10-Q 1 e10-q.txt AMERICAN PLUMBING & MECHANICAL, INC. - 06/30/2000 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2000 Commission File No. 333-81139 American Plumbing & Mechanical, Inc. (Exact name of Registrant as Specified in Its Charter) DELAWARE 76-0577626 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) 1950 LOUIS HENNA BLVD. 78664 ROUND ROCK, TEXAS (ZIP Code) (Address of Principal Executive Offices) (512) 246-5260 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 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| As of August 11, 2000, there were outstanding 13,271,310 shares of common stock and 331,116 shares of Class B common stock of the Registrant. 2 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS Part I - Financial Information Page ---- Item 1 - Financial Statements 2 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3 - Quantitative and Qualitative Disclosures About Market Risks 11 Part II - Other Information Item 1 - Legal Proceedings 13 Item 2 - Changes in Securities and Use of Proceeds 13 Item 3 - Defaults Upon Senior Securities 13 Item 4 - Submission of Matters to a Vote of Security Holders 13 Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 15
1 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
December 31, June 30, 1999 2000 -------------- -------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 393 $ 2,542 Accounts receivable, net 73,726 89,372 Inventories 8,356 9,411 Costs and estimated earnings in excess of billings on uncompleted contracts 13,919 15,967 Prepaid expenses and other current assets 2,135 3,200 -------------- -------------- Total current assets 98,529 120,492 PROPERTY AND EQUIPMENT, net 17,266 19,483 GOODWILL, net 146,050 163,655 OTHER NONCURRENT ASSETS 5,906 5,622 -------------- -------------- Total assets $ 267,751 $ 309,252 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of capital lease obligations $ 1,031 $ 960 Accounts payable and accrued expenses 42,871 55,931 Accounts payable, related parties, including acquisition consideration payable 12,160 9,079 Billings in excess of costs and estimated earnings on uncompleted contracts 16,721 19,217 -------------- -------------- Total current liabilities 72,783 85,187 LONG-TERM LIABILITIES: Long-term debt 136, 623 152,690 Deferred income taxes 1,319 891 -------------- -------------- Total liabilities 210,725 238,768 -------------- -------------- COMMITMENTS AND CONTINGENCIES SERIES A REDEEMABLE PREFERRED STOCK, $.01 par value, 10,000,000 shares authorized, 1,048,820 shares issued and outstanding 13,635 13,635 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized, 11,265,229 and 13,271,310 shares issued and outstanding, respectively 113 133 Class B common stock, $.01 par value, 5,000,000 shares authorized, 2,423,517 and 331,116 shares issued and outstanding, respectively 24 3 Additional paid-in capital 35,143 41,824 Retained earnings 8,111 14,889 -------------- -------------- Total stockholders' equity 43,391 56,849 -------------- -------------- Total liabilities and stockholders' equity $ 267,751 $ 309,252 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 2 4 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------ ---------------------------------------- 1999 2000 1999 2000 -------------------- ----------------- ----------------- ------------------ REVENUES $ 94,315 $ 141,679 $ 111,139 $ 266,816 COST OF REVENUES (including depreciation) 77,495 115,163 88,885 218,153 -------------- ------------- -------------- -------------- Gross profit 16,820 26,516 22,254 48,663 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,688 11,699 17,551 23,188 GOODWILL AMORTIZATION 951 1,446 951 2,746 -------------- ------------- -------------- -------------- Income from operations 181 13,371 3,752 22,729 OTHER INCOME (EXPENSE): Interest and dividend income 58 47 69 80 Interest expense (3,240) (4,343) (3,267) (9,083) Other 112 147 121 327 -------------- ------------- -------------- -------------- Other expense, net (3,070) (4,149) (3,077) (8,676) -------------- ------------- -------------- -------------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY LOSS (2,889) 9,222 675 14,053 PROVISION FOR INCOME TAXES 2,533 4,208 2,695 6,593 -------------- ------------- -------------- -------------- INCOME(LOSS)BEFORE EXTRAORDINARY LOSS (5,422) 5,014 (2,020) 7,460 -------------- ------------- -------------- -------------- EXTRAORDINARY LOSS 455 - 455 - NET INCOME (LOSS) (5,877) 5,014 (2,475) 7,460 -------------- ------------- -------------- -------------- PREFERRED DIVIDENDS 341 341 341 682 -------------- ------------- -------------- -------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (6,218) $ 4,673 $ (2,816) $ 6,778 ============== ============= ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 5 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Six Months Ended June 30, -------------------------------- 1999 2000 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (2,475) $ 