. Johnston joined Airtron, Inc. in 1988 and has served as its Senior Vice
President since 1995. He has also served as Secretary/Treasurer of Airtron since
1991 and Chief Financial Officer of Airtron since 1988.
ANDREW JEFFREY KELLY became a Director of the Company in November 1997. Mr.
Kelly is Chief Executive Officer of K&N, a subsidiary of the Company providing
plumbing and HVAC services to residential new construction markets in the
Dallas-Ft. Worth and Austin areas. He founded K&N in 1979 and has served as its
Chief Executive Officer since that time.
ROBERT MUNSON, III became a Director of the Company in November 1998. He is
President of Trinity Contractors, Inc, a subsidiary of the Company which
provides mechanical and electrical contracting services to commercial and
industrial customers, primarily in the Dallas-Ft. Worth area. He founded Trinity
in 1981 and has served as its President since that time.
FREDRIC J. SIGMUND became a Director of the Company in November 1997. Mr.
Sigmund is President and Chief Executive Officer of MacDonald-Miller Industries,
Inc., a subsidiary of the Company providing a full range of HVAC services to
commercial and industrial customers in the Pacific Northwest. He became an
employee of MacDonald-Miller in 1967 and has been its President and Chief
Executive Officer since 1986.
WILLIAM M. WITZ became a Director of the Company in March 1999. He is Chief
Executive Officer of Continental Electrical Construction Co., a subsidiary of
the Company that provides electrical contracting services in the Chicago
metropolitan area. Mr. Witz joined Continental Electrical in 1973 and has served
as its Chief Executive Officer since 1976.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since November 1997, the Common Stock of the Company has been listed for
trading on the New York Stock Exchange (the "NYSE") under the symbol "MAK." As
of March 17, 1999, there were 35,438,090 shares of Common Stock outstanding,
held by approximately 640 shareholders of record. The number of record holders
does not necessarily bear any relationship to the number of beneficial owners of
the Common Stock.
SALES PRICES OF COMMON STOCK
The following table sets forth the range of high and low sales prices for
the Common Stock on the NYSE (as reported by National Quotation Bureau, LLC) for
the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year ended December 31, 1997
4th quarter (November 7 to December 31).................. $17 3/16 $13
Year ended December 31, 1998
1st quarter.............................................. $17 1/8 $14
2nd quarter.............................................. 19 5/8 15 1/2
3rd quarter.............................................. 20 5/8 11 1/4
4th quarter.............................................. 14 3/16 10 5/16
</TABLE>
DIVIDENDS
Under applicable corporate law, the Company may pay dividends out of
surplus (as defined under the Texas Business Corporation Act). At December 31,
1998, the Company had surplus of approximately $315.9 million for the payment of
dividends. The Company has not paid a dividend on the Common Stock since its
incorporation and does not anticipate paying any dividends on the Common Stock
in the foreseeable future because it intends to retain any earnings to finance
the expansion of its business, to repay indebtedness and for general corporate
purposes.
Any payment of future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other relevant
factors. Additionally, the Company's revolving credit facility prohibits the
payment of dividends without the consent of the lenders, and the Company's
indenture relating to its Senior Subordinated Notes due 2009 (the "Notes")
places restrictions on the ability of the Company to pay dividends. For
additional information concerning the Company's revolving credit facility and
the Notes, see Note 7 to the Consolidated Financial Statements included under
Item 8 of this Annual Report.
SALES OF UNREGISTERED SECURITIES DURING 1998
During the fiscal year ended December 31, 1998, the Company issued
securities that were not registered pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), as follows:
(a) On January 12, 1998, the Company issued 191,900 shares of Common
Stock to the partners of Callahan/Roach & Associates ("Callahan Roach") as
part of the consideration for the purchase of the assets of Callahan Roach.
The Company incurred the obligation to issue these shares of Common Stock
in 1997;
(b) On March 20, 1998, the Company issued 3,750 shares of Common Stock
to the former shareholders of Linford Service Company ("Linford") as part
of a post-closing adjustment to the purchase price for Linford;
11
<PAGE> 14
(c) On April 20, 1998, the Company issued 22,528 shares of Common
Stock to the former shareholder of All Service Electric, Inc. ("All
Service") as part of the post-closing adjustment of the purchase price for
the acquisition of All Service;
(d) On April 20, 1998, the Company issued 38,482 shares of Common
Stock to the former shareholders of Willis Refrigeration, Air Conditioning
& Heating, Inc. ("Willis") as part of the post-closing adjustment of the
purchase price for the acquisition of Willis;
(e) On April 20, 1998, the Company issued 21,555 shares of Common
Stock to the former shareholders of Paul E. Smith Co., Inc. ("PES") as part
of the post-closing adjustment of the purchase price for the acquisition of
PES;
(f) On April 20, 1998, the Company issued 1,422 shares of Common Stock
to the former shareholders of Mechanical Services, Inc. ("MSI") as part of
the post-closing adjustment of the purchase price for the acquisition of
MSI;
(g) On April 20, 1998, the Company issued 12,959 shares of Common
Stock to the former shareholders of Arkansas Mechanical Services, Inc.
("AMS") as part of the post-closing adjustment of the purchase price for
the acquisition of AMS;
(h) On April 20, 1998, the Company issued 3,822 shares of Common Stock
to the former shareholders of Southeast Mechanical Service, Inc.
("Southeast Mechanical") as part of the post-closing adjustment of the
purchase price for the acquisition of Southeast Mechanical;
(i) On April 29, 1998, the Company issued 726 shares of Common Stock
to the former shareholders of Central Carolina Air Conditioning Company
("Central Carolina") as part of the post-closing adjustment of the purchase
price for the acquisition of Central Carolina;
(j) On April 29, 1998, the Company issued 22,149 shares of Common
Stock to the former shareholders of Yale Incorporated ("Yale") as part of
the post-closing adjustment of the purchase price for the acquisition of
Yale;
(k) On May 11, 1998, and June 12, 1998, the Company issued 24,460
shares and 13,108 shares, respectively, of Common Stock to the former
shareholders of Costner Brothers, Inc. ("Costner") as part of the
post-closing adjustment of the purchase price for the acquisition of
Costner;
(l) On November 13, 1998, the Company issued 1,449,980 shares of
Common Stock, warrants to purchase 828,853 shares of Common Stock, and
$16.0 million aggregate principal amount of subordinated notes in
connection with the acquisition of the outstanding capital stock of Trinity
Contractors, Inc.; and
(m) On December 2, 1998, the Company issued 52,032 shares of Common
Stock to the former shareholders of Sibley Services, Inc. ("Sibley") as
part of the post-closing adjustment of the purchase price for the
acquisition of Sibley.
Such sales were completed without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act, no
public offering being involved.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
Our first acquisition was that of Airtron. For accounting purposes, this
transaction was accounted for as a reverse acquisition, as if Airtron acquired
GroupMAC, because the former shareholders of Airtron owned a majority of our
common stock upon consummation of the acquisition. As such, the Selected Income
Statement and Balance Sheet data set forth below as of and for the three-year
period ended February 28, 1997 have been derived from the audited financial
statements of Airtron. The financial statements of GroupMAC and its
subsidiaries, other than Airtron, are included in the financial statements from
their respective dates of acquisition.
The selected financial data presented below should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Item 8, "Financial Statements and Supplementary
Data," included elsewhere herein (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR TEN MONTHS FISCAL YEAR ENDED
ENDED ENDED FEBRUARY 28 OR 29,(B)
DECEMBER 31, DECEMBER 31, ----------------------------
1998(A) 1997(A) 1997 1996 1995
------------ ------------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................... $761,541 $138,479 $81,880 $ 73,765 $72,226
Gross Profit................................ 176,145 36,717 23,374 21,091 21,766
Selling, General and Administrative
Expenses.................................. 118,119 35,862(c) 19,811 17,615 20,282(d)
Goodwill Amortization(e).................... 5,960 633 -- -- --
-------- -------- ------- -------- -------
Income from Operations...................... 52,066 222 3,563 3,476 1,484
Interest Income (Expense), Net.............. (6,188) (1,144) 89 68 76
Other Income, Net........................... 377 112 256 246 140
-------- -------- ------- -------- -------
Income (Loss) Before Income Tax Provision... 46,255 (810) 3,908 3,790 1,700
Income Tax Provision........................ 20,326 2,832 1,572 1,651 911
-------- -------- ------- -------- -------
Net Income (Loss)........................... $ 25,929 $ (3,642) $ 2,336 $ 2,139 $ 789
======== ======== ======= ======== =======
Net Income (Loss) Per Share:
Basic..................................... $ 0.94 $ (0.34)
======== ========
Diluted................................... $ 0.93 $ (0.34)
======== ========
Weighted Average Shares Outstanding:
Basic..................................... 27,544 10,800
======== ========
Diluted................................... 27,948 10,800
======== ========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
DECEMBER 31, DECEMBER 31, ----------------------------
1998 1997 1997 1996 1995
------------ ------------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.................... $ 2,371 $ 25,681 $ 4,339 $ 1,774 $ 650
Working Capital.............................. 86,441 40,478 6,337 3,285 4,561
Total Assets................................. 701,081 192,687 27,153 28,282 23,528
Total Debt................................... 223,959 2,938 1,290 -- --
Shareholders' Equity......................... 315,929 136,653 5,991 6,373 5,955
</TABLE>
- ---------------
(a) The operations of the acquired businesses (other than Airtron) are included
in the financial data from the effective date of their respective
acquisition.
(b) Concurrent with the initial public offering of GroupMAC's common stock (the
"IPO") we changed our fiscal year end from February 28 to December 31.
(c) Includes $7.0 million of non-recurring, non-cash compensation expenses
related to the reverse acquisition of GroupMAC during the ten months ended
December 31, 1997.
(d) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(e) Consists of amortization recorded, as a result of the acquisition of
acquired businesses, over a 40-year period and computed on the basis
described in the notes to consolidated financial statements.
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
GroupMAC derives revenues from providing maintenance, repair and
replacement and new installation services for mechanical, electrical and other
systems to commercial/industrial and residential customers. Our combined 1998
revenues, assuming all businesses were acquired on January 1, 1998, consisted of
the following (dollars in thousands):
<TABLE>
<CAPTION>
REVENUES PERCENTAGES
---------- -----------
<S> <C> <C>
Maintenance, repair and replacement......................... $ 636,787 59.2%
New installation............................................ 439,632 40.8
---------- -----
Total............................................. $1,076,419 100.0%
========== =====
</TABLE>
GroupMAC 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.
GroupMAC intends to make additional acquisitions in both of the technical
disciplines (mechanical and electrical) within the commercial/industrial and
residential markets. Our long-term objective is to develop maintenance, repair
and replacement capabilities (both residential and commercial/industrial) in the
top 100 markets within the United States, while offering new installation
services across a more limited range of markets where new construction in the
commercial/industrial and/or residential sectors is expected to out-pace the
national average over the long term. Over time, this objective is expected to
shift our revenues to an increased percentage of service revenue.
Cost of services consists primarily of components, parts and supplies
related to our 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 management, administrative
salaries and benefits, advertising, office rent and utilities, communications
and professional fees.
GroupMAC's balanced business mix is reflected to varying degrees in its
gross margins. The combined gross margin for the acquired businesses providing
services to commercial/industrial markets was 20.6% for the twelve months ended
December 31, 1998. Our businesses performing primarily maintenance, repair and
replacement services in the residential markets tend to have higher gross
margins, averaging 32.1% for the combined twelve months ended December 31, 1998.
On average, our residential new installation businesses have lower gross
margins. Such companies' combined gross margin was 23.3% for the twelve months
ended December 31, 1998. 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.
GroupMAC has begun to realize savings from (1) greater volume discounts
from suppliers of components, parts and supplies; (2) consolidation of insurance
and bonding programs; (3) other general and administrative expenses such as
training and advertising; and (4) our ability to borrow at lower interest rates
than most, if not all, of our subsidiaries. These savings are offset by costs
related to our corporate management structure, costs associated with being a
public company and integration costs.
The following discussion should be read in conjunction with the historical
consolidated financial statements and related notes and Item 6, "Selected
Financial Data," contained elsewhere herein. The combined data do not represent
combined results of operations presented in accordance with generally accepted
accounting principles, but are only a summation of the revenues, cost of sales
and gross margin of the acquired businesses on a historical basis. The combined
results of operations assume that each of the acquired businesses were combined
at the beginning of each period presented. The combined data also exclude the
effect of pro forma adjustments and may not be comparable to, and may not be
indicative of, our post-combination results of operations because (i) the
acquired businesses were not under common control or
14
<PAGE> 17
management during the periods presented and (ii) the combined data do not
reflect the potential benefits and cost savings GroupMAC expects to realize when
operating as a combined entity.
