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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 333-102885

 


 

THE BRICKMAN GROUP, LTD.

(Exact name of registrant as specified in its charter)

 


 

Delaware   23-2949247
(State of incorporation)   (I.R.S. Employer Identification No.)

 

375 South Flowers Mill Road

Langhorne, Pennsylvania

  19047
(Address of Principal Executive Offices)   (Zip Code)

 

(215) 757-9400

(Registrant’s Telephone Number, Including Area Code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

None

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The registrant is a wholly owned subsidiary of Brickman Group Holdings, Inc. None of its, or Brickman Group Holdings, Inc.’s, common equity is publicly traded.

 



Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

   2

Item 1. Financial Statements

   2-8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   9

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   14

Item 4. Controls and Procedures

   14

PART II. OTHER INFORMATION

   15

Item 1. Legal Proceedings

   15

Item 2. Changes in Securities and Use of Proceeds

   15

Item 3. Defaults Upon Senior Securities

   15

Item 4. Submission of Matters to a Vote of Security Holders

   15

Item 5. Other Information

   15

Item 6. Exhibits and Reports on Form 8-K

   15

SIGNATURES

   16


Table of Contents

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

THE BRICKMAN GROUP, LTD.

BALANCE SHEETS

(dollars in thousands except for share data)

 

     December 31,
2003


    (Unaudited)
March 31,
2004


 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 15,929     $ 15,698  

Accounts receivable, net of allowance for doubtful accounts

     38,103       25,633  

Unbilled revenue

     3,116       9,257  

Deferred tax asset

     6,449       6,569  

Other current assets

     2,214       4,872  
    


 


Total current assets

     65,811       62,029  

Property and equipment, net of accumulated depreciation

     26,130       27,846  

Deferred tax asset

     452       1,232  

Deferred charges, net of accumulated amortization

     8,272       7,895  

Intangible assets, net of accumulated amortization

     97,970       97,187  

Goodwill

     32,663       32,663  

Restricted investments and other assets

     1,015       1,054  
    


 


Total

   $ 232,313     $ 229,906  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                 

Current liabilities:

                

Accounts payable

   $ 10,677     $ 8,694  

Deferred revenue

     2,686       11,494  

Capital lease obligation - current portion

     307       424  

Long-term debt - current portion

     5,000       6,000  

Accrued interest

     734       5,140  

Accrued expenses

     21,370       19,910  
    


 


Total current liabilities

     40,774       51,662  

Long-term debt and other liabilities

                

Capital lease obligation

     215       15  

Long-term debt

     190,000       183,000  

Deferred tax liability

     —         —    

Other liabilities

     804       840  
    


 


Total liabilities

     231,793       235,517  
    


 


Commitments and contingencies

                

Shareholders’ equity (deficit):

                

Class A voting common stock, $.01 par value; 51,317 authorized, issued and outstanding both periods

     1       1  

Class A non-voting common stock, $.01 par value; 283,548 authorized, issued and outstanding both periods

     3       3  

Class B non-voting common stock, $.01 par value; 117,517 authorized, issued and outstanding both periods

     1       1  

Class C non-voting common stock, $.01 par value; 75,000 authorized, issued and outstanding both periods

     1       1  

Paid-in capital

     191,514       191,009  

Accumulated deficit

     —         (5,626 )

Continuing shareholders’ basis adjustment

     (191,000 )     (191,000 )
    


 


Total shareholders’ equity (deficit)

     520       (5,611 )
    


 


Total liabilities and shareholders’ equity (deficit)

   $ 232,313     $ 229,906  
    


 


 

The accompanying notes and the notes to the Company’s Audited Financial Statements are an integral part of the financial statements.

 

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THE BRICKMAN GROUP, LTD.

STATEMENTS OF OPERATIONS

(unaudited)

(dollars in thousands)

 

     For the three months
ended March 31,


 
     2003

    2004

 

Net service revenues

   $ 75,417     $ 70,399  

Cost of services provided

     59,577       54,390  
    


 


Gross profit

     15,840       16,009  

General and administrative expenses

     14,475       15,277  

Amortization expense

     5,810       5,145  
    


 


Loss from operations

     (4,445 )     (4,413 )

Interest expense

     5,038       4,963  
    


 


Loss before income taxes

     (9,483 )     (9,376 )

Income tax benefit

     (3,874 )     (3,750 )
    


 


Net loss

   $ (5,609 )   $ (5,626 )
    


 


 

The accompanying notes and the notes to the Company’s Audited Financial Statements are an integral part of the financial statements.

