10-Q 1 h06066e10vq.txt AMERICAN PLUMBING & MECHANICAL, INC.- 3/31/2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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. ROUND ROCK, TEXAS 78664 (Address of Principal Executive Offices) (ZIP Code)
(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] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of May 15, 2003, there were outstanding 13,211,383 shares of common stock and 331,116 shares of Class B common stock of the Registrant. ================================================================================ AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 TABLE OF CONTENTS Part I - Financial Information..................................................................................2 ITEM 1. Financial Statements................................................................................2 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risks........................................20 ITEM 4. Controls and Procedures............................................................................20 Part II - Other Information....................................................................................22 ITEM 1. - Legal Proceedings.................................................................................22 ITEM 2. - Changes in Securities and Use of Proceeds.........................................................23 ITEM 3. - Defaults Upon Senior Securities...................................................................23 ITEM 4. - Submission of Matters to a Vote of Security Holders...............................................23 ITEM 5. - Other Information.................................................................................23 ITEM 6. - Exhibits and Reports on Form 8-K..................................................................23 SIGNATURES.....................................................................................................24
1 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
December 31, March 31, 2002 2003 ------------- ------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,654 $ 5,622 Accounts receivable, net of allowance for doubtful accounts of $3,414 and $3,404, respectively 92,467 95,444 Inventories 13,311 13,961 Costs and estimated earnings in excess of billings on uncompleted contracts 20,486 21,704 Prepaid expenses and other current assets 7,604 9,103 ------------- ------------- Total current assets 136,522 145,834 PROPERTY AND EQUIPMENT, net 17,684 16,791 GOODWILL, net 107,222 107,222 OTHER NONCURRENT ASSETS 4,194 4,683 ------------- ------------- Total assets $ 265,622 $ 274,530 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 63,226 $ 60,183 Billings in excess of costs and estimated earnings on uncompleted contracts 22,123 21,678 Current maturities of long-term debt 113 72,613 ------------- ------------- Total current liabilities 85,462 154,474 LONG-TERM LIABILITIES: Long-term debt 154,596 94,617 Other long-term liabilities 7,798 8,188 ------------- ------------- Total liabilities 247,856 257,279 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized, 13,211,383 shares issued and outstanding 132 132 Class B common stock, $.01 par value, 5,000,000 shares authorized, 331,116 shares issued and outstanding 3 3 Additional paid-in capital 44,903 44,756 Retained deficit (27,272) (27,640) ------------- ------------- Total stockholders' equity 17,766 17,251 ------------- ------------- Total liabilities and stockholders' equity $ 265,622 $ 274,530 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 2 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands) (Unaudited)
Three Months Ended March 31, ------------------------------ 2002 2003 ------------- ------------- REVENUE $ 140,180 $ 138,196 COST OF REVENUE (including depreciation) 119,165 118,329 ------------- ------------- Gross profit 21,015 19,867 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,836 16,148 ------------- ------------- Income from operations 5,179 3,719 OTHER INCOME (EXPENSE): Interest expense (4,124) (4,334) Other 150 79 ------------- ------------- Other expense, net (3,974) (4,255) ------------- ------------- INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES, DISCONTINUED OPERATIONS and ACCOUNTING CHANGE 1,205 (536) PROVISION FOR/(BENEFIT FROM) INCOME TAXES 550 (168) ------------- ------------- INCOME/(LOSS) BEFORE DISCONTINUED OPERATIONS and ACCOUNTING CHANGE 655 (368) LOSS ON DISCONTINUED OPERATIONS, net of tax benefit (154) -- ACCOUNTING CHANGE, net of tax (34,627) -- ------------- ------------- NET LOSS (34,126) (368) PREFERRED DIVIDENDS 341 170 ------------- ------------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (34,467) $ (538) ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Three Months Ended March 31, ------------------------------ 2002 2003 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (34,126) $ (368) Adjustments to reconcile net income to net cash provided by operating activities- Cumulative effect of an accounting change 34,751 -- Depreciation 1,394 1,128 Amortization of deferred compensation expense 39 23 Gain on disposal of property and equipment (23) (27) Deferred income taxes (43) 1,177 Increase (decrease) in cash flows from: Accounts receivable, net (4,304) (2,977) Inventories 1,102 (650) Costs and estimated earnings in excess of billings on uncompleted contracts (1,383) (1,218) Prepaid expenses and other current assets 417 (1,427) Accounts payable and accrued expenses (7,923) (4,282) Billings in excess of costs and estimated earnings on uncompleted contracts 2,583 (445) Other 54 (225) ------------- ------------- Net cash used in operating activities (7,462) (9,291) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions of property and equipment (1,017) (303) Proceeds from sale of property and equipment 96 95 ------------- ------------- Net cash used in investing activities (921) (208) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on bank credit facility 9,500 12,500 Payments of long-term debt (70) (33) Payments of preferred dividends (341) -- ------------- ------------- Net cash provided by financing activities 9,089 12,467 ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 706 2,968 CASH AND CASH EQUIVALENTS, beginning of period 1,666 2,654 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 2,372 $ 5,622 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for- Interest $ 920 $ 1,018 Income taxes 3,359 49
The accompanying notes are an integral part of these consolidated financial statements. 4 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM" or the "Company"), is the largest company in the United States focused primarily on the residential plumbing contracting services industry. The Company also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. AMPAM provides plumbing, mechanical and HVAC installation services to single family residential, multifamily residential and commercial construction customers. 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, 2002. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. Management 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used to determine the Company's revenue on uncompleted contracts. These estimates also impact the current asset "Costs and estimated earnings in excess of billings on uncompleted contracts" and the current liability "Billings in excess of costs and estimated earnings on uncompleted contracts". See REVENUE RECOGNITION for a further discussion. Estimates of the ultimate liability for losses under self insured insurance programs are also included in the Company's consolidated financial statements. These estimates are developed based on the Company's historical losses and industry standard claims growth factors. Significant estimates are also used for goodwill impairment calculations. See GOODWILL for further discussion. Actual results could differ from those estimates. REVENUE RECOGNITION AMPAM recognizes revenue from construction contracts on the percentage-of-completion method measured by the percentage of cost incurred to total estimated costs for each contract. Contract costs include all direct material and labor costs. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, the effects of which are recognized in the period the revisions are determined. If the revised estimated direct costs will 5 result in a "loss" contract, an accrual is made to record the future loss at that time. The current asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents estimated revenue recognized in excess of amounts billed. The current liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of estimated revenue recognized. GOODWILL AMPAM evaluates the carrying value of its goodwill and other intangible assets at least annually. Potential goodwill impairment is assessed using a discounted cash flow methodology. The Company uses estimates to determine future discounted cash flows. Estimates used include, estimates of future cash flows, future short-term and long-term growth rates, and weighted average cost of capital. See note 8 for further discussion. 3. DISCONTINUED OPERATIONS In August 2002, management decided to discontinue the single family operations in southern Virginia. Following the standards set by Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"), the Company did not expense the estimated future costs of the discontinued operation at the time the decision was made. Under SFAS 144, the costs are recorded in the statement of income under operations until the impaired asset has been either completely disposed of or abandoned and all costs associated with it have been recorded. In the fourth quarter of 2002, the discontinued southern Virginia business unit ceased to operate. Accordingly, the results of this operation were reflected as a loss on discontinued operations, net of tax benefit in the statement of income. The results of the discontinued operation for the presented periods are as follows (in thousands):
Three months ended March 31, ---------------------------------- 2002 2003 --------------- --------------- Revenue $ 1,574 $ -- Cost of revenue (includes depreciation) 1,581 -- --------------- --------------- Gross loss (7) -- Selling, general and administrative expenses 246 -- --------------- --------------- Loss from operations (253) -- Other expense, net -- -- --------------- --------------- Loss before benefit from income taxes (253) -- Benefit from income taxes (99) -- --------------- --------------- Net loss $ (154) $ -- =============== ===============
The discontinued operations were abandoned except for leasehold improvements of $0.2 million related to the leased facility. This amount is included in the consolidated balance sheet at March 31, 2003. The leased facility is for sale by the owner who, upon sale of the facility, has verbally agreed to reimburse the Company for the amount of the leasehold improvements. The Company expects to realize this asset in 2003. 4. SHUTDOWN OPERATIONS Also in August 2002, management decided to shut down the commercial operations in Sacramento, CA and Pensacola, FL. For the quarter ended March 31, 2003, these operations collectively incurred operating losses of $1.9 million on a pretax basis. Management expects to incur an additional $1.0 million to $2.0 million pretax loss related to the shut down of these operations. The major portion of these losses relate to the Company's commercial operations in Sacramento, CA. 6 Management expects the shutdown locations' operations to be virtually completed by June 30, 2003. Loss reserves of $1.6 million have been recorded at March 31, 2003 to reflect expected costs in excess of contract revenue at our Sacramento, CA and Pensacola, FL commercial operation locations. As of March 31, 2003, there were 19 active jobs as compared to 91 active jobs at June 30, 2002, at these locations. The results of these shutdown operations included in income from operations for the presented periods are as follows (in thousands):
Three months ended March 31, ------------------------------ 2002 2003 ------------- ------------- Revenue $ 12,622 $ 1,087 Cost of revenue (including depreciation) 11,859 2,460 ------------- ------------- Gross profit (loss) 763 (1,373) Selling, general and administrative expenses 719 554 ------------- ------------- Income (loss) from operations 44 (1,927) Other expense, net (7) -- ------------- ------------- Loss before provision for (benefit from) income taxes 37 (1,927) Provision for (benefit from) income taxes 14 (752) ------------- ------------- Net income (loss) $ 23 $ (1,175) ============= =============
5. WARRANTY RESERVE For certain contracts, the Company warrants labor for one year after completion of a plumbing or air conditioning installation. A reserve for warranty costs is recorded based upon the historical level of warranty claims and management's estimate of future costs. The changes in the consolidated warranty liability for the presented periods are as follows:
Quarter ended March 31, ---------------------------- 2002 2003 ------------ ------------ Balance at beginning of quarter: $ 2,487 $ 2,957 Warranty costs incurred (1,001) (1,621) Warranty expense 1,158 1,734 ------------ ------------ Balance at end of quarter: $ 2,644 $ 3,070 ============ ============
6. LONG TERM DEBT Long-term debt consists of the following (in thousands):
December 31, March 31, 2002 2003 ------------- ------------- Senior Subordinated Notes $ 93,799 $ 93,853 Bank Credit Facility 60,000 72,500 Capital lease obligations 910 877 ------------- ------------- Total Debt 154,709 167,230 Less - Current maturities (113) (72,613) ------------- ------------- Long Term Debt $ 154,596 $ 94,617 ============= =============
7 THE BANK CREDIT FACILITY The bank credit facility, as amended, (the "Credit Facility") is a senior secured revolving commitment in an aggregate principal amount of $84.0 million. The Credit Facility was used to (a) fund acquisitions, (b) repurchase Senior Subordinated Notes, (c) repurchase Class B common stock (d) redeem preferred stock and (e) provide working capital. The Credit Facility bears interest, at the option of the Company, at the base rate of the arranging bank plus an applicable margin or at LIBOR, plus an applicable margin. The applicable margin is 4.50% above LIBOR or 3.50% above the agent bank's base rate. Interest on base rate loans is payable monthly in arrears and interest on LIBOR loans is payable at the end of each borrowing period. In 2001, the Company amended and restated its Credit Facility to extend the maturity to March 31, 2004. All principal amounts borrowed will be payable in full at maturity. The Credit Facility is secured by (1) the accounts receivable, inventory, equipment and other personal property of the Company, and (2) all of the capital stock owned by AMPAM of its existing or later-formed domestic subsidiaries. The Company is required to make prepayments or commitment reductions on the Credit Facility under certain circumstances. As of March 31, 2003, the average interest rate on the Credit Facility was 5.52%. Because the maturity of the Credit Facility is now one year from the end of the reporting period, the outstanding amount of the Credit Facility has been classified as a component of "Current maturities of long-term debt." As of March 31, 2003, the Company had borrowings under the Credit Facility of $72.5 million and outstanding letters of credit of $7.0 million, leaving $4.5 million in availability under the Credit Facility. The Credit Facility requires the Company to maintain compliance with certain specified financial covenants including maximum ratios of funded