<PAGE>
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 8-K
_______________________
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 11, 1999
(Date of earliest event reported: May 14, 1999)
GROUP MAINTENANCE AMERICA CORP.
(Exact name of registrant as specified in its charter)
Texas 1-13565 76-0535259
(State or other (Commission (I.R.S. Employer
jurisdiction of incorporation) File Number) Identification No.)
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 860-0100
================================================================================
<PAGE>
ITEM 5. ACQUISITION OR DISPOSITION OF ASSETS
On May 14, 1999, Group Maintenance America Corp. (the "Company") purchased
all of the outstanding capital stock of Cardinal Contracting Corporation, an
Indiana corporation ("Cardinal"). The purchase was effected in accordance with
the Stock Purchase Agreement (the "Agreement") dated as of May 13, 1999, among
the Company, Cardinal, and the stockholders of Cardinal. The purchase price paid
or to be paid by the Company for Cardinal consists of $22.9 million in cash and
0.9 million shares of the Company's common stock, par value $.001 per share
("Common Stock").
Substantially all of the stockholders of Cardinal prior to the acquisition
will be employed by Cardinal after the acquisition. After the acquisition,
Cardinal shall continue to lease a facility from one of the former stockholders
of Cardinal.
Cardinal is engaged in the business of providing control and instrument
systems, process piping, millwright, rigging services, and installation and
reinstallation of machinery and equipment in manufacturing and industrial
settings in the Indianapolis, Indiana and Lexington, Kentucky marketplaces. The
assets of Cardinal consist primarily of cash, accounts receivable, inventory,
equipment, vehicles and goodwill. The Company expects that Cardinal will
continue to conduct its business in substantially the same manner as conducted
before the acquisition.
The cash portion of the consideration paid by the Company in connection
with the acquisition was provided pursuant to loans made under a Credit
Agreement dated as of October 15, 1998 (the "Credit Agreement") among the
Company, certain subsidiaries of the Company, Chase Bank of Texas, National
Association, as Agent, Bank of America Texas, N.A., as Co-Agent, Paribas, as
Syndication Agent, ABN AMRO Bank, N.V., as Documentation Agent, and the banks
named therein (the "Lenders").
2
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of businesses acquired.
The following financial statements of Cardinal are included herein:
Independent Auditors' Report
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cardinal Contracting Corporation
We have audited the accompanying balance sheets of Cardinal Contracting
Corporation (the Company) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardinal Contracting
Corporation as of December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
June 2, 1999
4
<PAGE>
<TABLE>
<CAPTION>
CARDINAL CONTRACTING CORPORATION
BALANCE SHEETS
December 31, December 31, March 31,
1997 1998 1999
-------------- --------------- --------------
(unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 600 $ 776,864 $ 64,832
Accounts receivable - trade, net of allowance for doubtful accounts of $0, 17,517,640 8,548,346 11,104,468
$83,539 and $306,837, respectively
Accounts receivable - other 19,327 183,899 204,623
Notes receivable - stockholders 325,750 - -
Costs and estimated earnings in excess of billings on uncompleted contracts 5,183,529 12,235,765 13,117,573
Prepaid expenses and other current assets 78,644 100,189 115,761
----------- ----------- -----------
Total current assets 23,125,490 21,845,063 24,607,257
PROPERTY AND EQUIPMENT, NET 3,306,269 4,044,574 3,824,985
CASH SURRENDER VALUE OF LIFE INSURANCE 114,628 128,771 126,332
OTHER LONG-TERM ASSETS 68,444 27,373 39,236
----------- ----------- -----------
Total assets $26,614,831 $26,045,781 $28,597,810
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,000,000 $ 1,000,000 $ 1,950,000
Accounts payable 12,014,343 10,949,548 13,180,455
Accrued expenses 1,576,224 2,127,049 1,157,916
Billings in excess of costs and estimated earnings on uncompleted contracts 399,637 315,516 140,174
Distributions payable to stockholders 2,337,035 3,800,000 5,020,637
----------- ----------- -----------
Total current liabilities 17,327,239 18,192,113 21,449,182
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,800,000 500,000 250,000
----------- ----------- -----------
Total liabilities 19,127,239 18,692,113 21,699,182
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, no par value; 1,000 shares authorized and
543 shares issued and outstanding 301,000 301,000 301,000
Retained earnings 7,186,592 7,052,668 6,597,628
----------- ----------- -----------
Total stockholders' equity 7,487,592 7,353,668 6,898,628
----------- ----------- -----------
Total liabilities and stockholders' equity $26,614,831 $26,045,781 $28,597,810
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CARDINAL CONTRACTING CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31, Three months ended March 31,
-------------------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
--------------- ----------------- ------------------- ---------------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $41,791,674 $53,811,808 $62,099,916 $18,424,082 $13,207,148
COST OF SERVICES 33,732,225 46,011,619 51,872,447 15,027,215 11,278,661
----------- ----------- ----------- ----------- -----------
