<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-42317
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
CONSOLIDATION CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7600 52-2054952
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTIONOF INCORPORATION INDUSTRIALCLASSIFICATION IDENTIFICATION NO.)
OR ORGANIZATION) CODE NUMBER)
800 CONNECTICUT AVENUE, N.W., SUITE 1111
WASHINGTON, D.C. 20006
202/261-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JONATHAN J. LEDECKY
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CONSOLIDATION CAPITAL CORPORATION
800 CONNECTICUT AVENUE, N.W., SUITE 1111
WASHINGTON, D.C. 20006
202/261-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
F. TRAYNOR BECK, ESQUIRE LINDA L. GRIGGS, ESQUIRE
EXECUTIVE VICE PRESIDENT, MORGAN, LEWIS & BOCKIUS LLP
GENERAL COUNSEL AND SECRETARY 1800 M STREET, N.W.
800 CONNECTICUT AVENUE, N.W., SUITE 1111 WASHINGTON, D.C. 20036
WASHINGTON D.C. 20006 202/467-7000
202/261-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
CONSOLIDATION CAPITAL CORPORATION
24,000,000 SHARES OF COMMON STOCK
-----------
This Prospectus covers the offer and issuance of shares of common stock,
$.001 par value (the "Common Stock"), by Consolidation Capital Corporation (the
"Company") from time to time in connection with the acquisition by the Company
of other businesses, assets or securities. It is expected that the terms of the
acquisitions involving the issuances of securities covered by this Prospectus
will be determined by direct negotiations with the owners or controlling
persons of the businesses, assets or securities to be acquired by the Company.
No underwriting discounts or commissions will be paid, although finder's fees
may be paid from time to time with respect to specific mergers or acquisitions.
Any person receiving such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
As of July 1, 1998, 12,441,763 shares have been issued under this Prospectus
and 2,123,345 shares are reserved for issuance based upon assumptions regarding
agreements to pay contingent consideration in connection with certain
acquisitions. Accordingly, as of July 1, 1998, approximately 9,434,892 shares
are being offered for issuance hereby.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BUYR." As of July 1, 1998, the Company had 42,591,763 shares of Common
Stock outstanding. On July 1, 1998, the closing price of the Common Stock was
$23.56 per share. The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and files
reports and other information with the Securities and Exchange Commission. See
"Additional Information."
All expenses of this offering will be paid by the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 6, 1998
<PAGE>
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such offer or solicitation to such person. Neither the
delivery of this Prospectus nor any offer or sale made hereunder shall under
any circumstance imply that the information contained herein is correct as of
any date subsequent to the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................................... 2
Prospectus Summary....................................................... 3
Recent Developments...................................................... 5
Risk Factors............................................................. 9
Price Range of Common Stock.............................................. 19
Dividend Policy.......................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 23
Management............................................................... 30
Executive Compensation................................................... 33
Certain Relationships and Related Party Transactions..................... 35
Principal Stockholders................................................... 36
Description of Capital Stock............................................. 38
Plan of Distribution..................................................... 39
Restrictions on Resale................................................... 39
Legal Matters............................................................ 39
Experts.................................................................. 39
Index to Financial Statements............................................ F-1
</TABLE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Stock offered hereby. This Prospectus
omits certain information contained in the Registration Statement, and
reference is made to the Registration Statement, and the exhibits and
schedules thereto, for further information with respect to the Company and the
Common Stock offered hereby. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document filed as an exhibit to
the Registration Statement are not necessarily complete. Reference is made to
the respective exhibit for a more complete description of such statement,
which is qualified in its entirety by such reference. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission
maintained at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
Consolidation Capital Corporation is the successor to Ledecky Brothers L.L.C.
Hereinafter, except as otherwise indicated, Consolidation Capital Corporation
and Ledecky Brothers L.L.C. are referred to jointly as the "Company." This
Prospectus also contains pro forma financial information that gives effect to
certain events. Such information is not necessarily indicative of the results
that the Company would have attained had the events occurred at the beginning
of the periods presented, as assumed, or of the future results of the Company.
See "Pro Forma Combined Financial Statements."
This Prospectus may contain forward-looking statements, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "plans," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
matters described in "Risk Factors" and certain other factors noted throughout
this Prospectus and in any exhibits to the Registration Statement of which this
Prospectus is a part, constitute cautionary statements identifying important
factors with respect to any such forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.
THE COMPANY
Founded in February 1997 by Jonathan J. Ledecky, Consolidation Capital
Corporation is consolidating the facilities management industry with the intent
to become a national single-source provider of facilities management services.
Jonathan Ledecky was the founder, Chairman, and Chief Executive Officer of U.S.
Office Products Company ("USOP"). While managing USOP, Jonathan Ledecky
developed a strategy of "corporate democracy," which he believes facilitated
USOP's rapid consolidation of more than 200 companies within seven different
industry groups in the office products and services industry. The corporate
democracy approach includes (i) a general policy of empowering local management
and (ii) drawing upon the contacts and expertise of local management by
encouraging them to identify acquisition candidates and to participate in the
process of integrating newly acquired companies into a consolidated enterprise.
The Company is employing a corporate democracy approach as one of its principal
operating strategies. The Company completed its initial public offering (the
"IPO") in December 1997, selling 27,850,000 shares of Common Stock and 500,000
shares of Convertible Non-Voting Common Stock and raising net proceeds of
approximately $527,000,000.
As of July 1, 1998, the Company has acquired five businesses specializing in
providing janitorial maintenance management services, fourteen businesses
specializing in providing electrical installation and maintenance services and
one business specializing in mechanical installation and maintenance services
(the "Recent Acquisitions"). See "Recent Developments." In addition, the
Company has signed letters of intent to acquire three janitorial maintenance
management services businesses, one electrical installation and maintenance
services business and three mechanical installation and maintenance services
businesses (the "Pending Acquisitions"). Facilities management companies
generally provide many products and services needed for the operation and
maintenance of a building. These products and services include janitorial
maintenance management services, electrical installation and maintenance
services, lighting equipment and services, engineering services, mechanical
installation and maintenance services, parking facility management, security
systems and services, fire protection equipment and services, grounds keeping
and landscaping services, pest control and general equipment maintenance.
From 1994 until November 1997, Jonathan Ledecky served as Chief Executive
Officer of USOP and, in that capacity, was responsible for in excess of $1.7
billion in acquisitions of businesses in seven different industry groups,
including office supplies, office furniture, coffee and beverage services,
computer and telecommunications networks and services, print management,
corporate travel services and educational supplies. The Company will seek to
leverage the experience and expertise of Jonathan Ledecky, its founder,
Chairman and Chief Executive Officer, and the Company's management team to
become a leading consolidator of the facilities management industry.
3
<PAGE>
At the time of the IPO, the Company announced its intention to pursue
consolidation opportunities in one or more growing industries that are
fragmented with no clear market leader and that could benefit from economies of
scale. The Company believes that the facilities management industry has these
characteristics since it consists primarily of privately-held or family-owned
businesses, whose owner-operators desire liquidity and may be unable to access
the capital markets effectively or to expand beyond a local or regional base.
The Company has determined initially to focus exclusively on the facilities
management industry, rather than simultaneously pursue consolidations in
multiple, unrelated industries, based on its view that the facilities
management industry is a large scale industry offering significant
opportunities to expand into and consolidate many sectors that offer products
and services intended to enhance the operating efficiency of retail, commercial
and industrial clients.
During the last several years, property owners, such as real estate
investment trusts ("REITS"), have undergone consolidation. The Company believes
that, as the real estate industry undergoes further consolidation, the emerging
large-scale property owners will continue to develop an increased interest in
dealing with national providers of facilities management services. Property
owners also have increasingly turned to outsourcing many of the traditional
facilities management services that were once performed by the property owners'
own employees. This trend towards outsourcing allows property owners to focus
on their core competencies, reduce operating expenses, access technical
expertise of outside vendors and improve quality. The Company believes that the
consolidation of property owners and the increase in outsourcing of facilities
management services will present opportunities for the Company to (i) acquire
smaller, independent companies that are unable to compete with national
providers of facilities management services, (ii) expand through acquisitions
into new sectors of the facilities management industry, and (iii) broaden the
customer base of acquired companies.
The Company believes that it possesses substantial competitive advantages.
The Company expects to benefit from its ability to deploy rapidly its
significant financial resources and to use its publicly traded stock as
currency in selected acquisitions. Because the Company has significant cash and
cash equivalents, the Company's ability to acquire attractive companies is not
likely to be constrained at this time by the need to access the capital
markets. Furthermore, the Company believes that its corporate democracy
principles will help it attract and acquire companies and will differentiate it
from traditional consolidators. The Company believes that its corporate
democracy approach generates significant competitive advantages because this
approach allows managers of the acquired companies to benefit from the
economies of a large organization while simultaneously retaining local
operational control, enabling them to provide flexible and responsive service
to customers. Such an approach could, however, limit possible consolidation
efficiencies and integration efforts. In addition, although the Company's
management team has experience in acquiring and consolidating businesses, it
does not have experience managing companies in the facilities management
industry. The Company, therefore, relies on and expects to continue to rely on
management of acquired companies or other individuals who are experienced in
the facilities management industry. See "Risk Factors--Competition,"
"Business--Strategy" and "Management."
The Company will have broad discretion in identifying and selecting possible
acquisition candidates. Within the facilities management industry, the Company
intends to focus on the acquisition of businesses having some or all of the
following characteristics: (i) stable cash flows and recurring revenue streams
from long-term customer relationships; (ii) low product obsolescence and non-
reliance on innovation or technology to drive recurring revenue streams; (iii)
long-term growth prospects for products and services offered; (iv) a strong
"franchise" or presence in the communities served by the acquisition candidate;
(v) an experienced management team comprised of recognized industry leaders;
(vi) an ability to retain, promote and motivate management teams; (vii)
favorable demographic trends within the local regions serviced; and (viii) an
underpenetrated market for products or services provided by the acquisition
candidate. See "Risk Factors--Appropriate Acquisitions May Not Be Available and
Full Investment of Net Proceeds May Be Delayed" and "Business--Strategy."
The Company's principal executive offices are located at 800 Connecticut
Avenue, N.W., Suite 1111, Washington D.C. 20006, and its telephone number is
202-261-6000.
4
<PAGE>
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
Since the Company's IPO in December 1997, the Company has acquired five
companies offering janitorial maintenance management services, fourteen
companies offering electrical installation and maintenance services and one
company offering mechanical installation and maintenance services. A
description of these acquisitions follows:
Service Management USA, Inc. ("Service Management"). On February 4, 1998,
the Company completed the acquisition of Service Management. Service
Management was founded in 1984 and has become a leading facilities management
company specializing in providing janitorial maintenance management services
to retail, industrial and commercial clients in 39 states. Service Management
had revenues for the year ended December 31, 1997 of approximately $26.3
million. The consideration paid by the Company consisted of $9 million in cash
and 142,857 shares of Common Stock. In addition, there is the potential for
the payment of up to an additional $13 million, payable 50% in cash and 50% in
shares of Common Stock, based upon the performance of Service Management and
the achievement of certain acquisition goals.
Founding Electrical Group. On March 11, 1998, the Company completed the
simultaneous acquisition of a group of seven businesses offering electrical
installation and maintenance services (the "Founding Electrical Group"). The
Founding Electrical Group consists of the following businesses: Garfield
Electric Company ("Garfield"), Indecon, Inc. ("Indecon"), Riviera Electric
Construction Co. ("Riviera"), SKC Electric, Inc. ("SKC"), Town & Country
Electric, Inc. ("Town & Country"), Tri-City Electrical Contractors, Inc.
("Tri-City") and Wilson Electric Company, Inc. ("Wilson"). The Founding
Electrical Group specializes in providing electrical installation and
maintenance services for commercial, institutional, industrial and retail
customers in thirty-six states. Each company in the Founding Electrical Group
has been a member of a peer group that was formed in 1992 to bring together
electrical companies that are leaders in their respective markets. This peer
group shared detailed financial information, performance benchmarks, national
customers and operational best practices.
The combined 1997 revenues of the Founding Electrical Group were
approximately $284.2 million. The combined revenues of the Founding Electrical
Group, which have been in business for an average of 21 years, increased at a
compound annual growth rate of approximately 22% from 1994 through 1997. The
aggregate consideration (including certain fees) paid by the Company for the
Founding Electrical Group consisted of $71.8 million in cash and 3,423,453
shares of Common Stock. In addition, there is the potential for the payment of
up to an additional $37.0 million in cash and shares of Common Stock based
upon the performance of the acquired businesses as a group.
A description of each of the businesses acquired as part of the Founding
Electrical Group follows:
Tri-City. Tri-City was founded in 1958 and operates from its headquarters
in Altamonte Springs (near Orlando) and from its offices in Tampa, Fort
Myers and Pompano Beach, Florida. Tri-City had revenues of approximately
$79.5 million for the year ended December 31, 1997.
Wilson. Wilson was founded in 1988 and operates from its headquarters in
Scottsdale and from its offices in Sierra Vista, Prescott, Tucson and
Phoenix, Arizona. Wilson had revenues of approximately $71.0 million for
the year ended November 30, 1997.
Town & Country. Town & Country was founded in 1972 and operates from its
headquarters in Appleton, Wisconsin and from its offices in Madison,
Sheboygan, Wauwatosa, Plover, Howard, Crivitz, Menasha and Baraboo,
Wisconsin. Town & Country had revenues of approximately $48.7 million for
the year ended December 31, 1997.
5
<PAGE>
Riviera. Riviera was founded in 1980 and operates from its headquarters
in Englewood, Colorado and from its offices in Avon, Silverthorne and
Colorado Springs, Colorado. Riviera had revenues of approximately $37.0
million for the year ended December 31, 1997.
Garfield and Indecon. Garfield and Indecon were founded in 1972 and 1989,
respectively, and operate under common management from their headquarters
in Cincinnati and from an office in Dayton, Ohio. Garfield and Indecon had
combined revenues of approximately $24.5 million for the year ended
December 31, 1997.
SKC. SKC was founded in 1980 and operates from its headquarters in
Lenexa, Kansas and from its offices in Colombia and Springfield, Missouri.
SKC had revenues of approximately $23.5 million for the year ended December
31, 1997.
Walker Engineering, Inc. ("Walker"). On March 25, 1998, the Company
completed the acquisition of Walker. Walker was founded in 1981 and
specializes in providing electrical installation and maintenance services from
its headquarters in Dallas and from its offices in Fort Worth and Austin,
Texas. Walker had revenues of approximately $127.7 million for the year ended
December 31, 1997. The consideration paid by the Company for Walker (including
certain fees) consisted of approximately $36 million in cash and 1,521,739
shares of Common Stock. In addition, there is the potential for the payment of
up to an additional $30 million, payable 50% in cash and 50% in shares of
Common Stock, based upon the performance of Walker.
Crest International, LLC ("Crest"). On April 1, 1998, the Company completed
the acquisition of Crest in a pooling-of-interests transaction. Crest was
founded in 1995 and specializes in providing janitorial maintenance management
services to retail, industrial and commercial clients from its headquarters in
Green Bay and from its offices in Milwaukee, Appleton, Madison, Wausau,
LaCrosse, Sheboygan and Marionette, Wisconsin. Crest had revenues of
approximately $11.9 million for the year ended December 31, 1997. The
consideration paid by the Company for Crest consisted of 138,925 shares of
Common Stock.
United Service Solutions, Inc. ("USS"). On April 27, 1998, the Company
completed the acquisition of USS. USS was founded in October 1997 and is the
successor to California Professional Cleaning Services, Inc., and related
companies, which was founded in 1993, and Sullivan Service Company, which was
founded in 1953. USS provides janitorial maintenance management services to
retail customers throughout the United States and Puerto Rico. The companies
had combined revenues of approximately $67.8 million in 1997. The
consideration paid by the Company for USS consisted of 1,479,395 shares of
Common Stock.
