<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13565
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GROUP MAINTENANCE AMERICA CORP.
(Exact name of registrant as specified in its charter)
Texas 76-0535259
(State of Incorporation) (I.R.S. Employer Identification No.)
8 Greenway Plaza, Suite 1500
Houston, TX 77046
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (713) 860-0100
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value $0.001 per share; 38,346,845 shares outstanding as
of July 31, 1999.
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<PAGE>
GROUP MAINTENANCE AMERICA CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements............................................ 1
General Information.................................................. 1
Consolidated Condensed Balance Sheets................................ 2
Consolidated Condensed Statements of Operations...................... 3
Consolidated Condensed Statements of Cash Flows...................... 4
Notes to Consolidated Condensed Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 11
Item 3.Quantitative and Qualitative Disclosures About Market Risk....... 21
Part II Other Information
Item 1.Legal Proceedings................................................ *
Item 2.Changes in Securities and Use of Proceeds........................ *
Item 3.Defaults Upon Senior Securities.................................. *
Item 4.Submission of Matters to a Vote of Security Holders.............. 22
Item 5.Other Information................................................ *
Item 6.Exhibits and Reports on Form 8-K................................. 22
</TABLE>
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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
i
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
General Information
Group Maintenance America Corp., a Texas corporation ("GroupMAC"), is one of
the largest diversified providers of mechanical and electrical services to
commercial/industrial and residential customers in the United States. As used
herein, the "Company" refers to GroupMAC and its consolidated subsidiaries.
During 1998, the Company acquired 39 mechanical and electrical contracting
companies with combined annual revenues of approximately $698 million. As a
result of the companies acquired in 1998, 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 data cabling business with the acquisition of eight electrical
contractors.
During the six months ended June 30, 1999, the Company acquired nine
additional companies, including eight platform companies and one satellite
location (the "1999 Acquisitions"), representing approximately $282 million in
incremental annual revenues. As of June 30, 1999, the Company comprised 67
operating companies performing services in 61 cities across 28 states and with
$1.36 billion in pro forma 1998 revenues.
1
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 6,475 $ 2,371
Accounts receivable, net............................ 279,705 187,251
Inventories......................................... 20,887 17,843
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 49,107 26,533
Prepaid expenses and other current assets........... 9,657 6,134
Deferred tax assets................................. 8,856 7,579
Refundable income taxes............................. -- 3,341
-------- --------
Total current assets.............................. 374,687 251,052
PROPERTY AND EQUIPMENT, net........................... 51,297 40,795
GOODWILL, net......................................... 490,605 398,714
DEFERRED DEBT ISSUE COSTS............................. 14,121 9,260
OTHER LONG-TERM ASSETS................................ 1,710 1,260
-------- --------
Total assets...................................... $932,420 $701,081
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 793 $ 12,959
Accounts payable and accrued expenses............... 150,436 99,205
Due to related parties.............................. 4,938 14,961
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 44,402 27,830
Deferred service contract revenue................... 4,622 4,429
Income taxes payable................................ 3,076 2,028
Other current liabilities........................... 2,726 3,199
-------- --------
Total current liabilities......................... 210,993 164,611
REVOLVING CREDIT FACILITY............................. 205,000 195,000
SENIOR SUBORDINATED NOTES............................. 130,000 --
JUNIOR SUBORDINATED NOTES............................. 1,650 16,000
DEFERRED TAX LIABILITIES.............................. 680 733
OTHER LONG-TERM LIABILITIES........................... 1,499 8,808
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; 37,304 and 33,154 shares issued and
outstanding, respectively.......................... 37 33
Additional paid-in capital.......................... 370,543 322,478
Retained earnings (deficit)......................... 12,018 (6,582)
-------- --------
Total shareholders' equity........................ 382,598 315,929
-------- --------
Total liabilities and shareholders' equity........ $932,420 $701,081
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES............................ $ 381,854 $ 159,185 $684,619 $266,277
COST OF SERVICES.................... 299,813 119,838 543,831 202,544
--------- --------- -------- --------
Gross profit...................... 82,041 39,347 140,788 63,733
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 49,682 26,712 89,389 45,707
AMORTIZATION OF GOODWILL............ 3,117 1,183 5,923 2,004
--------- --------- -------- --------
Income from operations............ 29,242 11,452 45,476 16,022
OTHER INCOME (EXPENSE):
Interest expense.................. (6,846) (841) (12,638) (1,314)
Interest income................... 96 44 174 229
Other............................. 184 93 339 149
--------- --------- -------- --------
Income before income tax
provision........................ 22,676 10,748 33,351 15,086
INCOME TAX PROVISION................ 9,755 4,653 14,751 6,718
--------- --------- -------- --------
NET INCOME.......................... $ 12,921 $ 6,095 $ 18,600 $ 8,368
========= ========= ======== ========
BASIC EARNINGS PER SHARE:
EARNINGS PER SHARE................ $ 0.35 $ 0.24 $ 0.52 $ 0.35
========= ========= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 36,872 25,229 35,898 24,198
========= ========= ======== ========
DILUTED EARNINGS PER SHARE:
EARNINGS PER SHARE................ $ 0.35 $ 0.24 $ 0.51 $ 0.34
========= ========= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 37,210 25,667 36,243 24,595
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 18,600 $ 8,368
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 12,668 4,875
Other............................................... (37) (395)
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as purchases:
(Increase) decrease in--
Accounts receivable............................... (36,402) (8,372)
Inventories....................................... (1,627) (1,048)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (3,828) (5,691)
Prepaid expenses and other current assets......... (2,674) (2,286)
Refundable income taxes........................... 3,341 1,043
Other long-term assets............................ 1,226 672
Increase (decrease) in--
Accounts payable and accrued expenses............. 17,127 5,793
Due to related parties............................ 79 (5,434)
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 5,483 3,891
Deferred service contract revenue................. 193 (510)
Income taxes payable.............................. (116) 4,633
Other current liabilities......................... (625) 770
Other long-term liabilities....................... (444) (74)
---------- ---------
Net cash provided by operating activities........ 12,964 6,235
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired of
$4,445 and $8,567................................... (74,504) (71,480)
Deferred acquisition costs........................... (1,746) (726)
Purchase of property and equipment................... (7,495) (4,574)
Proceeds from sale of property and equipment......... 601 138
---------- ---------
Net cash used in investing activities............ (83,144) (76,642)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior subordinated debt offering, net
of offering costs................................... 119,105 --
Proceeds from other long-term debt................... 164,800 74,400
Payments of long-term debt........................... (207,949) (24,240)
Deferred financing costs on other long-term debt..... (1,851) --
Exercise of stock options............................ 179 --
---------- ---------
Net cash provided by financing activities........ 74,284 50,160
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. 4,104 (20,247)
CASH AND CASH EQUIVALENTS, beginning of period........ 2,371 25,681
---------- ---------
CASH AND CASH EQUIVALENTS, end of period.............. $ 6,475 $ 5,434
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................ $ 7,713 $ 629
Income taxes paid.................................... $ 14,793 $ 1,361
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of the Company and management's discussion and analysis of financial
condition and results of operations included in the Annual Report on Form 10-
K/A for the year ended December 31, 1998.