Gross profit 8,059,449 7,800,189 10,227,469 3,396,867 1,928,487
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,693,116 2,124,934 2,484,359 687,504 860,759
----------- ----------- ----------- ----------- -----------
Income from operations 6,366,333 5,675,255 7,743,110 2,709,363 1,067,728
OTHER INCOME (EXPENSE):
Interest income - 51,591 100,506 6,254 14,339
Interest expense (251,046) (393,774) (184,850) (58,274) (28,028)
Other, net 69,778 18,205 144,892 46,094 20,236
----------- ----------- ----------- ----------- -----------
Income before income tax
provision 6,185,065 5,351,277 7,803,658 2,703,437 1,074,275
INCOME TAX PROVISION 5,782 16,027 54,029 4,771 9,315
----------- ----------- ----------- ----------- -----------
Net income $ 6,179,283 $ 5,335,250 $ 7,749,629 $ 2,698,666 $ 1,064,960
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CARDINAL CONTRACTING CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Total
------------------------------- Retained Stockholders'
Shares Amount Earnings Equity
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 543 $301,000 $ 2,354,919 $ 2,655,919
Net income 6,179,283 6,179,283
Distribution to stockholders (2,520,740) (2,520,740)
--- -------- ----------- -----------
Balance, December 31, 1996 543 301,000 6,013,462 6,314,462
Net income 5,335,250 5,335,250
Distribution to stockholders (4,162,120) (4,162,120)
--- -------- ----------- -----------
Balance, December 31, 1997 543 301,000 7,186,592 7,487,592
Net income 7,749,629 7,749,629
Distribution to stockholders (7,883,553) (7,883,553)
--- -------- ----------- -----------
Balance, December 31, 1998 543 301,000 7,052,668 7,353,668
Net income (unaudited) 1,064,960 1,064,960
Distribution to stockholders (unaudited) (1,520,000) (1,520,000)
--- -------- ----------- -----------
Balance, March 31, 1999 (unaudited) 543 $301,000 $ 6,597,628 $ 6,898,628
=== ======== =========== ===========
The accompanying notes are an integral part of these financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CARDINAL CONTRACTING CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31, Three months ended March 31,
---------------------------------------------------------------------
1996 1997 1998 1998 1999
------------- ------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,179,283 $ 5,335,250 $ 7,749,629 $ 2,698,666 $ 1,064,960
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,039,197 1,109,364 981,929 300,000 237,982
(Gain) Loss on sale of property and equipment 2,653 (9,897) (144,892) (45,000) (20,236)
Change in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable-trade (1,557,006) (11,687,193) 8,969,294 2,444,096 (2,556,122)
Accounts receivable-other (108,790) 89,463 (164,572) (10,791) (20,724)
Costs and estimated earnings in excess of billings
on uncompleted contracts (3,623,201) 2,198,114 (7,136,357) 699,130 (1,057,150)
Prepaid expenses and other current assets (16,282) (33,729) (21,545) 4,876 (15,572)
Cash surrender value of life insurance (5,785) (4,235) (14,143) - 2,439
Other assets 3,572 (36,940) 41,071 28,125 (11,863)
Increase (decrease) in -
Accounts payable 2,539,422 6,023,075 (1,064,795) (2,551,133) 2,230,907
Accrued expenses 715,154 490,479 550,825 (334,511) (969,133)
----------- ------------- ----------- ------------ -----------
Net cash provided by (used in) operating activities 5,168,217 3,473,751 9,746,444 3,233,458 (1,114,512)
----------- ------------- ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,654,670) (1,893,515) (1,732,846) (535,150) (35,917)
Proceeds from sale of property and equipment 14,800 19,049 157,504 83,192 37,760
(Increase) decrease in notes receivable - stockholders (244,519) (81,231) 325,750 - -
----------- ------------- ----------- ------------ -----------
Net cash provided by (used in) investing activities (1,884,389) (1,955,697) (1,249,592) (451,958) 1,843
----------- ------------- ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 9,050,000 16,680,000 5,950,000 5,050,000 1,300,000
Payments on borrowings (9,622,930) (14,476,725) (7,250,000) (5,600,000) (600,000)
Distributions to stockholders (2,363,783) (4,098,544) (6,420,588) (500,100) (299,363)
----------- ------------- ----------- ------------ -----------
Net cash provided by (used in) financing activities (2,936,713) (1,895,269) (7,720,588) (1,050,100) 400,637
----------- ------------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 347,115 (377,215) 776,264 1,731,400 (712,032)
CASH AND CASH EQUIVALENTS, beginning of period 30,700 377,815 600 600 776,864
----------- ------------- ----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 377,815 $ 600 $ 776,864 $ 1,732,000 $ 64,832
=========== ============= =========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 114,638 $ 253,552 $ 184,850 $ 58,274 $ 28,028
Income taxes $ 10,377 $ 21,662 $ 54,029 $ 4,771 $ 9,315
=========== ============= =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
8
</TABLE>
<PAGE>
CARDINAL CONTRACTING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(All information with respect to the interim periods ended
March 31, 1998 and 1999 is unaudited)
1. BUSINESS AND ORGANIZATION
Cardinal Contracting Corporation, an Indiana corporation ("the Company"), is
an industrial contractor, specializing in millwright and rigging services
with operations in Indianapolis, Indiana and Lexington, Kentucky, servicing
principally manufacturers in Indiana, Kentucky and surrounding states. The
Company performs work under cost-plus-fee contracts, fixed price contracts,
and time and material contracts.