 

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THE BRICKMAN GROUP, LTD.

STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     For the three months
ended March 31,


 
     2003

    2004

 

Cash flows from operating activities:

                

Net loss

   $ (5,609 )   $ (5,626 )

Adjustments to reconcile net loss to net change in cash from operating activities:

                

Depreciation

     2,355       2,578  

Amortization

     5,810       5,145  

Deferred taxes

     (1,050 )     (900 )

Provision for doubtful accounts

     685       100  

Loss (gain) on disposal of assets

     (22 )     38  

Changes in operating assets and liabilities, net of businesses acquired

     3,316       13,628  
    


 


Net change in cash from operating activities

     5,485       14,963  
    


 


Cash flows from investing activities:

                

Purchase of property and equipment

     (3,660 )     (4,081 )

Cost of acquired businesses

     —         (4,809 )

Proceeds from sale of property and equipment

     14       224  
    


 


Net change in cash from investing activities

     (3,646 )     (8,666 )
    


 


Cash flows from financing activities:

                

Transaction fees paid

     (81 )     —    

Redemption of common stock

     —         (445 )

Payments on long-term debt

     (1,076 )     (6,083 )
    


 


Net change in cash from financing activities

     (1,157 )     (6,528 )
    


 


Net change in cash

     682       (231 )

Cash, beginning of period

   $ 6,281     $ 15,929  
    


 


Cash, end of period

   $ 6,963     $ 15,698  
    


 


 

The accompanying notes and the notes to the Company’s Audited Financial Statements are an integral part of the financial statements.

 

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THE BRICKMAN GROUP, LTD.

Notes to the Financial Statements

(Unaudited)

(dollars in thousands)

 

1. Business:

 

The Brickman Group, Ltd. (the “Company”) performs landscape maintenance, landscape construction and enhancement, and snow removal services for commercial customers in major metropolitan areas in 23 states throughout the United States. Landscape maintenance services are generally provided under cancelable contracts ranging from 1 to 8 years in length. The Company provides these services to a diverse set of customers with one or more sites, including regional and national commercial, retail, and industrial property owners, corporations, residential communities, schools and universities, hotels, hospitals, and governmental agencies. Services include grass mowing, planting and care of flower beds, tree and shrub pruning, bed edging, controlling weeds and pests, fertilizing, planting of grass, groundcovers, shrubs and trees, grading, and removing snow and ice.

 

2. Summary of Significant Accounting Policies:

 

Basis of Presentation:

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements and on the same basis of presentation as the Company’s annual financial statements. Accordingly, they do not include all information required by GAAP.

 

These financial statements have been prepared by management, are unaudited, and should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2001 and the period from January 1, 2002 to December 19, 2002, and the period from December 20 to December 31, 2002 and the year ended December 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. Due to the seasonality of the Company’s business, the results for the interim periods are not necessarily indicative of the results for the year. Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while the methods of accounting for fixed costs, such as depreciation and amortization, are not significantly impacted by business seasonality.

 

Use of Estimates:

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an ongoing basis, management reviews its estimates, including those related to allowances for doubtful accounts, revenue recognition, valuation of operating supplies, self-insurance reserves, purchase accounting estimates, useful lives for depreciation and amortization, realizability of deferred tax assets, and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from estimates.

 

Recent Accounting Pronouncements:

 

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. The Company is required to apply FIN 46R to variable interests in variable interest entities (“VIE”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling

 

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THE BRICKMAN GROUP, LTD.

Notes to the Financial Statements

(Unaudited)

(dollars in thousands)

 

interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company believes it has no variable interest entities and, therefore, FIN 46R did not have an impact on the Company’s consolidated financial statements.

 

In March 2004, the FASB issued an exposure draft proposal to amend FASB statements 123 and 95. The exposure draft covers a wide range of equity-based compensation arrangements. Under the Board’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. The FASB is expected to issue its final standard later in the year.