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange with Airtron (the "Airtron Agreement"), pursuant to which GroupMAC
issued $20.4 million in cash, 14.9 million shares of GroupMAC preferred stock
and 4.7 million shares of GroupMAC common stock 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 consolidated 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
Airtron Agreement. During 1997, GroupMAC changed its fiscal year end from
February 28 to December 31.
During 1997, GroupMAC acquired in separate transactions 23 companies (and
together with Airtron, the "Founding Companies") through a combination of cash,
preferred stock, common stock and warrants to purchase shares of common stock of
GroupMAC. During 1998, we acquired 39 additional businesses by offering a
combination of cash, notes payable, junior subordinated notes, common stock,
options to purchase common stock and warrants to purchase common stock.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
HISTORICAL COMBINED
----------------------------------------------------- -------------------------------------
FISCAL YEAR TEN MONTHS FISCAL YEAR TWELVE MONTHS ENDED
ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, FEBRUARY 28, -------------------------------------
1998 1997 1997 1998 1997
---------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $761,541 100.0% $138,479 100.0% $81,880 100.0% $1,076,419 100.0% $978,480 100.0%
Cost of Services......... 585,396 76.9 101,762 73.5 58,506 71.5 833,819 77.5 756,770 77.3
-------- ----- -------- ----- ------- ----- ---------- ----- -------- -----
Gross Profit............. 176,145 23.1 36,717 26.5 23,374 28.5 $ 242,600 22.5% $221,710 22.7%
========== ===== ======== =====
Selling, General and
Administrative
Expenses............... 124,079 16.2 36,495 26.3 19,811 24.1
-------- ----- -------- ----- ------- -----
Income from Operations... 52,066 6.9 222 0.2 3,563 4.4
Interest, Net............ (6,188) (0.8) (1,144) (0.8) 89 0.1
Other.................... 377 -- 112 -- 256 0.3
-------- ----- -------- ----- ------- -----
Income (Loss) Before
Income Tax Provision... 46,255 6.1 (810) (0.6) 3,908 4.8
Income Tax Provision..... 20,326 2.7 2,832 2.0 1,572 1.9
-------- ----- -------- ----- ------- -----
Net Income (Loss)........ $ 25,929 3.4% $ (3,642) (2.6)% $ 2,336 2.9%
======== ===== ======== ===== ======= =====
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TEN MONTHS ENDED DECEMBER 31,
1997
Revenues. Revenues increased $623.0 million, or 450.0%, to $761.5 million
for the twelve months ended December 31, 1998 from $138.5 million for the ten
months ended December 31, 1997. The increase in revenues is attributable to the
following:
- $328.7 million relates to 28 commercial/industrial companies acquired
during 1998,
- $54.1 million relates to 11 residential companies acquired during 1998,
15
<PAGE> 18
- $186.7 million relates to 13 companies acquired simultaneous with the
initial public offering of GroupMAC's common stock (the "IPO"), resulting
in twelve months of revenues during 1998 compared to two months of
revenues during 1997,
- $29.3 million relates to the other 10 companies acquired in June and July
of 1997, resulting in twelve months of revenue during 1998 compared to
six or seven months of revenues during 1997, and
- $24.2 million relates to Airtron, resulting in twelve months of revenues
in 1998 compared to ten months of revenues in 1997.
Gross Profit. Gross profit increased $139.4 million, or 379.8%, to $176.1
million for the twelve months ended December 31, 1998 from $36.7 million for the
ten months ended December 31, 1997. The increase in gross profit is attributable
to the following:
- $66.0 million relates to 28 commercial/industrial companies acquired
during 1998,
- $15.2 million relates to 11 residential companies acquired during 1998,
- $37.2 million relates to 13 companies acquired simultaneous with the IPO,
resulting in twelve months of activity during 1998 compared to two months
of activity during 1997,
- $8.9 million relates to the other 10 companies acquired in June and July
of 1997, resulting in twelve months of activity during 1998 compared to
six or seven months of activity during 1997,
- $10.1 million relates to Airtron, resulting in twelve months of activity
in 1998 compared to ten months of activity in 1997, and
- $2.0 million relates to materials purchases savings.
Gross profit margin decreased 3.4% for the twelve months ended December 31,
1998 compared to the ten months ended December 31, 1997 because of GroupMAC's
1998 acquisition emphasis on commercial/industrial businesses, which support the
Company's national accounts initiatives although they typically have lower gross
margins than residential businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $87.6 million, or 240.0%, to $124.1 million
for the twelve months ended December 31, 1998 from $36.5 million for the ten
months ended December 31, 1997. The increase in selling, general and
administrative expenses is attributable to the following:
- $37.5 million relates to 28 commercial/industrial companies acquired
during 1998,
- $10.6 million relates to 11 residential companies acquired during 1998,
- $23.5 million relates to 13 companies acquired simultaneous with the IPO,
resulting in twelve months of activity during 1998 compared to two months
of activity during 1997,
- $6.5 million relates to the other 10 companies acquired in June and July
of 1997, resulting in twelve months of activity during 1998 compared to
six or seven months of activity during 1997,
- $4.3 million relates to Airtron, resulting in twelve months of activity
in 1998 compared to ten months of activity in 1997,
- $7.8 million relates to corporate expenses representing the formation of
the corporate management team and infrastructure necessary to execute our
operating and acquisition strategies,
- $5.3 million relates to goodwill amortization associated with the above
described acquisitions, and
- $2.6 million relates to field bonuses.
16
<PAGE> 19
Offsetting the above increases were the following reductions:
- $7.0 million reduction in compensation expense recognized in the prior
year from the reverse acquisition of Airtron, and
- $3.5 million of savings related to our property and casualty insurance
programs.
As a percentage of revenues, selling, general and administrative expenses,
excluding corporate expenses, goodwill amortization and the 1997 non-recurring
compensation expense, decreased to 14.5% for the twelve months ended December
31, 1998 from 18.3% for the ten months ended December 31, 1997. This decrease
was due primarily to achieving lower selling and administrative expense margins
within the 23 companies acquired during 1997 and acquiring a higher mix of
commercial/industrial companies which tend to have lower selling and
administrative expense structures. When including corporate expenses and
goodwill amortization, but excluding the non-recurring, non-cash compensation
expense of $7.0 million, selling, general and administrative expenses as a
percentage of revenue decreased to 16.2% for the twelve months ended December
31, 1998 from 21.1% for the ten months ended December 31, 1997.
Net Interest. Net interest increased $5.0 million during the twelve months
ended December 31, 1998 compared to the ten months ended December 31, 1997 due
to borrowings under our credit facility to fund our aggressive acquisition
program during 1998. See "Liquidity and Capital Resources."
Income Tax Provision. The income tax provision increased $17.5 million, or
625.0%, to $20.3 million for the twelve months ended December 31, 1998 from $2.8
million for the ten months ended December 31, 1997. This increase corresponds
with the pre-tax income increase of $40.1 million between periods after adding
back the $7.0 million of non-recurring, non-cash compensation expense related to
the reverse acquisition of Airtron. The effective tax rate for the twelve months
ended December 31, 1998 was 43.9% compared to 45.8% for the ten months ended
December 31, 1997 after adding back the $7.0 million of non-recurring, non-cash
compensation expense related to the reverse acquisition of Airtron. The decrease
results primarily from income tax planning strategies implemented during 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 in June through November 1997, of nine commercial/industrial
companies, 12 residential companies and two companies providing products and
services outside of GroupMAC's two primary operating segments. The increase in
revenues was partially offset as the period ended December 31, 1997 included ten
months while the period ended February 28, 1997 included twelve months.
Gross Profit. Gross profit increased $13.3 million, or 56.8%, to $36.7
million for the ten months ended December 31, 1997 from $23.4 million for the
twelve months ended February 28, 1997. The increase in gross profit was
primarily attributable to the acquisitions in June through November, 1997. Also
contributing to the increase were 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 the gross
profit margins of certain of the businesses acquired 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. This increase was primarily attributable to the
aforementioned acquisitions and to the following:
- $7.0 million non-recurring, non-cash compensation charge related to the
reverse acquisition of Airtron in May 1997 and
17
<PAGE> 20
- $4.1 million increase in corporate expenses representing the formation of
the corporate management team and infrastructure necessary to execute our
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 our credit facilities to
fund the cash portion of the acquisition of Airtron and the ten operating
companies acquired in June and July 1997. 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 of
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.
COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO COMBINED TWELVE
MONTHS ENDED DECEMBER 31, 1997
Revenues. Combined revenues increased $97.9 million, or 10.0%, to $1,076.4
million for the twelve months ended December 31, 1998 from $978.5 million for
the twelve months ended December 31, 1997. The increase in combined revenues was
attributable to the following:
- $58.9 million increase, or 8.2%, relates to companies that provide
commercial/industrial services primarily in the Seattle/Portland, Dallas,
Baltimore, Salt Lake City, and Fort Lauderdale markets partially offset
by economic softening in the Richmond, Virginia market,
- $39.6 million increase, or 15.5%, relates to companies that provide
residential services. Of this increase, $26.1 million relates to
companies that primarily provide new installation services due to an
increase in new home starts in the markets they serve and $13.6 million
relates to companies that primarily provide maintenance, repair and
replacement services due to favorable weather patterns in the markets
they serve, and
- $0.6 million reduction related to two companies providing products and
services outside of those performed by GroupMAC's two primary operating
segments.
Gross Profit. Combined gross profit increased $20.9 million, or 9.4%, to
$242.6 million for the twelve months ended December 31, 1998 from $221.7 million
for the twelve months ended December 31, 1997. The increase in combined gross
profit was primarily attributable to the increase in combined revenues described
above. Gross profit margin decreased to 22.5% for the twelve month period ended
December 31, 1998 compared to 22.7% for the twelve months ended December 31,
1997. The slight net decrease in gross profit margin was primarily the result of
economic softening in the Richmond, Virginia market offset by the following:
- 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,
- A slightly higher mix of higher margin maintenance, repair and
replacement business in the residential sector from the favorable weather
patterns discussed above, and
18
<PAGE> 21
- Materials purchases 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. GroupMAC
recognizes that it must take action to ensure that its operation will not be
adversely impacted by Year 2000 software failures.
GroupMAC's State of Readiness. We have completed an initial systems survey
of each business acquired. That survey revealed that several of our core
business applications possess Year 2000 problems. However, none of these
problems are expected to be material to our individual operating companies or,
in the aggregate, to GroupMAC because the 59 operating companies acquired by
GroupMAC utilize approximately 34 different operating and accounting systems. As
further discussed herein, GroupMAC has not migrated its operating companies to a
common system platform. Accordingly, even if our Year 2000 evaluation fails to
detect or correct an issue at one or more of the operating companies, it would
not have a material impact on the other companies in the consolidated group.
GroupMAC's Year 2000 plan includes the following phases:
Evaluation
GroupMAC retained an outside consulting firm to evaluate more thoroughly
the extent of the problem and to assist us with cost estimates and in preparing
an action plan to address the issues in a timely manner. This phase began in
early July 1998 and included all companies from the initial system survey and
those acquired through the first quarter of 1999. The evaluation phase has been
completed at a cost of approximately $115,000. Additionally, GroupMAC 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. These evaluations have been performed for all acquisitions to date and
are included in the above cost estimates.
Upgrading and Testing
During the evaluation phase, we determined that most systems in use by
GroupMAC could be upgraded to eliminate Year 2000 problems. We estimate that the
cost of bringing the evaluated systems into compliance is between $140,000 and
$195,000. The estimate includes between $110,000 and $160,000 for software
upgrades and between $30,000 and $35,000 for implementation and testing. These
costs are expected to be incurred during the first three quarters of 1999.
GroupMAC will expense substantially all of these costs and will fund them
through cash flow from operations.
Management has implemented tracking mechanisms to ensure upgrades are
completed in a timely manner. Since each individual company has different
systems in use today, the implementation schedule varies for each company and
the Year 2000 plan will be modified as events warrant. All upgrading and testing
is scheduled to be completed by September 1999. It is not anticipated that
management involvement or the use of capital resources in solving Year 2000
problems will have a substantial impact on other information technology
projects.
Independent of its Year 2000 activities discussed in the previous
paragraph, GroupMAC 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 GroupMAC as a whole is not dependent on the
implementation of the common system to remedy its Year 2000 problem, one of the
acquired businesses requires a completely new system to solve its Year 2000
issues. This company (with annual revenues of approximately $8.0 million) is
expected to be one of the first to be implemented on the common system platform
discussed herein.
19
<PAGE> 22
GroupMAC expects to implement the common information system at the affected
company during the third quarter of 1999. General rollout of the common
information system will follow promptly thereafter.