Certain amounts recorded in the three and six month periods ended June 30,
1998 and at December 31, 1998 have been reclassified to conform with the
current period presentation.
2. Earnings Per Share
Basic earnings per share have been calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share have been calculated by dividing net income by the weighted average
number of common shares outstanding plus potentially dilutive common shares.
The following table summarizes weighted average shares outstanding for each
of the historical periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Shares issued through December 31, 1997
excluding acquisitions................. 16,629 16,629 16,629 16,629
Shares issued for 1997 acquisitions..... 4,733 4,444 4,733 4,439
Shares issued for 1998 acquisitions..... 12,095 4,156 12,086 3,130
Shares issued for 1999 acquisitions..... 3,384 -- 2,428 --
Exercise of stock options............... 31 -- 22 --
--------- --------- -------- --------
Weighted average shares outstanding--
Basic.................................. 36,872 25,229 35,898 24,198
Incremental effect of options and
warrants outstanding................... 338 438 345 397
--------- --------- -------- --------
Weighted average shares outstanding--
Diluted................................ 37,210 25,667 36,243 24,595
========= ========= ======== ========
</TABLE>
As of June 30, 1999, options to purchase 2.6 million shares of common stock
and warrants to purchase 0.6 million shares of common stock were not included
in the calculation of diluted earnings per share for both the three and six
month periods ended June 30, 1999 because the exercise price of such options
and warrants was greater than the average market price of the common shares.
3. Business Combinations
During the six months ended June 30, 1999, the Company completed the
acquisition of the 1999 Acquisitions for approximately $119.1 million, which
includes cash payments of $69.7 million, $1.6 million in junior subordinated
notes, 3.9 million shares of common stock and warrants to purchase
approximately 80,000 shares of common stock. Of the total consideration,
approximately $4.1 million of cash was due to former owners at June 30, 1999.
All such acquisitions were accounted for as purchases. In connection with
these acquisitions,
5
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
the Company assumed approximately $25.0 million of debt. The combined annual
1998 revenues of the 1999 Acquisitions were approximately $282 million.
Certain former owners of businesses acquired as part of the 1999 Acquisitions
have the ability to receive additional amounts of purchase price, payable in
cash and common stock, upon the occurrence of future events.
Also during the six months ended June 30, 1999, the Company paid
approximately $13.3 million of cash and 0.3 million shares of common stock
related to previously recorded amounts due to former shareholders of companies
acquired prior to December 31, 1998. Included in these amounts are payments of
contingent consideration related to acquisitions prior to December 31, 1998 of
approximately $3.0 million in cash and 0.3 million shares of common stock. In
addition, the Company reduced amounts due to former shareholders by
approximately $0.9 million related to final purchase price settlements.
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC and its subsidiaries as if all of the 1998
acquisitions and the 1999 Acquisitions were effective on the first day of the
period being reported (in thousands, except for per share amounts).
<TABLE>
<CAPTION>
Pro Forma Data Pro Forma Data
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................. $ 389,536 $ 349,259 $728,375 $649,451
Net income................................ $ 13,056 $ 13,448 $ 19,355 $ 19,694
Net income per share:
Basic................................... $ 0.35 $ 0.36 $ 0.52 $ 0.53
Diluted................................. $ 0.35 $ 0.35 $ 0.51 $ 0.52
</TABLE>
Pro forma adjustments included in the amounts above consist of (i)
compensation differentials, (ii) adjustment for goodwill amortization over a
period of 40 years, (iii) adjustment for interest expense as if borrowings
outstanding as of June 30, 1999 had been outstanding for both the three and
six month periods ended June 30, 1999 and 1998 at interest rates in effect on
June 30, 1999, and (iv) adjustment to the federal and state income tax
provisions based on pro forma operating results. Net income per share assumes
all shares issued for the acquisitions were outstanding from the beginning of
the periods presented.
The 1999 Acquisitions included in the accompanying financial statements were
accounted for under the purchase method of accounting. Purchase price
consideration is subject to final adjustment. The allocation of purchase price
to the assets acquired and liabilities assumed has been initially assigned and
recorded based on preliminary estimates of fair values and may be revised as
additional information becomes available. Such additional information includes
appraisals on property, contingent liabilities of the acquired business, and
final settlements related to the acquisition consideration and the net assets
acquired. However, the Company does not expect the receipt of this additional
information to cause any significant adjustments to the purchase price
allocations or amount of goodwill at June 30, 1999.