G. S. Group, Inc. ("Gulf States"). On May 22, 1998, the Company completed
the acquisition of Gulf States. Gulf States was founded in June 1986 and
provides mechanical installation and maintenance services to industrial
customers from its headquarters in Freeport, Texas and from offices in Clute,
Texas, Salt Lake City, Utah and Pittsburg, California. Gulf States had
revenues of approximately $64.1 million for the year ended December 31, 1997.
The consideration paid by the Company for Gulf States consisted of $14 million
in cash and 608,850 shares of Common Stock.
Taylor Electric, Inc. ("Taylor"). On May 22, 1998, the Company completed the
acquisition of Taylor. Taylor was founded in October 1978 and provides
electrical installation and maintenance services to retail, commercial and
industrial customers from its headquarters in Salt Lake City, Utah. Taylor had
revenues of approximately $19.2 million for the year ended December 31, 1997.
The consideration paid by the Company for Taylor consisted of $6.5 million in
cash and 275,338 shares of Common Stock. In addition, there is the potential
for the payment of up to an additional $6.3 million, payable 50% in cash and
50% in shares of Common Stock, based upon the performance of Taylor.
Perimeter Maintenance Corporation and Affiliates ("Perimeter"). On May 31,
1998, the Company completed the acquisition of Perimeter and related entities
in a pooling-of-interests transaction. Perimeter was founded in April 1985 and
specializes in providing janitorial maintenance management services and
products to
6
<PAGE>
a variety of clients from its headquarters in Atlanta, Georgia. Perimeter had
combined revenues of approximately $23.9 million for the year ended December
31, 1997. The consideration paid by the Company for Perimeter consisted of
581,983 shares of Common Stock.
Spann Building Maintenance Company and Affiliate ("Spann"). On May 31, 1998,
the Company completed the acquisition of Spann in a pooling-of-interests
transaction. Spann was founded in November 1959 and specializes in providing
janitorial maintenance management services to retail, industrial and
commercial clients from its headquarters in St. Louis, Missouri and from its
office in Indianapolis, Indiana. Spann had revenues of approximately $34.1
million for the year ended December 31, 1997. The consideration paid by the
Company for Spann consisted of 684,932 shares of Common Stock.
National Network Services, Inc. ("National Network"). On June 15, 1998, the
Company completed the acquisition of National Network. National Network was
founded in October 1990 and provides cabling services and networking products
for data, voice and video installations from its headquarters in Denver,
Colorado and from its offices in Springfield, Oregon; Pleasanton, California;
and Sioux Falls, South Dakota. National Network had revenues of approximately
$9.2 million for the year ended December 31, 1997. The consideration paid by
the Company for National Network consisted of approximately $5.0 million in
cash and 216,710 shares of Common Stock. In addition, there is the potential
for the payment of up to an additional $2.3 million, payable 50% in cash and
50% in shares of Common Stock, based upon the performance of National Network.
Riviera Electric of California, Inc. ("Riviera of California"). On June 17,
1998, the Company completed the acquisition of Riviera of California. Riviera
of California was founded in March 1995 and specializes in providing
electrical installation and maintenance services to a variety of clients from
its headquarters in Anaheim, California. Riviera of California had revenues of
approximately $7.0 million for the year ended December 31, 1997. The
consideration paid for Riviera of California consisted of $250,000 in cash and
11,110 shares of Common Stock. In addition, there is the potential for the
payment of additional consideration which is not expected to exceed $3.0
million, based upon the performance of Riviera of California.
Regency Electric Company, Inc. ("Regency"). On June 24, 1998, the Company
completed the acquisition of Regency. Regency was founded in 1979 and
specializes in providing electrical installation and maintenance services to
commercial clients from its headquarters in Jacksonville, Florida. Regency had
revenues of $66.2 million for the year ended December 31, 1997. The
consideration paid by the Company for Regency consisted of approximately $40.8
million in cash and 1,828,446 shares of Common Stock. In addition, there is
the potential for the payment of up to an additional $10 million, payable 50%
in cash and 50% in shares of Common Stock based upon the performance of
Regency.
The Lewis Companies, Inc. and Affiliates ("Lewis"). On June 29, 1998, the
Company completed the acquisition of Lewis and its affiliates in a pooling-of-
interests transaction. Lewis and its affiliates, Oil Capital Electric,
Engineering Design Group and Omni Mechanical services, specialize in providing
both electrical and mechanical installation and maintenance services to a
variety of clients from its headquarters in Tulsa, Oklahoma, and from its
offices in Texas, Ohio and Washington. Lewis had revenues of approximately $50
million for the year ended December 31, 1997. The consideration paid for Lewis
consisted of 1,430,988 shares of Common Stock.
Chambers Electronic Communications LLC ("Chambers"). On July 1, 1998, the
Company completed the acquisition of Chambers. Chambers was founded in 1969
and specializes in providing fire alarm, sound and communications installation
and maintenance services to a variety of clients from its headquarters in
Phoenix, Arizona and from its offices in Tucson, Arizona. Chambers had
revenues of approximately $9.4 million for the year ended December 31, 1997.
The consideration paid by the Company for Chambers was approximately
$2.3 million in cash and 97,037 shares of Common Stock. In addition, there is
the potential for the payment of up to an additional $1.5 million, payable 50%
in cash and 50% in shares of Common Stock, based upon the performance of
Chambers.
7
<PAGE>
PENDING ACQUISITIONS
As of July 1, 1998, the Company has signed letters of intent to acquire
three companies offering janitorial maintenance management services, one
company offering electrical installation and maintenance services and three
companies offering mechanical installation and maintenance services. The
letters of intent relating to these acquisitions contain confidentiality
provisions which prohibit the Company from publicly disclosing the names and
other information regarding the company to be acquired until the execution of
definitive agreements.
The Company is in discussions with additional acquisition candidates and
enters into letters of intent or agreements in principle with respect to the
acquisition of such businesses from time to time. No assurance can be given,
however, that the Company will complete any additional acquisitions. See "Risk
Factors--Appropriate Acquisitions May Not Be Available and Full Investment of
Net Proceeds May Be Delayed."
8
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the shares of Common Stock offered
hereby.
The risk factors set forth below and elsewhere in this Prospectus should be
read as accompanying all forward-looking statements made in this Prospectus.
These forward-looking statements can be identified by the use of forward-
looking terminology such as "may," "will," "expect," "intend," "plans,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements, for the reasons set forth below and for other reasons.
LIMITED OPERATING HISTORY
The Company was founded in February 1997 and completed its IPO in December
1997. Since the IPO, the Company has acquired 20 businesses in the facilities
management industry and has signed letters of intent to acquire seven
additional businesses. The Company intends to consolidate the facilities
management industry to become a single-source provider of facilities
management services. Until the Recent Acquisitions, the Company had not
generated any revenues other than interest income on the proceeds from the
IPO. The Company's ability to generate revenues and earnings will be directly
dependent upon the operating results of such acquired businesses and any
additional acquisitions and the successful integration and consolidation of
those businesses.
CONFLICTS OF INTEREST
The Company may be adversely affected by various other activities of its
Chairman and Chief Executive Officer, Jonathan Ledecky. Jonathan Ledecky
serves as the Non-Executive Chairman of U.S.A. Floral Products, Inc. ("USA
Floral") and a director and investor in UniCapital Corporation ("UniCapital")
and U.S. Marketing Services, Inc. ("U.S. Marketing"). In addition, in
connection with the recent restructuring of USOP, Jonathan Ledecky resigned as
the Chairman of USOP and became a director and employee of each of the four
companies that were spun off from USOP. Each of USA Floral, UniCapital, U.S.
Marketing and the four companies that were spun off from USOP is, or is
seeking to become, a consolidator of businesses in one or more industries. In
addition, Jonathan Ledecky may become an investor or director in other
companies seeking to consolidate an industry.
For so long as Jonathan Ledecky serves as a director of any of the companies
mentioned above, he will owe a duty of loyalty and a duty of care under
Delaware law to each of such companies. These duties obligate him to present
certain business opportunities to the company to which he owes the duties
before pursuing such opportunities himself. There is no agreement among
Jonathan Ledecky, the Company, USOP, USA Floral, UniCapital, U.S. Marketing or
the companies that were spun off from USOP that delineates Jonathan Ledecky's
duties to each company or resolves potential conflicts between his conflicting
duties and obligations, although USOP has approved the Company's entry into
the facilities management industry.
Pursuant to a Services Agreement between USOP and Jonathan Ledecky, Jonathan
Ledecky will serve as a senior consultant to USOP providing strategic business
advice and high level acquisition negotiations. In addition, Jonathan Ledecky
has entered into an employment agreement with each of the companies that were
spun off from USOP. Under the Services Agreement with USOP and the employment
agreements with the companies that were spun off from USOP, Jonathan Ledecky
has contractual obligations and duties of loyalty and care to USOP and the
companies that were spun off from USOP, and he may be unable in certain
circumstances to fulfill his duties or contractual obligations to one company
without allegedly breaching them to the others. Any alleged breach of such
duties of loyalty and care or contractual restrictions could result in
litigation by or on behalf of the offended company seeking damages under any
number of possible legal theories, including damages from Jonathan Ledecky for
the purported breach or from such other company for tortiously interfering
with the offended company's contractual relationship with Jonathan Ledecky or
for inducing him to
9
<PAGE>
breach his duties to the offended company. The conduct of or response to any
such litigation could consume significant management attention or resources,
and the defense, settlement or final adjudication of any such litigation could
have a material adverse effect on the Company's business, financial condition
and/or results of operations.
The Services Agreement and the employment agreements with the companies that
were spun off from USOP also contain covenants not to compete (which were
waived in part to permit three of the Recent Acquisitions) and restrictions on
Jonathan Ledecky's ability to recruit or employ current and certain former
employees of USOP. These restrictions could present a possible conflict
between Jonathan Ledecky's actions and recommendations regarding the business
of the Company and his efforts to employ suitable individuals with the
Company. In addition, the Services Agreement recites that in the course of
Jonathan Ledecky's employment with USOP he has become familiar with and aware
of certain information regarding USOP's operations that the agreements
describe as a trade secret of USOP. Were Jonathan Ledecky to be held
wrongfully to have disclosed any trade secret information to the Company or
others in violation of his obligations to USOP, he could face liability for
such disclosure, and the Company could face liability for inducing or aiding
in any such alleged violations. Finally, Jonathan Ledecky is not prohibited
from serving as an officer, director or employee of or consultant to the
Company, provided that such actions do not otherwise breach his obligations
under the Services Agreement.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend principally upon the
efforts of Jonathan J. Ledecky, its founder, Chairman and Chief Executive
Officer. In addition, the Company believes that its success will depend to a
significant extent upon Timothy Clayton, the Company's Executive Vice
President, Chief Financial Officer and Treasurer; F. Traynor Beck, the
Company's Executive Vice President, General Counsel and Secretary; and David
Ledecky, the Company's Executive Vice President and Chief Administrative
Officer.
Although Jonathan Ledecky has substantial experience in acquiring and
consolidating businesses and Messrs. Clayton and Beck have substantial
experience with such transactions on behalf of their prior clients, none of
them has any experience in managing companies formed for the specific purpose
of consolidating one or more industries (other than Jonathan Ledecky's
experience in managing USOP) or in managing businesses in the facilities
management industry. As a result, the Company depends on, and likely will
continue to depend on, the senior management of significant businesses it
acquires. Nevertheless, such senior management of recently acquired businesses
may not be suitable to the Company's business model or combined operations.
If the Company loses the services of one or more of its current executives,
the Company's business could be adversely affected. In addition, the Company
expects to hire additional senior management, such as a chief operating
officer and a new chief executive officer, to manage its operations. The
Company may not successfully recruit additional personnel and any additional
personnel that are recruited may not have the requisite skills, knowledge or
experience necessary or desirable to enhance the incumbent management. The
Company does not intend to maintain key man life insurance with respect to any
of its executive officers. See "Management."
ALLOCATION OF MANAGEMENT TIME
The competing claims upon Jonathan Ledecky's time and energies could divert
his attention from the affairs of the Company, placing additional demands on
the Company's other management resources. Pursuant to the CCC Employment
Agreement, Jonathan Ledecky is required to devote the substantial majority of
his business time, attention and efforts to the business of the Company.
Pursuant to the Services Agreement, Jonathan Ledecky is required to provide
strategic business advice and high level acquisition negotiations for USOP and
the companies that were spun off from USOP. In addition, Jonathan Ledecky
anticipates devoting time to his other directorships and professional and
philanthropic pursuits. Although each of the other executive officers of the
Company is required to devote his full business time, attention and efforts to
the business of the Company, the efforts of these individuals and the efforts
of Jonathan Ledecky may not be sufficient to meet the Company's management
needs.
10
<PAGE>
APPROPRIATE ACQUISITIONS MAY NOT BE AVAILABLE AND FULL INVESTMENT OF NET
PROCEEDS MAY BE DELAYED
The results of the Company's planned operations are dependent upon the
Company's ability to identify, attract and acquire additional desirable
acquisition candidates, which may take considerable time. The Company may not
be successful in identifying, attracting or acquiring additional acquisition
candidates, in integrating such candidates into the Company or in realizing
profits from any acquisition candidates, if acquired. The failure to complete
additional acquisitions or to operate the acquired companies profitably would
have a material adverse effect on the Company's business, financial condition
and/or results of operations.
The Company has only recently begun its acquisition program. To date, the
Company has paid approximately $215.7 million in cash in connection with the
Recent Acquisitions and has agreed to pay up to an additional $50 million in
cash (based on certain assumptions) in connection with contingent
consideration arrangements with the Recent Acquisitions. In addition, the
Company is expected to pay approximately $63.1 million in cash in connection
with the Pending Acquisitions and has agreed to pay approximately $2.7 million
in cash (based on certain assumptions) in connection with contingent
consideration arrangements with the Pending Acquisitions. The Company used,
and will use, a portion of the proceeds of the IPO to pay the cash
consideration for these acquisitions. Pending their application in the
acquisition of additional businesses, the remaining net proceeds of the IPO
have been invested in readily marketable, interest-bearing, investment grade
securities. Consequently, until such time as the Company uses such proceeds to
acquire acquisition candidates, the remaining net proceeds of the IPO will
yield only that rate of return earned by such interest-bearing securities. In
addition, a portion of the net proceeds of the IPO is being used to pay
corporate overhead and administrative costs.
RISKS ASSOCIATED WITH CONSOLIDATION STRATEGY
One of the Company's strategies is to increase its revenues, the range of
products and services that it offers and the markets that it serves through
the acquisition of additional facilities management businesses. To date, the
Company has completed 20 acquisitions and has signed letters of intent with
the seven Pending Acquisitions. Investors have no basis on which to evaluate
the possible merits or risks of any future acquisition candidates' operations
and prospects. Although management of the Company will endeavor to evaluate
the risks inherent in any particular acquisition candidate, the Company may
not properly ascertain all of such risks. See "Business--Strategy."
Management of the Company has virtually unrestricted flexibility in
identifying and selecting prospective acquisition candidates and broad
discretion with respect to the specific application of the remaining net
proceeds of the IPO. Management may not succeed in selecting acquisition
candidates that will be profitable or that can be integrated successfully.
Although the Company intends to scrutinize closely the management of a
prospective acquisition candidate in connection with evaluating the
desirability of effecting a business combination, the Company's assessment of
management may not prove to be correct. See "--Conflicts of Interest" and
"Certain Relationships and Related Party Transactions."