We are evaluating the effect of the Year 2000 problem on our most
significant customers and suppliers, and thus indirectly on GroupMAC. This
evaluation includes an ongoing process of contacting customers and suppliers
whose systems have, or may have, an effect on the way GroupMAC conducts
business. We are attempting to inventory and assess the Year 2000 readiness and
compatibility of our material customers and suppliers through the completion of
survey questionnaires. GroupMAC is currently reviewing survey questionnaires
received to date and we expect to complete the analysis of our customers' and
suppliers' systems by September 1999. GroupMAC does not have control of these
suppliers and customers. While we will work diligently to coordinate with our
suppliers and customers, there can be no assurance they will complete their
efforts prior to January 1, 2000. There are no individual customers who will
have a material impact on our revenues should they fail to complete their Year
2000 efforts. Additionally, GroupMAC has alternative vendors that can be relied
on should a current vendor fail in its Year 2000 preparations.
Embedded Technology. GroupMAC has focused its assessments to date on its
information technology systems. These assessments indicate that, due to the
nature of our 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. GroupMAC's operations do not include capital
intensive equipment with embedded microcontrollers.
Risks. While GroupMAC does not anticipate any difficulties achieving the
upgrading and testing schedule described above, there is a risk that one or more
of our companies will not meet the current schedule. If this occurs, the
affected company may have to install a system similar to that being utilized at
one of the other operating companies until the problem is remedied. Management
believes that, if necessary, this could be accomplished without meaningful
business interruption and/or significant cost to GroupMAC. Also, there is an
unlikely scenario where any of our larger national suppliers would have Year
2000 related constraints causing GroupMAC to shift product orders to other
readily available suppliers.
Contingency Plan. GroupMAC has not implemented a Year 2000 contingency
plan. As explained above, we have initiated action to identify and resolve Year
2000 problems. GroupMAC intends to develop and implement a contingency plan in
the event that our present course of action to solve the Year 2000 problem
should fall behind schedule.
Summary. The following table summarizes the status and historical/estimated
completion dates of the various stages of GroupMAC's Year 2000 plan:
<TABLE>
<CAPTION>
HISTORICAL
OR ESTIMATED
PHASE OF PROJECT STATUS COMPLETION DATE
- ---------------- ------ ---------------
<S> <C> <C>
Initial System Survey.................................... Complete February 1999
Evaluation............................................... Complete February 1999
Upgrade & Testing........................................ In Process September 1999
Customer/Supplier Evaluation............................. In Process September 1999
Contingency Plan......................................... If Necessary November 1999
</TABLE>
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, GroupMAC expects its
revenues and operating results generally will be lower in the first and, to a
lesser degree, fourth quarters. Historically, the construction industry has been
highly cyclical. As a result, our volume of business may be adversely affected
by declines in new installation projects in various geographic regions of the
United States.
20
<PAGE> 23
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 installation 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 residential new
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.
INFLATION
Inflation did not have a significant effect on the results of operations
for the year ended December 31, 1998, the ten months ended December 31, 1997 or
the year ended February 28, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During November and December 1997, GroupMAC 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 Founding
Companies, $19.3 million to retire all of the then outstanding preferred stock
and $11.9 million for general corporate purposes including working capital and
final consideration settlements related to previous acquisitions.
Historically, GroupMAC has financed its operations and growth with
internally generated working capital and borrowings from commercial banks or
other lenders. These borrowings are generally secured by the accounts receivable
and inventory of GroupMAC.
On December 11, 1997, GroupMAC entered into a three year agreement with
Texas Commerce Bank National Association (now Chase Bank of Texas, National
Association), as Agent, and four other banks to provide a revolving credit
facility (the "Credit Agreement") with an initial borrowing capacity of up to
$75 million. On June 12, 1998, we amended and restated the Credit Agreement to
increase our borrowing capacity from $75 million to $125 million. On October 15,
1998, GroupMAC amended and restated the Credit Agreement to increase our
borrowing capacity from $125 million to $230 million. Debt under the Credit
Agreement bears interest at variable rates. Under the Credit Agreement, GroupMAC
is required to maintain (1) a minimum Fixed Charge Coverage Ratio; (2) a maximum
ratio of total indebtedness for borrowed money to capitalization (as defined in
the Credit Agreement); (3) a maximum ratio of senior debt to pro forma earnings
before interest, taxes, depreciation and amortization; (4) a maximum amount of
total indebtedness to EBITDA; (5) a minimum amount of Consolidated Net Worth (as
defined in the Credit Agreement) and (6) a maximum amount of Capital
Expenditures in relation to Consolidated Net Worth. At December 31, 1998, we
were in compliance with those covenants. The Credit Agreement matures on October
13, 2001. To date, neither the terms of the Credit Agreement and the indenture
pursuant to which the Notes referred to below were issued, nor the debt
represented thereby, have materially restricted our ability to finance future
operations or capital needs or to respond to changes in our business or
competitive activity.
In January 1999, GroupMAC completed a private placement offering (the
"Offering") of $130 million of unsecured senior subordinated notes (the "Notes")
bearing interest at 9.75% and maturing in January 2009. The net proceeds of the
Offering were used to repay indebtedness incurred under the Credit Agreement.
Under a registration rights agreement executed as part of the Offering, the
Company will file a registration statement within 90 days after the issue date
of the Notes enabling holders of the Notes to exchange the privately placed
Notes for publicly registered notes with identical terms. The Company is
required to use all reasonable efforts to cause the registration statement to
become effective within 150 days after the issue date of the Notes and to
consummate the exchange offer within 180 days after the issue date of
21
<PAGE> 24
the Notes. If the Company cannot effect an exchange offer within the time
periods listed above and in other certain circumstances, management will use all
reasonable efforts to file a shelf registration statement for the resale of the
Notes. If the Company is unable to comply with these obligations under the
registration rights agreement, the interest rate on the Notes will increase
under certain circumstances.
The Notes are guaranteed by all of the Company's current and future U.S.
subsidiaries other than "Unrestricted Subsidiaries" (as defined in the indenture
governing the Notes). As of the closing of the Offering, there are no
"Unrestricted Subsidiaries." These guarantees are full, unconditional and joint
and several.
The Company entered into an agreement to lock in the ten year U.S. Treasury
rate used to price the offering of the Notes. The Company locked in $100 million
at 5.5212%, which management believes is an attractive long-term base rate. This
agreement expired on January 31, 1999, and was settled on that date based upon
the ten year Treasury yield of 4.648%, resulting in an additional pre-tax
financing cost of approximately $6.9 million. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 80, Accounting for Futures
Contracts, this agreement qualifies as a hedge and was recognized as deferred
financing costs.
The Company's largest need for capital in the past has been to fund
acquisitions. Historically, the Company has generally paid for its acquisitions
with cash and common stock in approximately equal amounts. The Company intends
to continue to use its common stock as a component of the consideration that it
pays for businesses to be acquired as long as the acquisition is immediately
accretive to its earnings. As the price of the Company's common stock has
declined, the Company has reduced the price it is willing to pay for
acquisitions and in some cases anticipates increasing the cash component of the
purchase price. If the price of the Company's common stock continues at its
present level or declines further, then the Company believes that the number of
companies willing to be acquired at an accretive price may be reduced, which
could adversely impact the growth of the Company. Furthermore, if the Company
pays a greater proportion of the consideration of future acquisitions in cash,
then it will exhaust its available credit faster than would otherwise be the
case and would increase its ratio of debt to total capitalization.
GroupMAC'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 year ended December 31, 1998 and the ten
months ended December 31, 1997, capital expenditures aggregated $9.3 million and
$2.0 million, respectively. GroupMAC anticipates that its cash flow from
operations and existing credit facilities will provide cash in excess of our
normal working capital needs, debt service requirements and planned capital
expenditures for property and equipment.
For the year ended December 31, 1998, the ten months ended December 31,
1997 and the year ended February 28, 1997, we generated $0.9 million, $4.4
million and $3.7 million in cash from operating activities, respectively. For
the year ended December 31, 1998, net income, depreciation, amortization,
deferred taxes and non-cash compensation generated $43.5 million and changes in
asset and liability accounts utilized a net $42.6 million. For the ten months
ended December 31, 1997, net loss, 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 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 year ended December 31, 1998, GroupMAC used $189.2 million in
investing activities. These activities principally consisted of $178.5 million
for acquisitions and $9.3 million for capital expenditures. For the ten months
ended December 31, 1997, we used $37.9 million in investing activities. These
activities principally consisted of $35.8 million for acquisitions and $2.0
million for capital expenditures. The cash impact of investing activities for
the year ended February 28, 1997 was not significant.
For the year ended December 31, 1998, GroupMAC generated $165.0 million in
cash from its financing activities. These activities principally consisted of
proceeds from long-term debt of $884.5 million and payments of long-term debt of
$719.5 million. For the ten months ended December 31, 1997, GroupMAC 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
22
<PAGE> 25
shareholders of $20.4 million, payments of long-term debt of $47.7 million and
retirement of preferred stock of $19.3 million. The cash impact of financing
activities for the year ended February 28, 1997 was not significant.
Since the IPO, GroupMAC registered fourteen million shares of common stock
under the Securities Act of 1933, as amended, for its use in connection with
future acquisitions. After their issuance, those registered shares generally are
freely tradable by persons not affiliated with GroupMAC unless we contractually
restrict the resale, which we generally do. Substantially all of the shares of
common stock issued in connection with the acquisition of the Founding Companies
were not registered under the Securities Act and were also subject to
contractual restrictions on transfer. However, the holders of these shares are
permitted to transfer a limited amount of these shares during 1999.
During the first quarter of 1999, GroupMAC completed the acquisition of
three commercial/industrial platform companies that will be accounted for as
purchases. The combined annual revenues of these acquired companies were
approximately $165.5 million. Total consideration paid included cash payments of
$35.6 million, $1.6 million of junior subordinated notes, 2.1 million shares of
common stock and total debt assumed of $13.8 million. GroupMAC financed the cash
portion of the purchase price using; (1) cash borrowed under the Credit
Agreement and (2) internally generated funds. As of March 26, 1999, the funds
available through the Credit Agreement totaled $73.5 million, subject to the
maintenance of financial ratios and covenants.
GroupMAC intends to aggressively pursue acquisition opportunities.
Management believes that funds provided by operations, together with funds
available under the Credit Agreement and other sources, will be adequate to meet
our anticipated requirements for acquisitions. Estimates as to working capital
needs and other expenditures may be materially affected if the foregoing sources
are not available or do not otherwise provide sufficient funds to meet our
obligations.
NEW ACCOUNTING PRONOUNCEMENTS
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 in fiscal 1999. The impact of this new standard is not expected to
have a significant effect on our 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 in fiscal 1999. The statement requires
capitalized costs related to start-up activities to be expensed as a cumulative
effect of a change in accounting principle when the statement is adopted. The
adoption of this new standard will not have a significant effect on GroupMAC's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("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. Under present operations, this statement will have no impact on
our financial position or results of operations.
23
<PAGE> 26
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements. Forward-looking
statements can be identified by the use of future tense or other forward-looking
terms such as "may," "intend," "will," "expect," "anticipate," "plan,"
"management believes," "estimate," "continue," "should," "strategy," or
"position," or the negatives of those terms or other variations on them or by
comparable terminology. In particular, statements, express or implied,
concerning future operating results or the ability to generate sales, income or
cash flow are forward-looking statements. The Company has based these
forward-looking statements on management's current expectations and projections
about future events. Although the Company believes that its expectations and
projections are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. These forward-looking statements are subject to
risks, uncertainties and assumptions about the Company including among other
things:
- the Company's reliance on acquisitions for growth,
- its plan to use common stock as consideration for future acquisitions,
and the effect of a decline in the stock price on that plan,
- the Company's ability to integrate acquired businesses,
- the reliance on commercial and residential new construction industries,
- anticipated trends and conditions in the Company's industry, including
future consolidation,
- the effect of moderate weather patterns on the demand for the Company's
services, and
- the Company's ability to compete in local markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The table below provides information about GroupMAC's market sensitive
financial instruments and constitutes a "forward-looking statement." Our major
market risk exposure is changing interest rates. All items described are
non-trading and are stated in U.S. dollars (in thousands).
<TABLE>
<CAPTION>
FAIR VALUE
AT DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- -------- -------- -------- -------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt...... $ 12,959 $ -- $ -- $ -- $ 16,000 $-- $ 28,959 $ 28,959
Average rate....... 7.12% -- -- -- 6.00% -- 6.50%
Credit Agreement..... $ -- $ -- $195,000 $ -- $ -- $-- $195,000 $195,000
Average rate....... -- -- (a) -- -- -- (a)
</TABLE>
- ---------------
(a) The Credit Agreement borrowings bear interest at a rate per annum, at the
Company's option, of either (1) the Alternate Base Rate or (2) the
Eurodollar Rate. The Alternate Base Rate is equal to the greater of the
Federal Funds Effective Rate plus 0.5% or the Prime Rate plus a Margin
depending on the ratio of indebtedness for borrowed money to EBITDA (with
all capitalized terms as defined in the Credit Agreement). The Eurodollar
Rate is the rate defined in the Credit Agreement plus a Margin depending on
the ratio of indebtedness for borrowed money to EBITDA. At December 31,
1998, the weighted average interest rate in effect for the Credit Agreement
borrowings was 7.075%.