 

3. Accounts Receivable:

 

Components of accounts receivable are as follows:

 

     December 31,
2003


    March 31,
2004


 

Accounts receivable

   $ 40,333     $ 27,963  

Allowance for doubtful accounts

     (2,230 )     (2,330 )
    


 


Accounts receivable, net

   $ 38,103     $ 25,633  
    


 


 

Accounts receivable amounts include retention on incomplete projects that will be completed within one year. All other amounts are due currently.

 

4. Accrued Expenses:

 

Accrued expenses consist of the following:

 

     December 31,
2003


   March 31,
2004


Payroll-related accruals

   $ 8,515    $ 8,992

Insurance reserves

     6,479      6,457

Other accrued expenses

     6,376      4,461
    

  

Total accrued expenses

   $ 21,370    $ 19,910
    

  

 

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THE BRICKMAN GROUP, LTD.

Notes to the Financial Statements

(Unaudited)

(dollars in thousands)

 

5. Long-term Debt:

 

Long-term debt consists of the following:

 

     December 31,
2003


    March 31,
2004


 

11.75% Senior subordinated notes due 2009

   $ 150,000     $ 150,000  

Senior bank facility, due 2008 bearing interest at 4.2% in 2004

     45,000       39,000  
    


 


Total long-term debt

   $ 195,000     $ 189,000  

Less:

                

Current portion

     (5,000 )     (6,000 )
    


 


Long-term debt, net

   $ 190,000     $ 183,000  
    


 


 

As of March 31, 2004, there was no balance outstanding on the Company’s revolving credit facility and the senior bank facility was fixed on a 180-day LIBOR contract, as allowed in accordance with our credit agreement, expiring in June with a rate of 4.2%.

 

6. Stock-based Compensation

 

The Company accounts for stock-based compensation in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Accordingly, no compensation expense has been recognized for grants because the exercise price of the options granted equaled the fair market value of the underlying stock on the dates of grants. Had the Company applied the fair market value based recognition and measurement provisions of SFAS No. 123 to stock-based compensation, net loss would have increased as follows:

 

     For the three month period
ended March 31,


 
     2003

    2004

 

Net loss, as reported

   $ (5,609 )   $ (5,626 )

Deduct: Total stock-based compensation determined under the fair value based method for all grants, net of related tax effects

     (1 )     (18 )
    


 


Pro forma net loss

   $ (5,610 )   $ (5,644 )
    


 


 

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THE BRICKMAN GROUP, LTD.

Notes to the Financial Statements

(Unaudited)

(dollars in thousands)

 

7. Supplemental Cash Flow Information:

 

     For the three months
ended March 31,


     2003

   2004

Cash paid for interest

   $ 728    $ 557

Cash paid for income taxes

   $ 1,015    $ 2,717

 

Changes in operating assets and liabilities are as follows:

 

     For the three months
ended March 31,


 
     2003

    2004

 

Accounts receivable

   $ (1,767 )   $ 12,979  

Unbilled revenue

     (3,474 )     (6,140 )

Other current assets

     90       (2,631 )

Accounts payable

     (2,424 )     (2,220 )

Deferred revenue

     6,867       8,757  

Accrued interest

     4,310       4,406  

Accrued expenses

     (326 )     (1,559 )

Other liabilities

     40       36  
    


 


Total

   $ 3,316     $ 13,628  
    


 


 

8. Commitments and Contingencies:

 

Risk Management: The Company carries general liability, vehicle collision and liability, workers compensation, professional liability, directors and officers’ liability, and employee health care insurance policies as well as umbrella liability insurance to cover claims over the liability limits contained in the primary policies.

 

The Company’s insurance programs for workers compensation, vehicle collision and liability, general liability and employee health care contain self-insured retention amounts. Claims in excess of the self-insured retention amounts are insured at levels considered prudent by management. The Company’s accrual for unpaid and incurred but not reported claims under these programs at December 31, 2003 and March 31, 2004 was $6,479 and $6,457, respectively, and is included with accrued expenses in the accompanying Balance Sheet in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” While the ultimate outcome of these claims is dependent on future developments, in management’s opinion, recorded accruals are adequate to cover these claims.