7,460 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 1,912 5,193 Non cash compensation charge related to issuance of stock to management 7,992 - Amortization of deferred compensation expense 114 177 Extraordinary loss on early extinguishments of debt 769 - Loss (gain) on disposal of property and equipment 5 (133) Deferred income taxes (140) (1,190) Increase (decrease) in cash flows from: Accounts receivable, net (10,430) (9,127) Inventories (1,307) (712) Costs and estimated earnings in excess of billings on uncompleted contracts (656) 1,736 Prepaid expenses and other current assets (670) (198) Accounts payable and accrued expenses 727 4,655 Billings in excess of costs and estimated earnings on uncompleted contracts 4,037 1,651 Other 260 524 ------------ ----------- Net cash provided by operating activities 138 10,036 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions of property and equipment (2,300) (3,132) Proceeds from sale of property and equipment 33 347 Acquisition of companies, net of cash acquired (52,363) (12,031) ------------- ------------ Net cash used in investing activities (54,630) (14,816) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on subordinated loan 30,000 - Payments on subordinated loan (30,000) - Payments of long-term debt (9,432) (944) Payments on notes to stockholders (5,766) - Issuance of senior subordinated notes 118,668 - Net borrowings on bank credit facility (1,025) 16,400 Distributions to stockholders (39,123) (878) Buy back of Class B shares - (6,966) Preferred dividends (341) (682) ------------- ------------ Net cash provided by financing activities 62,981 6,929 ------------ ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 8,489 2,149 CASH AND CASH EQUIVALENTS, beginning of period 1,980 393 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 10,469 $ 2,542 ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for- Interest $ 2,912 $ 8,355 Income taxes 1,640 5,512 Capital lease additions 393 -
The accompanying notes are an integral part of these consolidated financial statements. 4 6 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION: American Plumbing and Mechanical, Inc. (the "Company"), was organized in June 1998 and acquired ten U.S. businesses (the "Founding Companies") on April 1, 1999. The acquisitions were accounted for using the purchase method of accounting with Christianson Enterprises, Inc. and affiliates ("Christianson") being reflected as the accounting acquiror for accounting purposes. Subsequently, the Company acquired the outstanding stock of three additional companies and the assets of a fourth company (the "Subsequent Acquisitions", and collectively with the "Founding Companies", the "Acquired Companies"). Prior to April 1, 1999, Christianson elected S Corporation status. Under S Corporation status, as defined by the Internal Revenue Code, Christianson itself was not subject to taxation for federal purposes; rather, the stockholders reported their share of Christianson's taxable earnings or losses in their personal tax returns. Certain states do not recognize S Corporation status for purposes of state taxation. Consequently, the provision for current and deferred income taxes for the six months ended June 30, 1999, does not include federal income taxes for the first three months of this period. Christianson terminated its S Corporation status concurrent with the effective date of the merger discussed above. These unaudited interim statements should be read in conjunction with the Company's historical consolidated financial statements and related notes included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 1999. These unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission for reporting interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the fiscal year. 2. COMMITMENTS AND CONTINGENCIES: As of January 1, 2000, the Company became self insured for health care, workers' compensation, and general, property and auto liability up to predetermined amounts above which third party insurance applies. The Company is fully insured through third party insurance for all other types of exposures including an umbrella policy. The Company has not incurred significant claims or losses on any of these insurance policies. 