debt to EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, a capital expenditure covenant, minimum EBITDA and other restrictive covenants. Additionally, the terms of the Credit Facility limit the ability of the Company to incur additional indebtedness, dispose of assets, make acquisitions or other investments, and to make various other payments. On March 28, 2003, an amendment to the Credit Facility was executed which amended certain covenants prospectively. The Company met the amended covenants as of March 31, 2003 and believes that it will continue to meet the amended covenants. As a condition of the amendment, certain fees were paid and the interest rate on the Credit Facility was increased by 0.5%. Additionally, if the Company does not repay its obligation under the Credit Facility by July 31, 2003, an additional 1% fee will be due the banks. AMPAM utilizes its cash flow from operations and to the extent available, borrowings under the Credit Facility, to enable the Company to meet its working capital needs, debt service requirements and planned capital expenditures for property and equipment. As of April 30, 2003, the Company had borrowings under the Credit Facility of $76.9 million, outstanding letters of credit of $7.0 million and cash on hand of $6.1 million. As the Company is fully borrowed under the Credit Facility, all future cash flow requirements must be provided by operating activities. If cash flows from operations are insufficient to meet the Company's operating cash requirements, the Company will be forced to seek additional sources of liquidity or take other actions, which may include protection provided by the Federal reorganization statutes. SENIOR SUBORDINATED NOTES On May 19, 1999, the Company completed an offering of $125.0 million of 11 5/8% senior subordinated notes due in 2008 (the "Senior Subordinated Notes"). Subsequently, $30.0 million in face value of the outstanding Senior Subordinated Notes were repurchased and retired. The Senior Subordinated Notes are subordinated to all existing and future senior indebtedness of the Company and are guaranteed by each of the Company's current and future subsidiaries. Separate financial information of the subsidiary guarantors is not presented as the parent company has no independent assets or operations, and the guarantees as to the Senior Subordinated Notes are full and unconditional and joint 8 and several. There are no restrictions on the ability of the parent company to obtain funds from the subsidiary guarantors. The Company has the option to redeem the Senior Subordinated Notes at any time on or after 2004 at specified redemption prices. Additionally, the Company is required under certain circumstances to offer to repurchase the Senior Subordinated Notes at specified redemption prices in the event of a change in control. The terms of the Senior Subordinated Notes limit the ability of the Company to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and to make various other payments. The Senior Subordinated Notes are reflected in the accompanying balance sheet net of an original issuance discount of approximately $1.1 million which is being amortized to interest expense over the term of the bonds. The Company makes semi-annual interest payments on the Senior Subordinated Notes of $5.5 million on April 15 and October 15 of each year. The Company made the April 15, 2003 interest payment as scheduled. The Company's Credit Facility and Senior Subordinated Notes contain cross default provisions. 7. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who were holders of approximately one-half of AMPAM's Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. On April 1, 2002, the parties finalized a settlement agreement and general release pursuant to which the defendants and related parties tendered all of their preferred stock and AMPAM paid the defendants and related parties $3.1 million. Upon transfer of consideration, AMPAM retired the preferred stock and realized an increase in Additional Paid in Capital of $3.8 million representing the liquidation value of the preferred stock received net of the proceeds attributable to the preferred stock and costs incurred to facilitate the settlement. As of April 1, 2002, the defendants and their related parties held 524,410 shares of preferred stock with a liquidation value of $6.8 million and were due approximately $0.5 million for outstanding but undeclared dividends, all of which were included in the settlement. The parties have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and have released any and all claims against each other. Three remaining holders of preferred stock hold 524,410 combined shares. The remaining preferred stockholders have exercised their right under the terms of the preferred stock designation to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Because the preferred stock has been "put" to AMPAM, the liquidation value of these shares has been classified as "Other long-term liabilities" on the balance sheet as of March 31, 2003. On or about January 22, 2003, the remaining preferred stockholders initiated a binding arbitration proceeding against the Company seeking, among other things, specific performance by the Company to purchase all of their preferred stock. The Company intends to defend the arbitration vigorously but can make no representation as to the outcome of the arbitration. Additionally, because the Company has not purchased the preferred stock, pursuant to the terms of the preferred stock designation, the Company may not engage in the following activities without the affirmative vote of not less than a majority of the holders of the preferred stock, voting together as a single class: (i) incur any additional indebtedness for borrowed money other than borrowings under any credit facility to which the Company is a party at such time and as in effect when any 9 redemption payment becomes due and is unpaid or at the time any dividend payment becomes due and is unpaid; (ii) effect (or make any agreement or become obligated to effect) any (a) sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries which individually or in the aggregate would constitute a significant subsidiary, (b) consolidation or merger involving the Company or any of its subsidiaries, or (c) dissolution, liquidation or winding-up of the Company or any of its subsidiaries; provided however that in no event shall the Company effect any sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries to affiliates of the Company; (iii) make (or permit any subsidiary to make) any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company and except for any such loans and advances which do not in the aggregate exceed $250,000; (iv) make any loan or advance to any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business; or (v) acquire, by purchase, exchange, merger or otherwise, all or substantially all of the properties or assets of any other corporation or entity. The Company is also involved in other disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such "ordinary course" legal actions will have a material adverse effect on the Company's financial position or results of operations. INSURANCE The Company is self insured for health care, workers' compensation, and general, property and auto liability up to predetermined amounts above which third party insurance applies. As of March 31, 2003, the Company has accrued for the expected costs under the self insured programs. These accruals are based on industry development factors that may change based upon AMPAM's actual claim experience. The Company is insured through third party insurance for other types of exposures including an umbrella policy up to specific limits. 