 

The credit agreement for the Company’s senior bank facility was amended in April 2004 in connection with the issuance of a $45 million note by the Company’s parent company, Brickman Group Holdings, Inc. (‘Holdings’). Under the amendment, an acceleration of obligations under Holdings’ note that are not satisfied within 90 days of such acceleration constitutes an event of default under the Company’s senior credit facility. The note initially bears interest at 5.5% over LIBOR, which rate of interest is subject to reduction based on Holdings’ consolidated leverage ratio. Principal is due on the note as follows: $2.0 million in 2004, $4.5 million in 2005, $5.5 million in 2006, $6.5 million in 2007, $7.5 million in 2008, and $19.0 million in 2009. Holdings is a holding company and, as such, relies upon the Company to satisfy its obligations. The Company’s ability to fund Holdings’ obligations depends upon the Company’s cash flow and the restrictions on payments from the Company to Holdings contained in the Company’s credit agreement and subordinated note indenture.

 

Other: There are no other significant guarantees, commitments or contingencies as of March 31, 2004 that have not already been disclosed.

 

9. Acquisition:

 

In February 2004, the Company purchased substantially all of the assets of two related companies engaged in the landscape business in Columbus, Ohio. Net tangible assets acquired were $0.8 million and the balance of the purchase price was assigned to customer contracts and relationships. These intangible assets are being amortized over 14 years, the expected duration of these intangibles.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note Regarding Forward-Looking Statements

 

The Management’s Discussion and Analysis and other sections of this Form 10-Q may contain forward-looking statements that are based on current expectations, estimates and projections about the industries in which we operate and our management’s beliefs and assumptions. Forward-looking statements in this report include, but are not limited to: (1) statements regarding our belief that our internal cash flows and borrowings under our credit facility will provide us sufficient liquidity and capital resources and (2) statements regarding management’s expectation that various items would not reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows. We caution readers that all forward-looking statements are based on assumptions that we believe are reasonable, but are subject to a wide range of risks including, but not limited to, risks associated with the uncertainty of future financial results, acquisitions and dispositions, additional financing requirements, increased labor costs, loss of customers, ability to manage growth, the seasonal demand for our services and varying weather conditions, the effect of competitive services on pricing, reliance on key management personnel, the effect of changes in government regulations and immigration law, the outcome of legal proceedings and a variety of other factors. Due to these and other uncertainties, we cannot assure readers that any forward-looking statements will prove to have been correct. All forward-looking statements are subject to the safe harbor protections created by the Private Securities Litigation Reform Act of 1995. For further information on these and other risks, see the “Risk Factors” section of our S-4 Registration Statement filed June 11, 2003, as well as our other filings with the Securities and Exchange Commission. We assume no obligation to update publicly our forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview

 

We are one of the largest providers of commercial landscape maintenance services in the United States, servicing over 9,000 commercial properties in 23 states. We were founded in 1939 and have been continually managed by members of the Brickman family. We provide our landscape maintenance services, including lawn care, flower bed planting and care, tree and shrub pruning, leaf removal, weed and pest control, irrigation maintenance, fertilization and mulching, to a diverse set of customers pursuant to maintenance contracts. The vast majority of our customers use our services at more than one property. Our customers include regional and national property owners and managers of office parks, hotels, corporate facilities, retail centers, schools and universities, hospitals, professionally-managed residential properties and municipal facilities. We also provide snow removal services to our landscape maintenance customers in order to satisfy their needs and to leverage our infrastructure during the winter months. In addition, we provide our customers with landscape design/build services, which enhance our technical capabilities and brand recognition.

 

We recognize contract revenue on a monthly basis in proportion to our costs incurred compared to total expected costs. Each month, we divide the actual labor, material, and subcontractor costs incurred on each contract by the total labor, material, and subcontractor costs estimated to be incurred to complete the contract. The resulting ratio is multiplied by the total contract price and the difference between this product and the revenue previously recognized on the contract is recognized as revenue in the month. In the event estimated total contract costs exceed total contract price, the estimated loss on the contract is accrued in the period in which the loss is identified. The current asset (unbilled revenue) and the current liability (deferred revenue) result from differences between the timing of billings and the recognition of service revenues on uncompleted contracts. Because our work has seasonal peaks (e.g., mulch, flowers, and intensive mowing in the spring, and flowers and intensive mowing in the early fall), on calendar contracts, billings generally exceed revenue until March and then revenue exceeds billings until the completion of contracts at the end of the year.