2. SUMMARY OF SIGNIFICANT POLICIES
Interim Financial Information
The interim financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from fixed price contracts are recognized on the percentage of
completion method. The completed percentage is measured by the percentage of
cost incurred to date as compared to the estimated total cost for each
contract, including work for approved change orders. Revenues from
cost-plus-fee contracts are recognized on the basis of costs incurred during
the period plus the fee earned, measured by the cost-to-cost method. Revenue
from time and material contracts is accrued at the end of each month based
on chargeable costs incurred through month end.
Contract costs include all direct material, subcontract and labor costs and
a provision for indirect costs such as indirect labor. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and revenues and are recognized in the period in which the revisions are
determined.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
investments in money market accounts and certificates of deposits purchased
with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable-trade consists of the following at December 31, 1997 and
1998:
9
<PAGE>
CARDINAL CONTRACTING CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
1997 1998
----------- ----------
Accounts receivable-billed $17,095,633 $8,502,140
Retainage receivable 422,007 129,745
Allowance for doubtful accounts - (83,539)
----------- ----------
$17,517,640 $8,548,346
=========== ==========
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Expenditures for
major renewals and improvements, which extend the useful lives of existing
equipment, are capitalized and depreciated. Leasehold improvements are
capitalized and amortized over the life of the lease or the estimated useful
life of the asset. The estimated useful lives of property and equipment are
as follows:
Years
Construction Equipment 5-7
Trucks and Trailers 5-7
Leasehold Improvements 10
Office Equipment 5-7
Expenditures for repairs and maintenance are charged to expense when incurred.
Upon retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Cash Surrender Value of Life Insurance
Cash surrender value of life insurance is recorded at cash value as stated by
the insurance carrier.
Income Taxes
The stockholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby each stockholder's respective equitable
share in the taxable income of the Company is reportable on his individual tax
return. Accordingly, no provision or liability for federal income taxes is
recognized by the Company. The Company has made distributions to the
stockholders each year at least in the amounts necessary to pay personal
income taxes payable on the Company's taxable income. The Company is subject
to state income taxes. As of December 31, 1997 and 1998 deferred income taxes
are insignificant.
Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash, accounts receivable and costs and
estimated earnings in excess of billings on uncompleted contracts.
Accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts result primarily from contracts with customers
principally in the Company's service area in Indiana, Kentucky and the
surrounding states. The Company's customers are primarily engaged in the
automotive business. Credit is extended to customers after an evaluation for
credit worthiness; however, the Company does not require collateral or other
security from customers.
10
<PAGE>
CARDINAL CONTRACTING CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
The percentage contribution to total revenues from customers that represent
10% or more of total revenue for the years ended December 31, 1996, 1997 and
1998 are as follows:
1996 1997 1998
---- ---- ----
Customer A 35.3% 48.3% 47.5%
Customer B 23.6% 2.1% 0.5%
3. EMPLOYEE BENEFIT PLANS
The Company adopted a defined contribution retirement savings plan in 1997
that covers substantially all employees not covered by a collective
bargaining agreement. Plan participants may elect to have from 1% to 15% of
their annual compensation contributed to the Plan. The Company makes
discretionary contributions of up to 5% of eligible compensation.
Contributions to the plan by the Company for the years ended December 31,
1997 and 1998 were $14,365 and $45,025, respectively.
The Company contributes to several union-administered pension plans covering
all of its union employees. Pension expense charged to operations was
$2,995,372, $3,557,207 and $3,984,137 for the years ended December 31, 1996,
1997 and 1998, respectively. Governmental regulations impose certain
requirements relative to multi-employer plans. In the event of a plan's
termination or employer withdrawal, the Company may be liable for a portion
of the plan's unfunded vested benefits, if any. As of December 31, 1998,
there are no unfunded vested pension liabilities under these plans.