One of the key elements of the Company's internal growth strategy is to
improve the profitablilty and increase the revenues of acquired businesses.
The Company will seek to improve the profitability and increase the revenues
of acquired businesses by various means, including combining administrative
functions, eliminating redundant facilities, implementing system and
technology improvements, purchasing products and services in large quantities
and cross-selling products and services. The Company's ability to increase
revenues will be affected by various factors, including the Company's ability
to expand the products and services offered to the customers of acquired
companies, develop national accounts and attract and retain a sufficient
number of employees to perform the Company's services. There can be no
assurance that the Company's internal growth strategies will be successful.
See "Business--Strategy."
INTEGRATION OF ACQUISITIONS
The Company's business model is based upon an aggressive and rapid
acquisition program. No assurance can be given that the Company will be able
to successfully integrate its acquisitions without substantial costs,
11
<PAGE>
delays or other problems. The costs of such acquisitions and their integration
could have an adverse effect on short-term operating results. Such costs could
include severance payments to employees of such acquired companies,
restructuring charges associated with the acquisitions and other expenses
associated with a change of control, as well as non-recurring acquisition
costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations and various other acquisition-
related costs. Any failure by the Company to make acquisitions would have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company may be unable to replicate the
success in consolidating various industries that other consolidators,
including USOP, have achieved.
The Company may not be able to execute successfully its consolidation
strategy or anticipate all of the changing demands that consolidation
transactions will impose on its management personnel, operational and
management information systems and financial systems. The integration of newly
acquired companies may also lead to diversion of management attention from
other ongoing business concerns. In addition, the rapid pace of acquisitions
may adversely affect the Company's efforts to integrate acquisitions and
manage those acquisitions profitably. Moreover, it is possible that neither
management of the Company nor management of any of the acquired companies will
have the necessary skills to manage a company implementing an aggressive
acquisition program. The Company may seek to recruit additional managers to
supplement the incumbent management of the acquired companies but the Company
may not have the ability to recruit additional managers with the skills
necessary to enhance the management of the acquired companies. Any or all of
these factors could have a material adverse effect on the Company's business,
financial condition and/or results of operations.
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION; LEVERAGE
The Company initially intends to use substantially all of its resources for
acquisitions and, to a much lesser extent, for general corporate expenses. The
timing, size and success of the Company's acquisition efforts and any
associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock, cash, borrowed funds or a combination thereof. If the Common Stock does
not maintain a sufficient market value, or if potential acquisition candidates
are otherwise unwilling to accept Common Stock as part of the consideration
for the sale of their businesses, the Company may be required to use more of
its cash resources or more borrowed funds, in each case if available, in order
to initiate and maintain its acquisition program. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity financings.
As of July 1, 1998, the Company had cash and cash equivalents (excluding
working capital of the Company's operating subsidiaries) of approximately
$297.0 million and has agreed to pay consideration consisting, in part, of
$65.7 million in cash (including contingent consideration arrangements) in
connection with the Pending Acquisitions. In addition, BT Alex. Brown
Incorporated ("BT") has provided the Company with a letter, dated May 12,
1998, in which BT confirms that, upon the Company's request, BT commits to use
its best efforts to arrange and syndicate a $100 million senior secured
revolving bank credit facility to be used by the Company for future
acquisitions or other capital requirements. This bank credit facility may,
under certain conditions to be mutually agreed upon, be increased up to a $500
million facility. The terms and conditions of any BT debt facility, including
the fee arrangements, are subject to mutual agreement. Use of any such
facility would likely be subject to conditions customary to facilities of this
type, including restrictions on other indebtedness, mergers, acquisitions,
dispositions and similar transactions. The Company may not succeed in
obtaining a facility of any size or in negotiating terms satisfactory to the
Company. Except for this proposed bank credit facility, the Company currently
has no plan or intention to obtain additional capital through debt or equity
financing during the next 12 months. If and when the Company requires
additional financing for its acquisition program or for other capital
requirements, the Company may be unable to obtain any such financing on terms
that the Company deems acceptable.
Among the possible adverse effects of borrowings to consummate acquisitions
or for other capital requirements are: (i) if the Company's operating revenues
after acquisitions were to be insufficient to pay debt service, there would be
a risk of default and foreclosure on the Company's assets; (ii) if a loan
agreement contains covenants that require the maintenance of certain financial
ratios or reserves, and any such covenant
12
<PAGE>
were breached without a waiver or renegotiation of the terms of that covenant,
then the lender could have the right to accelerate the payment of the
indebtedness even if the Company has made all principal and interest payments
when due; (iii) if the terms of a loan did not provide for amortization prior
to maturity of the full amount borrowed and the "balloon" payment could not be
refinanced at maturity on acceptable terms, the Company might be required to
seek additional financing and, to the extent that additional financing were
not available on acceptable terms, to liquidate its assets; and (iv) if the
interest rate on a loan is variable, the Company would be subject to interest
rate fluctuations which could increase the Company's debt service obligations.
The level of indebtedness that the Company may incur cannot be predicted and
will depend upon these factors and the relevant business characteristics of
the acquisition candidates for which such indebtedness will be undertaken.
The Company currently has 250,000,000 authorized shares of Common Stock. As
of July 1, 1998, the Company had 42,591,763 shares of Common Stock
outstanding, approximately 9,116,648 shares reserved for issuance pursuant to
the terms of warrants, convertible securities, options and other employee
benefit plans and 2,261,062 reserved for issuance based upon assumptions
relating to acquisition agreements providing for the payment of contingent
consideration. Accordingly, as of July 1, 1998, the Company had 196,030,527
authorized but unissued and unreserved shares of Common Stock (excluding
shares of Common Stock valued at $93.4 million to be issued in the Pending
Acquisitions). Consequently, subject to the rules and regulations of The
Nasdaq National Market, the Company will be able to finance acquisitions by
issuing significant amounts of additional shares of Common Stock without
obtaining shareholder approval of such issuances. To the extent the Company
uses Common Stock for all or a portion of the consideration to be paid for
future acquisitions, dilution may be experienced by existing stockholders.
Moreover, the issuance of additional shares of Common Stock may have a
negative impact on earnings per share and may negatively impact the market
price of the Common Stock. See "Use of Proceeds."
COMPETITION AND INDUSTRY CONSOLIDATION
The facilities management industry is highly competitive. It is
characterized by both large national and multi-national organizations
providing a wide variety of facilities management services to their customers
and numerous smaller companies providing fewer services in limited geographic
areas. In addition, property management companies and REITS are beginning to
offer facilities management services for the properties that they own or
manage and large heating, ventilation and air conditioning manufacturers, such
as Carrier Corporation, Conditioning Company and Honeywell, Inc., and some
public utilities, are active in certain sectors of the facilities management
industry. Barriers to entry to the markets for certain facilities management
services, such as janitorial and custodial services, are low, and the Company
expects to compete against numerous smaller service providers, many of which
may have more experience in and knowledge of the local market for such
services. Such smaller service providers may also have lower overhead cost
structures and may be able to provide their services at lower rates than the
Company. In these same markets, the Company also expects to face large
competitors that offer multiple services and that are willing to accept lower
profit margins in order to capture market share. In addition, the Company
faces competition from both large and small companies that offer only one of
the services that the Company offers and may face competition in the future
from companies entering the markets in which the Company operates. In certain
geographic regions, the Company may not be eligible to compete for certain
contracts if its employees are not subject to collective bargaining
arrangements. As a result of this competition, the Company may lose customers
or have difficulty acquiring new customers. As a result of competitive
pressures on the pricing of facilities management services, the Company's
revenues or margins may decline.
The Company also expects to face significant competition to acquire
facilities management businesses from larger companies that currently pursue,
or are expected to pursue, acquisitions as part of their growth strategies and
as the industry undergoes continuing consolidation. Such competition could
lead to higher prices being paid for acquired companies.
The Company believes that the facilities management industry will undergo
considerable consolidation during the next several years. The Company expects
that, in response to such consolidation and in light of the Company's
significant financial resources, it will consider from time to time additional
strategies to enhance
13
<PAGE>
stockholder value. These include, among others, strategic alliances and joint
ventures; purchase, sale and merger transactions with other large companies;
and other similar transactions. In considering any of these strategies, the
Company will evaluate the consequences of such strategies, including, among
other things, the potential for leverage that would result from such a
transaction, the tax effects of the transaction, and the accounting
consequences of the transaction. In addition, such strategies could have
various other significant consequences, including changes in management,
control or operational or acquisition strategies of the Company. There can be
no assurance that any one of these strategies will be undertaken, or that, if
undertaken, any such strategy will be completed successfully.
DEPENDENCE ON HOURLY WAGE, TECHNICAL AND UNION EMPLOYEES
The Company's ability to increase productivity and profitability will depend
upon its ability to recruit, train and retain large numbers of hourly wage and
skilled employees necessary to meet the Company's service requirements.
Competition for such employees has led to increased wage levels and employee
turnover. Inability to recruit, train and retain such employees at competitive
wage rates could increase the Company's operating costs. In addition, many
companies that require skilled employees, such as electrical and mechanical
installation and maintenance and heating, ventilation and air conditioning
companies are currently experiencing shortages of qualified employees. There
can be no assurance that the Company will be able to maintain an adequate
labor force necessary to efficiently operate its business, that the Company's
labor expenses will not increase as a result of a shortage in the supply of
hourly wage or skilled employees or that the Company will not have to curtail
its planned internal growth as a result of labor shortages. In addition, many
sectors of the facilities management industry involve unionized employees. As
these union contracts expire, the Company may be required to renegotiate them
in an environment of increasing wage rates. There can be no assurance that the
Company will be able to renegotiate union contracts on terms favorable to the
Company or without experiencing a work stoppage.
EXPOSURE TO DOWNTURNS IN COMMERCIAL AND INDUSTRIAL CONSTRUCTION
Approximately 70% of the 1997 pro forma aggregate revenues of the Company's
Electrical Contracting Services Division involved the installation of
electrical systems in newly constructed commercial, institutional, industrial
and retail buildings and plants. The extent to which this Division is able to
maintain or increase revenues from new installation services will depend on
the levels of new construction starts from time to time in the geographic
markets in which the Company operates and likely will reflect the cyclical
nature of the construction industry. The level of new commercial installation
services is affected by fluctuations in the level of new construction of
commercial, institutional, industrial and retail buildings and plants in the
markets in which the Company operates, which fluctuations can be due to local
economic conditions, changes in interest rates and other related factors.
Downturns in levels of construction of commercial, institutional, industrial
or retail buildings and plants would have a material adverse effect on the
Company's business, financial condition and/or results of operations.
RISKS OF FIXED PRICE CONTRACTS; BID AND PERFORMANCE BONDS
A substantial portion of the Company's electrical installation contracts are
fixed price contracts. The terms of these contracts require the Company to
guarantee the price of the services and assume the risk that the costs
associated with the performance will be greater than anticipated. The
Company's profitability in this market is therefore dependent on its ability
to predict accurately the costs associated with its services. These costs may
be affected by a variety of factors, some of which may be beyond the Company's
control. If the Company is unable to accurately predict the costs of fixed
price contracts, certain projects could have lower margins than anticipated,
which could have a material adverse effect on the Company's combined results
of operations any/or financial condition.
Institutional and public works projects are frequently long-term, complex
projects requiring significant technical and management skills and financial
strength to, among other things, obtain bid and performance bonds, which are
often a condition to bidding for, and the awarding of, contracts for such
projects. There can be no assurance that the Company will be able to obtain
bid and performance bonds in the future and the inability to
14
<PAGE>
procure such bonds could have a material adverse effect on the Company's
business, operating results and/or financial condition.
DEPENDENCE ON SUBCONTRACTORS
Many businesses in the facilities management industry are largely dependent
on subcontractors to provide optimum service to their customers. Such reliance
reduces the ability of a facilities management business to directly control
both its workforce and the quality of services provided. There can be no
assurance that the Company, to the extent that the facilities management
businesses it operates are heavily dependent on subcontractors, will be able
to control its workforce and the quality of services provided in a
satisfactory manner.
LENGTH OF CONTRACTS
Many businesses in the facilities management industry perform the majority
of their work for customers under contracts with termination clauses
permitting the customer to cancel the contract on 30 to 90 days' notice. While
many businesses in the facilities management industry maintain long-standing
relationships with many of their customers and experience a low customer
turnover rate, there can be no assurance that the Company will retain
customers, that customers of acquired companies will not exercise their rights
to terminate their contracts prior to expiration or that the Company will be
successful in negotiating new contracts with customers as such contracts
expire.
POTENTIAL ENVIRONMENTAL LIABILITY; GOVERNMENT REGULATION
The nature of the facilities management industry often involves the
transport, storage, use and disposal of cleaning solvents, lubricants,
chemicals, gasoline, refrigerants, and other hazardous materials by employees
to, on and around the facilities of the facilities management company and its
customers. Such activities are subject to stringent and changing federal,
state and local regulation and present the potential for liability of the
Company for the actions of its employees in handling such materials. In
addition, the exposure of any employees to these materials may give rise to
claims by employees against the Company. There can be no assurance that
compliance with governmental regulations or liability related to hazardous
materials will not have a material adverse effect on the Company's financial
condition and/or results of operations.
Due to the nature of the facilities management industry, the Company's
operations will be subject to a variety of federal, state, county and
municipal laws, regulations and licensing requirements, including labor,
employment, immigration, health and safety, consumer protection and
environmental regulations. The failure of the Company to comply with
applicable regulations could result in substantial fines or revocation of the
Company's licenses. Changes in such laws, regulations and licensing
requirements may constrain the Company's ability to provide services to
customers or increase the costs of such services. In addition, competitive
pricing conditions in the industry may constrain the Company's ability to
adjust its billing rates to reflect any such increased costs.
LIABILITY CLAIMS AND INSURANCE COVERAGE
The nature of the facilities management industry may expose the Company to
liability for employee negligence and harassment, injuries, including workers'
compensation claims, and omissions. Facilities management companies generally
carry insurance of various types, including workers' compensation, employment
practices, vehicle and general liability coverage. While the Company will seek
to maintain appropriate levels of insurance, there can be no assurance that
the Company will avoid material claims or adverse publicity related thereto.
There can also be no assurance that the Company's insurance will be adequate
to cover the Company's liabilities or that such insurance coverage will remain
available at acceptable costs. A successful claim brought against the Company
for which coverage is denied or which is in excess of its insurance coverage
could have a material adverse effect on the Company's financial condition
and/or results of operations.
15
<PAGE>
CONSIDERATION FOR OPERATING COMPANIES MAY EXCEED ASSET VALUE; AMORTIZATION
CHARGES
The purchase prices of the Company's acquisitions will not be established by
independent appraisals, but generally will be established through arms'-length
negotiations between the Company's management and representatives of such
companies. The consideration paid for each such company will be based
primarily on the value of such company as a going concern and not on the value
of the acquired assets. Valuations of these companies determined solely by
appraisals of the acquired assets are likely to be less than the consideration
that is paid for the companies. The future performance of such companies may
not be commensurate with the consideration paid.
The Company will incur significant amortization charges resulting from
consideration paid in excess of the fair value of the net assets of the
companies acquired in business combinations accounted for under the purchase
method of accounting ("goodwill"). The Company will be required to amortize
the goodwill from acquisitions accounted for under the purchase method over a
period of time, with the amount amortized in a particular period constituting
an expense that reduces the Company's net income for that period. The amount
amortized, however, will not give rise to a deduction for tax purposes except
as it relates to Service Management. A reduction in net income resulting from
amortization charges may have a material and adverse impact upon the market
price of the Company's Common Stock.