4. 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.
6
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
5. Borrowing Activity
Revolving Credit Facility
The Company has a committed credit facility providing for $425 million of
borrowing capacity (the "Credit Agreement") and, at June 30, 1999, had
outstanding $205.0 million of borrowings under this facility. The Credit
Agreement was expanded from $230 million to $425 million during the second
quarter of 1999. This facility, which is with a syndicate of banks led by
Chase Bank of Texas, National Association, will mature in October 2001. 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 June 30, 1999, GroupMAC was in compliance with those covenants.
The Company has paid various underwriting and arrangement fees and closing
costs associated with the origination, syndication and expansion of the Credit
Agreement. The unamortized portion of these expenses is included as deferred
debt issue costs in the accompanying consolidated condensed balance sheets and
amounted to approximately $3.7 million and $2.4 million at June 30, 1999 and
December 31, 1998, respectively.
Senior Subordinated Notes
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, on
April 21, 1999 the Company filed a registration statement enabling holders of
the Notes to exchange the privately placed Notes for publicly registered notes
with identical terms. The registration statement became effective June 21,
1999 and the exchange offer was consummated on July 21, 1999.
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 August 16, 1999, there were no
"Unrestricted Subsidiaries." These guarantees are full, unconditional and
joint and several.
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, 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 debt issue costs.
7
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
In addition, the Company paid various arrangement fees and closing costs
associated with the Offering. The unamortized portion of these expenses, along
with the cost of the hedge discussed in the preceding paragraph, is included
as deferred debt issue costs in the accompanying consolidated condensed
balance sheets and amounted to approximately $10.4 million and $6.9 million at
June 30, 1999 and December 31, 1998, respectively.
Junior Subordinated Notes
In February 1999, the Company redeemed approximately $16.0 million of junior
subordinated notes that had been issued in connection with an acquisition
completed in November 1998. The holders of those notes had the right to
require redemption upon the issuance of the Notes. The Company paid the
redemption price with borrowings under the Credit Agreement.
6. 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 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 expenses primarily include
(1) corporate overhead, (2) corporate and operating company management
bonuses, (3) employee benefit plan expenses and (4) savings from national
purchase agreements relating to materials and property/casualty insurance.
Assets for the corporate function are included in the "Other" column in the
presentation below.
8
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
Segment information for the three and six month periods ended June 30, 1999
and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Commercial/
Industrial Residential Other Total
----------- ----------- ------- --------
<S> <C> <C> <C> <C>
Three month period ended June 30,
1999:
Revenues............................ $294,089 $ 87,265 $ 500 $381,854
Operating costs..................... 269,866 78,024 374 348,264
-------- -------- ------- --------
Subtotal............................ 24,223 9,241 126 33,590
Goodwill amortization............... 2,580 492 45 3,117
-------- -------- ------- --------
Segment operating earnings.......... $ 21,643 $ 8,749 $ 81 30,473
======== ======== =======
Unallocated corporate expenses...... (1,231)
--------
Income from operations.............. $ 29,242
========
Assets.............................. $752,718 $136,007 $43,695 $932,420
Three month period ended June 30,
1998:
Revenues............................ $ 84,428 $ 74,149 $ 608 $159,185
Operating costs..................... 78,071 65,676 562 144,309
-------- -------- ------- --------
Subtotal............................ 6,357 8,473 46 14,876
Goodwill amortization............... 736 401 46 1,183
-------- -------- ------- --------
Segment operating earnings.......... $ 5,621 $ 8,072 $ -- 13,693
======== ======== =======
Unallocated corporate expenses...... (2,241)
--------
Income from operations.............. $ 11,452
========
</TABLE>
Maintenance, repair and replacement services represented 58% and 48% and new
installation services represented 42% and 52% of total revenues for the three
months ended June 30, 1999 and 1998, respectively.
9
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
<TABLE>
<CAPTION>
Commercial/
Industrial Residential Other Total
----------- ----------- ------ --------
<S> <C> <C> <C> <C>
Six month period ended June 30, 1999:
Revenues.............................. $526,669 $156,897 $1,053 $684,619
Operating costs....................... 486,087 142,670 804 629,561
-------- -------- ------ --------
Subtotal.............................. 40,582 14,227 249 55,058
Goodwill amortization................. 4,867 965 91 5,923
-------- -------- ------ --------
Segment operating earnings............ $ 35,715 $ 13,262 $ 158 49,135
======== ======== ======
Unallocated corporate expenses........ (3,659)
--------
Income from operations................ $ 45,476
========
Six month period ended June 30, 1998:
Revenues.............................. $136,362 $128,646 $1,269 $266,277
Operating costs....................... 126,986 116,372 1,165 244,523
-------- -------- ------ --------
Subtotal.............................. 9,376 12,274 104 21,754
Goodwill amortization................. 1,141 774 89 2,004
-------- -------- ------ --------
Segment operating earnings............ $ 8,235 $ 11,500 $ 15 19,750
======== ======== ======
Unallocated corporate expenses........ (3,728)
--------
Income from operations................ $ 16,022
========
</TABLE>
Maintenance, repair and replacement services represented 58% and 44% and new
installation services represented 42% and 56% of total revenues for the six
months ended June 30, 1999 and 1998, respectively.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which are identified by the
use of forward-looking words and phrases, such as: "believes," "expects,"
"anticipates," and "intends." These statements are based on the Company's
current expectations and involve risks and uncertainties that could cause the
Company's actual results to differ materially from those set forth in the
statements. Among the factors that could cause results to differ materially
from current expectations are: (i) the general political, economic and
competitive conditions in markets where the Company operates; (ii) changes in
capital availability or costs; (iii) decreases in demand for the Company's
services and the resulting negative impact on the Company's revenues and
margins from such products; (iv) employee workforce factors; (v) the Company's
ability to integrate the operations of acquired businesses quickly and in a
cost-effective manner; and (vi) the timing and occurrence (or non-occurrence)
of transactions and events, which may be subject to circumstances beyond the
Company's control.