3. STOCKHOLDERS' EQUITY: At December 31, 1999, the Company had 11,265,229 shares of $.01 par value common stock and 2,423,517 shares of $.01 par value Class B common stock outstanding. Class B shares differ from common shares in voting rights and are subordinate in liquidation to all other classes of stock. In February 2000, the Company agreed to purchase approximately 1.5 million shares of Class B common stock from Sterling City Capital, LLC, the original sponsor of the Company, at a price of $3.25 per share. On April 7, 2000, the Company completed the transaction with funding from the Company's Credit Facility. A similar offer was made to the holders of the remaining 0.9 million shares of Class B 5 7 common stock; however, the members of the Company's management that are holders of the Class B common stock did not tender their shares (approximately 0.3 million shares). The purchase of the remaining shares closed in May 2000, and was also funded from the Company's Credit Facility. On March 1, 2000, the Company acquired the stock of Lindy Dennis Industries and related affiliates ( collectively "LDI"). The consideration paid by the Company for LDI consisted of 1,346,154 shares of the Company's common stock and approximately $12 million in cash which was funded through borrowings under the Company's existing $95 million Credit Facility. In April 2000, pursuant to the terms of "Earn-Out" , provisions contained in the original acquisition agreements, the Company also issued 659,927 shares of common stock to certain former stockholders of certain Founding Companies. No future share issuance is required under the terms of any of the acquisition agreements relating to any of the Acquired Companies. 4. RECLASSIFICATIONS: Certain reclassifications have been made to the prior-year financial statements to conform to the current-year presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q, THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING THE COMPANY INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, AND OTHER REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which are intended to be covered by safe harbors created thereby. Readers are cautioned that such information involves risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of the Company to maintain or improve its operating results. All statements, other than statements of historical facts, included or incorporated by reference in this section that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. GENERAL American Plumbing and Mechanical, Inc. (the "Company"), a Delaware corporation, is the largest company in the United States focused primarily on the plumbing contracting services industry. The Company provides plumbing, heating, ventilation and air conditioning ("HVAC") and mechanical 6 8 contracting services to single family residential, multifamily residential and commercial/institutional customers. The Company was organized in June 1998, and acquired ten U.S. businesses (the "Founding Companies") on April 1, 1999. The acquisitions were accounted for using the purchase method of accounting with Christianson Enterprises, Inc. and affiliates ("Christianson") being reflected as the accounting acquiror for accounting purposes. In September 1999, the Company acquired the outstanding stock of two additional companies and the assets of a third company. On March 1, 2000, the Company acquired the stock of Lindy Dennis Industries and related affiliates (collectively "LDI"), headquartered in Corona, California. All of the above companies acquired subsequent to the acquisition of the Founding Companies are herein referred to as the "Subsequent Acquisitions", and collectively with the "Founding Companies", the "Acquired Companies." RESULTS OF OPERATIONS Supplemental Pro Forma Combined To facilitate a meaningful comparison, the following unaudited supplemental pro forma combined discussion and analysis includes the results of operations of the Founding Companies, as if they were combined on January 1, 1999, and the Subsequent Acquisitions as if combined from the dates of their acquisition. The unaudited supplemental pro forma information does not reflect the Subsequent Acquisitions as if they had occurred at the beginning of the period. This data does not indicate the results that we would have obtained had these events actually occurred on January 1 of the respective period presented, or our future results. The unaudited pro forma financial data is based on preliminary estimates, available information, and certain assumptions that management deems appropriate. Selling, general and administrative expenses for the periods prior to the acquisitions have been decreased for reductions in salaries, bonuses, benefits and lease payments to former owners of the Founding Companies, agreed to in accordance with the terms of the employment agreements and lease agreements executed as a part of the acquisitions. The data will not be comparable to, and may not be indicative of, the Company's post-combination results of operations because: o the Founding Companies were not under common control or management; o the Company will incur incremental costs for its corporate management; and, o the combined data does not reflect the potential benefits and cost savings the Company expects to realize by operating as a combined entity. 7 9 The following table sets forth supplemental pro forma combined financial information of the Founding Companies in 1999 and the actual results of the Acquired Companies in 2000:
Six Months Ended June 30 --------------------------------------------------- 1999 2000 ------------------------- -------------------- (Dollars in thousands) (Unaudited) Revenues $ 182,794 100% $ 266,816 100% Cost of revenues 144,673 79 218,153 81 ------------ ----- ------------ ----- Gross Profit 38,121 21 48,663 19 Selling, general and administrative expenses 24,688 13 23,188 8 Goodwill Amortization 1,901 1 2,746 1 ------------ ----- ------------ ----- Income from operations $ 11,532 7% $ 22,729 10% ============ ====== ============ ======
Six months ended June 30, 1999 compared to six months ended June 30, 2000 Pro forma combined revenues were $266.8 million for the six months ended June 30, 2000, an increase of $84.0 million, or 46%, from $182.8 million for the six months ended June 30, 1999. The increase in combined revenues resulted from a $33.9 million increase in "same store" revenues for the Founding Companies, combined with $50.1 million generated by the Subsequent Acquisitions. The largest increase in "same store" revenues was associated with the single family and commercial/institutional subsidiaries. Revenues also increased due to modest price increases at most of the companies in response to rising material costs. Pro forma combined gross profit was $48.7 million for the six months ended June 30, 2000, an increase of $10.6 million, or 28%, from $38.1 million for the six months ended June 30, 1999. The increase in combined gross profit resulted from an $1.9 million increase in "same store" gross profit for the Founding Companies, combined with $8.7 million generated by the Subsequent Acquisitions. Pro forma combined selling, general and administrative expenses were $23.2 million for the six months ended June 30, 2000, an increase of $6.5 million, from $16.7 million for the six months ended June 30, 1999 (excluding a non-cash compensation charge of $8.0 million relating to the issuance of shares to management on April 1, 1999). Selling, general and administrative expenses generated by the Subsequent Acquisitions were $4.1 million with the remaining $2.4 million increase associated with "same store" volume. Pro forma goodwill amortization increased to $2.7 million for the six months ended June 30, 2000, from $1.9 million for the six months ended June 30, 1999. The increase in amortization is associated with the goodwill generated by the Subsequent Acquisitions and amortization of the goodwill generated by payments to certain stockholders of the Founding Companies under "Earn-Out" provisions contained in the acquisition agreements. The Company amortizes goodwill on a straight-line basis over a 30 year period. 8 10 Historical Financial Information The following historical consolidated financial information represents the operations of Christianson, the accounting acquiror, prior to April 1, 1999, and the remaining Acquired Companies from their respective dates of acquisition. Historical selling, general and administrative expenses for the periods prior to April 1, 1999, reflect salaries, bonuses, benefits, and lease payments to the former stockholders of Christianson. These amounts have been prospectively reduced in accordance with the terms of the acquisition agreement. Additionally, Christianson operated as an S Corp prior to April 1, 1999. Under S Corporation status, Christianson itself was not subject to taxation for federal purposes.
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------- --------------------------------------------- 1999 2000 1999 2000 ------------------- --------------------- ---------------------- --------------------- (Unaudited) (Dollars in thousands) Revenues $ 94,315 100% $ 141,679 100% $ 111,139 100% $ 266,816 100% Cost of revenues 77,495 82 115,163 81 88,885 80 218,153 82 ----------- ----- ------------ ----- ------------ ----- ------------ ----- Gross Profit 16,820 18 26,516 19 22,254 20 48,663 18 Selling, general and administrative expenses 15,688 17 11,699 8 17,551 16 23,188 9 Goodwill amortization 951 1 1,446 1 951 1 2,746 1 ----------- ----- ------------ ----- ------------ ----- ------------ ----- Income from operations 181 - 13,371 10 3,752 3 22,729 8 Interest expense (3,240) (3) (4,343) (3) (3,267) (3) (9,083) (3) Other, net 170 - 194 - 190 - 407 - ----------- ----- ------------ ----- ------------ ----- ------------ ----- Income (loss) before taxes and extraordinary loss (2,889) (3) 9,222 7 675 - 14,053 5 Provision for income taxes 2,533 3 4,208 3 2,695 2 6,593 2 ----------- ----- ------------ ----- ------------ ----- ------------ ----- Income (loss) before extraordinary loss (5,422) (6) 5,014 4 (2,020) (2) 7,460 3 ----------- ----- ------------ ----- ------------ ------- ------------ ----- Extraordinary loss 455 - - - 455 - - - Net income (loss) (5,877) (6) 5,014 4 (2,475) (2) 7,460 3 ----------- ----- ------------ ----- ------------ ------- ------------ ----- Preferred dividends 341 - 341 - 341 - 682 - ----------- ----- ------------ ----- ------------ ----- ------------ ----- Net income (loss) available to common shareholders $ (6,218) (6)% $ 4,673 4% $ (2,816) (2)% $ 6,778 3% =========== ===== ============ ===== ============ ====== ============ =====