24
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
Independent Auditors' Report................................ 26
Consolidated Balance Sheets................................. 27
Consolidated Statements of Operations....................... 28
Consolidated Statements of Shareholders' Equity............. 29
Consolidated Statements of Cash Flows....................... 30
Notes to Consolidated Financial Statements.................. 31
SEPARATE FINANCIAL STATEMENTS OF GROUP MAINTENANCE AMERICA
CORP. FROM INCEPTION THROUGH DATE OF REVERSE ACQUISITION
Independent Auditors' Report................................ 47
Balance Sheets.............................................. 48
Statements of Operations.................................... 49
Statements of Shareholders' Equity(Deficit)................. 50
Statements of Cash Flows.................................... 51
Notes to Financial Statements............................... 52
</TABLE>
25
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp.:
We have audited the accompanying consolidated balance sheets of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1998, the ten months ended December 31,
1997 and the year ended February 28, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the year ended December
31, 1998, the ten months ended December 31, 1997 and the year ended February 28,
1997, in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
February 23, 1999
26
<PAGE> 29
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,371 $ 25,681
Accounts receivable, net of allowance for doubtful
accounts of $5,355 and $1,825, respectively............ 187,251 45,516
Inventories............................................... 17,843 8,834
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 26,533 3,116
Prepaid expenses and other current assets................. 6,134 1,013
Deferred tax assets....................................... 7,579 1,647
Refundable income taxes................................... 3,341 --
-------- --------
Total current assets.............................. 251,052 85,807
Property and Equipment, net................................. 39,192 11,312
Goodwill, net of accumulated amortization of $6,593 and
$633, respectively........................................ 398,714 84,533
Deferred Tax Assets......................................... -- 4,739
Refundable Income Taxes..................................... -- 4,529
Other Long-Term Assets...................................... 12,123 1,767
-------- --------
Total assets...................................... $701,081 $192,687
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current maturities of long-term
debt................................................... $ 12,959 $ 2,769
Accounts payable and accrued expenses..................... 99,205 28,519
Due to related parties.................................... 14,961 3,358
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 27,830 4,737
Deferred service contract revenue......................... 4,429 3,305
Income taxes payable...................................... 2,028 31
Other current liabilities................................. 3,199 2,610
-------- --------
Total current liabilities......................... 164,611 45,329
Revolving Credit Facility................................... 195,000 169
Junior Subordinated Notes................................... 16,000 --
Deferred Tax Liabilities.................................... 733 --
Due to Related Parties...................................... -- 9,745
Other Long-Term Liabilities................................. 8,808 791
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $1.00 par value; 50,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $0.001 par value; 100,000 shares authorized;
33,154 and 20,629 shares issued and outstanding,
respectively........................................... 33 21
Additional paid-in capital................................ 322,478 169,143
Retained deficit.......................................... (6,582) (32,511)
-------- --------
Total shareholders' equity........................ 315,929 136,653
-------- --------
Total liabilities and shareholders' equity........ $701,081 $192,687
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE> 30
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................................ $761,541 $138,479 $81,880
Cost of Services........................................ 585,396 101,762 58,506
-------- -------- -------
Gross Profit....................................... 176,145 36,717 23,374
Selling, General and Administrative Expenses............ 117,951 28,643 19,811
Amortization of Goodwill................................ 5,960 633 --
Compensation Expense From Reverse Acquisition and
Issuance of Management Shares and Stock Options....... 168 7,219 --
-------- -------- -------
Income from operations............................. 52,066 222 3,563
Other Income (Expense):
Interest expense...................................... (6,595) (1,542) (82)
Interest income....................................... 407 398 171
Other................................................. 377 112 256
-------- -------- -------
Income (loss) before income tax provision..... 46,255 (810) 3,908
Income Tax Provision.................................... 20,326 2,832 1,572
-------- -------- -------
Net Income (Loss)....................................... $ 25,929 $ (3,642) $ 2,336
======== ======== =======
Basic Earnings (Loss) Per Share:
Earnings (Loss) Per Share............................. $ 0.94 $ (0.34) $ 0.45
======== ======== =======
Weighted Average Shares Outstanding................... 27,544 10,800 5,172
======== ======== =======
Diluted Earnings (Loss) Per Share:
Earnings (Loss) Per Share............................. $ 0.93 $ (0.34) $ 0.45
======== ======== =======
Weighted Average Shares Outstanding................... 27,948 10,800 5,172
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 31
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS TREASURY SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK RECEIVABLE EQUITY
------ ------ ---------- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 29, 1996.............. 5,692 $ 6 $ 2,701 $ 3,667 $ -- $ -- $ 6,374
Purchases of stock.................... -- -- -- -- (2,112) -- (2,112)
Repurchase of warrants................ -- -- -- (600) -- -- (600)
Cancellation of treasury stock........ (1,040) (1) (55) (2,056) 2,112 -- --
Distributions to shareholders......... -- -- -- (7) -- -- (7)
Net income............................ -- -- -- 2,336 -- -- 2,336
------ --- -------- -------- ------- ------- --------
BALANCE, February 28, 1997.............. 4,652 5 2,646 3,340 -- -- 5,991
Purchases of acquired companies....... 5,612 6 58,781 -- -- (6,153) 52,634
Public offering, net of offering
costs............................... 8,340 8 103,543 -- -- -- 103,551
Compensation expense from issuance of
management shares and stock
options............................. 5 -- 241 -- -- -- 241
Preferred stock issued to Airtron
shareholders in reverse
acquisition......................... -- -- -- (14,873) -- -- (14,873)
Distribution to Airtron shareholders
in reverse acquisition.............. -- -- -- (17,336) -- -- (17,336)
Shares issued under subscription
agreement........................... 2,000 2 -- -- -- 6,153 6,155
Exercise of stock options............. 20 -- 61 -- -- -- 61
Common stock to be issued in
acquisitions........................ -- -- 3,871 -- -- -- 3,871
Net loss.............................. -- -- -- (3,642) -- -- (3,642)
------ --- -------- -------- ------- ------- --------
BALANCE, December 31, 1997.............. 20,629 21 169,143 (32,511) -- -- 136,653
Purchases of acquired companies....... 12,455 12 148,762 -- -- -- 148,774
Debenture conversion.................. 68 -- 820 -- -- -- 820
Compensation expense from issuance of
management shares and stock
options............................. -- -- 168 -- -- -- 168
Exercise of stock options............. 2 -- 10 -- -- -- 10
Common stock to be issued in
acquisitions........................ -- -- 3,575 -- -- -- 3,575
Net income............................ -- -- -- 25,929 -- -- 25,929
------ --- -------- -------- ------- ------- --------
BALANCE, December 31, 1998.............. 33,154 $33 $322,478 $ (6,582) $ -- $ -- $315,929
====== === ======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 32
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)..................................... $ 25,929 $ (3,642) $ 2,336
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 13,863 1,413 208
Gain from sale of property and equipment........... (26) (32) (224)
Deferred income taxes.............................. 3,499 2,482 2,336
Non-cash compensation expense...................... 168 7,219 --
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as
purchases:
(Increase) decrease in --
Accounts receivable........................... (27,316) (2,849) (402)
Inventories................................... (1,718) (656) 332
Costs and estimated earnings in excess of
billings on uncompleted contracts........... (6,950) 503 23
Prepaid expenses and other current assets..... (3,404) 46 (8)
Refundable income taxes....................... 1,319 1,665 (3,235)
Other long-term assets........................ (780) (299) --
Increase (decrease) in --
Accounts payable.............................. 3,614 (918) (77)
Accrued expenses.............................. (2,918) (4,598) 2,534
Due to related parties........................ (5,469) (732) --
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 3,885 1,572 (86)
Deferred service contract revenue............. (502) 94 6
Income taxes payable.......................... 519 1,586 (296)
Other current liabilities..................... (2,282) 1,442 --
Compensation and benefits payable............. -- (8) 255
Other long-term liabilities................... (580) 120 --
--------- -------- -------
Net cash provided by operating activities... 851 4,408 3,702
--------- -------- -------
Cash Flows From Investing Activities:
Cash paid for acquisitions, net of cash acquired of
$13,176 and $5,263, respectively................... (178,542) (35,767) --
Deferred acquisition costs............................ (1,573) (246) --
Purchases of property and equipment................... (9,292) (2,017) (182)
Proceeds from sale of property and equipment.......... 199 83 296
Proceeds from note receivable......................... -- -- 156
--------- -------- -------
Net cash provided by (used in) investing
activities............................... (189,208) (37,947) 270
--------- -------- -------
Cash Flows From Financing Activities:
Purchase of common stock.............................. -- -- (787)
Retirement of preferred stock......................... -- (19,277) --
Repurchase of warrants................................ -- -- (539)
Proceeds from long-term debt.......................... 884,515 32,500 --
Payments of long-term debt............................ (719,478) (47,742) (35)
Payments of other long-term obligations............... -- -- (39)
Issuance of common stock.............................. -- 109,706 --
Exercise of stock options............................. 10 61 --
Distributions to shareholders prior to initial public
offering........................................... -- (20,367) (7)
--------- -------- -------
Net cash provided by (used in) financing
activities............................... 165,047 54,881 (1,407)
--------- -------- -------
Net Increase (Decrease) In Cash and Cash Equivalents.... (23,310) 21,342 2,565
Cash and Cash Equivalents, beginning of period.......... 25,681 4,339 1,774
--------- -------- -------
Cash and Cash Equivalents, end of period................ $ 2,371 $ 25,681 $ 4,339
========= ======== =======
Supplemental Disclosures of Cash Flow Information:
Interest Paid......................................... $ 5,163 $ 1,470 $ --
Income Taxes Paid..................................... $ 16,869 $ -- $ 2,586
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 33
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. ("GroupMAC") was incorporated as a Texas
corporation to build a national company providing mechanical and electrical
services in the commercial, industrial and residential markets.
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Airtron Agreement") with Airtron, Inc. ("Airtron") and certain of
its shareholders, pursuant to which $20.4 million in cash, 14.9 million shares
of GroupMAC preferred stock and 4.7 million shares of GroupMAC common stock were
issued to shareholders of Airtron in exchange for all of the then outstanding
shares of Airtron. Although for legal purposes Airtron was acquired by GroupMAC,
for accounting purposes the transaction was accounted for as a reverse
acquisition, as if Airtron acquired GroupMAC, due to the fact that the former
shareholders of Airtron then owned a majority of GroupMAC common stock. In
connection with the purchase of GroupMAC, the consideration paid to the
shareholders of GroupMAC was recorded as non-recurring compensation expense of
$7.0 million in the accompanying consolidated statements of operations for the
ten months ended December 31, 1997. The consolidated financial statements
presented herein for the periods prior to the effective date of the acquisition
only include the accounts of Airtron. The consolidated statements of
shareholders' equity have been converted from Airtron's capital structure to
GroupMAC's capital structure to reflect the exchange of shares pursuant to the
Airtron Agreement. The cash and redeemable preferred stock paid to the Airtron
shareholders, net of existing liabilities to former shareholders, have been
treated as a distribution to the Airtron shareholders. The consolidated group of
companies are collectively referred to herein as GroupMAC and Subsidiaries or
the "Company." All significant intercompany balances have been eliminated.
Concurrent with the initial public offering of GroupMAC's common stock (the
"IPO"), the Company changed its fiscal year end from February 28 to December 31.
Airtron was incorporated in 1970 as a Delaware corporation. Airtron
installs and services brand name heating and air conditioning equipment for
residential and commercial customers located in Ohio, Indiana, Kansas, Kentucky,
Florida and Texas.
In June and July 1997, the Company acquired, in separate transactions, 10
additional companies through a combination of cash, preferred stock, common
stock and warrants to purchase shares of common stock. During the fourth quarter
of 1997, the Company acquired, concurrently with the IPO, 13 additional
companies through a combination of cash and common stock. During 1998, the
Company acquired, in separate transactions, 39 additional businesses through a
combination of cash, notes payable, junior subordinated debt, common stock,
options to purchase common stock and warrants to purchase common stock. The
Company accounted for these acquisitions as purchase business combinations, with
the results of operations included in the Company's consolidated financial
statements from the effective date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed.