General
The Company's revenues are derived from providing maintenance, repair and
replacement services and new installation services for mechanical, electrical
and other systems to commercial/industrial and residential customers.
Approximately 58% of the Company's revenues for the six months ended June 30,
1999 were derived from maintenance, repair and replacement services and 42%
were attributable to new installation services. Maintenance, repair and
replacement revenues are recognized as the services are performed, except for
service contract revenue, which is recognized ratably over the life of the
contract. Revenues from fixed price installation and retro-fit contracts are
generally accounted for on a percentage-of-completion basis, using the cost-
to-cost method.
The Company intends to make additional acquisitions across the two main
technical disciplines (mechanical and electrical) within the
commercial/industrial and residential markets. The Company's long-term
objective is to develop maintenance, repair and replacement capabilities (both
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 continue to shift revenues of
the Company to an increased percentage of maintenance, repair and replacement
revenue.
Cost of services consists primarily of components, parts and supplies
related to the Company's new installation and maintenance, repair and
replacement services, salaries and benefits of service and installation
technicians, subcontracted services, depreciation, fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of administrative salaries and benefits, advertising, office
rent and utilities, communications and professional fees.
Results of Operations
The historical results of operations presented below are derived from the
consolidated condensed financial statements contained elsewhere herein.
11
<PAGE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended June 30
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C> <C> <C>
Revenues.................................... $381,854 100.0% $159,185 100.0%
Cost of Services............................ 299,813 78.5 119,838 75.3
-------- ----- -------- -----
Gross Profit................................ 82,041 21.5 39,347 24.7
Selling, General and Administrative
Expenses................................... 52,799 13.8 27,895 17.5
-------- ----- -------- -----
Income from Operations...................... 29,242 7.7 11,452 7.2
Interest Expense, Net....................... (6,750) (1.8) (797) (0.5)
Other....................................... 184 0.0 93 0.1
-------- ----- -------- -----
Income Before Income Tax Provision.......... 22,676 5.9 10,748 6.8
Income Tax Provision........................ 9,755 2.6 4,653 2.9
-------- ----- -------- -----
Net Income.................................. $ 12,921 3.4% $ 6,095 3.8%
======== ===== ======== =====
</TABLE>
Revenues. Revenues increased $222.7 million, or 139.9%, to $381.9 million
for the three months ended June 30, 1999 from $159.2 million for the three
months ended June 30, 1998. The increase in revenues is attributable to the
following:
. $172.3 million relates to the incremental revenue contributed in the three
months ended June 30, 1999 by commercial/industrial companies acquired
during or subsequent to the three months ended June 30, 1998;
. $5.1 million relates to the incremental revenue contributed in the three
months ended June 30, 1999 by residential companies acquired during or
subsequent to the three months ended June 30, 1998;
. $37.3 million relates to the same store growth in the commercial/industrial
group. Of this increase, $13.9 million results from growth in work in
mission-critical environments and voice/data cabling in the Mid-Atlantic
region, $11.9 million relates to volume increases in the Seattle/Portland
market, and the balance of the increase is primarily due to growth in the
Little Rock, Memphis and Bakersfield, CA markets; and
. $8.0 million relates to the same store growth in the residential group. Of
this increase, $5.1 million relates to companies that primarily provide new
installation services due to an increase in new home starts in the markets
they serve and $2.9 million relates to companies that primarily provide
maintenance, repair and replacement services.
Gross Profit. Gross profit increased $42.7 million, or 108.5%, to $82.0
million for the three months ended June 30, 1999 from $39.3 million for the
three months ended June 30, 1998. The increase in gross profit is attributable
to the following:
. $33.4 million relates to the incremental gross profit contributed in the
three months ended June 30, 1999 by commercial/industrial companies acquired
during or subsequent to the three months ended June 30, 1998;
. $0.9 million relates to the incremental gross profit contributed in the
three months ended June 30, 1999 by residential companies acquired during or
subsequent to the three months ended June 30, 1998;
. $4.3 million relates to the same store growth in the commercial/industrial
group. Of this increase, $1.5 million relates to growth in mission critical
environments and voice/data cabling in the Mid-Atlantic region, $2.0 million
relates to volume increases in the Seattle/Portland market, and the balance
of the increase due primarily to growth in the Little Rock, Memphis,
Bakersfield, CA and Vail, CO markets;
12
<PAGE>
. $3.5 million relates to the same store growth in the residential group. Of
this increase, $2.4 million relates to companies that primarily provide new
installation services due to an increase in new home starts in the markets
they serve and $1.1 million relates to companies that primarily provide
maintenance, repair and replacement services; and
. $0.6 million relates to additional materials purchases savings in the
current period.