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT COMPANY'S
BUSINESS; SEASONALITY
The Company's success will be dependent upon the general economic conditions
in the geographic areas in which a substantial number of its operating
businesses are located. Adverse changes in national economic conditions or in
regional economic conditions in which the Company conducts substantial
business likely would have an adverse effect on the operating results of one
or more of the acquired companies and, accordingly, on the Company's business,
financial condition and/or results of operations. To the extent the Company
targets owners of office buildings as potential clients, the Company's success
will be dependent upon occupancy levels at such buildings. Lower occupancy
rates could have a material adverse affect on, among other sectors of the
facilities management industry, janitorial maintenance management services and
parking facility management services. In addition, the electrical and
mechanical installation and service sectors of the facilities management
industry can be subject to seasonal variations in operations and demand that
affect the construction business. Specifically, the demand for construction
services may be lower during the winter months as a result of inclement
weather conditions. Accordingly, the Company's revenues and operating results
may be lower in the first and fourth quarters. See also, "--Exposure to
Downturns in Commercial and Industrial Construction."
POTENTIAL REGULATORY REQUIREMENTS
Many of the Company's acquisitions will be subject to the requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), which could adversely affect the pace of the Company's acquisitions in
a particular sector of the facilities management industry. Among the
requirements that may be imposed in order to obtain approval of an acquisition
under the HSR Act may be a requirement that the Company divest a portion of
its then-existing operations or those of the acquisition candidate, which may
render a given acquisition disadvantageous. In addition, acquisitions of
businesses in regulated industries would subject the Company to regulatory
requirements which could limit the Company's flexibility in growing and
operating its businesses.
TAX CONSIDERATIONS
As a general rule, federal and state tax laws and regulations have a
significant impact upon the structuring of business combinations. The Company
will evaluate the possible tax consequences of any prospective business
combination and will endeavor to structure the business combination so as to
achieve the most favorable tax treatment to the Company, the acquisition
candidate and their respective stockholders. Nonetheless, the Internal Revenue
Service (the "IRS") or appropriate state tax authorities may not ultimately
agree with the Company's
16
<PAGE>
tax treatment of a consummated business combination. To the extent that the
IRS or state tax authorities ultimately prevail in recharacterizing the tax
treatment of a business combination, there may be adverse tax consequences to
the Company, the acquisition candidate and/or their respective stockholders.
POTENTIAL INFLUENCE OF MANAGEMENT
As of July 1, 1998, executive officers and directors of the Company owned
beneficially approximately 13.6% of the outstanding shares of Common Stock. In
addition, many of the officers of the Company's subsidiaries received shares
of Common Stock in connection with the sale of their businesses to the
Company. The Company's executive officers and directors and officers of the
Company's subsidiaries, if acting together, may be able to significantly
influence the election of directors and other matters requiring the approval
of the stockholders of the Company. This concentration of ownership may also
have the effect of delaying or preventing a change in control of the Company.
See "Principal Stockholders."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON THE PRICE OF COMMON
STOCK
As of July 1, 1998, the Company had 42,591,763 shares of Common Stock
outstanding. Of such shares, 27,600,000 shares are freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that any shares purchased by an
"affiliate" of the Company, as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act, may generally be sold only in compliance
with Rule 144, as described below. As an affiliate, Jonathan Ledecky will be
subject to the resale restrictions of Rule 144. In addition, he may not
transfer 2,300,000 of his shares until November 26, 1998.
As of July 1, 1998, the Company had 1,950,000 shares of Common Stock
reserved for issuance upon the exercise of a warrant issued to Jonathan
Ledecky in connection with the IPO (the "Ledecky Warrant") at an exercise
price equal to $20.00 per share, 1,130,000 shares of Common Stock reserved for
issuance upon exercise of a warrant issued to Friedman, Billings, Ramsey &
Co., Inc. ("FBR"), at an exercise price of $20.00 per share, 500,000 shares
reserved for issuance upon the conversion of shares of Convertible Non-Voting
Common Stock (which shares will be eligible for resale beginning on November
25, 1998, the first anniversary of the Effective Date), 3,430,220 shares of
Common Stock reserved for issuance upon the exercise of outstanding stock
options, and an aggregate of 1,703,039 shares reserved for issuance pursuant
to the Incentive Plan, the Directors' Plan and the Purchase Plan. Because the
number of shares reserved for issuance upon the exercise of awards made or to
be made under the Incentive Plan is 9% of the aggregate number of shares of
Common Stock outstanding from time to time, future issuances of Common Stock,
whether in acquisitions or otherwise, will result in an increase in the number
of awards available to be made. The Registration Statement of which this
Prospectus forms a part registers 24,000,000 shares of Common Stock for
issuance, of which 12,441,763 shares have been issued in connection with the
Recent Acquisitions.
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect the prevailing market price of the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. The Company has filed a registration
statement on Form S-8 with respect to the shares of Common Stock issuable upon
exercise of options granted under the Incentive Plan. In addition, FBR and
Jonathan Ledecky have the right, beginning on November 26, 1998, to require
the Company to register for sale under the Securities Act shares issuable upon
their exercise of their warrants.
The Company has an aggressive acquisition program under which it issues
shares of Common Stock. As of July 1, 1998, approximately 9,604,935 of the
42,591,763 shares outstanding were issued in connection with acquisitions and
were subject to contractual restrictions on the transfer thereof. The
contractual restrictions expire at various times, generally one to two years
from the date of issuance of the shares. In addition, as of July 1, 1998,
2,836,828 of the 42,591,763 shares of Common Stock outstanding were subject to
restrictions on transfer because they were issued in acquisitions accounted
for under the pooling-of-interests method of accounting. Under the pooling-of-
interests method of accounting, the affiliates of acquired companies, which
are expected to
17
<PAGE>
be in many, if not most, cases all of the stockholders of the companies
acquired by the Company, must be free to sell or otherwise transfer shares of
Common Stock received in the acquisition, subject to their compliance with the
federal securities laws, as soon as the Company releases results of operations
that reflect the combined post-acquisition operations of the Company and the
acquired company for a minimum of 30 days. The approximately 2,836,828 shares
of Common Stock will become freely transferable (subject to certain volume and
other restrictions of Rule 145(d) under the Securities Act) upon the Company's
public announcement of results of operations reflecting 30 days of combined
post-acquisition operations of it and the acquired companies. The Company
expects to complete additional acquisitions in the future that will be
accounted for under the pooling-of-interests method. If a significant number
of shares of Common Stock are issued in acquisitions that are completed in
close proximity to each other, such shares will become freely tradeable at the
same time. If a large number of shares are sold in the market by stockholders
as soon as their shares become freely transferable, the price of shares of
Common Stock could be adversely affected.
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the IPO, there was no public market for the Company's Common Stock.
An active public market for the Common Stock may not develop or be sustained.
The offering price for the Common Stock to be issued pursuant to this
Prospectus will be determined by negotiations between the Company and the
owners of the companies to be acquired. Any such negotiated price may bear no
relationship to the price at which the Common Stock will trade after each
respective acquisition and an active trading market may not be sustained
subsequent to any future acquisition transactions.
The trading price of the Common Stock could be subject to significant
fluctuations in response to activities of the Company's competitors,
variations in quarterly operating results, changes in market conditions and
other events or factors. The market price of the Company's Common Stock could
also be adversely affected by confusion or uncertainty as to the pace of the
Company's consolidation activities, the ability of the Company to integrate
effectively different sectors of the facilities management industry and the
difficulty for securities analysts and investors to analyze the Company's
financial and operational performance when it operates in more than one sector
of the facilities management industry. Moreover, the volatility of the stock
market could adversely affect the market price of the Common Stock and the
ability of the Company to raise equity in the public markets.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock to date. The
payment of any dividends will be within the discretion of the Company's Board
of Directors. It is the present intention of the Board of Directors to retain
all earnings, if any, for use in the Company's business operations and,
accordingly, the Board of Directors does not anticipate declaring any
dividends in the foreseeable future. See "Dividend Policy."
DILUTION
When the Company issues additional shares of Common Stock in the future,
including shares which may be issued pursuant to earn-out arrangements, option
grants, the Ledecky Warrant, FBR's warrants and future acquisitions,
purchasers of Common Stock may experience dilution in the net tangible book
value per share of the Common Stock. Since the holders of Common Stock do not
have any preemptive right to purchase shares of Common Stock issued by the
Company in the future, their voting power will be diluted by future issuances
of shares of Common Stock by the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibit the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
"interested stockholder," unless the business combination is approved in a
prescribed manner. See "Description of Capital Stock--Certain Provisions of
Delaware Law and the Company's Restated Certificate of Incorporation."
18
<PAGE>
YEAR 2000 ISSUE
The Company has begun to assess whether its business systems and products
could be affected by the year 2000 issue. The year 2000 issue refers to a
number of date-related problems that may affect software applications,
including codes imbedded in chips and other hardware devices. These problems
include software programs that identify a year by two digits and not four so
that a date using "00" would be recognized as the year "1900" rather than the
year "2000."
The Company plans to complete the assessment of the impact of the year 2000,
formalize its plan to resolve the issues and begin to implement the plan by
December 1998. At this time, the Company cannot assess the extent to which it
will be dependent upon third parties to identify or address such issues and
does not have an estimate of the cost of compliance. Any failure by the
Company to ensure that its computer systems are year 2000 compliant could have
a material adverse effect on the Company's operations. Any failure of the
Company's business systems or products to perform could result in claims
against the Company.
PRICE RANGE OF COMMON STOCK
The Common Stock, par value $0.001 per share, has traded on the Nasdaq
National Market since November 26, 1997. On July 1, 1998, the last sale price
of the Common Stock was $23.56 per share. The number of record holders of the
Common Stock as of July 1, 1998 was 190. The Company believes that a
substantially larger number of beneficial owners hold such shares of Common
Stock in depository or nominee form. The following table sets forth the range
of high and low sale prices for the Common Stock, as reported on the Nasdaq
National Market, for the fourth fiscal quarter of 1997 and through the latest
practicable date in the third fiscal quarter of 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1997
Fourth fiscal quarter........................................ $21.50 $20.13
FISCAL YEAR 1998
First fiscal quarter......................................... $25.88 $18.38
Second fiscal quarter........................................ $25.94 $19.75
Third fiscal quarter through July 3.......................... $23.75 $22.13
</TABLE>
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future because it intends to retain its earnings, if
any, to finance the expansion of its business and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other factors, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
considerations that the Board of Directors deems relevant. Further, in the
event that the Company obtains a credit facility to be used for future
acquisitions or other capital requirements, it is likely that the terms of
such credit facility will prohibit or limit the payment of dividends by the
Company.
19
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Selected Financial Data for the year ended December 31, 1997 (except pro
forma combined amounts) have been derived from the Company's audited financial
statements which are included elsewhere in this Prospectus. The Selected
Financial Data for the three months ended March 31, 1998 have been derived
from unaudited interim consolidated financial statements of the Company. The
unaudited interim consolidated financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for the periods presented. The unaudited pro forma
combined financial data gives effect to the Recent Acquisitions as if they had
been consummated on January 1, 1997. The selected unaudited pro forma combined
financial data are not necessarily indicative of operating results or
financial position that would have been achieved had the events described
above been consummated and should not be construed as representative of future
operating results or financial position. The Selected Financial Data should be
read in conjunction with the Unaudited Pro Forma Combined Financial
Statements, the supplemental consolidated financial statements of the Company,
the historical financial statements of the Company and the Recent Acquisitions
and the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, 1997 ENDED MARCH 31,
------------------------ --------------------------------------
1998 1997 1998
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) PRO FORMA(1)
---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ $ 790,911 $ 37,497 $179,379 $206,126
Cost of Revenues...... 635,766 30,245 146,789 168,821
---------- ---------- ----------- ---------- ----------
Gross profit.......... 155,145 7,252 32,590 37,305
Selling, general and
administrative....... 1,985 92,542 4,595 21,104 23,728
Goodwill
amortization......... 8,662 324 2,165 2,165
---------- ---------- ----------- ---------- ----------
Operating income
(loss)............... (1,985) 53,941 2,333 9,321 11,412
Other (income) expense
Interest expense.... 2,984 35 1,444 1,145
Interest income..... (2,056) (3,914) (6,657) (292) (4,265)
Minority interest... 848 181 767
Other, net.......... (3,109) (30) (1,348) (2,197)
---------- ---------- ----------- ---------- ----------
Income before income
taxes................ 71 57,132 8,985 9,336 15,962
Provision for income
taxes................ 64 25,958 3,722 4,510 6,984
---------- ---------- ----------- ---------- ----------
Net income............ $ 7 $ 31,174 $ 5,263 $ 4,826 $ 8,978
========== ========== =========== ========== ==========
Net income per share--
Basic................ $ -- $ 1.12 $ 0.17 $ 0.18 $ 0.21
========== ========== =========== ========== ==========
Net income per share--
Diluted.............. $ -- $ 1.10 $ 0.16 $ 0.18 $ 0.20
========== ========== =========== ========== ==========
Weighted average
number of common
shares outstanding .. 4,911,401 27,879,034 31,696,546 26,663,052 42,591,763
========== ========== =========== ========== ==========
Weighted average
number of common and
potentially dilutive
shares outstanding... 4,990,500 28,255,014 32,670,033 26,972,501 43,878,851
========== ========== =========== ========== ==========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF MARCH 31, 1998
----------------------- --------------------
PRO FORMA
ACTUAL ACTUAL COMBINED(3)
----------------------- -------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital................. $527,277 $446,760 $370,228
Total assets.................... 529,065 710,209 893,344
Long term debt, net of current
maturities..................... -- 3,414 8,287
Stockholders' equity............ 527,297 629,954 734,771
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the Recent
Acquisitions, the IPO and the sale of 500,000 shares of Convertible Non-
Voting Common Stock concurrent with the IPO were completed on January 1,
1997, and give effect to certain pro forma adjustments as further
described in the Unaudited Pro Forma Combined Financial Statements
included elsewhere in this Prospectus.
(2) For calculation of the pro forma weighted average common shares
outstanding and common and potentially dilutive shares outstanding, see
Note 4 of Notes to Unaudited Pro Forma Combined Financial Statements.
(3) The pro forma combined balance sheet data assume that the Recent
Acquisitions completed after March 31, 1998 were consummated on March 31,
1998.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31,
1997, the unaudited financial statements for the three months ended March 31,
1998 and the related notes thereto appearing elsewhere in this Prospectus.
Founded in February 1997, Consolidation Capital Corporation intends to
consolidate the facilities management industry to become a national single-
source provider of facilities management services. The Company completed its
IPO in December 1997 raising net proceeds of approximately $527,000,000. The
proceeds are being used by the Company primarily in its acquisition program
although some are being used to fund operations of the Company.
During the three months ended March 31, 1998, the Company acquired all of
the outstanding stock of Service Management USA, Inc., Garfield Electric
Company, Indecon, Inc., Riviera Electric Construction Co., Inc., SKC Electric,
Inc., Town & Country Electric, Inc., Tri-City Electrical Contractors, Inc.,
Walker Engineering, Inc. and Wilson Electric Company, Inc. (the "Purchased
Companies") in business combinations accounted for under the purchase method
of accounting.
Due to the Company's growth through acquisitions, comparisons of the
historical results of the Company's operations have been and will continue to
be affected primarily by the addition of acquired companies. In most
instances, these dollar increases in the various revenues and expense
components of the Company's results are due primarily to growth from
acquisitions. Neither the magnitude nor the source of such changes is
necessarily indicative of changes that will occur in the future.