8. GOODWILL In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 142, effective January 1, 2002, established new accounting and reporting requirements for goodwill and other intangible assets and addressed the accounting and reporting for acquired goodwill and other intangible assets. It also provides that goodwill should not be amortized, but must be tested for impairment annually or more frequently if circumstances indicate potential impairment. SFAS 142 also required the Company to complete a transitional goodwill impairment test within six months from the date of adoption and at least annually thereafter. Under SFAS 142, the impairment adjustment, if any, recognized at adoption of the new rules was to be reflected as a cumulative effect of change in accounting principle in the statement of income. Prospectively, goodwill impairment will be assessed using a discounted cash flow methodology. Impairment adjustments recorded subsequently are required to be recognized as an operating expense. 10 Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, and weighted average cost of capital. On an ongoing basis (absent any impairment indicators), the Company will perform impairment tests annually. In the first quarter of 2002, goodwill was tested for impairment by comparing the fair value of each business segment with its carrying value. Based on the impairment tests performed, the Company recognized a charge of $34.6 million (net of tax) in the first quarter of 2002 to reduce the carrying value of goodwill associated with the commercial segment to its implied fair value. This adjustment was reflected as a cumulative effect of a change in accounting principle in the first quarter 2002 statement of income. Due to further deterioration of the commercial segment in 2002, AMPAM re-evaluated the carrying value of the goodwill for each segment as of December 31, 2002. Upon completion of the evaluation, the Company recorded an impairment of the remaining goodwill related to the commercial segment of $12.7 million in December 2002. Because the expensing of goodwill is almost entirely non-deductible for tax purposes, neither of these expenses created a material tax benefit for the Company. At March 31, 2003, the Company had $107.2 million of goodwill remaining on the balance sheet. 9. STOCK BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure an amendment of FASB Statement No. 123, 'Accounting for Stock-Based Compensation'", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method of accounting for stock-based compensation and the effect of the method used on reported results. Certain disclosure requirements under SFAS No. 148 are effective for all financial statements issued for fiscal years and interim reporting periods ending after December 15, 2002. The Company has elected to follow the disclosure only requirements of SFAS 148 and thus will not record compensation expense for option issuances. Therefore, in accordance with SFAS 148, the Company must disclose the proforma amounts as if compensation expense had been recorded for all option issuances. The Company uses the Black-Scholes pricing model to measure the pro-forma compensation expense attributable to stock options granted to employees. If the stock options granted had been expensed the Company's net loss would have been increased to the pro forma amounts indicated below (in thousands):
Three months ended March 31, ------------------------------ 2002 2003 ------------- ------------- Net loss as reported $ (34,126) $ (368) Pro forma compensation expense associated with expensing options at fair value (231) (142) ------------- ------------- Pro forma net loss $ (34,357) $ (510) ============= =============
As of March 31, 2003, approximately 2.2 million options for common stock are available for grant under the Company's stock option plan. The Company has reserved 108,928 shares of its common stock for issuance to certain current and former employees pursuant to the Founding Companies acquisition agreements. 11 10. OPERATING SEGMENTS AMPAM's internal organizational structure is divided into three reporting segments: single family residential, multifamily residential and commercial. The Company's reportable segments offer the same products and services to distinct customer groups. Because each business segment requires different operating and marketing strategies they are managed and reviewed separately. During the first quarter of 2003, AMPAM derived approximately 55%, 31% and 14% of its revenue from single family residential, multifamily residential and commercial customers. These three reporting segments all operate domestically, with no intersegment or foreign sales. The residential segments share the same growth strategies and provide plumbing and HVAC services; however, these different segments provide services to different customers and have different competitors. The commercial segment is focused on obtaining plumbing and mechanical contracts with higher margins. The single family residential market includes housing projects, small condominium projects and townhouse development. The multifamily residential market includes large apartment and condominium projects. The commercial market includes retail establishments, office buildings, hotels, manufacturing plants and other industrial complexes and public and private institutional buildings including schools, hospitals, dormitories, stadiums, airports and prisons. The financial information presented for each segment does not allocate corporate overhead costs. Corporate expenses in the quarters presented include costs related to executive and operations management, sales and marketing, accounting and administrative support. Corporate assets primarily include cash, deferred tax assets, debt issuance costs, intangible assets (other than goodwill), fixed assets related to the Company's corporate office and non-trade accounts receivable. The goodwill associated with each segment is reflected in total assets for the segment. The Company measures performance of the segments based on income (loss) from operations. Segment information for the three months ended March 31, 2003 and 2002 is as follows (unaudited, in thousands):
Single 2003 Family Multifamily Commercial Corporate Total ------------- ------------- ------------- ------------- ------------- Revenue $ 75,422 $ 42,459 $ 20,315 $ -- $ 138,196 Gross profit/(loss) 10,320 8,468 1,277 (198) 19,867 Income/(loss) from operations 2,108 4,496 (1,056) (1,829) 3,719 Total assets 109,496 112,972 33,186 18,876 274,530 Capital spending 166 73 64 -- 303 Depreciation expense 598 233 241 56 1,128
2002 Single Family Multifamily Commercial Corporate Total ------------- ------------- ------------- ------------- ------------- Revenue $ 70,714 $ 38,874 $ 30,587 $ 5 $ 140,180 Gross profit/(loss) 12,187 6,463 2,570 (205) 21,015 Income/(loss) from operations 4,484 2,767 361 (2,433) 5,179 Total assets 110,250 110,560 58,627 12,921 292,358 Capital spending 366 372 187 92 1,017 Depreciation expense 671 252 435 36 1,394