Gross profit margin decreased 3.2% for the three months ended June 30, 1999
compared to the three months ended June 30, 1998 because of GroupMAC's
acquisition emphasis during 1998 and the first half of 1999 on
commercial/industrial businesses, which support the Company's national
accounts initiatives although they typically have lower gross margins than
residential businesses. Furthermore, 72% of the total growth in same store
revenue during the three months ended June 30, 1999 came from companies that
historically have gross margins below the average of all companies combined.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including goodwill amortization, increased $24.9
million, or 89.3%, to $52.8 million for the three months ended June 30, 1999
from $27.9 million for the three months ended June 30, 1998. The increase in
these expenses is attributable to the following:
. $16.5 million relates to the incremental selling, general and administrative
expenses incurred in the three months ended June 30, 1999 by
commercial/industrial companies acquired during or subsequent to the three
months ended June 30, 1998;
. $0.8 million relates to the incremental selling, general and administrative
expenses incurred in the three months ended June 30, 1999 by residential
companies acquired during or subsequent to the three months ended June 30,
1998;
. $3.4 million relates to the same store growth in the commercial/industrial
group. Of this increase, $0.8 million relates to growth in mission critical
environments and voice/data cabling in the Mid-Atlantic region and $1.2
million relates to volume increases in the Seattle/Portland market;
. $2.8 million relates to the same store growth in the residential group;
. $1.7 million relates to incremental corporate expenses representing
expansion of the corporate management team, expenses of employee benefit
programs and infrastructure necessary to execute our operating and
acquisition strategies;
. $1.9 million relates to an increase in goodwill amortization associated with
the above described acquisitions; and
. $0.1 million relates to increased field bonuses.
Partially offsetting the above increases is approximately $2.3 million of
increased savings related to our property and casualty insurance programs.
As a percentage of revenues, selling, general and administrative expenses,
excluding corporate expenses and goodwill amortization, decreased to 12.0% for
the three months ended June 30, 1999 from 15.3% for the three months ended
June 30, 1998, respectively, due primarily to achieving lower selling and
administrative expense margins on a same store basis and acquiring a higher
mix of commercial companies which tend to have lower selling, general and
administrative expense structures relative to revenues earned. When including
corporate expenses and goodwill amortization, selling, general and
administrative expenses as a percentage of revenues decreased to 13.8% for the
three months ended June 30, 1999 from 17.5% for the three months ended June
30, 1998.
Net Interest. Net interest increased $6.0 million during the three months
ended June 30, 1999 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility and the issuance in January 1999 of $130 million of unsecured
senior subordinated notes (the "Notes"), which carry a higher rate of interest
than loans under the credit facility. The higher level of borrowings was
needed to finance the Company's aggressive acquisition program during 1998 and
the first half of 1999. See "Liquidity and Capital Resources."
13
<PAGE>
Income Tax Provision. The income tax provision increased $5.1 million to
$9.8 million for the three months ended June 30, 1999 from $4.7 million for
the three months ended June 30, 1998. This increase corresponds with the pre-
tax income increase of $11.9 million between periods. The effective tax rate
for the three months ended June 30, 1999 was 43.0% compared to 43.3% for the
three months ended June 30, 1998. The effective tax rate exceeds the Company's
statutory federal and state tax rate due primarily to non-deductible goodwill
amortization of $2.3 million and $1.2 million in the three months ended June
30, 1999 and 1998, respectively. The overall decrease in the effective tax
rate results from certain income tax strategies, including structuring five of
the Company's acquisitions as taxable transactions, resulting in the
deductibility of goodwill for these entities.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The following table sets forth certain financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six months ended June 30
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues................................ $684,619 100.0% $266,277 100.0%
Cost of Services........................ 543,831 79.4 202,544 76.1
-------- ----- -------- -----
Gross Profit............................ 140,788 20.6 63,733 23.9
Selling, General and Administrative
Expenses............................... 95,312 13.9 47,711 17.9
-------- ----- -------- -----
Income from Operations.................. 45,476 6.6 16,022 6.0
Interest Expense, Net................... (12,464) (1.8) (1,085) (0.4)
Other................................... 339 0.1 149 0.1
-------- ----- -------- -----
Income Before Income Tax Provision...... 33,351 4.9 15,086 5.7
Income Tax Provision.................... 14,751 2.2 6,718 2.6
-------- ----- -------- -----
Net Income.............................. $ 18,600 2.7% $ 8,368 3.1%
======== ===== ======== =====
</TABLE>
Revenues. Revenues increased $418.3 million, or 157.1%, to $684.6 million
for the six months ended June 30, 1999 from $266.3 million for the six months
ended June 30, 1998. The increase in revenues is attributable to the
following:
. $335.5 million relates to the incremental revenue contributed in the six
months ended June 30, 1999 by commercial/industrial companies acquired
during or subsequent to the six months ended June 30, 1998;
. $9.8 million relates to the incremental revenue contributed in the six
months ended June 30, 1999 by residential companies acquired during or
subsequent to the six months ended June 30, 1998;
. $54.8 million relates to the same store growth in the commercial/industrial
group. Of this increase, $20.7 million relates to volume increases in the
Seattle/Portland market and $13.9 million results from growth in work in
mission-critical environments and voice/data cabling in the Mid-Atlantic
region with the balance of the increase generated primarily from the Dallas,
Little Rock, Memphis, Fort Lauderdale, Bakersfield, CA and Vail, CO markets;
and
. $18.2 million relates to the same store growth in the residential group. Of
this increase, $12.6 million relates to companies that primarily provide new
installation services due to an increase in new home starts in the markets
they serve and $5.6 million relates to companies that primarily provide
maintenance, repair and replacement services.