CONSOLIDATED RESULTS OF OPERATIONS
Inception (February 27, 1997) through December 31, 1997
For the period from inception (February 27, 1997) through December 31, 1997,
the Company's operations consisted of organizational activities, research and
analysis with respect to industry consolidations and acquisition
opportunities, efforts to refine the Company's business strategy and meetings
and negotiations with potential acquisition candidates. The Company generated
no revenues for the period ended December 31, 1997 other than investment
earnings on the net proceeds of the IPO and incurred expenses of $2.0 million
in connection with the analysis of industry consolidation and acquisition
opportunities, efforts to refine the Company's strategy, meetings and
negotiations with potential acquisition candidates and to fund operating
expenses.
Activity for the period from inception to March 31, 1997 consisted only of
minimal operating expenses and accordingly statements of operations for the
period of inception to March 31, 1997 would not provide meaningful information
and have therefore not been presented.
Three Months Ended March 31, 1998
The following discussion includes the results of Consolidation Capital
Corporation and the companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Revenues. The Company's revenues are derived primarily from the providing of
janitorial maintenance management services and electrical installation and
maintenance services. For the three months ended March 31, 1998, approximately
14.7% and 85.3% of the Company's revenues were derived from janitorial
maintenance management services and electrical installation and maintenance
services, respectively.
22
<PAGE>
The Company's revenues are recognized as services are performed for
maintenance and service contracts. Additionally, the Company utilizes the
percentage-of-completion method of accounting for installation contracts.
Under this method, revenues are recognized according to the ratio of costs
incurred to estimated total contract costs. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result
in revisions to costs and income and are recognized in the period in which the
revisions are determined.
Consolidated revenues were approximately $37.5 million for the three months
ended March 31, 1998. These revenues were generated from the Purchased
Companies, which have been included since their respective dates of
acquisition.
Gross profit. Gross profit was approximately $7.3 million or 19.3% of
revenues for the three months ended March 31, 1998.
Selling, general and administrative. Selling, general and administrative
expenses approximated $4.9 million, or 13.1% as a percentage of revenues.
Selling, general and administrative expenses consist of general and
administrative costs associated with the Company's corporate activities,
selling, general and administrative costs of the Purchased Companies and
goodwill amortization associated with the Purchased Companies. Selling general
and administrative costs as a percentage of revenues for the three months
ended March 31, 1998 are disproportionately higher as a result of the
Company's corporate costs relative to the operating results which are only
included since their respective dates of acquisition. Accordingly, the Company
anticipates that selling, general and administrative costs as a percentage of
revenues will decrease as the operating results of the Purchased Companies and
future acquisitions increase.
Interest income. Interest income was approximately $6.7 million for the
three months ended March 31, 1998. This interest income was generated from the
Company's investment of the proceeds raised in its initial public offering in
November 1997. This interest income represents an effective interest rate of
5.56%.
Provision for income taxes. Provision for income taxes was approximately
$3.7 million for the three months ended March 31, 1998, reflecting an
effective income tax rate of 41.4%. The effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 34.0%,
appropriate state and local taxes and the non-deductibility of certain
goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $424.5
million, primarily consisting of investment grade securities and working
capital of $446.8 million. Additionally, BT Alex. Brown Incorporated has
provided the Company with a letter, dated May 12, 1998, in which BT confirms
that, upon the Company's request, BT commits to use its best efforts to
arrange and syndicate a $100 million senior secured revolving bank credit
facility to be used by the Company for future acquisitions or other capital
requirements. This bank credit facility may, under certain conditions to be
mutually agreed upon, be increased up to a $500 million facility. The terms
and conditions of any BT debt facility, including the fee arrangements, are
subject to mutual agreement. Use of any such facility would likely be subject
to conditions customary to facilities of this type, including restrictions on
other indebtedness, mergers, acquisitions, dispositions and similar
transactions. The Company may not succeed in obtaining a facility of any size
or in negotiating terms satisfactory to the Company. Except for this proposed
bank credit facility, the Company currently has no plan or intention to obtain
additional capital through debt or equity financing in the next 12 months. If
and when the Company requires additional financing for its acquisition program
or for other capital requirements, the Company may be unable to obtain any
such financing on terms that the Company deems acceptable.
The Company also expects to utilize its Common Stock as a source of capital
to provide a portion of the consideration paid to acquire certain companies.
The Company believes that its cash and cash equivalents, cash flow from
operations and its available authorized but unissued and unreserved shares of
Common Stock that may be issued in acquisitions, will be sufficient to fund
its operations and acquisition program through the end of 1998.
23
<PAGE>
During the three months ended March 31, 1998, net cash provided by operating
activities was $7 million. Net cash used in investing activities was $111.6
million, which primarily consisted of $111.8 million used for acquisitions.
The acquisitions of the Purchased Companies also provide for the payment of
up to $80 million in cash and shares of Common Stock based upon the
performance of these companies.
Subsequent to March 31, 1998 and through July 1, 1998, the Company completed
eleven business combinations for an aggregate consideration of 7,353,714
shares of Common Stock $67.8 million in cash and the assumption of
approximately $34.5 million in debt which was paid at the time of closing.
Additionally, the Company has signed letters of intent to acquire three
companies offering janitorial maintenance management services and four
companies offering electrical and mechanical installation and maintenance
services. Total consideration which may be issued in connection with these
pending acquisitions is $153.4 million in cash and shares of common stock.
Additionally, there is the potential for the payment of up to an additional
$2.3 million in cash and shares of common stock in connection with contingent
consideration agreements. See "Recent Developments."
SUPPLEMENTAL CONSOLIDATED RESULTS OF OPERATIONS
Subsequent to March 31, 1998 and through July 1, 1998, the Company acquired
all of the outstanding stock of Perimeter Maintenance Corporation
("Perimeter"), Crest International LLC ("Crest"), Spann Building Maintenance
("Spann") and The Lewis Companies, Inc. ("Lewis"), (collectively, the "Pooled
Companies"), in exchange for 2,836,828 shares of Common Stock of the Company.
These business combinations have been accounted for under the pooling-of-
interests method and, accordingly, supplemental consolidated financial
statements have been presented elsewhere in this Prospectus to give
retroactive effect to these Pooled Companies for all periods presented.
Perimeter, Crest and Spann provide janitorial maintenance management services
and Lewis provides electrical and mechanical installation and maintenance
services. The following discussion of Supplemental Consolidated Results of
Operations should be read in conjunction with the supplemental consolidated
financial statements for the three years ended December 31, 1997 and the three
months ended March 31, 1997 and 1998 and the related notes thereto.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenues. Consolidated revenues for the three months ended March 31, 1998
increased $39.5 million, or 128.7%, to $70.2 million from $30.7 million for
the three months ended March 31, 1997. This increase was primarily as a result
of the acquisition of the Purchased Companies during the three months ended
March 31, 1998, which have been included since their respective dates of
acquisition.
Gross profit. Gross profit for the three months ended March 31, 1998
increased $9.0 million, or 177.1%, to $14.1 million from $5.1 million for the
three months ended March 31, 1997. This increase is primarily as a result of
the acquisition of the Purchased Companies. Gross profit as a percentage of
revenues increased to 20.0% for the three months ended March 31, 1998 from
16.5% for the three months ended March 31, 1997. This increase in the gross
profit percentage is primarily attributable to the Purchased Companies, which
had an average gross profit percentage of 19.3% and, to a lesser extent an
increase in the gross profit percentage of Lewis.
Selling, general and administrative. Selling, general and administrative
expenses for the three months ended March 31, 1998 increased $6.6 million, or
154.0%, to $10.9 million from $4.3 million for the three months ended March
31, 1997. Selling, general and administrative expenses as a percentage of
revenues increased to 15.5% for the three months ended March 31, 1998 from
14.0% for the three months ended March 31, 1997. These increases are primarily
attributable to the selling, general and administrative expenses of the
Purchased Companies, the goodwill amortization associated with the Purchased
Companies and the general and administrative costs of the Company's corporate
activities.
24
<PAGE>
Other income, net. Other income, net for the three months ended March 31,
1998 increased $7.2 million, or 1347.2%, to $7.7 million from $.5 million for
the three months ended March 31, 1997. This increase is primarily attributable
to the interest income of $6.7 million generated from the investment of the
proceeds raised in the Company's initial public offering in November 1997.
Provision for income taxes. The provision for income taxes for the three
months ended March 31, 1998 increased $4.1 million, to $4.5 million from $.4
million for the three months ended March 31, 1997, reflecting an effective tax
rate of 41.4% and 31.7% respectively. The increase in the effective rate is
primarily attributable to the increase in income generated from entities which
were subject to C corporation taxes, versus certain of the Pooled Companies
which had elected to be treated as a subchapter S corporation for tax purposes
prior to their being acquired by the Company.
Year ended December 31, 1997 Compared to the Year ended December 31, 1996
Revenues. Consolidated revenues for the year ended December 31, 1997
decreased $9.1 million, or 7.4%, to $115.3 million from $124.5 million for the
year ended December 31, 1996. This decrease was primarily attributable to a
decrease of approximately $16 million in revenues at Lewis, partially offset
by increases at the other Pooled Companies in the janitorial maintenance
management services business through expansion into new geographic markets and
further penetration of their existing markets. The decrease in revenues at
Lewis is attributable to a large project in 1996 for a power plant in
Argentina. Lewis entered into a contract to provide electrical design,
engineering and installation services of a power plant in Argentina (the
"Argentina Project"). During the construction process certain changes in the
scope of the project were implemented, however the parties were in dispute as
to the amount to be paid related to these changes. The disputed matters were
submitted to a binding arbitration process. Because of the nature of the
uncertainty surrounding the outcome of the arbitration, Lewis wrote off a
substantial amount of the receivables related to this project in 1996, which
resulted in an overall loss for Lewis. In May 1998 Lewis was awarded a total
of $12.4 million by the arbitration panel and this amount was received in June
1998. Lewis is finalizing an analysis of the settlement award, but anticipates
recognizing an after tax gain ranging from $1.0 to $1.5 million in the second
quarter.
Gross profit. Gross profit for the year ended December 31, 1997 increased
$9.3 million, or 80.6%, to $20.9 million from $11.6 million for the year ended
December 31, 1996. Gross profit as a percentage of revenues increased to 18.1%
for the year ended December 31, 1997 from 9.3% for the year ended December 31,
1996. These increases were primarily attributable to the approximate $5.0
million loss recognized on the Argentina Project in 1996, resulting in a lower
gross profit for Lewis.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1997 increased $2.5 million, or
16.3%, to $17.8 million from $15.3 million for the year ended December 31,
1996 primarily as a result of the Pooled Companies in the janitorial
maintenance services business increasing their staff to support the increase
in revenues. Selling, general and administrative expenses as a percentage of
revenues increased to 15.4% for the year ended December 31, 1997 from 12.3%
for the year ended December 31, 1996. This increase is primarily attributable
to the overall decrease in revenue in 1997.
Other income, net. Other income, net for the year ended December 31, 1997
increased $1.8 million, or 740%, to $2.0 million from $.2 million for the year
ended December 31, 1996. This increase is primarily attributable to the
interest income generated from the investment of the proceeds raised in the
Company's initial public offering in November 1997.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1997 increased $3.1 million, to $1.5 million from a benefit
of $1.6 million for the year ended December 31, 1996, reflecting an effective
tax rate of 28.7% and 45.9% respectively. The decrease in the effective rate
is primarily
25
<PAGE>
attributable to the increase in income generated from entities which had
elected to be treated as a subchapter S corporation for tax purposes prior to
being acquired by the Company.
Year ended December 31, 1996 Compared to the Year ended December 31, 1995
Revenues. Consolidated revenues for the year ended December 31, 1996
increased $23.7 million, or 23.5%, to $124.5 million from $100.8 million for
the year ended December 31, 1995. This increase was primarily as a result of
the Argentina Project at Lewis. The remaining increase is a result of the
increases experienced by the other Pooled Companies in the janitorial
maintenance management services business as they expanded into new geographic
markets and further penetrated their existing markets.
Gross profit. Gross profit for the year ended December 31, 1996 decreased
$4.5 million, or 28.1%, to $11.6 million from $16.1 million for the year ended
December 31, 1995. Gross profit as a percentage of revenues decreased to 9.3%
for the year ended December 31, 1996 from 16.0% for the year ended December
31, 1995. These decreases were primarily attributable to the loss recognized
on the Argentina Project in 1996, resulting in a lower gross profit for Lewis.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1996 increased $1.0 million, or
16.3%, to $15.3 million from $14.3 million for the year ended December 31,
1995 primarily as a result of the increases in the staffs of the Pooled
Companies in the janitorial maintenance services business to support the
increase in revenues. Selling, general and administrative expenses as a
percentage of revenues decreased to 12.3% for the year ended December 31, 1996
from 14.2% for the year ended December 31, 1995. This decrease is primarily
attributable to the unusually small percentage of selling, general and
administrative expenses as a percentage of revenues at Lewis, as a result of
revenues generated on the Argentina Project in 1996.
Other income/expense, net. Other income, net for the year ended December 31,
1996 increased $.7 million, to $.2 million from net expense of $.5 million for
the year ended December 31, 1995.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1996 decreased $2.2 million, to a benefit of $1.6 million
from a provision of $.6 million for the year ended December 31, 1995,
reflecting an effective tax rate of 45.9% and 47.2% respectively.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Quarterly results may be materially affected by the timing of acquisitions,
the timing and magnitude of costs related to such acquisitions, variations in
services provided by the Company and the timing of these services, general
economic conditions, and the retroactive restatement in accordance with
generally accepted accounting principles of the Company's consolidated
financial statements for acquisitions accounted for under the pooling-of-
interests method. Moreover, the operating margins of companies acquired by the
Company may differ substantially from those for the Company, which could
contribute to the further fluctuation in its quarterly operations. Therefore,
results for any quarter are not necessarily indicative of the results that the
Company may achieve for any subsequent fiscal quarter or for a full fiscal
year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the three months ended March 31, 1998.
26
<PAGE>
BUSINESS
THE COMPANY
Consolidation Capital Corporation was founded in February 1997 by Jonathan
J. Ledecky to build consolidated enterprises with national market reach
through the acquisition and integration of multiple businesses in one or more
fragmented industries that have no clear market leader and could benefit from
economies of scale. The Company has determined to focus exclusively on the
facilities management industry, which it believes has the appropriate
consolidation characteristics since the facilities management industry
consists primarily of privately-held or family-owned businesses, whose owner-
operators desire liquidity and may be unable to access the capital markets
effectively or to expand beyond a local or regional base. The Company has
determined not to simultaneously pursue consolidations in multiple, unrelated
industries based on its view that the facilities management industry is a
large scale industry offering significant opportunities to expand into and
consolidate many sectors that offer products and services intended to enhance
the operating efficiency of retail, commercial and industrial clients.
Jonathan Ledecky was the founder, Chairman, and the Chief Executive Officer
of USOP. While managing USOP, Jonathan Ledecky developed a strategy of
"corporate democracy," which he believes facilitated USOP's rapid
consolidation of more than 200 companies within seven different industry
groups in the office products and services industry. The corporate democracy
approach includes (i) a general policy of empowering local management and (ii)
drawing upon the contacts and expertise of local management by encouraging
them to identify acquisition candidates and to participate in the process of
integrating newly acquired companies into a consolidated enterprise. The
Company is employing a corporate democracy approach as one of its principal
operating strategies.
From 1994 until November 1997, Jonathan Ledecky served as Chief Executive
Officer of USOP and, in that capacity, was responsible for in excess of $1.7
billion in acquisitions of domestic and international businesses. The Company
seeks to leverage the experience and expertise of Jonathan Ledecky, its
founder, Chairman and Chief Executive Officer, and the Company's management
team to become a leading consolidator of the facilities management industry.
The Company believes that, through the prior experience of Jonathan Ledecky
and the Company's management team, it has an extensive referral network of
investment and commercial bankers, business leaders, attorneys, accountants
and business and financial brokers, which will further its ability to
identify, attract and acquire desirable acquisition candidates.