Revenues from service and maintenance contracts are recognized over the life of
contracts. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses
31
<PAGE> 34
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out ("FIFO") basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the useful lives of the assets.
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the
fair value of net assets acquired and is amortized on a straight-line basis over
a period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The Company will reassess the recoverability of
goodwill if estimated future operating cash flows are not achieved.
Deferred Financing Costs
Deferred financing costs related to the Company's revolving credit
agreement and senior subordinated note offering completed subsequent to December
31, 1998 (see Note 7) are included in other noncurrent assets and amortized to
interest expense over the scheduled maturity of the debt.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, encourages but does not require companies to
record compensation expense for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation expense for stock options is
measured as the excess, if any, of the quoted market price of GroupMAC's common
stock at the date of the grant over the amount an employee must pay to acquire
the common stock.
32
<PAGE> 35
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warranty Costs
The Company generally warrants all of its work for a period of one year
from the date of installation. A provision for estimated warranty costs is made
at the time a product is sold or service is rendered.
Income Taxes
The Company uses the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Weighted average shares outstanding for each of the periods presented were
as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shares issued in the acquisition of Airtron...... 4,652 4,652 5,172
Shares issued, excluding acquisitions and the
IPO............................................ 3,637 3,628 --
Shares issued for 1997 acquisitions.............. 4,733 1,259 --
Shares issued for 1998 acquisitions.............. 6,182 -- --
Shares issued in the IPO......................... 8,340 1,261 --
------ ------ -----
Weighted average shares outstanding -- Basic... 27,544 10,800 5,172
------ ------ -----
Incremental effect of options and warrants
outstanding.................................... 404 -- --
------ ------ -----
Weighted average shares
outstanding -- Diluted...................... 27,948 10,800 5,172
====== ====== =====
</TABLE>
Basic earnings per share have been calculated by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings
per share are computed by dividing net income by the weighted average number of
common shares outstanding plus potentially dilutive common shares.
Because the Company reported a net loss for the ten months ended December
31, 1997, the potentially dilutive common shares (including warrants and stock
options discussed in Note 9) had an anti-dilutive effect on earnings per share.
As of December 31, 1998, options to purchase 0.4 million shares of common stock
and warrants to purchase 1.3 million shares of common stock were not included in
the calculation of diluted earnings per share because the options' or warrants'
exercise price was greater than the average market price of the common shares.
Reclassifications
Certain amounts recorded in the year ended February 28, 1997 and the ten
months ended December 31, 1997 have been reclassified to conform with the
current year presentation.
3. BUSINESS COMBINATIONS
During 1997, the Company acquired 23 companies for approximately $44.2
million in cash, 4.5 million shares of common stock, 4.4 million shares of
redeemable preferred stock (which were retired in connection
33
<PAGE> 36
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the IPO), options to acquire 0.1 million shares of common stock and
warrants to purchase 0.5 million shares of common stock. Of the total recorded
consideration, approximately $3.2 million of cash and 0.5 million shares of
common stock were due to former owners at December 31, 1997. During 1998, a
reduction of approximately $1.0 million in cash and 0.1 million shares of common
stock was recorded to reflect final settlements on certain 1997 acquisitions. In
addition, payments of approximately $1.9 million in cash and 0.4 million shares
of common stock were made to former shareholders on certain 1997 acquisitions.
During 1998, the Company completed the acquisition of 39 platform and five
tuck-in companies for approximately $194.8 million in cash, $4.0 million of
notes payable, $16.0 million of junior subordinated debt, 12.1 million shares of
common stock, options to purchase 0.3 million shares of common stock and
warrants to purchase 0.8 million shares of common stock. Of the total
consideration, approximately $7.2 million of cash was due to former owners at
December 31, 1998.
In conjunction with the above mentioned acquisitions, the Company assumed
$26.2 million and $16.1 million of debt for acquisitions completed in 1998 and
1997, respectively.
For the above mentioned acquisitions, the common stock, options and
warrants were valued at estimated fair value at the time of the respective
acquisition and the preferred stock was valued at its redemption value of $1 per
share. For certain 1998 acquisitions, allocation of purchase price to the assets
acquired and liabilities assumed has been initially assigned and recorded based
on preliminary estimates of fair value and may be revised as additional
information becomes available. Such additional information includes appraisals
on property, contingent liabilities of the acquired business, and working
capital settlements related to the acquisition consideration and the net assets
acquired. However, the Company does not expect any significant adjustments to
the purchase price allocations or amount of goodwill at December 31, 1998.
Several former owners of businesses acquired by the Company have the
ability to receive additional amounts of purchase price, payable in cash and
common stock contingent upon the occurrence of future events. The Company
records such contingent consideration as additional purchase price when earned.
During 1997, approximately $0.3 million in cash and 22,500 shares of common
stock were earned and due to former owners related to these contingent payments.
These amounts were paid in 1998. During 1998, approximately $5.2 million of cash
and 0.3 million shares of common stock were earned related to these contingent
payments, of which approximately $3.3 million of cash and 0.3 million shares of
common stock were due to former owners as of December 31, 1998. Additional cash
and common stock may become payable in 1999 through 2001 contingent upon future
events.
The unaudited pro forma data presented below consists of the combined
income statement data for GroupMAC and its subsidiaries as if the acquisitions
were effective on the first day of the period being reported (in thousands,
except for per share amounts).
<TABLE>
<CAPTION>
PRO FORMA DATA (UNAUDITED)
---------------------------
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
Revenues.................................................... $1,076,419 $978,480
Net income.................................................. $ 33,201 $ 27,372
Net income per share:
Basic..................................................... $ 0.99 $ 0.82
Diluted................................................... $ 0.98 $ 0.81
</TABLE>
Pro forma adjustments reflected in the amounts above include compensation
differentials, adjustment for goodwill amortization over a period of 40 years,
elimination of historical interest income and historical interest expense on
long-term debt which was repaid with the proceeds of the IPO or otherwise
retired, additional
34
<PAGE> 37
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest expense on funds borrowed for certain 1998 acquisitions, and adjustment
to the federal and state income tax provisions based on pro forma operating
results. Net income per share assumes all shares issued for the acquisitions
were outstanding for the periods presented.
4. DETAIL OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable, trade..................................... $59,067 $13,804
Accrued payroll costs and benefits.......................... 29,736 11,167
Warranties.................................................. 2,502 1,297
Other accrued expenses...................................... 7,900 2,251
------- -------
$99,205 $28,519
======= =======
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The summary of the status of uncompleted contracts is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Costs incurred.............................................. $ 618,547 $ 85,101
Estimated earnings recognized............................... 129,912 27,268
--------- ---------
748,459 112,369
Less billings on contracts.................................. (749,756) (113,990)
--------- ---------
$ (1,297) $ (1,621)
========= =========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 26,533 $ 3,116
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (27,830) (4,737)
-------- -------
$ (1,297) $(1,621)
======== =======
</TABLE>
35
<PAGE> 38
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL ------------------
LIVES 1998 1997
---------------- -------- -------
<S> <C> <C> <C>
Land.............................................. -- $ 1,144 $ 218
Buildings and improvements........................ 20-30 years 6,128 677
Service and other vehicles........................ 4-7 years 17,643 5,385
Machinery and equipment........................... 5-10 years 9,491 2,873
Office equipment, furniture and fixtures.......... 5-10 years 10,842 3,761
Leasehold improvements............................ -- 4,334 1,220
-------- -------
49,582 14,134
Less accumulated depreciation..................... (10,390) (2,822)
-------- -------
$ 39,192 $11,312
======== =======
</TABLE>
7. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Bank revolving credit agreement (7.1% at December 31,
1998)..................................................... $195,000 $ --
Junior subordinated notes payable to former shareholders of
an acquired business at 6%, due November 2003............. 16,000 --
Notes payable to former shareholders of acquired businesses
at 6%, due January 1999 and May 1998, respectively........ 4,399 2,466
Note payable to a bank at 8%, due January 1999.............. 8,000 --
Equipment installment loans payable to banks and other
lenders, interest varying from 2.9% to 10%, secured by
certain equipment, due in monthly and quarterly
installments.............................................. 495 228
Other notes payable to former shareholders at interest rates
ranging from 4.8% to 8.25%, due in monthly installments... 65 244
-------- -------
Total short- and long-term debt................... 223,959 2,938
Less short-term borrowings and current maturities........... (12,959) (2,769)
-------- -------
$211,000 $ 169
======== =======
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the "Original
Credit Agreement") with a total commitment of $35 million. The Original Credit
Agreement consisted of three portions: (i) a revolving credit agreement
providing up to $3 million for use as working capital, (ii) a $12 million
advancing acquisition line of credit to finance acquisitions, and (iii) a $20
million term loan to finance the acquisition of Airtron. Borrowings under the
Original Credit Agreement totaled $32.5 million to fund the cash portion of the
purchase prices related to Airtron and the businesses acquired in June and July
1997. The Original Credit Agreement was repaid from the proceeds of the IPO and
terminated in December 1997.
On December 11, 1997, the Company entered into a three-year revolving
credit agreement with an initial borrowing capacity of $75 million. On June 12,
1998, the Company amended and restated this facility (the "Credit Agreement") to
increase its borrowing capacity from $75 million to $125 million. On October 15,
1998, the Company amended and restated the Credit Agreement to increase its
borrowing capacity from
36
<PAGE> 39
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$125 million to $230 million. Borrowings under the Credit Agreement are
guaranteed by the Company's domestic subsidiaries, 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.
Borrowings under the Credit Agreement bear interest at a rate per annum, at
the Company's option, of either (1) the Alternate Base Rate or (2) the
Eurodollar Rate. The Alternate Base Rate is equal to the greater of the Federal
Funds Effective Rate plus 0.5% or the Prime Rate plus a Margin depending on the
ratio of indebtedness for borrowed money to EBITDA (with all capitalized terms
as defined in the Credit Agreement). The Eurodollar Rate is the rate defined in
the Credit Agreement plus a Margin depending on the ratio of indebtedness for
borrowed money to EBITDA. The Company is subject to commitment fees payable
quarterly in arrears and administration fees payable annually to the Agent until
such time as the Credit Agreement is terminated. The commitment fees range from
0.25% to 0.375% per annum with respect to the unused commitments under the
Credit Agreement depending on the ratio of indebtedness for borrowed money to
EBITDA. In addition, the Company paid various underwriting and arrangement fees
and closing costs associated with the origination and syndication of the Credit
Agreement. The unamortized portion of these expenses is included as deferred
financing costs in the accompanying consolidated balance sheets and amounted to
approximately $2.4 million and $0.7 million at December 31, 1998 and 1997,
respectively.
Under the Credit Agreement, the Company is required to maintain certain
financial covenants and tests, including: (1) a minimum Fixed Charge Coverage
Ratio; (2) a maximum ratio of total indebtedness for borrowed money to
capitalization (as defined in the Credit Agreement); (3) a maximum ratio of
senior debt to pro forma earnings before interest, taxes, depreciation and
amortization; (4) a maximum ratio of total indebtedness to EBITDA; (5) a minimum
amount of Consolidated Net Worth (as defined in the Credit Agreement) and (6) a
maximum amount of Capital Expenditures in relation to Consolidated Net Worth.
The Credit Agreement places limitations upon the amount of letters of credit
which may be drawn, investments which may be permitted, and liens which may be
granted to secure other debt. The Company may not pay any dividends or redeem,
retire or guarantee the value of shares of any class of stock in the Company
without prior approval from the lending banks, other than the purchase of
outstanding shares of the Company's stock within defined limits. At December 31,
1998, the Company was in compliance with these covenants. The Credit Agreement
matures on October 13, 2001.
In connection with the acquisition of Trinity Contractors, Inc.
("Trinity"), the Company paid cash and issued $16.0 million of subordinated
notes (the "Trinity Notes"), common stock and warrants to purchase common stock
(the "Trinity Warrants"). Unless prepaid in whole or part at any time by the
Company, the balance of the Trinity Notes was due in November 2003. 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. Subsequent to December 31, 1998 and in connection with the private
placement offering discussed below, the Put Option was exercised by
substantially all the holders of the Trinity Notes, such notes were repaid by
the Company and the related Trinity Warrants were surrendered.
The aggregate maturities of debt as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999...................................................... $ 12,959
2000...................................................... --
2001...................................................... 195,000
2002...................................................... --
2003...................................................... 16,000
--------
$223,959
========
</TABLE>
37
<PAGE> 40
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1999, the Company completed a private placement offering (the
"Offering") of $130 million of unsecured senior subordinated notes (the "Notes")
bearing interest at 9.75% and maturing in January 2009. The net proceeds of the
offering were used to repay indebtedness incurred under the Credit Agreement.