4. LEASES
The Company leases its primary office and warehouse space from the President
and controlling stockholder of the Company which provides for payment of
taxes, maintenance and insurance by the Company. The lease expires May 31,
2004, and the Company has an option to extend the lease for up to three
successive two-year terms. The Company also leases the Lexington, Kentucky
office and warehouse space from an unrelated party under a non-cancelable
operating lease, which expires March 31, 2000.
Future minimum lease payments under these non-cancelable operating leases
are as follows:
Year ending December 31,
------------------------
1999 $ 190,926
2000 167,245
2001 198,813
2002 226,563
2003 245,313
Thereafter 62,500
----------
Total minimum lease payments $1,091,360
==========
Rent expenses under these leases, the majority of which relates to the
related party lease, totaled approximately $187,434, $204,064 and $227,761
for the years ended December 31, 1996, 1997 and 1998, respectively.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts as of December 31, 1997 and
December 31, 1998 is as follows:
11
<PAGE>
CARDINAL CONTRACTING CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
1997 1998
------------ ------------
Costs incurred 40,893,429 46,783,703
Estimated earnings recognized 12,918,379 15,316,212
------------ ------------
53,811,808 62,099,915
Less billings on contracts 49,027,916 50,179,666
------------ ------------
$ 4,783,892 $ 11,920,249
============ ============
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
1997 1998
---------- -----------
Costs and estimated earnings in
excess of billings 5,183,529 12,235,765
Billings in excess of costs and
estimated earnings (399,637) (315,516)
---------- -----------
$4,783,892 $11,920,249
========== ===========
6. PROPERTY AND EQUIPMENT
The principal categories of property and equipment as of December 31, 1997
and 1998 are as follows:
1997 1998
---------- -----------
Construction equipment $6,336,654 $ 7,650,313
Trucks and trailers 2,309,107 2,457,886
Leasehold improvements 358,821 358,822
Office equipment 250,606 379,313
---------- -----------
9,255,188 10,846,334
Less: Accumulated depreciation 5,948,919 6,801,760
---------- -----------
Total Property and Equipment, net $3,306,269 $ 4,044,574
========== ===========
7. LONG-TERM DEBT
Long-term debt at December 31, 1997, December 31, 1998 and March 31, 1999
consist of:
12
<PAGE>
CARDINAL CONTRACTING CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
December 31, December 31, March 31,
1997 1998 1999
------------ ------------ -----------
(Unaudited)
Three-year note payable to a $2,500,000 $1,500,000 $1,250,000
bank in monthly installments
of $83,333, plus interest at
prime less 1/2%, secured by
the personal guaranty of the
Company's majority
stockholder, and maturing in
June, 2000.
Borrowings under the revolving
line of credit 300,000 - 950,000
---------- ---------- ----------
2,800,000 1,500,000 2,200,000
Less: Current maturities 1,000,000 1,000,000 1,950,000
---------- ---------- ----------
Total long-term debt $1,800,000 $ 500,000 $ 250,000
========== ========== ==========
The Company has a $5,000,000 revolving line of credit with a bank. The line
of credit expires June 30, 1999 and bears interest at the bank's prime
lending rate less 0.5 percent (7.25% at March 31, 1999). All bank borrowings
under the revolving line of credit are unsecured except for the personal
guarantee by the President and majority stockholder. There were no
borrowings outstanding on this line as of December 31, 1998.
8. FINANCIAL INSTRUMENTS
The Company's significant financial instruments at December 31, 1997 and
1998 consist of cash and cash equivalents and notes payable. The Company
believes the carrying value of these instruments on the accompanying balance
sheets at December 31, 1997 and 1998 approximates their fair value.
9. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
10. SUBSEQUENT EVENTS
Effective May 14, 1999, Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash and
common stock of GroupMAC.
13
<PAGE>
(b) Pro forma financial information.
The following pro forma financial statements of the Company, reflecting
the acquisition of Cardinal (which does not qualify as an individually
significant transaction under Regulation S-X, Rule 3-05) and other acquisitions
made by the Company since January 1, 1998, as more fully described in the pro
forma financial statements, are included herein:
Introduction to Unaudited Pro Forma Combined Financial Statements
Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statements of Operations
Notes to Unaudited Pro Forma Combined Financial Statements
14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements utilize the
historical financial statements of Group Maintenance America Corp. and
Subsidiaries ("GroupMAC" or "the Company") as of and for the quarter ended March
31, 1999 and for the year ended December 31, 1998 and give effect to (i) the
pre-acquisition financial information of 39 companies acquired during 1998 (the
"1998 Acquisition Companies"), (ii) three companies acquired during the first
quarter of 1999 (the "First Quarter 1999 Acquisition Companies") and (iii) six
companies acquired during the second quarter of 1999 (the "Second Quarter 1999
Acquisition Companies" and, together with the First Quarter 1999 Acquisition
Companies, the "1999 Acquisition Companies"). The 1999 Acquisition Companies are
as follows:
<TABLE>
<CAPTION>
Date
Company Acquired
------- --------
<S> <C>
Pacific Rim Mechanical Contractors, Inc............................. 01/09/99
Air Systems, Inc.................................................... 02/11/99
Statewide Heating & Air Conditioning, Inc........................... 02/12/99
Klassic Air Conditioning, Inc....................................... 04/08/99
Tower Electric Company.............................................. 04/14/99
Vermont Mechanical, Inc. ........................................... 05/13/99
Cardinal Contracting Corporation ................................... 05/14/99
L.T. Mechanical, Inc. .............................................. 05/14/99
Electrical Associates of Dallas, Inc. .............................. 05/17/99
</TABLE>
All of the acquisitions were or will be accounted for under the purchase
method of accounting. These unaudited pro forma combined financial statements
are based on the historical financial statements of the acquired companies and
estimates and assumptions set forth below and in the notes to the unaudited pro
forma combined financial statements.