The Company believes that it possesses substantial competitive advantages.
The Company expects to benefit from its ability to deploy rapidly its
significant financial resources and to use its publicly traded stock as
currency in selected acquisitions. Because the Company has significant cash
and cash equivalents, the Company's ability to acquire attractive companies is
not likely to be constrained at this time by the need to access the capital
markets. Furthermore, the Company believes that its corporate democracy
principles will help it attract and acquire companies and will differentiate
it from traditional consolidators. The Company believes that its corporate
democracy approach generates significant competitive advantages because this
approach allows managers of the acquired companies to benefit from the
economies of a large organization while simultaneously retaining local
operational control, enabling them to provide flexible and responsive service
to customers. Such an approach could, however, limit possible consolidation
efficiencies and integration efforts. In addition, although the Company's
management team has experience in acquiring and consolidating businesses, it
does not have experience managing companies in the facilities management
industry. The Company, therefore, relies, and expects to continue to rely, in
part upon management of acquired companies. In addition, the Company expects
to hire additional senior management, such as a chief operating officer and a
new chief executive officer, to manage its operations.
As of July 1, 1998, the Company has acquired five businesses specializing in
providing janitorial maintenance management services, fourteen businesses
specializing in providing electrical installation and maintenance services and
one business specializing in providing mechanical installation and maintenance
services. In addition, the Company has signed letters of intent to acquire an
additional three janitorial maintenance management services businesses, one
electrical installation and maintenance services business and three mechanical
installation and maintenance services businesses. See "Recent Developments."
27
<PAGE>
INDUSTRY BACKGROUND
Facilities management companies generally provide many products and services
needed for the operation and maintenance of a building. These products and
services include, among others, janitorial maintenance management services,
electrical installation and maintenance, lighting equipment and services,
engineering services, mechanical installation and maintenance services,
parking facility management, security systems and services, fire protection
equipment and services, grounds keeping and landscaping services, pest control
and general equipment maintenance.
The Company believes that, over the last several years, there has been a
significant trend towards the outsourcing of business support services.
According to The Outsourcing Institute, approximately 80% of U.S. companies
outsource some aspect of their business support services, and spending on
outsourcing services increased approximately 100% from 1992 through 1996. The
Company further believes that this trend will continue. The Outsourcing
Institute estimates that the demand for outsourcing services in the facilities
management industry will grow at a compound annual growth rate of
approximately 20% through the year 2000.
The Company believes that the trend toward outsourcing has transformed the
traditional facilities management industry. As companies began to realize the
benefits of outsourcing non-core business functions to single source vendors,
the opportunities for facilities management companies to expand into new
business sectors and obtain new customers have increased. Facilities
management companies have expanded their businesses from providing traditional
cleaning services for commercial property managers and large corporations to
performing higher value added services for companies in the retail, commercial
and industrial sectors. Outsourcing allows companies to, among other things,
focus on their core competencies, reduce operating expenses, share risk
management responsibility and access technical expertise not available
internally.
STRATEGY
The Company's goal is to consolidate the facilities management industry to
become the premier, national single-source provider of facilities management
services. To achieve this goal, the Company has begun to acquire and intends
to continue to acquire established local or regional businesses and combine
and integrate them into an effective national organization. The Company
believes that its strong financial position, the operating and acquisition
expertise of its management team and its ability to address the needs of local
management will allow it to achieve its goal of being the "consolidator of
choice" of acquisition candidates.
In order to achieve its goal, the Company will focus on: (1) identifying
acquisition candidates which meet the Company's consolidation criteria; (2)
attracting and acquiring companies through implementation of the Company's
corporate democracy approach, which the Company believes differentiates it
from other consolidators; (3) providing integrated facilities solutions; and
(4) achieving operating efficiencies and synergies by combining administrative
functions, eliminating redundant facilities, implementing system and
technology improvements and purchasing products and services in large volumes.
Pursue Strategic Consolidation Opportunity. The Company intends to
capitalize upon the consolidation opportunity in the facilities management
industry by acquiring companies having some or all of the following
characteristics: (i) stable cash flows and recurring revenue streams from
long-term customer relationships; (ii) low product obsolescence and non-
reliance on innovation or technology to drive recurring revenue streams; (iii)
long-term growth prospects for products and services offered; (iv) a strong
"franchise" or presence in the communities served by the acquisition
candidate; (v) an experienced management team comprised of recognized industry
leaders; (vi) an ability to retain, promote and motivate management teams;
(vii) favorable demographic trends within the local regions serviced; and
(viii) an underpenetrated market for products or services provided by the
acquisition candidate.
In general, the Company plans to acquire larger, established high quality
companies, or "hubs," in high density, metropolitan areas, and additional
smaller companies, or "spokes," in secondary markets surrounding the hubs.
Where possible, the operations of the spokes will be integrated into the
operations of existing hubs,
28
<PAGE>
thereby enabling the Company to achieve the economies of scale necessary to
decrease operating cost and increase operating margin.
The Company believes that, based on the experience of Jonathan Ledecky and
the Company's management team, it is well positioned to identify acquisition
candidates within the facilities management industry to become a national
single-source provider of facilities management services. The Company believes
that another competitive advantage will be the Company's ability to deploy
rapidly its significant financial resources and/or to use its publicly traded
stock as consideration in selected acquisitions.
Differentiate Through Corporate Democracy. The Company believes that its
implementation of corporate democracy gives the Company a competitive
advantage over rival consolidators in attracting, buying and integrating
acquired companies. The Company's business model entails both a decentralized
management philosophy and a centralized operating approach. Each of the
acquired companies continues to manage all functions that "touch the
customer," including sales, marketing, customer service, credit and
collections. The Company intends to manage functions such as purchasing,
accounting, inventory management, human resources and finance centrally where
it can leverage its size and scale. Principles of corporate democracy that are
being used by the Company include:
. Control by Owner/Operator. The corporate democracy approach to
consolidation allows the owners and operators who have built an acquired
company to retain operational control of the business while the Company
centralizes certain administrative functions to provide benefits from
operating efficiencies and synergies resulting from the consolidation of
the acquired company into a larger enterprise. This is in contrast to the
traditional consolidation approach used by other consolidators in which
the owner/operators and their employees are often relieved of management
responsibility as a result of a complete centralization of management in
the consolidated enterprise.
. ""Think National, Act Local" Management. The Company provides strategic
oversight and guidance with respect to acquisitions, financing, marketing
and operations. At the same time, managers of acquired companies are
responsible for the day-to-day operations of each of the acquired
companies. As part of its "Think National, Act Local" management
strategy, the Company fosters a culture of cooperation and teamwork that
emphasizes dissemination of "best practices" among its local or acquired
management teams. The Company believes that this decentralized management
philosophy results in better customer service by allowing local
management the flexibility to implement policies and make decisions based
upon the needs and desires of local customers and the context of local
market conditions. The decentralized sales and customer contact also
facilitates the retention of historical customers of the acquired
companies.
. Local Business Identity, Management and Sales Organization. The corporate
democracy approach to consolidation permits the Company to capitalize on
the strength of the owner/operator's connection to his locality, region
or community by maintaining the original name of the acquired company in
the given geographic location. This contrasts with other consolidation
approaches which often eliminate the local name of the acquired company
and replace it with a single or "national" business name. The Company
believes that many customers purchase products and services based upon
long-term commercial relationships. The Company believes that corporate
democracy best preserves the business-customer relationships by, in most
circumstances, retaining the management, sales organizations, and brand
name identity of acquired companies and minimizing operational changes
that adversely affect the customer.
. Use of Stock as Currency and Incentive Compensation. The Company can
structure its acquisitions using the Company's stock as currency. This
use of stock as acquisition currency, coupled with the retention of
experienced owner/operators and established sales organizations, creates
a high percentage of employee ownership and strong incentives for good
performance. The Company believes that this stock ownership plan, in
conjunction with the implementation of incentive compensation programs
geared to specific performance goals, helps to align the objectives of
the acquired companies' managers and employees with those of the
Company's stockholders.
29
<PAGE>
Provide Integrated Facilities Solutions. The Company believes that an
attractive opportunity exists in the facilities management industry to become
the premier sole source provider of a full range of facilities management
services. These services are intended to enhance the operating efficiency of
customers' facilities while relieving the Company's customers from the
management and personnel burdens associated with non-core functions. Many
companies have increased the volume and types of services they outsource in
order to focus on their respective core competencies.
. Expanding Service Lines Through Acquisitions. Through acquisitions of
related facilities management services companies, the Company expects to
expand the range of products and services that it offers, thereby
creating opportunities, where possible, for its sales force to sell
multiple product and service lines to its customer base. Cross-selling
new services to existing customers represents a cost-effective method for
the Company to achieve revenue growth. As part of this strategy, the
Company intends to focus its efforts on increasing the proportion of its
business devoted to delivering higher value added services to its
customers.
. Expanding Service Lines Through Strategic Partnering. In order to supply
seamless integrated services to a broad base of customers and facilities,
the Company intends to select, manage and integrate services provided by
third parties into the Company's overall portfolio of services.
Achieve Operating Efficiencies. The Company believes that it will be able to
achieve certain operating efficiencies and synergies among its acquired
companies. Such operating efficiencies include:
. Combining Administrative Functions. The Company will seek to institute a
Company-wide management information system and to combine at the
corporate level certain administrative functions, such as financial
reporting and finance, insurance, employee benefits and legal support.
. Using Hub and Spoke System to Eliminate Redundant Facilities and
Service. The hub and spoke strategy involves the acquisition of a larger,
established, high-quality company in a targeted geographic area into
which the facilities and operations of local, smaller acquired companies,
or "spokes", are folded, allowing the elimination of redundant facilities
and reducing overhead. This hub and spoke strategy also enables the
integration of certain operational activities, such as inventory
management, purchasing, shipping, accounting and human resources, among
acquired companies located in a geographic area, thereby permitting the
elimination of duplicative facilities and costs.
. Implementing System and Technology Improvements. The Company believes it
will be able to increase the operating margin of combined acquired
companies by using operating and technology systems to improve and
enhance the operations of the combined acquired companies, which may
include computerized inventory management and order processing systems,
computerized quotation and job costing systems and computerized logistics
and distribution systems. The Company believes that many of the acquired
companies have not made material investments in such operating and
technology systems because they lack the necessary scale to justify the
investment. The Company believes that the implementation of such systems
may significantly increase the speed and accuracy of order processing and
fulfillment at acquired companies, while providing measurement and
analysis tools that facilitate efficient operation.
. Using Volume Purchasing. The Company believes that it may achieve
operating efficiencies through volume purchasing and may benefit from
favorable prices and rebates accruing as the result of high volume
purchases. The Company may also negotiate improved arrangements with
wholesalers and manufacturers to reduce inventory levels of certain
acquired companies, thereby allowing more efficient operations by
decreasing inventory holding costs and increasing operating margins. The
Company may also seek to leverage its size and scale to negotiate
attractive volume purchasing or leasing programs for goods and services
such as delivery vehicles, long distance voice and data services,
overnight delivery services, real estate services, banking and financial
services, and insurance.
. Implementing Strategic Marketing and Cross-Functional Selling. The
Company believes that it may achieve certain efficiencies through
strategic marketing plans to be shared by acquired companies as well
30
<PAGE>
as cross-functional selling to customers of each of the acquired
companies. These synergies of strategic marketing and cross-functional
selling may allow additional services to be provided or goods to be sold
to existing customers of the acquired companies, resulting in additional
revenues for the Company. These synergies may also provide a broader
geographic sales and service reach for each of the acquired companies,
increasing the customer base of the acquired companies.
SERVICES
As of the date of this Prospectus, the Company operates in the janitorial
maintenance management and the electrical and mechanical installation and
maintenance services sectors of the facilities management industry.
To achieve its goal of becoming a single-source provider of facilities
management services, the Company expects that it will expand the range of
products and services that it offers, primarily through acquisitions of other
facilities management businesses. In addition to janitorial maintenance
management services and electrical and mechanical installation and maintenance
services, the Company may in the future seek to offer, among others, lighting
equipment and services, engineering services, parking facilities management,
security systems and services, fire protection equipment and services, grounds
keeping and landscaping services, pest control and general equipment
maintenance.
Janitorial Maintenance Management Services. The Company's janitorial
maintenance management division offers a full range of commercial
janitorial cleaning services as well as the sale of janitorial supplies and
equipment to a variety of customers, including retail chain stores, grocery
stores, office buildings, industrial plants, banks, department stores,
warehouses, educational and health facilities, restaurants, and airport
terminals throughout the United States. The services provided by the
Company include floor and carpet cleaning and maintenance; floor stripping
and refinishing; window, wall and structural cleaning and maintenance;
bathroom and other area sanitation; duct cleaning; furniture polishing; and
exterior window, wall, sidewalk, and parking lot cleaning and maintenance.
Most of the Company's janitorial contracts are subject to termination by
either party upon 30 to 90 days written notice.
This division is in a favorable position to capitalize on the growing
number of industries that are outsourcing non-core business functions. The
Company offers an extensive array of general programs and systems that free
the customer to focus on its core business activity while the support
services are being managed and performed in an efficient, cost-effective
manner. The Company believes that its depth of management expertise, its
breadth of services, and the presence of new technologies will attract this
potential business.
The Company has acquired five businesses and has signed letters of intent
or definitive agreements to acquire three businesses that provide
janitorial maintenance management services. See "Recent Developments." The
Company is seeking to further increase its market presence through
aggressive acquisitions of premier commercial cleaning contractors.
Janitorial maintenance is believed to be a $50 billion industry comprised
of more than 45,000 companies, most of which are small, privately-owned
businesses with fewer than 20 employees. The Company intends to seek out
ventures that will expand its geographic regions and augment the services
currently provided. In so doing, the Company plans to broaden its customer
base and attain a larger proportion of national accounts in diversified
areas.
Electrical Installation and Maintenance Services. The Company offers a
broad range of electrical design, installation and maintenance services for
industrial, commercial, retail and institutional markets, including:
lighting, power, building access, security systems, and fire protection
systems; fiber optic and other cabling for telecommunications and computer
systems; diagnostic evaluation of systems for predictive and preventative
maintenance; back up power systems; multi-media installations; digital
control integration and remote monitoring of life safety, lighting,
temperature, building access and surveillance and manufacturing process
controls and instrumentation.
31
<PAGE>
Virtually all construction and renovation in the United States generates
demand for electrical installation services. Depending upon the exact scope
of work, electrical work generally accounts for approximately 8% to 12% of
the total construction cost of commercial and industrial projects. In
recent years, electrical installation and services companies have
experienced a growing demand for electrical installation services per
project due to increased electrical code requirements, demand for
additional electrical capacity, including increased capacity for computer
systems, additional data cabling requirements and the digital control of
integrated services such as fire protection, security systems and
temperature controls.
The overall electrical installation industry, including commercial,
industrial and residential markets, was estimated by the U.S. Census to
have generated annual revenues in excess of $40 billion in 1992, the most
recent year for which U.S. Census data is available. These Census data
indicate that the electrical contracting industry is highly fragmented with
more than 54,000 companies, most of which are small, owner-operated
businesses, performing various types of electrical work. The Company
believes there are significant opportunities for a well-capitalized
national company to provide comprehensive electrical installation and
maintenance services and that the fragmented nature of the electrical
installation industry will provide significant opportunities to consolidate
commercial and industrial electrical installation and maintenance service
businesses. In addition, the Company believes that there are significant
growth opportunities in the electrical maintenance and specialized services
portion of the business and intends to focus on increasing the proportion
of revenues represented by such services. Electrical maintenance services
generate a recurring revenue stream that are less susceptible to downswings
in the economy than the more cyclical construction market. Furthermore,
specialized services typically require specific skills and equipment and
provide higher margins than general electrical installation and maintenance
services.