12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING AMPAM INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 AND OTHER REPORTS FILED BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Exchange Act to be covered by safe harbors created thereby. Such forward-looking statements are made only as of the date of this report and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. 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 American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM", the "Company", "we" or "us") to maintain or improve its operating results. Such risks, uncertainties and other important factors include, among others, retention of key management, a national economic downturn or one or more regional downturns in construction, shortages of labor and specialty building materials, difficulty in obtaining or increased costs associated with debt financing, seasonal fluctuations in the demand for plumbing and HVAC systems, existing or future claims that could exceed the levels at which the Company is insured by third parties, the Company's ability to manage its growth, the use of incorrect project cost estimates which are used to determine our percentage of completion and revenue on uncompleted jobs and goodwill impairment write-offs. For further details on these risks, refer to the Risk Factor section of the Company's Form 10-K for the year ended December 31, 2002. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect 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 our 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 we believe 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 that it will occur. GENERAL American Plumbing and Mechanical, Inc. and subsidiaries ("AMPAM", the "Company", "we" or "us") is the largest company in the United States focused primarily on the residential plumbing contracting services industry. The Company also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. We provide plumbing, mechanical and HVAC installation services to single family residential, multifamily residential and commercial construction customers. The following discussion should be read in conjunction with the consolidated financial statements. Our internal organizational structure is divided into three reporting segments: single family residential, multifamily residential and commercial. These operating segments offer similar products and services with differing complexities to distinct customer groups and have different competitors. Because 13 each business segment requires different operating and marketing strategies they are managed and reviewed separately. All three reporting segments operate domestically, with no intersegment or foreign sales. The residential segments share similar growth strategies and provide plumbing and HVAC services. Our commercial segment is focused on obtaining plumbing and mechanical contracts with higher margins. The single family residential market includes housing projects, small condominium projects and townhouse development. The multifamily residential market includes large apartment and condominium projects. The commercial market includes retail establishments, office buildings, hotels, manufacturing plants and other industrial complexes and public and private institutional buildings including schools, hospitals, dormitories, stadiums, airports and prisons. The financial information presented for each segment does not allocate corporate overhead costs. Corporate expenses in the quarters presented include costs related to executive and operations management, sales and marketing, accounting and administrative support. Corporate assets primarily include cash, deferred tax assets, debt issuance costs, intangible assets (other than goodwill), fixed assets related to the Company's corporate office and non-trade accounts receivable. The goodwill associated with each segment is reflected in total assets for the segment. The Company measures performance of the segments based on income (loss) from operations which is presented in the tables below:
Quarter ended March 31, ------------------------------------------------------------------------------- Single 2003 Family Multifamily Commercial Corporate Total ------------- ------------- ------------- ------------- ------------- Revenue $ 75,422 $ 42,459 $ 20,315 $ -- $ 138,196 Cost of revenue (includes depreciation) 65,102 33,991 19,038 198 118,329 ------------- ------------- ------------- ------------- ------------- Gross profit (loss) 10,320 8,468 1,277 (198) 19,867 Selling, general and administrative expenses 8,212 3,972 2,333 1,631 16,148 ------------- ------------- ------------- ------------- ------------- Income (loss) from operations $ 2,108 $ 4,496 $ (1,056) $ (1,829) $ 3,719 ============= ============= ============= ============= ============= 2002 Revenue $ 70,714 $ 38,874 $ 30,587 $ 5 $ 140,180 Cost of revenue (includes depreciation) 58,527 32,411 28,017 210 119,165 ------------- ------------- ------------- ------------- ------------- Gross profit (loss) 12,187 6,463 2,570 (205) 21,015 Selling, general and administrative expenses 7,703 3,696 2,209 2,228 15,836 ------------- ------------- ------------- ------------- ------------- Income (loss) from operations $ 4,484 $ 2,767 $ 361 $ (2,433) $ 5,179 ============= ============= ============= ============= =============
As further discussed below, we are in the process of shutting down two of our commercial operations and have completed the shutdown of one of our small single family locations. DISCONTINUED OPERATIONS In August 2002, management decided to discontinue the single family operations in southern Virginia. Following the standards set by Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"), the Company did not expense the estimated future costs of the discontinued operation at the time the decision was made. Under SFAS 144, the costs are recorded in the statement of income under operations until the impaired asset has been either completely disposed of or abandoned and all costs associated with it have been recorded. In the fourth quarter of 2002, the discontinued southern Virginia business unit ceased to 14 operate. Accordingly, the results of this operation were reflected as a loss on discontinued operations, net of tax benefit in the statement of income. The results of the discontinued operation for the presented periods are as follows (in thousands):
Quarters ended March 31, ------------------------------ 2002 2003 ------------- ------------- Revenue $ 1,574 $ -- Cost of revenue (includes depreciation) 1,581 -- ------------- ------------- Gross loss (7) -- Selling, general and administrative expenses 246 -- ------------- ------------- Loss from operations (253) -- Other expense, net -- -- ------------- ------------- Loss before benefit from income taxes (253) -- Benefit from income taxes (99) -- ------------- ------------- Net loss $ (154) $ -- ============= =============
SHUTDOWN OPERATIONS Also in August 2002, management decided to shut down our commercial operations in Sacramento, CA and Pensacola, FL. For the quarter ended March 31, 2003, these operations collectively incurred operating losses of $1.9 million on a pretax basis. Management expects to incur an additional $1.0 million to $2.0 million pretax loss related to the shut down of these operations. The major portion of these losses relate to our commercial operations in Sacramento, CA. This operation expanded rapidly in late 2001 and early 2002 growing from approximately 150 employees at September 30, 2001 to approximately 450 employees at June 30, 2002. The loss at the shutdown locations resulted from underbidding jobs, unfavorable changes in job estimates and poor field performance. Management expects the shutdown locations' operations to be virtually completed by June 30, 2003. Loss reserves of $1.6 million have been recorded at March 31, 2003 to reflect expected costs in excess of contract revenue at our Sacramento, CA and Pensacola, FL commercial operation locations. As of March 31, 2003, there were 19 active jobs as compared to 91 active jobs at June 30, 2002, at these locations. The results of these shutdown operations included in income from operations for the presented periods are as follows (in thousands):
Quarters ended March 31, ------------------------------ 2002 2003 ------------- ------------- Revenue $ 12,622 $ 1,087 Cost of revenue (including depreciation) 11,859 2,460 ------------- ------------- Gross profit/(loss) 763 (1,373) Selling, general and administrative expenses 719 554 ------------- ------------- Income (loss) from operations 44 (1,927) Other expense, net (7) -- ------------- ------------- Income (loss) before provision for (benefit from) income taxes 37 (1,927) Provision for (benefit from) income taxes 14 (752) ------------- ------------- Net income (loss) $ 23 $ (1,175) ============= =============