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheet of the Company and the balance sheets of the Second
Quarter 1999 Acquisition Companies, as if such acquisitions had occurred on
March 31, 1999. The accompanying unaudited pro forma statements of operations of
the Company combine the historical statement of operations of the Company and
the statements of operations of the acquired entities as if such acquisitions
had occurred on January 1, 1998.
GroupMAC has analyzed the savings that it expects to realize from reductions
in salaries and certain benefits to the owners of the acquired companies. To the
extent the owners of the acquired entities have agreed prospectively to
reductions in salary, bonuses and benefits, these reductions have been reflected
in the unaudited pro forma combined statements of operations.
The pro forma adjustments are based on available information and certain
assumptions that management deems appropriate and may be revised as additional
information becomes available. The consideration for certain acquisitions is
subject to adjustment, of which an estimate is reflected in the pro forma
adjustments. The pro forma combined financial data do not purport to represent
what GroupMAC's financial position or results of operations would actually have
been if such transactions had in fact occurred on those dates and are not
necessarily representative of GroupMAC's financial position or results of
operations for any future period. Since the acquisitions have not historically
been under common control or management, historical pro forma combined results
may not be indicative of or comparable to future performance. The unaudited pro
forma combined financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K/A for the fiscal year ended December 31,
1998 and the unaudited consolidated condensed financial statements and notes
thereto included in the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1999.
15
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Second
Quarter
1999
GroupMAC and Acquisition Pro Forma Pro Forma
Subsidiaries Companies Adjustments Combined
ASSETS ------------ ----------- ----------- ---------
------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............ $ 6,607 $ 3,543 $(10,150) $ --
Accounts receivable,
net of allowance....... 229,865 18,878 -- 248,743
Due from related
parties................ -- 212 (212) --
Inventories............ 18,644 741 -- 19,385
Costs and estimated
earnings in excess of
billings on
uncompleted contracts.. 32,195 13,418 -- 45,613
Prepaid expenses and
other current assets... 9,624 333 -- 9,957
Deferred tax assets.... 8,660 38 13 8,711
-------- ------- -------- --------
Total current assets. 305,595 37,163 (10,349) 332,409
-------- ------- -------- --------
PROPERTY AND EQUIPMENT,
net 45,178 5,396 -- 50,574
GOODWILL, net........... 449,071 -- 42,885 491,956
DEFERRED DEBT ISSUE
COSTS................... 12,652 -- -- 12,652
OTHER LONG-TERM ASSETS.. 1,245 174 (127) 1,292
-------- ------- -------- --------
Total assets......... $813,741 $42,733 $ 32,409 $888,883
======== ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
Short-term borrowings
and current maturities
of long-term debt...... $ 885 $ 2,264 $ (2,264) $ 885
Accounts payable and
accrued expenses....... 115,158 19,372 -- 134,530
Due to related
parties................ 9,522 6,426 (6,426) 9,522
Billings in excess of
costs and estimated
earnings on
uncompleted contracts.. 38,507 1,521 -- 40,028
Deferred service
contract revenue....... 4,397 -- -- 4,397
Income taxes payable... 3,612 203 -- 3,815
Other current
liabilities............ 3,236 -- -- 3,236
-------- ------- -------- --------
Total current
liabilities.......... 175,317 29,786 (8,690) 196,413
-------- ------- -------- --------
REVOLVING CREDIT
FACILITY................ 156,000 -- 32,726 188,726
SENIOR SUBORDINATED
NOTES................... 130,000 -- -- 130,000
JUNIOR SUBORDINATED
NOTES................... 1,650 -- -- 1,650
DEBT OF ACQUIRED
COMPANY................. -- 696 (696) --
DEFERRED TAX LIABILITY.. 795 246 -- 1,041
DUE TO RELATED PARTIES.. -- 676 (676) --
OTHER LONG-TERM
LIABILITIES............. 1,508 -- -- 1,508
SHAREHOLDERS' EQUITY
Common stock........... 35 320 (318) 37
Additional paid-in
capital................ 349,339 119 20,953 370,411
Retained earnings
(deficit).............. (903) 10,950 (10,950) (903)
Treasury stock......... -- (60) 60 --
-------- ------- -------- --------
Total shareholders'
equity............... 348,471 11,329 9,745 369,545
-------- ------- -------- --------
Total liabilities and
shareholders'