Gross Profit. Gross profit increased $77.1 million, or 120.9%, to $140.8
million for the six months ended June 30, 1999 from $63.7 million for the six
months ended June 30, 1998. The increase in gross profit is attributable to
the following:
14
<PAGE>
. $60.7 million relates to the incremental gross profit contributed in the six
months ended June 30, 1999 by commercial/industrial companies acquired
during or subsequent to the six months ended June 30, 1998;
. $2.1 million relates to the incremental gross profit contributed in the six
months ended June 30, 1999 by residential companies acquired during or
subsequent to the six months ended June 30, 1998;
. $7.4 million relates to the same store growth in the commercial/industrial
group. Of this increase, $3.7 million relates to volume increases in the
Seattle/Portland market and $1.5 million results from growth in work in
mission-critical environments and voice/data cabling in the Mid-Atlantic
region, with the balance of the increase generated primarily from the Little
Rock, Memphis, Fort Lauderdale, Bakersfield, CA and Vail, CO markets, offset
by continued economic softening in the Richmond, VA market;
. $5.8 million relates to the same store growth in the residential group. Of
this increase, $4.4 million relates to companies that primarily provide new
installation services due to an increase in new home starts in the markets
they serve and $1.4 million relates to companies that primarily provide
maintenance, repair and replacement services; and
. $1.1 million relates to additional materials purchases savings in the
current period.
Gross profit margin decreased 3.3% for the six months ended June 30, 1999
compared to the six months ended June 30, 1998 because of GroupMAC's
acquisition emphasis during 1998 and the first half of 1999 on
commercial/industrial businesses, which support the Company's national
accounts initiatives although they typically have lower gross margins than
residential businesses. Furthermore, 73% of the total growth in same store
revenue during the six months ended June 30, 1999 came from companies that
historically have gross margins below the average of all companies combined.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including goodwill amortization, increased $47.6
million, or 99.8%, to $95.3 million for the six months ended June 30, 1999
from $47.7 million for the six months ended June 30, 1998. The increase in
these expenses is attributable to the following:
. $31.9 million relates to the incremental selling, general and administrative
expenses incurred in the six months ended June 30, 1999 by
commercial/industrial companies acquired during or subsequent to the six
months ended June 30, 1998;
. $1.7 million relates to the incremental selling, general and administrative
expenses incurred in the six months ended June 30, 1999 by residential
companies acquired during or subsequent to the six months ended June 30,
1998;
. $5.0 million relates to the same store growth in the commercial/industrial
group, with $1.8 million of the increase coming from the Company's
Seattle/Portland operations and $0.8 million from the Mid-Atlantic market;
. $4.3 million relates to the same store growth in the residential group;
. $4.4 million relates to incremental corporate expenses representing
expansion of the corporate management team, expenses of employee benefit
programs and infrastructure necessary to execute our operating and
acquisition strategies;
. $3.9 million relates to an increase in goodwill amortization associated with
the above described acquisitions; and
. $0.5 million relates to increased field bonuses.
Partially offsetting the above increases is approximately $4.1 million of
increased savings related to our property and casualty insurance programs.
As a percentage of revenues, selling, general and administrative expenses,
excluding corporate expenses and goodwill amortization, decreased to 11.9% for
the six months ended June 30, 1999 from 15.6% for the six
15
<PAGE>
months ended June 30, 1998, due primarily to achieving lower selling and
administrative expense margins on a same store basis and acquiring a higher
mix of commercial companies which tend to have lower selling, general and
administrative expense structures relative to revenues earned. When including
corporate expenses and goodwill amortization, selling, general and
administrative expenses as a percentage of revenues decreased to 13.9% for the
six months ended June 30, 1999 from 17.9% for the six months ended June 30,
1998.
Net Interest. Net interest increased $11.4 million during the six months
ended June 30, 1999 compared to the same period of the prior year. Such
increase was attributable to a higher level of borrowings under the Company's
credit facility and the issuance in January 1999 of the Notes, which carry a
higher rate of interest than loans under the credit facility. The higher level
of borrowings was needed to finance the Company's aggressive acquisition
program during 1998 and the first half of 1999. See "Liquidity and Capital
Resources."
Income Tax Provision. The income tax provision increased $8.0 million to
$14.8 million for the six months ended June 30, 1999 from $6.7 million for the
six months ended June 30, 1998. This increase corresponds with the pre-tax
income increase of $18.3 million between periods. The effective tax rate for
the six months ended June 30, 1999 was 44.2% compared to 44.5% for the six
months ended June 30, 1998. The effective tax rate exceeds the Company's
statutory federal and state tax rate due primarily to non-deductible goodwill
amortization of $4.5 million and $2.0 million in the six months ended June 30,
1999 and 1998, respectively. The overall decrease in the effective tax rate
results from certain income tax strategies, including structuring five of the
Company's acquisitions as taxable transactions, resulting in the deductibility
of goodwill for these entities.
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. Demand for HVAC
services is generally higher in the second and third quarters. Accordingly,
the Company expects its revenues and operating results generally will be lower
in the first and, to a lesser degree, fourth quarters. Historically, the
construction industry has been highly cyclical. As a result, the Company's
volume of business may be adversely affected by declines in new installation
projects in various geographic regions of the United States.
A substantial portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed residences and
commercial/industrial facilities. Revenues from new installation services in
the residential market are dependent upon the level of housing starts in the
areas in which the Company operates. The housing industry is cyclical, and the
Company's 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 the Company
operates could have a material adverse effect on the Company's business,
including its financial condition and results of operations.
Inflation
Inflation did not have a significant effect on the results of operations of
the Company for the six month periods ended June 30, 1999 and 1998.
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
16
<PAGE>
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 operations will not be adversely impacted by
Year 2000 software failures.
GroupMAC's State of Readiness. The Company has completed an initial systems
survey of each business acquired. That survey revealed that several of its
core business applications possessed Year 2000 problems. However, none of
these problems are expected to be material to individual operating companies
or, in the aggregate, to the Company because the 67 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 its 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 it 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 half of 1999. The evaluation phase has been
completed at a cost of approximately $130,000. 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 figure.