 

Costs of services includes both direct costs that are charged to specific projects (e.g., labor and materials) and indirect costs that are not charged to specific projects (e.g., overtime, debris disposal, small tools, depreciation and fuel) and are expensed as incurred. A large component of our costs is variable, the largest of which are labor and materials. Many of our contracts contain provisions allowing us to periodically adjust our pricing to reflect increases in these costs.

 

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General and administrative expenses are comprised of salaries and related expenses, including benefits and bonuses, for non-field personnel. Other general and administrative expenses include rent, office expenses, professional fees, insurance and depreciation of leaseholds, computer hardware, software licenses and office equipment.

 

Results of Operations

 

The following table for the three month periods ended March 31, 2003 and 2004 depicts costs as a percentage of revenue.

 

    

Three Months

Ended March 31,


 
     2003

    2004

 

Net service revenue

   100 %   100 %

Cost of service

   79 %   77 %

Gross profit

   21 %   23 %

General and administrative expenses

   19 %   22 %

Amortization

   8 %   7 %

Income from operations

   -6 %   -6 %

Interest expense

   7 %   7 %

Income before taxes

   -13 %   -13 %

Income tax provision

   -5 %   -5 %

Net income

   -7 %   -8 %

 

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2004

 

Revenue. Revenue for the three months ended March 31, 2004 decreased by $5.0 million, or 6.7%, to $70.4 million from $75.4 million for the same period in 2003. The decrease was driven by an $11.5 million decrease in snow removal revenue offset by a $6.2 million increase in landscape maintenance services revenue and a $0.3 million increase in design build services revenue. The decrease in snow removal revenue was primarily the result of more normalized snowfall amounts this winter compared to last winter. Landscape maintenance revenue was the largest component accounting for 52.6% of total revenue for the three months ended March 31, 2004. The increase in maintenance revenues was the result of new contract sales and weather conditions that allowed landscape operations to begin sooner than in 2003.

 

Gross profit. Gross profit for the three months ended March 31, 2004 increased by $0.2 million, or 1.1%, to $16.0 million from $15.8 million for the same period in 2003. The increase in gross profit resulted from increased profit from landscape maintenance activities which were offset by the decrease in profit from snow removal activities. Gross margin (gross profit as a percent of revenue) increased to 22.7% for the three months ended March 31, 2004 from 21.0% for the same period in 2003. The increase was the result of a greater percentage of revenue from higher margin landscape maintenance revenue in 2004 (52.6 %) as compared to 2003 (40.9%) when wet weather and snowfall in many markets presented production and scheduling challenges for landscape maintenance activities.

 

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2004 increased 5.5% to $15.3 million from $14.5 million for the same period in 2003. General and administrative expenses as a percentage of revenue increased to 21.7% for the three months ended March 31, 2004 from 19.2% for the three months ended March 31, 2003. This increase is the result of the decrease in revenue from snow removal activities in the period and staffing for growth in our landscape business.

 

Amortization expense. Amortization expense decreased for the three months ended March 31, 2004 by $0.7 million to $5.1 million from $5.8 million for the same period in 2003. Amortization expense relates to the customer contracts and relationships intangible asset. Customer contracts and relationships have estimated useful lives of 1 to 14 years.

 

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Loss from operations. Loss from operations was $4.4 million for the three month periods ended March 31, in both 2004 and 2003.

 

Interest expense. Interest expense was $5.0 million for both the three months ended March 31, 2004 and 2003. Average debt outstanding decreased to $192.5 million from $200.3 million. The weighted average rate of interest on the borrowings increased to 10.2% for the three months ended March 31, 2004 from 9.9% for the same period in 2003.

 

Income taxes. An income tax benefit was recorded for the three months ended March 31, 2004 at an effective rate of 40.0%. The expected effective rate for the year ended December 31, 2004 is 40.0%. This rate differs from the federal statutory rate of 35% primarily due to state taxes. We expect to generate taxable income for the year ended December 31, 2004 and therefore believe the recoverability of the benefit recorded is probable.

 

Net loss. Net loss was $5.6 million for the three month periods ended March 31 in both 2004 and 2003.