equity............... $813,741 $42,733 $ 32,409 $888,883
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
16
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
GroupMAC and Acquisition Acquisition Pro Forma Pro Forma
Subsidiaries Companies Companies Adjustments Combined
------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES................... $761,541 $314,878 $282,119 $ -- $1,358,538
COST OF SERVICES........... 585,396 248,518 227,997 -- 1,061,911
-------- -------- -------- -------- ----------
Gross profit.............. 176,145 66,360 54,122 -- 296,627
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.... 118,119 43,934 29,334 (10,133)(a) 181,254
AMORTIZATION OF GOODWILL... 5,960 -- -- 6,575 (b) 12,535
-------- -------- -------- -------- ----------
Income from operations.. 52,066 22,426 24,788 3,558 102,838
OTHER INCOME (EXPENSE):
Interest expense.......... (6,595) (749) (1,458) (19,661)(c) (28,463)
Interest income........... 407 271 210 (888)(d) --
Other..................... 377 495 180 -- 1,052
-------- -------- -------- -------- ----------
Income before income tax
provision............... 46,255 22,443 23,720 (16,991) 75,427
INCOME TAX PROVISION....... 20,326 1,124 4,387 7,181 (e) 33,018
-------- -------- -------- -------- ----------
NET INCOME................. $ 25,929 $ 21,319 $ 19,333 $(24,172) $ 42,409
======== ======== ======== ======== ==========
NET INCOME PER SHARE--
BASIC...................... $ 0.94 $ 1.14
======== ==========
WEIGHTED AVERAGE SHARES--
BASIC...................... 27,544 37,318 (f)
======== ==========
NET INCOME PER SHARE--
DILUTED.................... $ 0.93 $ 1.12
======== ==========
WEIGHTED AVERAGE SHARES--
DILUTED.................... 27,948 37,888 (f)
======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
17
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999
GroupMAC and Acquisition Pro Forma Pro Forma
Subsidiaries Companies Adjustments Combined
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES................... $302,765 $ 36,074 $ -- $ 338,839
COST OF SERVICES........... 244,018 29,244 -- 273,262
-------- -------- -------- ----------
Gross profit.............. 58,747 6,830 -- 65,577
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.... 39,707 3,745 (208)(a) 43,244
AMORTIZATION OF GOODWILL... 2,806 -- 328 (b) 3,134
-------- -------- -------- ----------
Income from operations.. 16,234 3,085 (120) 19,199
OTHER INCOME (EXPENSE):
Interest expense.......... (5,792) (59) (1,265)(c) (7,116)
Interest income........... 78 42 (120)(d) --
Other..................... 155 45 -- 200
-------- -------- -------- ----------
Income before income tax
provision............... 10,675 3,113 (1,505) 12,283
INCOME TAX PROVISION....... 4,996 370 325 (e) 5,691
-------- -------- -------- ----------
NET INCOME................. $ 5,679 $ 2,743 $ (1,830) $ 6,592
======== ======== ======== ==========
NET INCOME PER SHARE--
BASIC...................... $ 0.16 $ 0.18
======== ==========
WEIGHTED AVERAGE SHARES--
BASIC...................... 34,914 37,318 (f)
======== ==========
NET INCOME PER SHARE--
DILUTED.................... $ 0.16 $ 0.17
======== ==========
WEIGHTED AVERAGE SHARES--
DILUTED.................... 35,265 37,671 (f)
======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
18
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
The respective results of operations for the 1998 Acquisition Companies from
January 1, 1998 to the dates of the acquisitions were combined with the actual
results of operations of the Company and the 1999 Acquisition Companies for the
twelve months ended December 31, 1998 to determine the pro forma results of
operations for the twelve months ended December 31, 1998.
The respective results of operations for the First Quarter 1999 Acquisition
Companies from January 1, 1999 to the dates of acquisition were combined with
actual results of operations of the Company and the Second Quarter 1999
Acquisition Companies for the three months ended March 31, 1999 to determine the
pro forma results of operations for the three months ended March 31, 1999.
2. ACQUISITIONS:
The results of operations of the acquired businesses are included in the
actual results of operations of the Company from the date of acquisition, and
the historical balance sheet at March 31, 1999 includes the acquisitions
completed as of that date. All of the acquisitions are accounted for as
purchases. The cash consideration associated with the acquisition of the 1999
Acquisition Companies was provided by borrowings under an amended and restated
credit agreement (the "Credit Agreement").