Under a registration rights agreement executed as part of the Offering, the
Company will file a registration statement within 90 days after the issue date
of the Notes enabling holders of the Notes to exchange the privately placed
Notes for publicly registered notes with identical terms. The Company is
required to use all reasonable efforts to cause the registration statement to
become effective within 150 days after the issue date of the Notes and to
consummate the exchange offer within 180 days after the issue date of the Notes.
If the Company cannot effect an exchange offer within the time periods listed
above and in other certain circumstances, management will use all reasonable
efforts to file a shelf registration statement for the resale of the Notes. If
the Company is unable to comply with these obligations under the registration
rights agreement, the interest rate on the Notes will increase under certain
circumstances.
The Notes are guaranteed by all of the Company's current and future U.S.
subsidiaries other than "Unrestricted Subsidiaries" (as defined in the indenture
governing the Notes). As of the closing of the Offering, there were no
"Unrestricted Subsidiaries." These guarantees are full, unconditional and joint
and several. Accordingly, no separate financial statements of the guarantor
subsidiaries are presented because management believes this information is not
material to users of its financial statements.
The Notes pay interest semi-annually commencing July 15, 1999 and are
redeemable at the option of the Company at any time on or after January 15,
2004. Additionally, the Notes' indenture has restrictive covenants or
limitations on the payment of dividends, the distribution or redemption of
capital stock as well as limitations on the incurrence of debt and on the sale
of assets.
The Company entered into an agreement to lock in the ten year U.S. Treasury
rate used to price the offering of the Notes. The Company locked in $100 million
at 5.5212%, which management believes is an attractive long-term base rate. This
agreement expired on January 31, 1999, and was settled on that date based upon
the ten year Treasury yield of 4.648%, resulting in an additional pre-tax
financing cost of approximately $6.9 million. In accordance with SFAS No. 80,
Accounting for Futures Contracts, this agreement qualifies as a hedge and was
recognized as deferred financing costs.
8. DUE TO RELATED PARTIES
Under the Airtron Agreement, part of the cash purchase price payable to
former shareholders of Airtron relates to the tax benefits which have been or
will be received by the Company related to the exercise of previously
outstanding warrants and distributions under deferred compensation arrangements.
The Company recognized liabilities of $9.7 million at the date of acquisition as
an estimate of these amounts. This amount is paid to the former shareholders of
Airtron as the tax benefit is realized by the Company either through receipt of
net operating loss carryback claims or utilization of current deductions and net
operating loss carryforwards to reduce estimated tax payments. The $9.7 million
liability and the related refundable income taxes and deferred tax assets were
reflected as long-term in the December 31, 1997 balance sheet as such tax
benefits were not expected to be realized during 1998. During 1998, the Company
was able to realize certain tax benefits under the Airtron Agreement and
correspondingly paid $5.3 million of the original liability to the former
shareholders. As of December 31, 1998, the $4.4 million remaining liability and
the related refundable income taxes and deferred tax assets are reflected as
current assets and liabilities in the December 31, 1998 consolidated balance
sheet as all remaining tax benefits are expected to be realized during 1999.
38
<PAGE> 41
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK-BASED PLANS
GroupMAC has implemented the following stock-based programs for its
employees and others:
Stock Awards Plan -- In August 1997, GroupMAC adopted the Group Maintenance
America Corp. 1997 Stock Awards Plan which provides GroupMAC the latitude to
grant a variety of awards, such as stock options, stock appreciation rights
("SARs"), restricted stock, performance awards and phantom stock awards, to
officers, directors, key employees and other persons working for GroupMAC and
its subsidiaries. The plan requires that options and SARs be granted at not less
than the fair market value of a share of common stock on the grant date. The
plan also requires that no stock option granted shall vest in less than six
months after the grant date. GroupMAC may issue not more than 9% of the number
of total shares outstanding (determined on a quarterly basis) under the plan,
which will terminate on June 30, 2007. At December 31, 1998, options to purchase
3.0 million shares at an average exercise price of $12.86 were outstanding under
this plan.
Stock Option Plan -- In August 1997, GroupMAC adopted the Group Maintenance
America Corp. 1997 Stock Option Plan under which GroupMAC may grant options to
employees who are not eligible for awards under the Stock Awards Plan. The plan
requires that options be granted at not less than fair market value of a share
of common stock on the grant date. The plan also requires that no stock option
granted shall vest in less than six months after the grant date. GroupMAC may
issue not more that 3% of the number of shares outstanding (determined on a
quarterly basis) under this plan, which will terminate on June 30, 2007. At
December 31, 1998, options to purchase 0.7 million shares at an average exercise
price of $13.98 were outstanding under this plan.
Founder Options -- Between October 1996 and August 1997, the Company
granted to directors, senior management and other employees options to purchase
an aggregate of 388,800 shares of common stock at an exercise price of $3.08.
These options vest and expire over various periods.
During 1998, the Company issued options to purchase approximately 1.6
million shares of common stock at a weighted average exercise price of $14.32.
These options vest at a rate of 25% per year and expire at various dates during
2003.
Additionally, the Company issued options to purchase 0.3 million and 0.1
million shares of common stock in connection with acquisitions at a weighted
average exercise price of $4.09 and $11.89 in 1998 and 1997, respectively. These
options were valued at $3.4 million and $1.2 million in 1998 and 1997,
respectively, and are included in the purchase price of the acquired company.
Substantially all of these options are immediately exercisable.
As consideration for a company acquired in November 1998, the Company
issued 829,000 warrants to purchase shares of common stock at $19.30 per share.
As indicated in Note 7, substantially all of these warrants were surrendered
subsequent to year end and accordingly no value was included for these warrants
in the purchase price of the acquired company. In connection with the purchase
of one company in July 1997, the Company issued warrants to purchase 514,000
shares of common stock at $17.50 per share. These warrants were valued at $1.0
million and are included in the purchase price of the acquired company.
39
<PAGE> 42
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option and warrant activity (in
thousands, except for exercise price):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE OPTIONS AND
PRICE WARRANTS
-------- -----------
<S> <C> <C>
Granted..................................................... $3.08 292
-----
Balance at December 31, 1996................................ 3.08 292
Granted..................................................... 3.08 69
-----
Balance at April 30, 1997, date of Airtron Agreement........ 3.08 361
Granted..................................................... 14.33 2,611
Exercised................................................... 3.08 (20)
Surrendered................................................. 3.08 (25)
-----
Balance at December 31, 1997................................ 13.07 2,927
Granted..................................................... 14.56 2,701
Exercised................................................... 5.77 (2)
Surrendered................................................. 14.54 (165)
-----
Balance at December 31, 1998................................ 13.77 5,461
=====
</TABLE>
A summary of outstanding and exercisable options and warrants as of
December 31, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED NUMBER OF WEIGHTED EXERCISE NUMBER OF
RANGE OF AVERAGE OUTSTANDING AVERAGE PRICE OF EXERCISABLE
OPTION AND OPTION AND OPTIONS AND REMAINING EXERCISABLE OPTIONS AND
WARRANT WARRANT WARRANTS CONTRACTUAL OPTIONS AND WARRANTS
PRICES PRICES (THOUSANDS) LIFE (YEARS) WARRANTS (THOUSANDS)
- ---------------- ---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 3.08 to $ 5.00 $ 3.57 713 5.8 $ 3.69 576
$ 5.01 to $10.00 $ 6.54 38 2.8 $ 6.39 25
$10.01 to $15.00 $13.60 2,890 4.2 $14.00 456
$15.01 to $19.30 $18.14 1,820 6.2 $18.61 1,343
----- -----
5,461 2,400
===== =====
</TABLE>
The Company applies Accounting Principle Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its stock options (other than
options issued in connection with acquisitions). Accordingly, compensation cost
has been recognized only for the options that have an exercise price less than
the fair market value of the underlying stock at the date of grant. A
compensation charge of approximately $0.2 million is reflected in the
consolidated statements of operations and shareholders' equity for the fiscal
year ended December 31, 1998 and the ten months ended December 31, 1997 related
to the issuance of management shares and stock options at prices below the fair
market value at the date of issue or grant.
40
<PAGE> 43
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma data is calculated as if compensation expense for
the Company's stock option plans were determined based on the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss)......................... $25,929 $23,173 $(3,642) $(3,983)
Net income (loss) per share:
Basic................................... $ 0.94 $ 0.84 $ (0.34) $ (0.37)
Diluted................................. $ 0.93 $ 0.83 $ (0.34) $ (0.37)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, 1997
---------------------------
YEAR ENDED SUBSEQUENT TO PRIOR TO
DECEMBER 31, THE AIRTRON THE AIRTRON
1998 AGREEMENT AGREEMENT
------------ ------------- -----------
<S> <C> <C> <C>
Dividend yield................................... -- -- --
Expected volatility.............................. 48.0% 33.0% 0%
Risk-free interest rate.......................... 4.70% 5.83% 6.26%
Expected lives................................... 5.0 years 6.6 years 10 years
Fair value of options at grant date.............. $7.445 $5.425 $1.425
</TABLE>
The Company had outstanding 60,000 warrants to purchase common stock for
$1.00 per share at February 29, 1996. In August 1996, 15,000 of these warrants
were purchased from a former shareholder for $0.5 million, resulting in a
reduction in retained earnings for the original recorded value of the warrants
of $0.6 million with the offset recorded as other income. At February 28, 1997,
45,000 warrants were outstanding. In connection with the Airtron Agreement these
warrants were exchanged for cash and preferred and common shares of GroupMAC.
Airtron had deferred compensation arrangements for certain members of its
management and its board of directors. The Company reflected the assets and
liabilities associated with these arrangements as distributions in the
accompanying consolidated financial statements.
10. SHAREHOLDERS' EQUITY
On October 24, 1996, the Company entered into a stock subscription
agreement with an individual providing for the sale of up to 2.6 million shares
of common stock at a purchase price of $3.08 per share. At December 31, 1997,
the Company had sold all of the 2.6 million shares.
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 certain acquired businesses, $42.6 million to
repay corporate indebtedness and debt assumed in connection with the acquisition
of businesses, $19.3 million to retire all of the then outstanding preferred
stock and $11.9 million
41
<PAGE> 44
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for general corporate purposes including working capital, final consideration
settlements related to acquired businesses and future acquisitions. In March
1998, the Company issued $0.8 million of subordinated convertible debentures to
fund a portion of the consideration of one acquisition. These debentures were
converted to 68,000 shares of common stock during 1998.
11. INCOME TAXES
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR TEN MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal....................................... $13,553 $ -- $(1,020)
State......................................... 3,274 489 385
------- ------ -------
16,827 489 (635)
Deferred:
Federal and state............................. 3,499 2,343 2,207
------- ------ -------
$20,326 $2,832 $ 1,572
======= ====== =======
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. federal statutory income tax rate to income (loss) before income tax
provision as a result of the following (in thousands):
<TABLE>
<CAPTION>
YEAR TEN MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before income tax provision....... $46,255 $ (810) $3,908
Applicable U.S federal statutory rate........... 35.0% 34.0% 34.0%
------- ------ ------
Tax provision (benefit) at statutory rate....... 16,189 (275) 1,329
Increase (decrease) resulting from:
State income taxes, net of federal benefit.... 2,128 323 254
Compensation expense from reverse acquisition
and issuance of management shares and stock
options.................................... 59 2,455 --
Non-deductible goodwill amortization.......... 1,975 199 --
Other......................................... (25) 130 (11)
------- ------ ------
$20,326 $2,832 $1,572
======= ====== ======
</TABLE>
42
<PAGE> 45
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ -------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts........................... $2,088 $ 713
Inventories............................................... 300 279
Accrued expenses.......................................... 5,101 2,489
Deferred revenue.......................................... 1,510 348
Compensation and benefits................................. 280 3,736
Net operating loss carryforward........................... 497 1,231
Other..................................................... 259 183
------ -------
Total deferred income tax assets.................. 10,035 8,979
------ -------
Deferred income tax liabilities:
Depreciation.............................................. (951) (585)
Completed contract accounting for tax purposes............ (1,899) (1,836)
Other..................................................... (339) (172)
------ -------
Total deferred income tax liabilities............. (3,189) (2,593)
------ -------
Net deferred income tax assets.................... $6,846 $ 6,386
====== =======
</TABLE>
These deferred income tax assets and liabilities are included in the
accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets -- current.............................. $7,579 $1,647
Deferred tax assets -- long-term............................ -- 4,739
Deferred tax liabilities -- long-term....................... (733) --
------ ------
$6,846 $6,386
====== ======
</TABLE>
Management believes it is more likely than not that the Company will
realize the benefits of the net deferred tax assets. Accordingly, no valuation
allowance has been recorded as of December 31, 1998 or December 31, 1997.
12. LEASES
Operating leases for certain facilities and transportation equipment expire
at various dates through 2011. Certain leases contain renewal options.