The Company believes that growth in the commercial, industrial,
institutional and retail sectors of the electrical installation and
services market will be driven by a number of factors, including (i) higher
levels of capital investment in new facility installation and renovation of
existing facilities; (ii) new codes for power and life safety; (iii)
revised national energy standards that dictate the use of more energy
efficient lighting fixtures and other equipment; (iv) new demands for
backup power; (v) increased complexity of systems requiring specialized
technical expertise; (vi) cost savings that can be derived from the central
monitoring and control of integrated systems (e.g., fire protection,
security systems, temperature control); (vii) networking of local area and
wide area computer systems; and (viii) minimizing downtime through
predictive and preventative maintenance. Competitive factors in the
electrical installation and services industry include, among others, the
availability of qualified and licensed electricians, safety record,
geographic diversity, experience in specialized markets and financial
resources. See "Risk Factors--Competition."
Mechanical Installation and Maintenance Services. The Company provides
mechanical installation and maintenance services with respect to many
systems necessary for the operation of a building or industrial facility,
including heating, ventilation and air conditioning ("HVAC"), plumbing,
process piping and instrumentation and control systems ("mechanical
systems") to a variety of customers. These services include periodic
evaluation and testing of system performance, cleaning and filter change-
outs, emergency repairs, and the retrofitting or remodeling of mechanical
systems and associated parts of a commercial building. Maintenance services
are typically performed on either a fixed schedule under service contracts
or on an as needed basis in response to service calls. The Company also
designs and installs HVAC, plumbing, control and monitoring, industrial
process piping and other systems on behalf of property owners/managers or
general contractors in commercial and industrial buildings. [In a few of
its operating locations, the Company provides certain specialized services,
including installation of fire sprinkler systems and the provision of
technical facilities management services to commercial and industrial
building owners or building managers. In connection with both its new
installation business and its maintenance, repair and replacement services,
the Company sells a wide range of HVAC and other systems' equipment, parts
and supplies.]
32
<PAGE>
Based on available industry data, the HVAC services industry is believed
to generate approximately $35 billion in annual commercial and industrial
revenues and the plumbing services industry is estimated to generate
approximately $19 billion in annual commercial, industrial and residential
revenues. The Company also believes these industries are highly fragmented
with over 50,000 businesses, consisting predominantly of small, owner-
operated companies focusing on a single local geographic area and providing
a limited range of services. The Company believes that the majority of
owners in its industry have limited access to adequate capital for
modernization, training and expansion and limited opportunities for
liquidity in their business. In addition, many of these businesses are
being threatened by increased competition from larger entities with greater
financial resources, resulting in part from the deregulation of the U.S.
gas and electric utility industries. As a result, several publicly traded
consolidators, in addition to the Company, have emerged in some or all of
these markets.
Growth in the HVAC service industry is affected by a number of factors,
particularly (i) the aging of the installed base of systems, which has
increased the demand for maintenance and replacement services, (ii) the
increasing automation, sophistication and complexity of HVAC and other
systems; (iii) the increasing restrictions on the use of refrigerants
commonly used in older HVAC systems; (iv) a desire by property
owners/managers to outsource their maintenance services; and (v) an
increasing focus by property owners/managers on the ability to achieve
savings on energy costs by replacing less efficient systems. These factors
also mitigate the effect on the HVAC service industry of economic cycles
inherent in the traditional construction industry. An aging installed base
has also positively affected growth in the plumbing service industry.
The Company believes significant opportunities are available to a well-
capitalized, national company providing a broad range of high quality
commercial services in an industry that has been characterized by
inconsistent quality, reliability and pricing. In addition, the increasing
complexity of HVAC and plumbing systems has led to a need for better
trained technicians to install, monitor and service these systems. The cost
of recruiting, training and retaining a sufficient number of qualified
technicians makes it more difficult for smaller HVAC and plumbing companies
to expand their businesses.
COMPETITION
The facilities management industry is highly competitive. It is
characterized by both large national and multi-national organizations
providing a wide variety of facilities management services to their customers
and numerous smaller companies providing fewer services in limited geographic
areas. In addition, property management companies are beginning to enter the
facilities management business. Barriers to entry to the markets for certain
facilities management services, such as janitorial services, are low, and the
Company expects to compete against numerous smaller service providers, many of
which may have more experience in and knowledge of the local market for such
services. Such smaller service providers may also have lower overhead cost
structures and may be able to provide their services at lower rates than the
Company. In these same markets, the Company also faces large competitors that
are offering multiple services and that are willing to accept lower profit
margins in order to capture market share. As a result of this competition, the
Company may lose customers or have difficulty acquiring new customers. As a
result of competitive pressures on the pricing of facilities management
services, the Company's revenues or margins may decline.
The Company also expects to face significant competition to acquire
facilities management businesses from larger companies that currently pursue,
or are expected to pursue, acquisitions as part of their growth strategies and
as the industry undergoes continuing consolidation. Such competition could
lead to higher prices being paid for acquired companies.
POTENTIAL ENVIRONMENTAL LIABILITY
The nature of the facilities management industry necessarily involves the
transport, storage, use and disposal of cleaning solvents, lubricants,
chemicals, gasoline, refrigerants and other hazardous materials by employees
to,
33
<PAGE>
on and around the customers' facilities or, in certain cases, facilities
leased by the Company on behalf of its customers. Such activities are subject
to stringent and changing federal, state and local regulation and present the
potential for liability of the Company for the actions of its employees in
handling such materials. In addition, the exposure of the Company's employees
to these materials may give rise to claims by employees against the Company.
As a result, there can be no assurance that compliance with governmental
regulations or liability related to hazardous materials will not have a
material adverse effect on the Company's financial condition or results of
operations.
EMPLOYEES
As of July 1, 1998, the Company had more than 10,300 employees. In general,
the Company considers its relations with its employees to be satisfactory.
PROPERTIES
As of July 1, 1998, the Company operated 103 facilities in various states.
Of these facilities, 97 are leased and six are owned. The facilities are used
for warehouse and office purposes, or a combination of these functions. At
this time, the Company believes that its facilities are suitable for their
purposes, having adequate capacity for the Company's present and anticipated
needs.
LEGAL PROCEEDINGS
As a result of the Recent Acquisitions, the Company is a party to litigation
that arises from the normal course of the business of the acquired companies.
Management believes that none of these actions will have a material adverse
effect on the financial condition, results of operations or cash flows of the
Company.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of the
executive officers and directors of the Company as of June 27, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Jonathan J. Ledecky 40 Chairman and Chief Executive Officer
Timothy C. Clayton 43 Executive Vice President, Chief Financial
Officer and Treasurer
F. Traynor Beck 42 Executive Vice President, General Counsel
and Secretary
David Ledecky 36 Executive Vice President and Chief
Administrative Officer; Director
William P. Love, Jr. 39 Director; President--Electrical Contracting
Services Division
Thomas D. Heule 39 Director; Vice President--United Service
Solutions
Vincent W. Eades 38 Director
W. Russell Ramsey 37 Director
M. Jude Reyes 42 Director
</TABLE>
Jonathan J. Ledecky founded the Company in February 1997 and serves as its
Chairman and Chief Executive Officer. Jonathan Ledecky founded U.S. Office
Products Company, a company engaged in providing office and educational
products and business services, in October 1994 and served as its Chairman of
the Board until June 10, 1998 and as its Chief Executive Officer until
November 5, 1997. Prior to founding USOP, Jonathan Ledecky served from 1989 to
1991 as the President of The Legacy Fund, Inc., and from 1991 to September
1994 as President and Chief Executive Officer of Legacy Dealer Capital Fund,
Inc., a wholly owned subsidiary of Steelcase Inc., the nation's largest
manufacturer of office furniture products. Jonathan Ledecky has also served as
the Non-Executive Chairman of the Board of USA Floral since April 1997 and
currently serves as a director of UniCapital, U.S. Marketing, Aztec Technology
Partners, Inc., School Specialty, Inc., Workflow Management, Inc., Navigant
International, Inc. and MicroStrategy Incorporated. Jonathan Ledecky is a
graduate of Harvard College and Harvard Business School. Jonathan Ledecky is
the brother of David Ledecky.
Timothy C. Clayton has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company since November 25, 1997. Between August
1976 and October 1997, Mr. Clayton was associated with Price Waterhouse LLP,
most recently as a partner since July 1988. In his capacity as partner, Mr.
Clayton focused his practice on, among others, distribution, technology,
financial services, business services and manufacturing industries, and was
responsible for providing audit and business advisory services to clients
active in consolidating a variety of industries. Mr. Clayton is a graduate of
Michigan State University.
F. Traynor Beck has served as Executive Vice President, General Counsel and
Secretary of the Company since November 25, 1997. Between January 1988 and
November 25, 1997, Mr. Beck was associated with Morgan, Lewis and Bockius LLP,
most recently as a partner since October 1994. Mr. Beck's practice was focused
on mergers, acquisitions and general corporate matters, including
consolidation transactions. Mr. Beck is a graduate of the University of
Pennsylvania, Oxford University and Stanford Law School.
35
<PAGE>
David Ledecky joined the Company as Senior Vice President, Secretary and
Treasurer in September 1997 and was appointed Executive Vice President and
Chief Administrative Officer on November 25, 1997. David Ledecky has also
served as a director since November 25, 1997. Prior thereto, he operated
Ledecky Brothers L.L.C., the Company's predecessor, as its Vice President and
sole employee since its inception in February 1997. In that capacity, he
researched and analyzed industry consolidation and acquisition opportunities.
From 1992 to 1996, David Ledecky was an attorney at the Washington, D.C. law
firm of Comey, Boyd & Luskin. Prior to 1992, he was an attorney with the law
firm of Shearman & Sterling, and a Vice President of The Legacy Fund, Inc. in
Washington, D.C. He is a former consultant to the computer and
telecommunications industries. He is a graduate of Harvard College and Yale
Law School. David Ledecky is the brother of Jonathan Ledecky.
William P. Love, Jr. has served as the President of the Electrical
Contracting Services Division of the Company and has been a director of the
Company since March 11, 1998. From September 1980 to March 11, 1998, Mr. Love
served as the President and Chief Executive Officer of SKC Electric, Inc., an
electrical installation and maintenance services company that Mr. Love founded
and that has been a wholly owned subsidiary of the Company since its
acquisition by the Company on March 11, 1998. Mr. Love is the director
designee of the Founding Electrical Group pursuant to the agreements between
the Company and each company in the Founding Electrical Group.
Thomas D. Heule has been a director since April 27, 1998. Mr. Heule has
served as a Managing Director of BACE Capital Partners, LLC, an industry
consolidation buyout firm based in Denver, Colorado since March 1997. Between
November 1997 and April 1998, Mr. Heule also served as Vice President of USS,
a company acquired by the Company in April 1998. Between 1991 and 1997, Mr.
Heule was a Managing Director in the Corporate Finance Department of Dain
Bosworth Inc., where he was responsible for completing public and private
equity and debt transactions totaling over $1.4 billion. Mr. Heule is a
graduate of the University of Colorado, the College of St. Thomas and the
Wharton School of the University of Pennsylvania. Mr. Heule is the director
designee of the stockholders of USS pursuant to the acquisition agreement
between the Company and USS.
Vincent W. Eades has been a director of the Company since November 25, 1997.
Mr. Eades has served as the Chairman and Chief Executive Officer of TEC, Inc.,
a company seeking to consolidate a fragmented industry, since May 20, 1998.
Between May 1995 and May 20, 1998, Mr. Eades served as the Senior Vice
President of Sales and Marketing for Starbucks Coffee Co. Inc. Mr. Eades was
employed by Hallmark Cards Inc., most recently as a General Manager from
November 1985 through April 1995. Additionally, he serves as a director of USA
Floral.
W. Russell Ramsey has been a director of the Company since November 25,
1997. Mr. Ramsey is President, co-founder and a director of Friedman,
Billings, Ramsey Group, Inc. ("FBR Group"), a holding company engaged in
brokerage, investment banking, corporate finance and asset management
activities in the Washington, D.C. area. He has continuously served as
President of FBR Group and its predecessors since co-founding FBR Group in
1989. FBR, the representative of the underwriters in the IPO, is a wholly
owned indirect subsidiary of FBR Group. Mr. Ramsey holds a B.A. from The
George Washington University. Mr. Ramsey is a director designee of FBR
pursuant to an agreement between the Company and FBR.
M. Jude Reyes has been a director of the Company since November 25, 1997.
Mr. Reyes has served as Chairman and President of Premium Distributors of
Virginia, L.L.C., a beverage distributor, since 1992. Between 1989 and 1992,
Mr. Reyes served as President and Chairman of Harbor Distributing Company in
Los Angeles, California. He also is a director and investor in three other
beverage distributors and two wholesale food service distributors. Mr. Reyes
is a director designee of FBR pursuant to an agreement between the Company and
FBR.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee.
36
<PAGE>
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to
conduct the annual audit of the books and records of the Company, reviewing
the proposed scope of such audit and approving the audit fees to be paid,
reviewing accounting and financial controls of the Company with the
independent public accountants and the Company's financial and accounting
staff and reviewing and approving transactions between the Company and its
directors, officers and affiliates. Messrs. Eades, Ramsey and Reyes are the
members of the Audit Committee.
The Compensation Committee provides a general review of the Company's
compensation plans to ensure that they meet corporate objectives. The
responsibilities of the Compensation Committee also include administering the
Incentive Plan and Bonus Plan, including selecting the officers and salaried
employees to whom awards will be granted. Messrs. Eades and Reyes, independent
directors of the Company, are the members of the Compensation Committee.
DIRECTOR COMPENSATION
Directors who are not receiving compensation as officers, employees or
consultants of the Company are entitled to receive an annual retainer fee of
$25,000. In addition, pursuant to the Consolidation Capital Corporation 1997
Non-Employee Directors' Stock Plan, each non-employee director receives an
automatic initial grant of options to purchase 20,000 shares of Common Stock
on the date of their initial election to the Board of Directors, and an
automatic annual grant of options to purchase 5,000 shares. Each such option
will have an exercise price equal to the fair market value of a share of
Common Stock on the date of grant.
37
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides for fiscal 1997 certain summary information
concerning the cash and non-cash compensation earned by or awarded to (i) the
Company's Chief Executive Officer and (ii) each of the Company's other
executive officers (collectively, the "named executive officers"). The Company
was organized in February 1997, with David Ledecky as its sole employee. All
other named executive officers were employed by the Company as of November 25,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDER-
LYING
FISCAL SALARY OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) SARS (#)(2) COMPENSATION
--------------------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Jonathan J. Ledecky,
Chief Executive Officer and
Chairman of the Board.......... 1997 $125,000 -- --
Timothy C. Clayton,
Executive Vice President, Chief
Financial Officer and
Treasurer...................... 1997 $223,000 500,000 25,000(3)
F. Traynor Beck,
Executive Vice President,
General Counsel and Secretary.. 1997 $223,000 500,000 --
David Ledecky,
Executive Vice President and
Chief Administrative Officer,
Director....................... 1997 $327,994(4) 500,000 --
</TABLE>
- --------
(1) Includes guaranteed bonus payments of $200,000 for Mr. Clayton, Mr. Beck
and David Ledecky, which were declared in December 1997 and paid in
January 1998.
(2) Represents options granted in 1997 with respect to the Company's Common
Stock, each option to vest ratably on November 25, 1998, 1999, 2000 and
2001, unless accelerated under certain conditions.
(3) Represents amount paid to Mr. Clayton for consulting services during
November 1997.