The table below sets forth the consideration paid or to be paid in cash and
shares of Common Stock to the shareholders of the Second Quarter 1999
Acquisition Companies.
For purposes of computing the estimated purchase price for accounting purposes
for the Second Quarter 1999 Acquisition Companies, the value of the Common Stock
is determined using an estimated weighted average fair value of $11.84 per
share, which represents a discount rate of 10.0% from the weighted average stock
price of $13.16 at the respective dates of acquisition due primarily to
restrictions on the sale and transferability of such shares. The restrictions
are created by a contractual restriction imposed on the shares issued in
connection with the acquisition of the acquired businesses. This contractual
provision prohibits the shareholders from selling, transferring or otherwise
disposing of any shares for one year following the date of acquisition of such
shares and limiting dispositions for one additional year to no more than 36% of
their holdings.
19
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
Several former owners of the acquired companies have the ability to receive
additional amounts of purchase price, payable in cash and common stock in 1999
through 2001, contingent upon the occurrence of future events. The Company will
record such contingent consideration as additional purchase price when earned.
The estimated purchase price and related allocations of the excess purchase
price for the Second Quarter 1999 Acquisition Companies are based upon
preliminary estimates and are subject to certain purchase price adjustments at
and following closing. Based upon management's preliminary analysis, it is
anticipated that the historical carrying value of the assets and liabilities of
the Second Quarter 1999 Acquisition Companies (representing $14.8 million) will
approximate fair value. This results in an allocation to goodwill of
approximately $42.9 million. Management has not identified any other material
tangible or identifiable intangible assets to which a portion of the purchase
price could reasonably be allocated. Consideration paid for the Second Quarter
1999 Acquisition Companies is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Shares Dollars
------ -------
<S> <C> <C>
Cash............................................................ -- $36,614
Common Stock.................................................... 1,779 21,074
-------
Total Consideration........................................... $57,688
=======
</TABLE>
20
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Records the deferred income tax adjustments on certain Second Quarter 1999
Acquisition Companies associated with converting all acquired companies taxed
under Subchapter S of the Internal Revenue Code (the Code) to corporations taxed
under Subchapter C of the Code.
b) Records the settlement of all shareholder receivables and payables with
cash at closing.
c) Records the elimination of the historical equity accounts of the Second
Quarter 1999 Acquisition Companies.
d) Records the purchase of the Second Quarter 1999 Acquisition Companies,
including the cash and Common Stock consideration due to these companies.
e) Records the refinancing of debt assumed in connection with the acquisition
of the Second Quarter 1999 Acquisition Companies and also records the
utilization of cash on hand and cash acquired to pay down borrowings under the
Credit Agreement.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
Pro Forma
(a) (b) (c) (d) (e) Adjustments
---- ------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ -- $(1,398) $ -- $ -- $ (8,752) $(10,150)
Due from related
parties................ -- (212) -- -- -- (212)
Deferred tax asset...... 13 -- -- -- -- 13
Goodwill................ (13) -- (11,329) 54,227 -- 42,885
Other long term assets.. -- (127) -- -- -- (127)
Short-term borrowings
and current maturities
of long-term debt...... -- -- -- -- 2,264 2,264
Due to related parties.. -- 3,641 -- 2,785 -- 6,426
Revolving credit
facility............... -- (1,904) -- (36,614) 5,792 (32,726)
Debt of acquired
company................ -- -- -- -- 696 696
Due to related parties
(noncurrent)........... -- -- -- 676 -- 676
Common stock............ -- -- 320 (2) -- 318
Additional paid-in
capital................ -- -- 119 (21,072) -- (20,953)
Retained earnings....... -- -- 10,950 -- -- 10,950
Treasury stock.......... -- -- (60) -- -- (60)
----- ------- -------- -------- -------- --------
Total................. $ -- $ -- $ -- $ -- $ -- $ --
===== ======= ======== ======== ======== ========
</TABLE>
21
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the acquired companies to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the terms
of the employment agreements. Such employment agreements are primarily for
three years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
The salaries, bonuses, benefits and other compensation items recorded in the
individual financial statements amounted to $15.5 million and $0.5 million for
the year ended December 31, 1998 and the three months ended March 31, 1999,
respectively. The contractually agreed upon compensation and benefits for these
same businesses, on a going forward basis, amount to $5.4 million and $0.3
million for the year ended December 31, 1998 and the three months ended March
31, 1999, respectively. The difference between these amounts equates to $10.1