 

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2003

 

Revenue. Revenue for the three months ended March 31, 2003 increased by $27.8 million, or 58.3%, to $75.4 million from $47.6 million for the same period in 2002. The increase was driven by a $29.8 million increase in snow removal revenue offset by a $1.4 million decrease in landscape maintenance revenue and a $0.6 million decrease in design/build revenue. Snow removal revenue was the largest component accounting for 53.2% of total revenue for the three months ended March 31, 2003. The increase in snow removal revenues was a result of greater snowfall amounts in many of our seasonal markets in 2003, combined with an increased penetration of this service offering with existing and new maintenance customers. The declines in both maintenance and in design/build revenues were the result of weather-related delays in commencing operations principally in the markets that experienced heavy snowfalls.

 

Gross profit. Gross profit for the three months ended March 31, 2003 increased by $5.3 million, or 49.6%, to $15.8 million from $10.6 million for the same period in 2002. The increase in gross profit was the result of the additional snow volume described above. Gross margin decreased slightly to 21.0% for the three months ended March 31, 2003 from 22.2% for the same period in 2002. This decline was the result of a sharp increase in subcontractor costs related to increased snow removal activity and the continuation of fixed landscaping costs (e.g., depreciation, vehicle insurance) despite the weather-related delay in landscape activity.

 

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2003 increased 17.8% to $14.5 million from $12.3 million for the same period in 2003. General and administrative expenses as a percentage of revenue decreased to 19.2% for the three months ended March 31, 2003 from 25.8% for the three months ended March 31, 2002. This decline is the result of the large increase in revenue in the period, principally from snow removal activities, compared to the significantly smaller increase in general and administrative expenses.

 

Amortization expense. Amortization expense increased for the three months ended March 31, 2003 by $5.3 million to $5.8 million from $0.5 million for the same period in 2002. Amortization of goodwill associated with the 1998 business combination was discontinued in 2003 with the adoption of Statement of Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Amortization expense in 2003 relates to the customer contracts and relationships intangible asset established in connection with the 2002 recapitalization transaction. Customer contracts and relationships have estimated useful lives of 1 to 14 years.

 

Income from operations. Income from operations for the three months ended March 31, 2003 increased $2.2 million to $4.4 million from $2.2 million for the same period in 2002. Additional amortization expense described above was the primary reason for the increased loss.

 

Interest expense. Interest expense for the three months ended March 31, 2003 increased $3.8 million to $5.0 million from $1.2 million for the same period in 2002. Average debt outstanding increased to $200.3 million from $104.0 million as a result of our 2002 recapitalization transaction. The weighted average rate of interest on the borrowings increased to 9.9% for the three months ended March 31, 2003 from 6.0% for the same period in 2002 as a result of our 2002 recapitalization transaction.

 

Income taxes. An income tax benefit was recorded for the three months ended March 31, 2003 at an effective rate of 40.9%, the expected effective rate for the year ended December 31, 2003. This rate differs from the federal statutory rate of 35% primarily due to state taxes. We generated taxable income for the year ended December 31, 2003 and therefore we recovered the benefit recorded.

 

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Net loss. Net loss for the three months ended March 31, 2003 increased $3.7 million to $5.6 million from $1.9 million for the same period in 2002 and primarily resulted from the increase in amortization and interest expense noted above.

 

Liquidity and Capital Resources

 

We have historically used internal cash flow from operations and borrowings under our existing credit facility to fund our operations, capital expenditures and working capital requirements. For the three month periods ended March 31, 2003 and 2004, cash provided by operating activities was $5.5 million and $15.0 million, respectively. The increase is primarily attributed to an improvement in the collection of receivables.

 

Our capital expenditure requirements are primarily comprised of landscape equipment, trucks and trailers. Our capital expenditures were $3.7 million and $4.1 million, for the three months ended March 31, 2003 and 2004, respectively. Additionally, in the three months ended March 31, 2004, we acquired two related landscape companies.

 

In the first quarter of 2004, net cash used in financing activities was $6.5 million, primarily consisting of debt repayments of $6.1 million, including a voluntary prepayment of $5.0 million. In the first quarter of 2003, net cash used in financing activities was $1.2 million, primarily consisting of debt repayments of $1.1 million.

 

As of March 31, 2004, we had no balance outstanding on our revolving credit facility and our senior bank facility was fixed on a 180-day LIBOR contract, as allowed in accordance with our credit agreement, expiring in June with a rate of 4.2%. Availability on the revolving credit facility, after deducting outstanding letters of credit, was $25.6 million.