Upgrading and Testing
During the evaluation phase, we determined that most systems in use by
GroupMAC could be upgraded to eliminate Year 2000 problems. The Company
estimates that the cost of bringing the evaluated systems into compliance is
between $275,000 and $350,000. The estimate includes between $175,000 and
$225,000 for software upgrades and between $100,000 and $125,000 for
implementation and testing. Substantially all of these costs are expected to
be incurred by the end 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 November 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
paragraphs, 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) will be converted to a new system before December 31, 1999.
Regarding the common information system, GroupMAC's board of directors has
approved the prototype and pilot phase of an enterprise resource planning
system ("ERP"). This phase has commenced and is expected to take approximately
ten months to complete, with conclusion expected by the end of the second
quarter of the Year 2000. If the prototype and pilot phase achieve acceptable
results, the Company expects to implement the ERP system at most of its
existing companies over a period of approximately three years.
17
<PAGE>
The Company is evaluating the effect of the Year 2000 problem on its 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. The Company has focused its assessments to date on its
information technology systems. These assessments indicate that, due to the
nature of its 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 large national supplier 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
Completion
Phase of Project Status Date
---------------- ------------ --------------
<S> <C> <C>
Initial System Survey............................... Complete February 1999
Evaluation.......................................... Complete February 1999
Upgrade and Testing................................. In Process November 1999
Customer/Supplier Evaluation........................ In Process September 1999
Contingency Plan.................................... If Necessary November 1999
</TABLE>
Liquidity and Capital Resources
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 the Company.
The Company has a committed credit facility providing for $425 million of
borrowing capacity (the "Credit Agreement") and, at June 30, 1999, had
outstanding $205.0 million of borrowings under this facility. This facility
was expanded from $230 million to $425 million during the second quarter of
1999. This facility, which is with a syndicate of banks led by Chase Bank of
Texas, National Association, will mature in October 2001. Debt under the
Credit Agreement bears interest at variable rates. Under the Credit Agreement,
GroupMAC is
18
<PAGE>
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 June 30, 1999,
GroupMAC was in compliance with those covenants. To date, neither the terms of
the Credit Agreement and the indenture pursuant to which the Notes were
issued, nor the debt represented thereby, have materially restricted the
Company's ability to finance future operations or capital needs or to respond
to changes in the Company's business or competitive activity.
In January 1999, GroupMAC completed a private placement offering (the
"Offering") of $130 million of 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.
The Company entered into an agreement to lock in the ten year U.S. Treasury
rate used to price the Offering. 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
debt issue 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 significant component
of the consideration that it pays for businesses to be acquired.
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 six months ended June 30, 1999 and
1998, capital expenditures aggregated $7.5 million and $4.6 million,
respectively. GroupMAC anticipates that its cash flow from operations and
existing credit facilities will provide cash in excess of its normal working
capital needs, debt service requirements and planned capital expenditures for
property and equipment.
For the six months ended June 30, 1999 and 1998, the Company generated $13.0
million and $6.2 million in cash from operating activities, respectively. For
the six months ended June 30, 1999, net income, depreciation, amortization and
other items generated $31.3 million and changes in asset and liability
accounts utilized a net $18.3 million. The use of cash due to changes in asset
and liability accounts is due primarily to increased levels of receivables,
the majority of which results from internal revenue growth during the six
months ended June 30, 1999. For the six months ended June 30, 1998, net
income, depreciation, amortization and other items generated $12.9 million and
changes in asset and liability accounts utilized a net $6.7 million.
For the six months ended June 30, 1999, GroupMAC used $83.1 million in cash
in investing activities. These activities principally consisted of $74.5
million for acquisitions and $7.5 million for capital expenditures. For the
six months ended June 30, 1998, GroupMAC used $76.6 million in cash in
investing activities. These activities principally consisted of $71.5 million
for acquisitions and $4.6 million for capital expenditures.
For the six months ended June 30, 1999, GroupMAC generated $74.3 million in
cash from its financing activities. These activities principally consisted of
proceeds from long-term debt, net of offering costs, of $282.1 million and
$208.0 million in payments of long-term debt. For the six months ended June
30, 1998, GroupMAC generated $50.2 million in cash from its financing
activities. These activities consisted of proceeds from long-term debt of
$74.4 million and $24.2 million in payments of long-term debt.
GroupMAC has registered under the Securities Act of 1933, as amended, and
has available for issuance in connection with future acquisitions
approximately 7.2 million shares of common stock. After their issuance,
19
<PAGE>
those registered shares generally are freely tradable by persons not
affiliated with GroupMAC unless it contractually restricts the resale, which
it generally does.
During the six months ended June 30, 1999, GroupMAC completed the
acquisition of seven commercial/industrial platform companies, one residential
platform company and one commercial/industrial satellite location, all
accounted for as purchases. The combined annual revenues of these acquired
companies were approximately $282 million. Total consideration paid included
cash payments of $69.7 million, $1.6 million of junior subordinated notes, 3.9
million shares of common stock, warrants to purchase approximately 80,000
shares of common stock and total debt assumed of $25.0 million. Additionally,
during the six months ended June 30, 1999, the Company paid approximately
$13.3 million of cash and 0.3 million shares of common stock related to
previously recorded amounts due to former shareholders of the companies
acquired prior to December 31, 1998. GroupMAC financed the cash portion of the
purchase prices using: (1) cash borrowed under the Credit Agreement and (2)
internally generated funds.
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 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, as amended, is effective for all fiscal
years beginning after June 15, 2000. Under present operations, the Company
estimates that this statement will not have a material impact on the Company's
financial position or results of operations.