Approximate minimum future rental payments as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $11,172
2000........................................................ 10,059
2001........................................................ 8,901
2002........................................................ 7,843
2003........................................................ 4,358
Thereafter.................................................. 19,685
-------
$62,018
=======
</TABLE>
43
<PAGE> 46
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rental expense for the year ended December 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997 was approximately
$13.5 million, $2.3 million and $1.7 million, respectively (including $4.3
million, $1.2 million and $0.6 million, respectively, to related parties).
13. EMPLOYEE BENEFIT PLANS
Several of GroupMAC's subsidiaries maintain defined contribution employee
retirement plans, which are open to certain employees after various lengths of
service. Employee contributions and employer matching contributions occur at
different rates and the matched portions of the funds vest over a period of
years. Company contributions to these plans totaled approximately $4.8 million,
$0.4 million and $0.2 million for the year ended December 31, 1998, the ten
months ended December 31, 1997 and the year ended February 28, 1997,
respectively.
Certain of GroupMAC's subsidiaries make contributions to union-administered
benefit funds that cover the majority of these companies' union employees. For
the year ended December 31, 1998 and the ten months ended December 31, 1997, the
participant costs charged to operations were approximately $8.8 million and $0.6
million, respectively. Governmental regulations require that, 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 is not aware of any
liabilities resulting from unfunded vested benefits related to union
administered benefit plans. The Company does not anticipate withdrawal from the
plans, nor is the Company aware of any expected plan terminations.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
15. 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 values of
these instruments on the accompanying consolidated balance sheets approximate
their fair value.
16. OPERATING SEGMENTS
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
The Company has two reportable segments: commercial/industrial and
residential markets. The commercial/industrial segment provides maintenance,
repair and replacement services and new installation services in manufacturing
and processing facilities, power generation facilities, hospitals and other
critical care facilities, colleges and universities, hotels, commercial office
buildings and complexes, retail stores and restaurants, supermarkets and
convenience stores. The residential segment provides maintenance, repair and
replacement services and new installation services in single family and low-rise
multifamily housing units.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on income from operations of the respective business units
prior to unallocated corporate expenses.
Other activities include financial data of two operating subsidiaries that
provide products and services outside of those performed by the Company's two
primary operating segments. Unallocated corporate
44
<PAGE> 47
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses primarily include (1) corporate overhead, (2) corporate and operating
company management bonuses, and (3) savings from national purchase agreements
relating to materials and property/casualty insurance. Assets, capital
expenditures and depreciation expense for the corporate function are included in
the "Other" column in the presentation below.
Segment information for the year ended December 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997 was as follows (in
thousands):
<TABLE>
<CAPTION>
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
----------- ----------- ------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenues.................................. $472,451 $286,737 $ 2,353 $761,541
Operating costs........................... 434,431 257,917 2,077 694,425
-------- -------- ------- --------
Subtotal.................................. 38,020 28,820 276 67,116
Goodwill amortization..................... 4,130 1,652 178 5,960
-------- -------- ------- --------
Segment operating earnings................ $ 33,890 $ 27,168 $ 98 61,156
======== ======== =======
Unallocated corporate expenses............ (9,090)
--------
Income from operations.................... $ 52,066
========
Assets.................................... $542,998 $123,775 $34,308 $701,081
Capital expenditures...................... 6,157 2,376 759 9,292
Depreciation expense...................... 4,847 2,745 311 7,903
TEN MONTHS ENDED DECEMBER 31, 1997:
Revenues.................................. $ 23,305 $113,927 $ 1,247 $138,479
Operating costs........................... 22,023 103,017 1,068 126,108
-------- -------- ------- --------
Subtotal.................................. 1,282 10,910 179 12,371
Goodwill amortization..................... 174 351 108 633
-------- -------- ------- --------
Segment operating earnings................ $ 1,108 $ 10,559 $ 71 11,738
======== ======== =======
Unallocated corporate expenses............ (11,516)
--------
Income from operations.................... $ 222
========
Assets.................................... $ 65,566 $ 96,237 $30,884 $192,687
Capital expenditures...................... 355 1,376 286 2,017
Depreciation expense...................... 147 575 58 780
YEAR ENDED FEBRUARY 28, 1997:
Revenues.................................. $ -- $ 81,880 $ -- $ 81,880
Operating costs........................... -- 78,317 -- 78,317
-------- -------- ------- --------
Subtotal.................................. -- 3,563 -- 3,563
Goodwill amortization..................... -- -- -- --
-------- -------- ------- --------
Segment operating earnings................ $ -- $ 3,563 $ -- 3,563
======== ======== =======
Unallocated corporate expenses............ --
--------
Income from operations.................... $ 3,563
========
Assets.................................... $ -- $ 27,153 $ -- $ 27,153
Capital expenditures...................... -- 182 -- 182
Depreciation expense...................... -- 208 -- 208
</TABLE>
45
<PAGE> 48
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance, repair and replacement services represented 53%, 35% and 19%
and new installation services represented 47%, 65% and 81% of total revenues for
the year ended December 31, 1998, the ten months ended December 31, 1997 and the
year ended February 28, 1997, respectively. The heavy emphasis on new
installation services in the earlier two fiscal periods is a result of the
operations of Airtron, which represent a significant portion of revenues during
the ten months ended December 31, 1997 and all of the revenues during the year
ended February 28, 1997.
17. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues................................... $283,597 $211,667 $159,185 $107,092
Operating income........................... 19,746 16,297 11,452 4,571
Net income................................. 9,193 8,369 6,095 2,272
Earnings per share:
Basic.................................... $ 0.28 $ 0.30 $ 0.24 $ 0.10
Diluted.................................. $ 0.28 $ 0.30 $ 0.24 $ 0.10
1997(A)
Revenues................................... $ 68,011 $ 39,382 $ 25,419 $ 17,425
Operating income........................... 2,552 2,438 (5,055) (1,060)
Net income................................. 1,158 1,025 (5,998) (484)
Earnings per share(b):
Basic.................................... $ 0.08 $ 0.11 $ (0.70) $ (0.10)
Diluted.................................. $ 0.07 $ 0.11 $ (0.70) $ (0.10)
</TABLE>
- ---------------
(a) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31 (see Note 1). The accompanying consolidated
statements of operations contain results for the ten month period ended
December 31, 1997; however, the quarterly financial summary above contains
four calendar quarters of information for 1997, as reported on Forms 10-Q.
(b) Because the Company reported a net loss in the first two quarters of 1997,
the potentially dilutive common shares (including warrants and stock options
discussed in Note 9) had an anti-dilutive effect on earnings per share.
Accordingly, diluted earnings per share is the same as basic earnings per
share for each of these periods.
18. SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 1999, the Company completed the acquisition of
three platform companies. The combined annual revenues of the companies were
approximately $165.5 million. Total consideration paid included cash payments of
$35.6 million, $1.6 million of junior subordinated notes, 2.1 million shares of
common stock and total debt assumed of $13.8 million. The Company will account
for these acquisitions using the purchase method of accounting.
46
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp.
We have audited the accompanying balance sheets of Group Maintenance
America Corp. (the Company) as of December 31, 1996 and April 30, 1997, and the
related statements of operations, shareholders' equity (deficit), and cash flows
for the periods from October 21, 1996 (inception) to December 31, 1996 and the
four months ended April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Group Maintenance America
Corp. as of December 31, 1996 and April 30, 1997 and the results of its
operations and its cash flows for the periods from October 21, 1996 (inception)
to December 31, 1996 and the four months ended April 30, 1997, in conformity
with generally accepted accounting principles.
KPMG LLP
Houston, Texas
July 11, 1997
47
<PAGE> 50
GROUP MAINTENANCE AMERICA CORP.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 228,036 $ 516,838
Due from employee......................................... 1,200 6,759
Prepaid expenses.......................................... 2,341 --
----------- -----------
Total current assets.............................. 231,577 523,597
Property and equipment, net................................. 100,996 120,694
Other noncurrent assets..................................... 19,473 1,094,708
----------- -----------
Total assets...................................... $ 352,046 $ 1,738,999
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 137,377 $ 527,869
Accrued expenses.......................................... 6,118 1,478,898
----------- -----------
Total current liabilities......................... 143,495 2,006,767
Long-term debt.............................................. 75,000 75,000
Other long-term liabilities................................. -- 73,424
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.001 par value; 50,000,000 shares
authorized; none issued or outstanding................. -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 1,211,345 and 1,611,345 shares issued,
respectively........................................... 1,211 1,611
Additional paid-in capital................................ 8,238,857 8,238,457
Retained earnings......................................... (722,517) (2,503,260)
Subscriptions receivable.................................. (7,384,000) (6,153,000)
----------- -----------
Total shareholders' equity (deficit).............. 133,551 (416,192)
----------- -----------
Total liabilities and shareholders' equity........ $ 352,046 $ 1,738,999
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE> 51
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Revenues.................................................... $ -- $ --
Cost of services............................................ -- --
--------- -----------
Gross profit...................................... -- --
Selling, general and administrative expenses................ 724,006 1,783,409
--------- -----------
Loss from operations.............................. (724,006) (1,783,409)
--------- -----------
Other income (expense):
Interest expense.......................................... (1,118) (2,000)
Interest income........................................... 2,607 4,666
--------- -----------
Loss before income tax provision.................. (722,517) (1,780,743)
Income tax provision........................................ -- --
--------- -----------
Net loss.................................................... $(722,517) $(1,780,743)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE> 52
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL SHAREHOLDERS'
NUMBER OF PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 21, 1996....... -- $ -- $ -- $ -- $ -- $ --
Net loss...................... -- -- -- (722,517) -- (722,517)
Issuance of subscription
agreement.................. -- -- 8,000,000 -- (8,000,000) --
Issuance of common stock...... 791,345 791 32,807 -- -- 33,598
Shares issued under
subscription agreement..... 200,000 200 (200) -- 616,000 616,000
Compensation expense related
to issuance of management
shares..................... 220,000 220 206,250 -- -- 206,470
--------- ------ ---------- ----------- ----------- -----------
Balance, December 31, 1996...... 1,211,345 1,211 8,238,857 (722,517) (7,384,000) 133,551
Net loss...................... -- -- -- (1,780,743) -- (1,780,743)
Shares issued under
subscription agreement..... 400,000 400 (400) -- 1,231,000 1,231,000
--------- ------ ---------- ----------- ----------- -----------
Balance, April 30, 1997......... 1,611,345 $1,611 $8,238,457 $(2,503,260) $(6,153,000) $ (416,192)
========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE> 53
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21, FOUR
1996) MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(722,517) $(1,780,743)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 3,343 12,877
Noncash compensation charge............................ 206,250 --
Changes in operating assets and liabilities:
(Increase) decrease in --
Prepaid expenses and other assets................. (3,541) (3,218)
Other noncurrent assets........................... -- (1,567)
Increase (decrease) in --
Accounts payable.................................. 137,377 390,492
Accrued expenses.................................. 6,118 979,562
--------- -----------
Net cash used in operating activities........... (372,970) (402,597)
--------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (104,339) (32,575)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 649,818 1,231,000
Proceeds from borrowings.................................. 75,000 --
Deferred offering costs................................... (19,473) (439,205)
Deferred financing costs.................................. -- (67,821)
--------- -----------
Net cash provided by financing activities....... 705,345 723,974
--------- -----------
Increase in cash and cash equivalents....................... 228,036 288,802
Cash and cash equivalents, beginning of period.............. -- 228,036
--------- -----------
Cash and cash equivalents, end of period.................... $ 228,036 $ 516,838
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE> 54
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. (the Company or GroupMAC Parent) was
incorporated in October 1996 and, therefore, the financial statements reflect
the period since the Company's inception through December 31, 1996 and the four
months ended April 30, 1997. The Company's primary business is to build a
national company providing heating, ventilation and air conditioning (HVAC),
plumbing and electrical services.
Effective April 30, 1997, GroupMAC Parent entered into an Agreement and
Plan of Exchange (the Agreement) with Airtron, Inc. (Airtron), in which
$20,366,951 in cash, 14,873,133 shares of GroupMAC Parent preferred stock and
4,652,140 shares of GroupMAC Parent common stock were issued to shareholders of
Airtron in exchange for 100 percent of the then outstanding shares of Airtron.