15 RESULTS OF ONGOING OPERATIONS Our ongoing operations reflect the results of the Company excluding the shutdown and discontinued operations. SINGLE FAMILY SEGMENT The results of the continuing single family operations for the presented periods were as follows (in thousands):
Quarters ended March 31, ----------------------------- 2002 2003 ------------- ------------- Revenue $ 70,714 $ 75,422 Cost of revenue (includes depreciation) 58,527 65,102 ------------- ------------- Gross profit 12,187 10,320 Selling, general and administrative expenses 7,703 8,212 ------------- ------------- Income from operations $ 4,484 $ 2,108 ============= =============
Revenue from continuing single family operations increased $4.7 million or 6.7% in the first quarter of 2003 compared to the first quarter of 2002. The increase in revenue was due to an increased number of housing starts in our Phoenix and Sacramento markets offset by a slowdown of service in our Las Vegas market. The decrease in volume in our Las Vegas market is due to a deliberate reduction in volume in an effort to improve our margins in the market. Gross profit declined by $1.9 million or 15.3% in the first quarter of 2003 compared to the first quarter of 2002, while gross margins from single family operations decreased from 17.2% in the quarter ended March 31, 2002, to 13.7% in the quarter ended March 31, 2003. The decrease in gross margins was mainly due to declines in Las Vegas, northern Virginia and Maryland offset by improvements in the Phoenix and Sacramento markets. The lower margins in our Las Vegas, northern Virginia and Maryland markets were the result of inefficiencies in our material utilization and higher labor costs offset by lower materials costs resulting from the implementation of our national procurement strategy. Selling, general and administrative expenses increased by $0.5 million or 6.6% in the first quarter compared to the first quarter of 2002, due to higher property and casualty insurance costs. As a percentage of revenue selling, general and administrative expenses stayed consistent at 10.9% of revenue for the quarters ended March 31, 2002 and 2003. Income from single family operations declined by $2.4 million from 6.3% in the first quarter of 2002 to 2.8% in the first quarter of 2003 as a percentage of revenue due to the factors discussed above. MULTIFAMILY SEGMENT The results of the multifamily operations for the presented periods were as follows (in thousands):
Quarters ended March 31, ----------------------------- 2002 2003 ------------- ------------- Revenue $ 38,874 $ 42,459 Cost of revenue (includes depreciation) 32,411 33,991 ------------- ------------- Gross profit 6,463 8,468 Selling, general and administrative expenses 3,696 3,972 ------------- ------------- Income from operations $ 2,767 $ 4,496 ============= =============
16 Revenue from multifamily operations increased $3.6 million or 9.2% in the first quarter of 2003 compared to the first quarter of 2002. The increase in revenue was due mainly to increased levels of multifamily construction and favorable changes in job cost estimates on jobs completed in the first quarter of 2003 resulting in the recognition of the remaining revenue on these jobs, particularly in our southern California, central Florida and Atlanta markets. Gross profit from multifamily operations increased $2.0 million or 31.0% in the first quarter of 2003 compared to the first quarter of 2002, while gross margins increased from 16.6% in the quarter ended March 31, 2002, to 19.9% in the quarter ended March 31, 2003. The increase in gross margins was due to higher volume leveraged over relatively constant levels of field overhead, favorable changes in jobs estimates and lower materials costs resulting from the implementation of our national procurement strategy. Selling, general and administrative expenses increased $0.3 million or 7.5% in the first quarter of 2003, compared to the first quarter of 2002, and decreased slightly from 9.5% in the quarter ended March 31, 2002, to 9.4% in the quarter ended March 31, 2003, as a percentage of revenue. Income from multifamily operations increased $1.7 million from 7.1% in the quarter ended March 31, 2002 to 10.6% in the quarter ended March 31, 2003, as a percentage of revenue due to the factors discussed above. COMMERCIAL SEGMENT The results of the commercial operations for the presented periods were as follows (in thousands):
Quarter ended March 31, 2002 Quarter ended March 31, 2003 --------------------------------------- ---------------------------------------- Ongoing Shutdown Total Ongoing Shutdown Total ----------- ----------- ----------- ----------- ----------- ----------- Revenue $ 17,965 $ 12,622 $ 30,587 $ 19,228 $ 1,087 $ 20,315 Cost of revenue (includes depreciation) 16,158 11,859 28,017 16,578 2,460 19,038 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit/(loss) 1,807 763 2,570 2,650 (1,373) 1,277 Selling, general and administrative expenses 1,490 719 2,209 1,779 554 2,333 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations $ 317 $ 44 $ 361 $ 871 $ (1,927) $ (1,056) =========== =========== =========== =========== =========== ===========
Revenue from ongoing commercial operations increased $1.3 million or 7.0% in the first quarter of 2003 compared to the first quarter of 2002. The increase in revenue was due mainly to renewed strength in the commercial construction industry in our southern California market. Gross profit from ongoing commercial operations increased $0.8 million in the first quarter of 2003, compared to the first quarter of 2002, while gross margins increased from 10.0% in the quarter ended March 31, 2002, to 13.8% in the quarter ended March 31, 2003. The increase in gross margins was due to our continued focus on higher margin jobs, increased volume and more efficient production. Selling, general and administrative expenses increased $0.3 million from 8.3% in the quarter ended March 31, 2002, to 9.3% in the quarter ended March 31, 2003, as a percentage of revenue. The increase in selling, general and administrative costs was due to an increase in management and personnel costs. Income from ongoing commercial operations increased $0.6 million from 1.8% in the quarter ended March 31, 2002, to 4.5% in the quarter ended March 31, 2003, as a percentage of revenue due to the factors as discussed above. CORPORATE Selling, general and administrative expenses at corporate decreased $0.6 million from $2.2 million in the quarter ended March 31, 2002, to $1.6 million in the quarter ended March 31, 2003. The decrease in 17 selling, general and administrative expenses at corporate was mainly due to a reduction in personnel and overall cost cutting efforts. OTHER CONSOLIDATED ITEMS REQUIRED TO RECONCILE TO NET INCOME Other expense, net, increased $0.3 million from $4.0 million in the quarter ended March 31, 2002, to $4.3 million in the quarter ended March 31, 2003. The increase was mainly due to increased interest expense resulting from the higher interest rate that the Company pays on its variable rate debt. The provision for (benefit from) income taxes decreased $0.7 million reflecting the tax benefit generated by the Company's operating loss during the first quarter of 2003. Consolidated net loss decreased from a loss of $34.1 million for the quarter ended March 31, 2002, to a loss of $0.4 million for the quarter ended March 31, 2003. The net loss in the quarter ended March 31, 2002 reflects the cumulative effect of a change in accounting principle resulting from our adoption of SFAS 142. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used to determine the Company's revenue on uncompleted contracts. These estimates also impact the current asset "Costs and estimated earnings in excess of billings on uncompleted contracts" and the current liability "Billings in excess of costs and estimated earnings on uncompleted contracts". See REVENUE RECOGNITION for a further discussion. Estimates of the ultimate liability for losses under self insured insurance programs are also included in the Company's consolidated financial statements. These estimates are developed based on the Company's historical losses and industry standard claims growth factors. Significant estimates are also used for goodwill impairment calculations, see GOODWILL for a further discussion. Actual results could differ from those estimates. REVENUE RECOGNITION AMPAM recognizes revenue from construction contracts on the percentage-of-completion method measured by the percentage of cost incurred to total estimated costs for each contract. Contract costs include all direct material and labor costs. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, the effects of which are recognized in the period the revisions are determined. If the revised estimated direct costs will result in a "loss" contract, an accrual is made to record the remaining loss at that time. The current asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents estimated revenue recognized in excess of amounts billed. The current liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of estimated revenue recognized. GOODWILL AMPAM evaluates the carrying value of its goodwill and other intangible assets at least annually. Potential goodwill impairment is assessed using a discounted cash flow methodology. The Company uses estimates to determine future discounted cash flows. Estimates used include, estimates of future cash flows, future short-term and long-term growth rates, and weighted average cost of capital. 18 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2003, current liabilities exceeded current assets by $8.6 million reflecting the classification of amounts under the Credit Facility due March 31, 2004 as a current liability. Additionally, the Company had $94.6 million of outstanding long-term indebtedness, including capital lease obligations totaling $0.8 million. For the three months ended March 31, 2003, net cash used in operating activities was $9.3 million. This was primarily attributable to an increase in the use of working capital and losses incurred at locations that are being shutdown. Cash used in investing activities was $0.2 million which primarily relates to capital expenditures of $0.3 million, offset by proceeds from sales of property and equipment. Cash provided by financing activities for the three months ended March 31, 2003, was $12.5 million and was obtained from net borrowings on the Company's Credit Facility. For the three months ended March 31, 2002, net cash used in operating activities was $7.5 million. This use of cash was primarily attributable to an increase in working capital. Cash used in investing activities was $0.9 million which primarily relates to capital expenditures of $1.0 million. Cash provided by financing activities for the three months ended March 31, 2002, was $9.1 million and was obtained from net borrowings on our Credit Facility. The Company's Credit Facility, with a total commitment of $84.0 million, as amended, matures on March 31, 2004. Pursuant to the March 28, 2003, amendment, the Credit Facility bears interest, at the option of the Company, at the base rate of the arranging bank plus an applicable margin or at LIBOR, plus an applicable margin. The applicable margin is 4.50% above LIBOR or 3.50% above the agent bank's base rate. As of March 31, 2003, the Company had borrowings of $72.5 million and outstanding letters of credit of $7.0 million, leaving $4.5 million available under the Credit Facility. Borrowings under the credit facility are classified as a current liability as of March 31, 2003. The Company is investigating alternative sources of borrowings to repay the Credit Facility on or before maturity. There are no assurances that such borrowings will be available to the Company. AMPAM utilizes its cash flow from operations and to the extent available, borrowings under the Credit Facility, to enable the Company to meet its working capital needs, debt service requirements and planned capital expenditures for property and equipment. As of April 30, 2003, the Company had borrowings under the Credit Facility of $76.9 million, outstanding letters of credit of $7.0 million and cash on hand of $6.1 million. As the Company is fully borrowed under the Credit Facility, all future cash flow requirements must be provided by operating activities. If cash flows from operations are insufficient to meet the Company's operating cash requirements, the Company will be forced to seek additional sources of liquidity or take other actions, which may include protection provided by the Federal reorganization statutes. The Company makes semi-annual interest payments on the Senior Subordinated Notes of $5.5 million on April 15 and October 15 of each year. The Company made the April 15, 2003, interest payment as scheduled. The Credit Facility requires the Company to maintain compliance with certain specified financial covenants including maximum ratios of funded debt to EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, a capital expenditure covenant, minimum EBITDA and other restrictive covenants. Additionally, the terms of the Credit Facility limit the ability of the Company to incur additional indebtedness, dispose of assets, make acquisitions or other investments and to make various other payments. On March 28, 2003, an amendment to the Credit Facility was executed which amended certain covenants prospectively. The Company met the amended covenants as of March 31, 2003 and believes that it will continue to meet the amended covenants. As a condition of the amendment, certain 19 fees were paid and the interest rate on the Credit Facility was increased by 0.5%. Additionally, if the Company does not repay its obligation under the Credit Facility by July 31, 2003, an additional 1% fee will be due the banks. The Company's Credit Facility and Senior Subordinated Notes contain cross default provisions. AMPAM has three remaining holders of preferred stock who cumulatively hold 524,410 shares. As of March 31, 2003, the value of the outstanding preferred shares was $6.8 million not including $0.5 million for accrued and outstanding but undeclared dividends. The preferred stockholders have exercised their right under the terms of the preferred stock designation to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Because the preferred stock has been "put" to AMPAM, the liquidation value of these shares has been classified as "Other long-term liabilities" on the balance sheet as of March 31, 2003. For further discussion regarding the outstanding preferred shares refer to Part II, Item I, Legal Proceedings. SEASONALITY The plumbing and HVAC industry is influenced by seasonal declines in operations and demand that affect the construction business, particularly in residential construction. These declines due to weather, buying trends and other factors result in lower activity during the first and fourth quarters. There can be no assurance that AMPAM's combined geographic, service and product mix will be sufficient to overcome such declines that may occur in the future or that other seasonal patterns will not emerge. The Company's quarterly results may also be affected by the regional economic conditions. Accordingly, performance in any particular quarter may not be indicative of the results that can be expected for other quarters or for the entire year. ITEM 3. Quantitative and Qualitative Disclosures About Market Risks We are exposed to various