9 11 Three months ended June 30, 1999 compared to three months ended June 30, 2000 Revenues increased $47.4 million, from $94.3 million for the three months ended June 30, 1999, to $141.7 million for the three months ended June 30, 2000. The increase in revenues resulted from a $16.9 million increase in "same store" revenues for the Founding Companies, combined with $30.5 million generated by the Subsequent Acquisitions. Gross profit increased $9.7 million, from $16.8 million for the three months ended June 30, 1999, to $26.5 million for the three months ended June 30, 2000. The increase in gross profit resulted from a $4.0 million increase in "same store" gross profit generated by the Founding Companies, combined with $5.7 million generated by the Subsequent Acquisitions. Selling, general and administrative expenses increased $4.0 million, from $7.7 million for the three months ended June 30, 1999, (excluding a non-cash compensation charge of $8.0 million relating to the issuance of shares to management on April 1, 1999), to $11.7 million for the three months ended June 30, 2000. The increase in selling, general and administrative expenses was primarily due to the Subsequent Acquisitions. Net income increased $2.9 million, from $2.1 million for the three months ended June 30, 1999, (excluding a non-cash compensation charge of $8.0 million relating to the issuance of shares to management on April 1, 1999), to $5.0 million for the three months ended June 30, 2000. The increase is due primarily to the results of the Subsequent Acquisitions. Six months ended June 30, 1999 compared to six months ended June 30, 2000 Revenues increased $155.7 million from $111.1 million for the six months ended June 30, 1999, to $266.8 million for the six months ended June 30, 2000. The growth was primarily due to the acquisition of the remaining Acquired Companies and an increase in activity. Gross profit increased $26.4 million, from $22.3 million for the six months ended June 30, 1999, to $48.7 million for the six months ended June 30, 2000. The increase in gross profit was primarily due to the acquisition of the remaining Acquired Companies and an increase in activity. Selling, general and administrative expenses increased $13.6 million, from $9.6 million for the six months ended June 30, 1999, (excluding a non-cash compensation charge of $8.0 million relating to the issuance of shares to management on April 1, 1999), to $23.2 million for the six months ended June 30, 2000. The increase in selling, general and administrative expenses was primarily due to the acquisition of the remaining Acquired Companies, and the corporate general and administrative costs incurred after April 1, 1999. Goodwill amortization increased $1.7 million for the six months ended June 30, 2000, as compared to the same period in 1999. The increase in amortization is associated with the goodwill generated by the acquisition of the remaining Acquired Companies and amortization of the goodwill generated by payments to certain Founding Company stockholders under "earn out" provisions in the purchase agreements. The Company amortizes goodwill on a straight-line basis over a 30 year period. Interest expense increased $5.8 million for the six months ended June 30, 2000 as compared to the same period in 1999. This is a result of the interest on the Senior Subordinated Notes, issued May 19, 1999, and the Credit Facility. The increase in the provision for income taxes of $3.9 million results from the Company recording federal income taxes for the period after April 1, 1999. Prior to this date, Christianson elected S Corp status. 10 12 Net income increased $2.0 million, from $5.5 million for the six months ended June 30, 1999, (excluding a non-cash compensation charge of $8.0 million relating to the issuance of shares to management on April 1, 1999), to $7.5 million for the six months ended June 30, 2000. The increase is primarily due to an increase in activity offset by the interest expense on the indebtedness incurred to fund the cash portion of the acquisition consideration and the income tax expense resulting from the Company recording federal taxes for the period after April 1, 1999. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the Company had $35.3 million in working capital and $152.7 million of outstanding long-term indebtedness, including capital lease obligations totaling $1.5 million. For the six months ended June 30, 2000, net cash provided by operating activities was $10.0 million resulting primarily from operations and decreases in working capital. Cash used in investing activities was $14.8 million which primarily relates to the acquisition of LDI. Cash provided by financing activities for the six months ended June 30, 2000, was $ 6.9 million and was primarily provided by net borrowings on the Company's Credit Facility offset by amounts used in the buy back of Class B shares (See Item 1 above). On April 1, 1999, the Company entered into the Credit Facility with a total commitment of $95 million. At the option of the Company, the Credit Facility bears interest at the base rate of the arranging bank plus an applicable margin or at LIBOR, plus an applicable margin and has a three year term. At June 30, 2000, $62.8 million was available under the Credit Facility. The Company's capital expenditures, for the six months ended June 30, 2000, primarily relate to the purchase of equipment and leasehold improvements that were funded from cash flow from operations. During the six months ended June 30, 2000, capital expenditures were $3.1 million. The Company anticipates that its cash flow from operations will provide sufficient cash to enable the Company to meet its working capital needs, debt service requirements, and planned capital expenditures for property and equipment through the foreseeable future. While the Company continues to pursue acquisitions of leading companies, it has identified several markets where there are no suitable acquisition candidates. AMPAM intends to enter these markets through "start ups" which will initially focus on serving existing customers in the new markets. From this base, the Company will work to develop relationships with new customers. The Company intends to fund start up costs with working capital, cash flow from operations and borrowings from the Credit Facility. SEASONALITY The plumbing and mechanical contracting services industry is influenced by seasonal factors, which generally result in lower activity during winter months than in other periods. As a result, the Company expects that its revenues and profits will generally be lower in the first and fourth quarters of each fiscal year, and higher in the second and third quarters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to various market risks primarily related to potential adverse changes in interest rates. In the normal course of business, the Company employs established policies and procedures to manage this risk. The Company is not exposed to any other significant market risks including foreign currency exchange risk, or interest rate risks from the use of derivative financial instruments. The Company does not use derivative financial 11 13 instruments for trading or to speculate on changes in interest rates or commodity prices. The Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The Company's debt with fixed interest rates consists of Senior Subordinated Notes and capital leases. The Company's debt with variable interest rates consists primarily of the Credit Facility. There were no significant changes in market risks during the three months ended June 30, 2000. 12 14 PART II - OTHER INFORMATION ITEM 1. - Legal Proceedings From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. The Company maintains insurance coverage against potential claims in an amount which management believes to be adequate. Currently, the Company is not aware of any legal proceedings or pending claims that management believes will have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. ITEM 2. - Changes in Securities and Use of Proceeds In April 2000, pursuant to the terms of "Earn-Out" provisions combined in the original acquisition agreements, the Company also issued 659,927 shares of common stock to certain of the former stockholders of certain Founding Companies. The issuance of such common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as a transaction by the issuer not involving a public offering. ITEM 3. - Defaults Upon Senior Securities None ITEM 4. - Submission of Matters to a Vote of Security Holders None ITEM 5. - Other Information None ITEM 6. - Exhibits and Reports on Form 8-K (a) The exhibits to this report are listed below *3.1 Amended and Restated Certificate of Incorporation (American Plumbing& Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.1). *3.2 Amended and Restated Bylaws (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.2). *3.3 Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 3.3). *4.1 Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc., State Street Bank and Trust Company and the other parties named therein with respect to $125,000,000 11 5/8% Senior Subordinated Notes due 2008 (American Plumbing & Mechanical, Inc. Registration Statement on Form S-4 (File No. 333-81139), Exhibit 4.1). 27.1 Financial data schedule *Incorporated by reference 13 15 (b) The registrant filed a report dated May 15, 2000, on Form 8-K/A during the period covered by this quarterly report on Form 10-Q. 14 16 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. AMERICAN PLUMBING AND MECHANICAL, INC. Date: August 11, 2000 By: /s/ David C. Baggett -------------------- David C. Baggett Senior Vice President and Chief Financial Officer