20
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The table below provides information about the Company'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 June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999
---- ---- ------- ---- ---- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revolving Line of
Credit................. -- -- 205,000 -- -- -- 205,000 205,000
Average Rate........... (a)
Senior Subordinated
Notes.................. -- -- -- -- -- 130,000 130,000 130,000
Average Rate........... 10.6%(b)
Junior Subordinated
Debt................... -- -- -- -- 37 1,613 1,650 1,650
Average Rate........... 6.0% 6.0%
Fixed Rate Debt......... 793 -- -- -- -- -- 793 793
Average Rate........... 6.4%
</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 June 30,
1999, the weighted average interest rate in effect for the Credit
Agreement borrowings, including amortization of related debt issuance
costs, was 7.9%.
(b) The Senior Subordinated Notes is unsecured, matures January 2009 and bears
interest at 9.75% payable semi-annually. In addition, there are
approximately $10.9 million in related debt issuance costs which are being
amortized to interest expense over the ten year life of the Notes,
increasing the effective interest rate to 10.6%.
21
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on May 12, 1999 (the
"Annual Meeting") for the purpose of electing five directors, approving the
GroupMAC Employee Stock Purchase Plan and approving the appointment of
independent public accountants for the year 1999. The following summarizes the
shareholder voting results:
(a) Election of directors for a term to expire at the year 2002 Annual
Meeting of Shareholders:
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
David L. Henninger................................... 29,472,672 192,079
Donald L. Luke....................................... 29,472,572 192,179
J. Patrick Millinor, Jr.............................. 29,472,672 192,079
Lucian L. Morrison................................... 28,155,237 1,509,514
Robert Munson, III................................... 29,472,672 192,079
</TABLE>
Directors whose terms of office continued after the Annual Meeting include
Chester J. Jachimiec, Thomas B. McDade, James D. Weaver, Andrew Jeffrey Kelly,
Timothy Johnston, James P. Norris, Fredric J. Sigmund and John M. Sullivan.
(b) Approval of the GroupMAC Employee Stock Purchase Plan, which permits
employees of the Company to acquire an equity interest in the Company
through the purchase of the Company's Common Stock. Such Plan is
intended to qualify under Section 423 of the Internal Revenue Code of
1986, as amended.
<TABLE>
<CAPTION>
Broker
For Against Abstained Non-Vote
--- ------- --------- --------
<S> <C> <C> <C>
29,311,435 205,645 147,671 -0-
</TABLE>
(c) Approval of the appointment of KPMG LLP as independent accountants for
the Company for the year 1999:
<TABLE>
<CAPTION>
Broker
For Against Abstained Non-Vote
--- ------- --------- --------
<S> <C> <C> <C>
29,412,633 78,682 173,436 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits.
<TABLE>
<C> <S>
2 --None
3.1 --Articles of Incorporation of the Company, as amended (Exhibit 3.1 to
Registration No. 333-34067).
3.2 --Bylaws of the Company, as amended November 19, 1998 (Exhibit 3.2 to
the Company's Form 10-K/A for the fiscal year ended December 31, 1998,
File No. 1-13565).
4.1 --Indenture dated January 22, 1999 among the Company, the Guarantors
named therein and State Street Bank and Trust Company, as Trustee
(Exhibit 4.1 to Registration No. 333-76713).
10.1 --First Amendment to Second Amended and Restated Credit Agreement dated
effective as of May 25, 1999 (Exhibit 10.9 to Registration No. 333-
76713).
11 --None
15 --None
18 --None
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
19 --None
22 --None
23 --None
24 --None
27 --Financial Data Schedule
99 --None
</TABLE>
(2) Reports on Form 8-K.
On April 16, 1999, the Company filed a Current Report on Form 8-K which
disclosed, under Item 5 thereof, the acquisition by the Company of Air
Systems, Inc. ("Air Systems"). The report included audited financial
statements of Air Systems and pro forma financial information of the Company.
On May 10, 1999, the Company filed a Current Report on Form 8-K, which
disclosed, under Item 5 thereof, the issuance of a press release announcing
the Company's operating results for the quarter ended March 31, 1999, as well
as a letter to stockholders discussing such operating results. The report
included a copy of such press release and such letter to stockholders.
On June 11, 1999, the Company filed a Current Report on Form 8-K which
disclosed, under Item 5 thereof, the acquisition by the Company of Cardinal
Contracting Corporation ("Cardinal"). The report included audited financial
statements of Cardinal and pro forma financial information of the Company.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Group Maintenance America Corp.
Date: August 16, 1999 By: /s/ Darren B. Miller
-----------------------------------
Darren B. Miller
Executive Vice President and Chief
Financial Officer (principal financial
officer)
Date: August 16, 1999 By: /s/ Daniel W. Kipp
-----------------------------------
Daniel W. Kipp
Senior Vice President and Chief Accounting
Officer (principal accounting officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,475
<SECURITIES> 0
<RECEIVABLES> 287,458
<ALLOWANCES> 7,753
<INVENTORY> 20,887
<CURRENT-ASSETS> 347,687
<PP&E> 68,153
<DEPRECIATION> 16,856
<TOTAL-ASSETS> 932,420
<CURRENT-LIABILITIES> 210,993
<BONDS> 336,650
0
0
<COMMON> 37
<OTHER-SE> 382,561
<TOTAL-LIABILITY-AND-EQUITY> 932,420
<SALES> 684,619
<TOTAL-REVENUES> 684,619
<CGS> 543,831
<TOTAL-COSTS> 543,831
<OTHER-EXPENSES> 94,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,464
<INCOME-PRETAX> 33,351
<INCOME-TAX> 14,751
<INCOME-CONTINUING> 18,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,600
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