market risks primarily related to potential adverse changes in interest rates. In the normal course of business, we employ established policies and procedures to manage this risk. Our exposure to changes in interest rates primarily results from our short-term and long-term debt with both fixed and floating interest rates. AMPAM's debt with fixed interest rates consists of Senior Subordinated Notes and capital leases. Our debt with variable interest rates consists primarily of the Credit Facility. If market interest rates were to increase immediately and uniformly by 100 basis points from levels as of March 31, 2003, the related annual interest expense would increase by approximately $0.7 million. Other than the items mentioned above, there were no other material quantitative or qualitative changes during the first three months of fiscal 2003 in the Company's market risk sensitive instruments. ITEM 4. Controls and Procedures Within the 90-day period before the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Controller, of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and Controller have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, 20 including the CEO and Controller, as appropriate, to allow timely decisions regarding required disclosure. AMPAM also maintains a system of internal accounting controls that are designed to provide reasonable assurance that the books and records of the Company accurately reflect the transactions of the Company and that the Company's polices and procedures are followed. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls since the most recent evaluation of these controls, including any corrective actions with regard to significant deficiencies or material weaknesses in the Company's internal controls. 21 PART II - OTHER INFORMATION ITEM 1. - Legal Proceedings In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who were holders of approximately one-half of AMPAM's Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. On April 1, 2002, the parties finalized a settlement agreement and general release pursuant to which the defendants and related parties tendered all of their preferred stock and AMPAM paid the defendants and related parties $3.1 million. Upon transfer of consideration, AMPAM retired the preferred stock and realized an increase in Additional Paid in Capital of $3.8 million representing the liquidation value of the preferred stock received net of the proceeds attributable to the preferred stock and costs incurred to facilitate the settlement. As of April 1, 2002, the defendants and their related parties held 524,410 shares of preferred stock with a liquidation value of $6.8 million and were due approximately $0.5 million for outstanding but undeclared dividends, all of which were included in the settlement. The parties have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and have released any and all claims against each other. Three remaining holders of preferred stock hold 524,410 combined shares. The remaining preferred stockholders have exercised their right under the terms of the preferred stock designation to require the Company to purchase all of their preferred stock. Restrictions within the terms of the Company's Credit Facility preclude redemption of the preferred stock and the payment of further dividends. Because the preferred stock has been "put" to AMPAM, the liquidation value of these shares has been classified as "Other long-term liabilities" on the balance sheet as of March 31, 2003. On or about January 22, 2003, the remaining preferred stockholders initiated a binding arbitration proceeding against the Company seeking, among other things, specific performance by the Company to purchase all of their preferred stock. The Company intends to defend the arbitration vigorously but can make no representation as to the outcome of the arbitration. Additionally, because the Company has not purchased the preferred stock, pursuant to the terms of the preferred stock designation, the Company may not engage in the following activities without the affirmative vote of not less than a majority of the holders of the preferred stock, voting together as a single class: (vi) incur any additional indebtedness for borrowed money other than borrowings under any credit facility to which the Company is a party at such time and as in effect when any redemption payment becomes due and is unpaid or at the time any dividend payment becomes due and is unpaid; (vii) effect (or make any agreement or become obligated to effect) any (a) sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries which individually or in the aggregate would constitute a significant subsidiary, (b) consolidation or merger involving the Company or any of its subsidiaries, or (c) dissolution, liquidation or winding-up of the Company or any of its subsidiaries; provided however that in no event shall the Company effect any sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries to affiliates of the Company; 22 (viii) make (or permit any subsidiary to make) any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company and except for any such loans and advances which do not in the aggregate exceed $250,000; (ix) make any loan or advance to any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business; or (x) acquire, by purchase, exchange, merger or otherwise, all or substantially all of the properties or assets of any other corporation or entity. The Company is also involved in other disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such "ordinary course" legal actions will have a material adverse effect on the Company's financial position or results of operations. ITEM 2. - Changes in Securities and Use of Proceeds None ITEM 3. - Defaults Upon Senior Securities None ITEM 4. - Submission of Matters to a Vote of Security Holders None ITEM 5. - Other Information On or about April 23, 2003 Mr. David C. Baggett resigned his positions as President, Chief Operating Officer and Chief Financial Officer. Mr. Robert A. Christianson, the Company's Chief Executive Officer, has assumed Mr. Baggett's operations responsibilities until a successor is identified. Mr. Paul Leleux, the Company's Controller, has assumed Mr. Baggett's financial responsibilities until a successor is identified. 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 23 $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). 99.1 Certification of Robert A. Christianson pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Paul Leleux pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Incorporated by reference (b) The registrant filed no reports on Form 8-K during the period covered by this quarterly report on Form 10-Q. 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: May 15, 2003 By: /s/ Robert A. Christianson ---------------------------------- Robert A. Christianson Chief Executive Officer Date: May 15, 2003 By: /s/ Paul Leleux ---------------------------------- Paul Leleux Controller 24 CERTIFICATIONS I, Robert A. Christianson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Plumbing & Mechanical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Robert A. Christianson ------------------------------ Robert A. Christianson, Chief Executive Officer (Principal Executive Officer) 25 I, Paul Leleux, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Plumbing & Mechanical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Paul Leleux ------------------------------- Paul Leleux, Controller 26 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION\ ------- ------------ *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). 99.1 Certification of Robert A. Christianson pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Paul Leleux pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------- *Incorporated by reference