million and $0.2 million for the year ended December 31, 1998 and the three
months ended March 31, 1999, respectively, and is reflected as a pro forma
adjustment.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
22
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
c) Represents the adjustment necessary to reflect interest expense related to
borrowings under the Credit Agreement to fund the cash portion of the purchase
price and the assumption of debt related to the 1998 and 1999 Acquisition
Companies, interest related to Senior Subordinated Notes used to retire amounts
outstanding under the Credit Agreement, and interest related to the junior
subordinated debt. A summary of the historical and pro forma debt outstanding
and a summary of the pro forma interest expense (including amounts recognized in
the historical financial statements) assuming the acquisitions occurred on
January 1, 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
Interest Expense
March 31, --------------------------------
March 31, Pro Forma 1999 Year Ended Three Months
1999 Acquisition Pro Forma Interest December 31, Ended
Balances Adjustments Balances Rate 1998 March 31, 1999
------------ ----------- ----------- -------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Short-Term Senior Debt:
Historical March
31, 1999 short-term
debt..................... $ 885 $ -- $ 885(i) 7.70%(iii) $ 68 $ 17
======== ======= ======== ======= ======
Long-Term Senior Debt:
Historical March
31, 1999 Credit
Agreement................ $156,000 $(6,607) $149,393 7.70%(iii) $11,503 $2,876
Second Quarter 1999
Acquisition Companies
assumed debt refinanced.. -- 2,960 2,960 7.70%(iii) 228 57
Second Quarter 1999
Acquisition Companies
borrowings to fund cash
portion of purchase
price, net of cash
acquired................. -- 36,373 36,373 7.70%(iii) 2,801 700
-------- ------- -------- ------- ------
Total long-term
senior debt/interest
expense................ $156,000 $32,726 $188,726(i),(ii) $14,532 $3,633
======== ======= ======== ======= ======
Long-Term Senior
Subordinated Debt:
Historical March
31, 1999 long term
debt..................... $130,000 $ -- $130,000 9.75%(iv) $12,675 $3,169
Amortization of deferred
financing costs of the
Senior Subordinated
Notes.................... -- -- -- 1,089(vi) 272
-------- ------- -------- ------- ------
Total long-term senior
subordinated debt/
interest expense......... $130,000 $ -- $130,000 $13,764 $3,441
======== ======= ======== ======= ======
Long-Term Junior
Subordinated Debt:
Historical March
31, 1999 long-term
debt..................... $ 1,650 $ -- $ 1,650 6.00%(v) $ 99 $ 25
======== ======= ======== ======= ======
Total debt/interest
expense................... $288,535 $32,726 $321,261 $28,463 $7,116
======== ======= ======== ======= ======
</TABLE>
- ----
(i) Represents total senior indebtedness.
(ii) Represents total guarantor senior indebtedness.
(iii) Represents the current borrowing rates under the Credit Agreement.
(iv) Represents the coupon interest rate on the Senior Subordinated Notes.
(v) Represents the contractual interest rates for the junior subordinated
debt.
(vi) Represents amortization of deferred debt issue costs over the ten-year
life of the related Senior Subordinated Notes.
d) Reflects the reduction to historical interest income related to existing
and acquired cash, all of which is assumed to be used for the acquisition of
the 1998 and 1999 Acquisition Companies.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
23
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
f) Weighted average shares outstanding include the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- ---------
<S> <C> <C>
Shares issued and outstanding at March 31, 1999................. 35,438 35,438
Shares to be issued for companies acquired prior to
March 31, 1999................................................. 101 101
Shares issued for Second Quarter 1999 Acquisition Companies..... 1,779 1,779
------ ------
Weighted average shares outstanding--basic...................... 37,318 37,318
Incremental effect of options and warrants on shares
outstanding.................................................... 570 353
------ ------
Weighted average shares outstanding--diluted.................... 37,888 37,671
====== ======
</TABLE>
24
<PAGE>
(c) Exhibits.
The following exhibit is filed with this report:
23 Independent Auditors' Consent.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GROUP MAINTENANCE AMERICA CORP.
By: /s/ Daniel W. Kipp
-------------------------------
Daniel W. Kipp
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
Date: June 11, 1999
26
<PAGE>
INDEX OF EXHIBITS
23 Independent Auditors' Consent.
27
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Group Maintenance America Corp.
We consent to the incorporation by reference in the registration statements
on Form S-8 (No. 333-41749, No. 333-41751, No. 333-58651, No. 333-60537,
No. 333-69421 and No. 333-78311) and Form S-4 (No. 333-69533 and No. 333-76713)
of Group Maintenance America Corp. of our report dated June 2, 1999, relating to
the balance sheets of Cardinal Contracting Corporation as of December 31, 1998
and 1997, and the related statements of operations, stockholders' equity and
cash flows each of the years in the three-year period ended December 31, 1998,
which report appears in the current report of Form 8-K of Group Maintenance
America Corp. dated June 11, 1999.
KPMG LLP
Houston, Texas
June 11, 1999