 

On April 16, 2004, our parent company, Brickman Group Holdings, Inc., borrowed $45 million from a group of lenders. The loan initially bears interest at 5.5% over LIBOR, which interest rate is subject to reduction based on our parent company’s consolidated leverage ratio, and amortizes through November 2009. Our parent company is a holding company and as such will rely on our cash flow to service this obligation. In connection with this borrowing, we entered into an amendment of our senior credit facility. The amendment, among other things, i) permits our parent company to incur this indebtedness, ii) permits us to make distributions with respect to equity securities to our parent company to service our parent company’s indebtedness to the extent such distributions are permitted under our Senior Subordinated Note Indenture, iii) provides that an acceleration of obligations under our parent company’s indebtedness not satisfied within 90 days of such acceleration constitutes an event of default under our senior credit facility, and iv) reduces the excess cash flow distribution under our senior credit facility. Principal is due on the note as follows: $2.0 million in 2004, $4.5 million in 2005, $5.5 million in 2006, $6.5 million in 2007, $7.5 million in 2008, and $19.0 million in 2009. The proceeds from our parent company’s indebtedness were used to redeem our parent company’s Class L Common Stock, make a distribution to holders of our parent company’s Class A Common Stock, and pay fees and expenses associated with the financing.

 

We believe that our internal cash flows and borrowings under the revolving portion of our credit facility will provide us with sufficient liquidity and capital resources to meet our current and future financial obligations for the next twelve months, including funding our operations, debt service and capital expenditures. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they may mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including our senior subordinated notes, on or before maturity. We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including our senior subordinated notes and our senior credit facility, may limit our ability to pursue any of these alternatives.

 

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Seasonality

 

Our landscape business is seasonal. Losses generally occur in the first quarter since, in most markets, there is very little landscape revenue to be recognized, but fixed overheads (e.g., management and supervisory salaries and benefits, rent, depreciation) continue.

 

Effect of Inflation

 

Inflation has generally not been a material factor affecting our business. Our general operating expenses, such as wages and salaries, employee benefits and materials and facilities costs, are subject to normal inflationary pressures.

 

Critical Accounting Policies

 

Certain of our accounting policies as discussed below require the application of significant judgment by management in selecting the appropriate estimates and assumptions for calculating amounts to record in our financial statements. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and our financial position. Our significant accounting policies are more fully described in the notes to the financial statements. Certain accounting policies, however, are considered to be critical in that they are most important to the depiction of our financial condition and results of operations and their application requires management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.

 

Goodwill: Goodwill, representing the excess of the cost over the net tangible and identifiable assets acquired in business combinations, is stated at cost. Goodwill and intangibles with indefinite lives are not amortized but tested for impairment no less frequently than annually. Impairment is measured by comparing the carrying value to fair value using quoted market prices, a discounted cash flow model, or a combination of both.

 

Impairment or Disposal of Long-lived Assets: In the event that facts and circumstances indicate that the carrying value of long-lived assets, primarily property and equipment and certain identifiable intangible assets with defined lives, may be impaired, we perform a recoverability evaluation. If the evaluation indicates that the carrying amount of the asset is not recoverable from the undiscounted cash flows related to the asset, an impairment loss is recorded for the difference between the carrying amount of the asset and its fair value.

 

Service Revenues: We perform landscape maintenance, landscape construction and enhancement, and snow removal services. Revenue is recognized based upon the service provided and the contract terms.

 

Landscape maintenance:

 

Landscape maintenance services are generally provided under annual contracts. Revenue for these services is recognized as follows: each month, we divide the actual labor, material, and subcontractor costs incurred on each contract by the total labor, material, and subcontractor costs estimated to be incurred to complete the contract. The resulting ratio is multiplied by the contract price and the difference between this product and the revenue previously recognized on the contract is recognized as revenue in the month. In the event estimated total contract costs exceed total contract price, the estimated loss on the contract is accrued in the period in which the loss is identified.

 

Landscape construction and enhancement:

 

Landscape construction and enhancement services are generally provided under contracts of less than one year. Revenue for these services is recognized as follows: each month, we divide the actual labor, material, and subcontractor costs incurred on each contract by the total labor, material, and subcontractor costs estimated to be incurred to complete the contract. The resulting ratio is multiplied by the total contract price and the difference between this product and the revenue previously recognized on the contract is recognized as revenue in the month. In the event estimated total contract costs exceed total contract price, the estimated loss on the contract is accrued in the period in which the loss is identified.