In connection with this merger the combined company is referred to as GroupMAC
and Subsidiaries. The Agreement closed on May 2, 1997 with the cash portion
funded by the Company's available credit facility and a capital contribution
from a shareholder pursuant to a stock subscription agreement (see note 6). For
accounting purposes, the transaction was accounted for as a reverse acquisition,
as if Airtron acquired GroupMAC Parent, as the former shareholders of Airtron
then owned a majority of GroupMAC Parent's common stock. Concurrent with this
transaction, the resulting combined entity will be named Group Maintenance
America Corp. and Subsidiaries. The Company is included in the consolidated
financial statements of GroupMAC and Subsidiaries, presented elsewhere herein,
for periods subsequent to the effective date of the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents. There were no cash payments for interest or income taxes
in 1996 or in the four months ended April 30, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures of major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109. Under this
method deferred income taxes are recorded based upon differences between the
financial reporting and tax bases of assets and liabilities and are measured
using
52
<PAGE> 55
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the enacted tax rates and laws that will be in effect when the underlying assets
or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for the losses incurred.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Deferred offering costs................................ $13,648 $ 452,853
Deferred financing costs............................... -- 634,463
Other noncurrent assets................................ 5,825 7,392
------- ----------
$19,473 $1,094,708
======= ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Accrued compensation................................... $ -- $ 767,476
Accrued financing costs................................ -- 566,642
Other accrued expenses................................. 6,118 144,780
------ ----------
$6,118 $1,478,898
====== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, APRIL 30,
USEFUL LIVES 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Office equipment, furniture and fixtures..... 3-7 years $104,339 $136,358
Less accumulated depreciation................ (3,343) (15,664)
-------- --------
$100,996 $120,694
======== ========
</TABLE>
5. LONG-TERM DEBT
CREDIT AGREEMENT
In May 1997, the Company entered into a credit agreement (the Credit
Agreement) with a group of banks providing for secured facilities consisting of
an 18-month revolving credit line of $3 million, a six-year term loan of $20
million used in connection with the acquisition of Airtron (see note 1) and a
term loan facility, available until October 31, 1998, providing for up to $12
million in term loans having a final maturity six years after the date of the
Credit Agreement, to be used in connection with future acquisitions. Loans under
the revolving credit facility are limited to a borrowing base consisting of 70%
of eligible accounts receivable. Interest on outstanding borrowings is payable
in quarterly installments beginning August 31, 1997. A commitment fee of .25% is
payable on the unused portion of the revolving credit line.
The Credit Agreement contains covenants which, among other matters,
restrict or limit the ability of the Company to pay dividends, incur
indebtedness, make capital expenditures and repurchase capital stock. The
53
<PAGE> 56
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company must also maintain a minimum fixed charge coverage ratio (as defined)
and certain other ratios, among other restrictions.
As of June 30, 1997, available borrowing capacity under the Credit
Agreement was $5.4 million.
LONG-TERM DEBT
On October 24, 1996, the Company executed a $75,000 subordinated note with
a Texas limited liability company. The note bears interest at eight percent (8%)
and is payable upon the earlier of (i) the closing of the Company's first public
offering of its common stock or (ii) two years from the date of the note. The
note is subordinate to all indebtedness of the Company to the banks and is
guaranteed by certain officers of the Company.
6. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
The Company is authorized to issue 100 million shares of common stock,
$.001 par value. There were 1,211,345 and 1,611,345 shares of common stock
issued and outstanding at December 31, 1996 and April 30, 1997, respectively. In
connection with the sale of certain shares of common stock to management, a
nonrecurring, noncash compensation charge of $206,250 was recorded in 1996 to
reflect the difference between the amount paid for the shares and the estimated
fair value of the shares on the date of sale.
On October 24, 1996, the Company entered into a stock subscription
agreement with an individual allowing for the purchase of up to 2.6 million
shares of common stock at a purchase price of $3.08 per share. Under this
agreement, 0.2 million shares were purchased in October 1996, 0.2 million in
January 1997 and 0.2 million in April 1997 and additional shares are required to
be purchased upon written notice from the Company, but in no event later than
October 24, 1998. Subsequent to April 30, 1997, an additional 1.658 million
shares have been purchased under the Subscription Agreement.
PREFERRED STOCK
The Company is authorized to issue up to 50 million shares of preferred
stock, par value $.001 per share, in one or more series. As of December 31, 1996
and April 30, 1997, none were outstanding.
OPTIONS
Under an option agreement dated October 24, 1996, the Company is authorized
to grant stock options with respect to 388,800 shares of the Company's common
stock to directors and senior management.
The following is a summary of stock option activity and number of shares
reserved for outstanding options.
<TABLE>
<CAPTION>
OPTION
PRICE PER NUMBER
SHARE OF SHARES
--------- ---------
<S> <C> <C>
Granted..................................................... $3.08 291,600
-------
Balance at December 31, 1996................................ 291,600
Granted..................................................... $3.08 69,200
-------
Balance at April 30, 1997................................... 360,800
=======
</TABLE>
At April 30, 1997, options representing 28,000 shares were available to be
granted under the option agreement.
54
<PAGE> 57
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-based
Compensation. Accordingly, no compensation cost has been recognized for the
option agreement as all options have an exercise price equal to or greater than
the fair value of the underlying stock at date of grant. Had compensation cost
for the Company's stock option plan been determined consistent with the
provisions of SFAS No. 123, net loss would have been increased by the following
pro forma amounts:
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(722,517) $(1,780,743)
Pro forma................................................ $(745,602) $(1,837,870)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used by the plan for fiscal 1996 and for the four months ending
April 30, 1997: no dividend yield; expected volatility of 0%; risk-free interest
rate of 6.26%; and expected lives of ten years. The weighted average fair value
per share of the options granted during fiscal 1996 and in the four months
ending April 30, 1997 is estimated to be $1.425.
7. INCOME TAXES
There is no Federal income tax provision as losses were incurred and a
valuation allowance has been established against future benefits deriving from
the carryforward of these losses.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements, primarily
for office space, furniture and service equipment. Minimum annual rental
payments under non-cancelable operating leases as of June 30, 1997, were
approximately as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING APRIL 30,
- -----------------------------
<S> <C>
1997........................................................ $46,000
1998........................................................ 600
1999........................................................ 300
</TABLE>
Rental expense under operating leases was $9,032 for the period ended
December 31, 1996 and $49,194 for the four months ending April 30, 1997.
9. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT -- STOCK SPLIT
On August 16, 1997, the Company's Board of Directors declared a 1-for-2.5
reverse stock split of the Company's common stock. All share data included in
the consolidated financial statements have been restated to reflect the stock
split.
55
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the caption "Election of Directors" in the
Company's proxy statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding executive officers of
the Company is presented in Item 4A of this Form 10-K under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the caption "Executive Compensation" in the
Company's proxy statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under the caption "Stock Ownership" in the Company's
proxy statement for the 1999 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the caption "Transactions with Management and
Others" in the Company's proxy statement for the 1999 Annual Meeting of
Shareholders is incorporated herein by reference.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial statements
See "Index to Financial Statements of Group Maintenance America Corp. and
Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary
Data."
(2) Financial statement schedules
None
(3) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
2 -- None
3.1* -- Articles of Incorporation of the Company, as amended
(Exhibit 3.1 to Registration Statement No. 333-34067).
3.2 -- By-laws of the Company, as amended.
4.1 -- Indenture dated as of January 22, 1999, between Group
Maintenance America Corp., the subsidiaries named therein
and State Street Bank and Trust Company, as trustee.
4.2 -- First Supplemental Indenture dated March 22, 1999,
between Group Maintenance America Corp., the subsidiaries
named therein and State Street Bank and Trust Company, as
trustee.
9 -- None
10.1*+ -- Group Maintenance America Corp. 1997 Stock Awards Plan
(Exhibit 10.1 to Registration Statement No. 333-34067).
10.2*+ -- Group Maintenance America Corp. 1997 Stock Option Plan
(Exhibit 10.2 to Registration Statement No. 333-34067).
10.3+ -- Form of Employment Agreement between Group Maintenance
America Corp. and James P. Norris.
10.4+ -- Form of Employment Agreement between Group Maintenance
America Corp. and J. Patrick Millinor, Jr.
10.5+ -- Form of Employment Agreement between Group Maintenance
America Corp. and Donald L. Luke.
10.6*+ -- Form of Employment Agreement between Group Maintenance
America Corp. and Timothy Johnston (Exhibit 10.32 to
Registration Statement No. 333-34067).
10.7+ -- Form of Employment Agreement between Group Maintenance
America Corp. and Ronald D. Bryant.
10.8 -- Credit Agreement among Group Maintenance America Corp.,
the Subsidiaries listed as Guarantors, Chase Bank of
Texas, National Association, and the signatory banks,
dated as of October 15, 1998.
10.9* -- Agreement and Plan of Exchange by and among Group
Maintenance America Corp. and the Holders of a Majority
of the Outstanding Common Stock of Airtron, Inc., dated
April 30, 1997 (Exhibit 10.3 to Registration Statement
No. 333-34067).(Confidential information has been omitted
from this document and has been filed separately with the
Commission.)
11 -- None.
</TABLE>
57
<PAGE> 60
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
12 -- Statement re: Computation of Ratio of Earnings to Fixed
Charges.
13 -- None.
16 -- None.
18 -- None.
21 -- Subsidiaries of Group Maintenance America Corp. as of
December 31, 1998.
22 -- None.
23 -- Consent of KPMG LLP.
24 -- Powers of Attorney
27 -- Financial Data Schedule.
99 -- None.
</TABLE>
- ---------------
* Incorporated by reference from a prior filing as indicated.
+ Management contract or compensatory plan or arrangement.
UNDERTAKING
GroupMAC has not filed with this report copies of certain instruments
defining the rights of holders of long-term debt of GroupMAC and its
subsidiaries. GroupMAC agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K:
On October 28, 1998, GroupMAC filed a Current Report on Form 8-K which
disclosed, under Item 2 thereof, the Company's acquisition of Continental
Electrical Construction Co. ("Continental"). This report was amended on
December 22, 1998, to include audited financial statements of Continental
and the pro forma financial statements of the Company reflecting the
acquisition of Continental.
On November 4, 1998, GroupMAC filed a Current Report on Form 8-K which
disclosed, under Item 5 thereof, that the Company had signed a definitive
purchase agreement to purchase all of the capital stock of Trinity
Contractors, Inc. ("Trinity").
On November 25, 1998, GroupMAC filed a Current Report on Form 8-K
which disclosed, under Item 2 thereof, the Company's acquisition of
Trinity. This report was amended on December 22, 1998, to include audited
financial statements of Trinity and the pro forma financial statements of
the Company reflecting the acquisition of Trinity.
On December 22, 1998, GroupMAC filed a Current Report on Form 8-K
which contained, in Item 5 thereof, risk factors that could affect an
investment in the Company's equity securities and Management's Discussion
and Analysis of Financial Condition and Results of Operations, and, under
Item 7 thereof, financial statements of certain businesses acquired by the
Company.
58
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1999.
GROUP MAINTENANCE AMERICA CORP.
By:/s/ J. PATRICK MILLINOR, JR.
----------------------------------
J. Patrick Millinor, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES P. NORRIS* Chairman of the Board and March 31, 1999
- --------------------------------------------------- Director
James P. Norris
/s/ J. PATRICK MILLINOR, JR. Chief Executive Officer and March 31, 1999
- --------------------------------------------------- Director
J. Patrick Millinor, Jr.
/s/ DARREN B. MILLER Executive Vice President and March 31, 1999
- --------------------------------------------------- Chief Financial Officer
Darren B. Miller (Principal Financial Officer)
/s/ DANIEL W. KIPP Senior Vice President and March 31, 1999
- --------------------------------------------------- Corporate Controller (Principal
Daniel W. Kipp Accounting Officer)
/s/ DONALD L. LUKE President, Chief Operating March 31, 1999
- --------------------------------------------------- Officer and Director
Donald L. Luke
/s/ DAVID L. HENNINGER* Director March 31, 1999
- ---------------------------------------------------
David L. Henninger
/s/ CHESTER J. JACHIMIEC Director March 31, 1999
- ---------------------------------------------------
Chester J. Jachimiec
/s/ TIMOTHY JOHNSTON* Director March 31, 1999
- ---------------------------------------------------
Timothy Johnston
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANDREW J. KELLY* Director March 31, 1999
- ---------------------------------------------------
Andrew J. Kelly
/s/ THOMAS B. MCDADE* Director March 31, 1999
- ---------------------------------------------------
Thomas B. McDade
/s/ ROBERT MUNSON, III* Director March 31, 1999
- ---------------------------------------------------
Robert Munson, III
/s/ FREDRIC J. SIGMUND* Director March 31, 1999
- ---------------------------------------------------
Fredric J. Sigmund
/s/ JOHN M. SULLIVAN* Director March 31, 1999
- ---------------------------------------------------
John M. Sullivan
/s/ JAMES D. WEAVER* Director March 31, 1999
- ---------------------------------------------------
James D. Weaver
*By: /s/ RANDOLPH W. BRYANT
---------------------------------------------
Randolph W. Bryant
Attorney-in-fact
</TABLE>
60