 

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Snow Removal:

 

Snow removal services are generally provided under time and material contracts. Revenue for these services is recognized in the period in which the services are performed.

 

The current asset, unbilled revenue, and the current liability, deferred revenue, result from differences between the timing of billings and the recognition of service revenues on uncompleted contracts.

 

Risk Management: We carry general liability, vehicle collision and liability, workers compensation, professional liability, directors and officers’ liability, and employee health care insurance policies as well as umbrella liability insurance to cover claims over the liability limits contained in the primary policies.

 

Our insurance programs for general liability, vehicle collision and liability, workers compensation and employee health care contain self-insured retention amounts. Claims in excess of the self-insurance retention amounts are insured at levels considered reasonable by management. Our accrual for unpaid and incurred but not reported claims under these programs at December 31, 2003 and March 31, 2004 was $6,479 and $6,457, respectively and is included in accrued expenses in the accompanying Balance Sheets in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” While the ultimate amount of these claims is dependent on future developments in management’s opinion, recorded accruals are adequate to cover these claims.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 31, 2004, there were no changes with regard to market risk that would require further quantitative or qualitative disclosure. For our quantitative and qualitative disclosures about market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K filed March 30, 2004.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic SEC reports is recorded, processed, summarized, and reported as and when required. There have been no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

 

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are from time to time a party to litigation arising in the normal course of business. Generally, such litigation involves claims for personal injury and property damage incurred in connection with operations. We are not currently involved in any litigation, nor are we aware of any threatened litigation, that we believe is likely to have a material adverse effect on its financial condition, results of operations or cash flows. We believe our insurance coverage is adequate to cover the risks of any situations that currently exist or are reasonably likely to arise.

 

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

 

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

  (a) Exhibits:

 

Number

 

Description


  10.7.1   Third Amendment to Lease Agreement, dated January 1, 2004, between Brickman Leasing L.L.C. and The Brickman Group, Ltd. regarding the property located in Langhorne, Pennsylvania
  10.8.1   Third Amendment to Lease Agreement, dated January 1, 2004, between Brickman Leasing L.L.C. and The Brickman Group, Ltd. regarding the property located in Long Grove, Illinois
  10.9.1   Third Amendment to Lease Agreement, dated January 1, 2004, between Brickman Leasing L.L.C. and The Brickman Group, Ltd. regarding the property located in St. Louis, Missouri
  10.15*   Agreement, dated January 7, 2004 by and between The Brickman Group, Ltd. and Mark A. Hjelle
  10.19**   Amendment to Credit Agreement dated as of April 16, 2004 among The Brickman Group, Ltd. and Antares Capital Corporation, as Administrative Agent and General Electric Capital Corporation as Syndication Agent and LaSalle Bank National Association as Documentation Agent and Harris Trust and Saving Bank as Co-Agent
  10.20**   Credit Agreement dated as of April 16, 2004 by and among Brickman Group Holdings, Inc. as Borrower, Antares Capital Corporation for itself and as Agent for all Lenders and the other financial institutions party hereto as Lenders
  10.21   Amended and Restated Employment Agreement, dated April 12, 2004, between The Brickman Group, Ltd, Brickman Group Holdings, Inc. and Scott Brickman
  31.1   Certification by Charles B. Silcox, Chief Financial Officer, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
  31.2   Certification by Scott W. Brickman, Chief Executive Officer, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
  32.1   Certification by Charles B. Silcox, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
  32.2   Certification by Scott W. Brickman, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the Exhibit of the same number filed with The Brickman Group, Ltd.’s Annual Report on Form 10-K filed March 30, 2004
** Incorporated by reference to the Exhibit of the same number filed with The Brickman Group, Ltd.’s Current Report on Form 8-K/A filed April 20, 2004

 

  (b) Reports on Form 8-K:

 

Form 8-K, Item 12, filed on March 29, 2004 regarding The Brickman Group, Ltd.’s earnings press release for the fiscal quarter and year ended December 31, 2003

 

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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 duly authorized officer.

 

    The Brickman Group, Inc.
    (Registrant)

Date: May 11, 2004

       
       

/s/ Charles B. Silcox


    Name:   Charles B. Silcox
    Title:   Chief Financial Officer
        Principal Financial and Principal Accounting Officer

 

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