(4) Includes payments made to David Ledecky by Ledecky Brothers LLC,
predecessor to the Company.
Employment Agreements. The Company has entered into an employment agreement
with Jonathan Ledecky. The agreement has a one-year term and is automatically
renewable for one-year terms thereafter unless either party gives notice of
non-renewal at least 90 days prior to the end of the term. Pursuant to the
terms of the agreement, Jonathan Ledecky is obligated to devote the
substantial majority of his business time, attention and efforts to his duties
thereunder, except when necessary to fulfill his fiduciary obligations to USOP
and the provisions of his employment agreement with USOP, as well as his
fiduciary obligations to USA Floral and UniCapital. The agreement provides for
an annual salary of $750,000 and a discretionary bonus in an amount up to 100%
of the employee's base salary. If the agreement is terminated by the Company
other than for Cause (as defined), Jonathan Ledecky is entitled to receive an
amount equal to twice his base salary and one times the bonus he received in
the prior year. The agreement prohibits Jonathan Ledecky from competing with
the Company during the term of his employment and for a period of one year
thereafter. The agreement also provides for certain executive perquisites.
The Company has entered into employment agreements with each of F. Traynor
Beck, Timothy Clayton and David Ledecky, the terms of which are substantially
identical. Each of the agreements has a two-year term and is automatically
renewable for one-year terms thereafter, unless either party gives notice of
non-renewal at least six months prior to the end of the term. Pursuant to the
terms of the agreements, each of F. Traynor Beck, Timothy Clayton and David
Ledecky is obligated to devote his full business time, attention and efforts
to his duties thereunder. Each of the agreements provides for an annual salary
of $300,000, a guaranteed bonus of
38
<PAGE>
$200,000 for the first year of the term and a discretionary bonus in an amount
of up to 100% of the employee's base salary each year thereafter. On the
Effective Date, each of these executive officers received a grant of an option
to purchase 500,000 shares of Common Stock at an exercise price equal to the
initial public offering price per share ($20.00), which option will vest
ratably on the first, second, third and fourth anniversaries of the date of
grant, unless accelerated upon a Change in Control (as defined) or upon
termination of the employee without Cause (as defined). If the agreement is
terminated by the Company other than for Cause (as defined), the executive
officer will be entitled to receive amounts equal to twice his base salary and
one times the bonus he received in the prior year. The agreements prohibit the
executive officer from competing with the Company during the term of his
employment and for a period of one year thereafter. The agreements also
provide for certain specified executive benefits and perquisites, including,
in the case of Timothy Clayton, the purchase of an annuity contract to be
placed in a deferred compensation plan that will provide him with an annual
payout of $100,000 for each year of his life between age 55 and age 75.
The Company has entered into an employment agreement with William P. Love,
the President of the Company's Electrical Contracting Services Division and a
Director of the Company. The agreement has a two-year term and may be extended
on such terms and conditions as the Company and Mr. Love may mutually agree.
The agreement provides for an annual salary of $200,000 and a performance-
based incentive bonus payable in cash, stock options or other non-cash awards
as determined by the Compensation Committee of the Board of Directors for each
calendar year during the term of the agreement beginning on January 1, 1999.
If the agreement is terminated for other than Cause (as defined), Mr. Love
will receive his base salary and group health benefits, as then in effect, for
the longer of one year from the date of termination or whatever time period is
remaining under the term of the agreement. In addition, a termination of Mr.
Love's employment without cause will accelerate the payout of contingent
consideration owed by the Company to Mr. Love and to the other shareholders of
the Founding Electrical Group. The agreement prohibits Mr. Love from competing
with the Company during the term of his employment and, depending on the
nature of his termination of employment, for a period of up to two years from
the date of termination.
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information concerning the grant of
options to purchase Common Stock of the Company during Fiscal 1997 to each of
the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
- --------------------------------------------------------------------- --------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE DATE 0% 5% 10%
---- ---------- ------------- -------- ---------- --- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky..... -- -- --
Timothy C. Clayton...... 500,000 33.3% $20.00 11/25/07 0 $5,515,000 $13,580,000
F. Traynor Beck......... 500,000 33.3% $20.00 11/25/07 0 $5,515,000 $13,580,000
David Ledecky........... 500,000 33.3% $20.00 11/25/07 0 $5,515,000 $13,580,000
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
- --------
(1) The options granted are incentive stock options, which are exercisable at
the market price on the date of grant beginning one year from the date of
grant in cumulative yearly amounts of 25% of the shares and expire ten
years from the date of grant. The options became fully exercisable upon a
change in control, as defined in the Incentive Plan.
(2) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of zero percent (0%), five
percent (5%) and ten percent (10%). These assumed rates of growth were
selected by the Commission for illustration purposes only. They are not
intended to forecast possible future appreciation, if any, of the
Company's stock price. No gain to the optionees is possible without an
increase in stock prices, which will benefit all stockholders. A zero
percent (0%) gain in stock price will result in a zero percent (0%)
benefit to optionees.
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Set forth below is a description of certain transactions and relationships
between the Company and certain persons who are officers, directors and
principal stockholders of the Company.
Jonathan Ledecky, the Company's Chairman, Chief Executive Officer and
founder, is the brother of David Ledecky, Executive Vice President, Chief
Administrative Officer and a director of the Company.
Jonathan Ledecky advanced to the Company $305,000, at an annual interest
rate equal to 6.75%, to pay the expenses incurred in connection with the IPO.
The Company repaid Jonathan Ledecky's loans to the Company, including accrued
interest of approximately $4,000, using the proceeds of the IPO.
W. Russell Ramsey, a director of the Company, is President and a principal
stockholder of FBR Group. FBR rendered investment banking services to the
Company in connection with the IPO.
Timothy C. Clayton, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, was, through October 1997, a partner at Price
Waterhouse LLP, the Company's independent accountants.
F. Traynor Beck, Executive Vice President, General Counsel and Secretary of
the Company, was, until the Effective Date, a partner at Morgan, Lewis &
Bockius LLP, the Company's legal counsel.
On March 11, 1998, the Company completed the acquisition of SKC. SKC leases
office, warehouse and storage space from SKC Properties, L.L.C., a principal
member of which is William B. Love, Jr., one of the former owners of SKC and a
director of the Company and the President of the Company's Electrical
Contracting Services Division. The lease provides for lease payments in the
amount of $8,095 per month, or $97,140 annually.
Thomas D. Heule, a director of the Company, and a vice president of USS, a
wholly owned subsidiary of the Company, is a Managing Director of BACE Capital
Partners LLC (a former shareholder of USS) ("BACE"), and is a member of BCP
Partners, LLC ("BCP"), which owns an 80% interest in BACE. The Company has
entered into a consulting agreement with BACE whereby BACE will provide
advisory services in connection with identifying and closing acquisitions of
building maintenance services businesses. As compensation for its services,
BACE will generally receive a fee equal to a percentage of the consideration
paid in connection with acquisitions identified by BACE. The Company has not
made any payments under the agreement to date. In addition, the Company has
agreed to pay to BACE in twelve equal monthly installments a termination fee
in the amount of $500,000 in connection with the termination of a consulting
agreement between USS and BACE that was entered into prior to the Company's
acquisition of USS. Generally, any payments to be made under BACE's consulting
agreement with the Company will be offset by payments made pursuant to the
termination fee.
For information with respect to certain conflicts of interest, see "Risk
Factors--Conflicts of Interest."
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 1, 1998, by: (i) each person (or
group of affiliated persons) known by the Company to be the beneficial owner
of more than five percent of the outstanding Common Stock; (ii) each director
of the Company; (iii) each executive officer of the Company; and (iv) all of
the Company's directors and executive officers as a group. Each stockholder
possesses sole voting and investment power with respect to the shares listed,
unless otherwise noted.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF CONVERTIBLE
NUMBER OF CONVERTIBLE PERCENTAGE OF NON-VOTING
NAME AND ADDRESS OF SHARES OF NON-VOTING COMMON STOCK COMMON STOCK
BENEFICIAL OWNER COMMON STOCK COMMON STOCK OWNED OWNED
- ------------------- ------------ ------------------- ------------- -------------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Jonathan J. Ledecky..... 4,500,000(1) 0 10.6% 0%
c/o Consolidation
Capital Corporation
800 Connecticut Avenue,
N.W. Suite 1111
Washington, DC 20006
David Ledecky........... 0 0 0 0
F. Traynor Beck......... 0 0 0 0
Timothy C. Clayton...... 2,000 0 * 0
William P. Love, Jr..... 423,322(2) 0 1.0% 0
Thomas D. Heule......... 783,116(3) 0 1.8% 0
Vincent W. Eades........ 10,000(4) 0 * 0
W. Russell Ramsey....... 30,000(5) 500,000(6) * 100%
M. Jude Reyes........... 30,000(7) 0 * 0
All directors and
executive officers as a
group (9 persons)...... 5,778,438 500,000 13.6% 100%
5% STOCKHOLDERS
Massachusetts Financial
Services Company....... 2,448,500(8) 0 5.7% 0
500 Boylston Street,
15th Floor
Boston, MA 02116
</TABLE>
- --------
* Less than one percent
(1) Includes: (i) 1,950,000 shares underlying the Ledecky Warrant and (ii)
2,300,000 shares of Common Stock subject to a contractual restriction on
transfer for one year following the Effective Date. The Company has agreed
that, at Jonathan Ledecky's request, it will file a registration statement
under the Securities Act for an offering of the shares underlying the
Ledecky Warrant during a ten-year period beginning on the Effective Date.
In addition, the Company has agreed to give Jonathan Ledecky the right to
request that the Company include the shares underlying the Ledecky Warrant
on a registration statement filed by the Company during a twelve-year
period beginning on the Effective Date.
(2) Includes 207,428 shares owned by Mr. Love's wife. Mr. Love serves as one
of four trustees of the SKC Electric, Inc. Profit Sharing Plan (the
"Plan"). The number of shares shown as beneficially owned by Mr. Love
excludes shares that may be deemed to be beneficially owned by the Plan.
(3) Represents shares owned by BACE. Mr. Heule is a member of BCP, an 80%
member of BACE, and, in that capacity, has shared voting and dispositive
power over the shares. Mr. Heule disclaims beneficial ownership of those
securities that are in excess of his proportionate ownership.
(4) Represents shares which may be acquired upon the exercise of options that
will be exercisable within 60 days.
41
<PAGE>
(5) Includes 10,000 shares which may be acquired upon the exercise of options
that will be exercisable within 60 days.
(6) The number of shares of Convertible Non-Voting Common Stock represents the
shares of Convertible Non-Voting Common Stock owned by FBR Asset
Investment Corporation, Inc., an affiliate of FBR Group. Mr. Ramsey is
President, co-founder and a director of FBR Group. Mr. Ramsey disclaims
beneficial ownership of such shares. Mr. Ramsey's address is c/o FBR
Group, 1001 North 19th Street, Arlington, VA 22209.
(7) Includes 10,000 shares which may be acquired upon the exercise of options
that will be exercisable within 60 days.
(8) Based upon a Schedule 13G filed with the Securities and Exchange
Commission on February 17, 1998.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 250,000,000 shares
of Common Stock, par value $.001 per share, and 500,000 shares of Convertible
Non-Voting Common Stock, par value $.001 per share. As of July 1, 1998, the
Company had outstanding 42,591,763 shares of Common Stock and 500,000 shares
of Convertible Non-Voting Common Stock. The following summary description of
the capital stock of the Company does not purport to be complete and is
subject to the detailed provisions of, and is qualified in its entirety by
reference to, the Company's Restated Certificate of Incorporation and Amended
and Restated Bylaws and to the applicable provisions of the General
Corporation Law of the State of Delaware (the "DGCL").
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Cumulative
voting is not permitted under the Company's Restated Certificate of
Incorporation. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available. See "Dividend Policy." In the event of a liquidation, dissolution
or winding up of the Company, holders of the Common Stock are entitled to
share ratably in the distribution of all assets remaining after payment of
liabilities, subject to the rights of any holders of preferred stock of the
Company. The holders of Common Stock have no preemptive rights to subscribe
for additional shares of the Company and no right to convert their Common
Stock into any other securities. In addition, there are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, fully paid and nonassessable.
CONVERTIBLE NON-VOTING COMMON STOCK
The holders of Convertible Non-Voting Common Stock have the same rights and
privileges as the holders of Common Stock, except that holders of Convertible
Non-Voting Common Stock have no voting rights. The Convertible Non-Voting
Common Stock is non-transferable and will not be publicly traded. Further,
each share of Convertible Non-Voting Common Stock will automatically be
converted into one share of Common Stock on November 26, 1998.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION
The Company is subject to the provisions of Section 203 of the DGCL. Section
203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes a merger, asset sale or
other transaction resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years prior to the proposed business combination has owned, 15% or more of the
corporation's voting stock.
The Company's Restated Certificate of Incorporation provides that a director
shall not be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
or (iv) for any transaction from which the director derived any improper
personal benefit. The effect of this provision is to eliminate the rights of
the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty of care as a director except in the situation
described in clauses (i) through (iv) above. If the DGCL is subsequently
amended to authorize the further elimination or limitation of the liability of
a director, then the liability of a director of the Company shall be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
43
<PAGE>
PLAN OF DISTRIBUTION
The Company will offer and issue the Common Stock from time to time in
connection with the acquisition by the Company of other businesses, assets or
securities. It is expected that the terms of the acquisitions involving the
issuances of securities covered by this Prospectus will be determined by
direct negotiations with the owners or controlling persons of the businesses,
assets or securities to be acquired by the Company. No underwriting discounts
or commission will be paid, although finder's fees may be paid from time to
time with respect to specific mergers or acquisitions. Any person receiving
such fees may be deemed to be an underwriter within the meaning of the
Securities Act.
RESTRICTIONS ON RESALE
Affiliates of entities acquired by the Company who do not become affiliates
of the Company may not resell Common Stock registered under the Registration
Statement to which this Prospectus relates except pursuant to an effective
registration statement under the Securities Act covering such shares, or in
compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
Generally, Rule 145 permits such affiliates to sell such shares immediately
following the acquisition in compliance with certain volume limitations and
manner of sale requirements. Under Rule 145, sales by such affiliates during
any three-month period cannot exceed the greater of (i) 1% of the shares of
Common Stock of the Company outstanding and (ii) the average weekly reported
volume of trading of such shares of Common Stock on all national securities
exchanges during the four calendar weeks preceding the proposed sale. These
restrictions will cease to apply under most other circumstances if the
affiliate has held the Common Stock for at least one year, provided that the
person or entity is not then an affiliate of the Company. Individuals who are
not affiliates of the entity being acquired and do not become affiliates of
the Company will not be subject to resale restrictions under Rule 145 and,
unless otherwise contractually restricted, may resell Common Stock immediately
following the acquisition without an effective registration statement under
the Securities Act. The ability of affiliates to resell shares of the Common
Stock under Rule 145 will be subject to the Company having satisfied its
Exchange Act reporting requirements for specified periods prior to the time of
sale.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Morgan, Lewis & Bockius LLP, Washington, D.C.
EXPERTS
The historical financial statements and supplemental consolidated financial
statements included in this Prospectus have been audited by various
independent accountants. The companies and periods covered by these audits are
indicated in the individual accountants' reports. Such financial statements
have been so included in reliance on the reports of the various independent
accountants given on the authority of such firms as experts in auditing and
accounting.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
CONSOLIDATION CAPITAL CORPORATION
Report of Independent Accountants.................................. F-4
Consolidated Balance Sheet ........................................ F-5
Consolidated Statement of Income................................... F-6
Consolidated Statement of Stockholders' Equity..................... F-7
Consolidated Statement of Cash Flows............................... F-8
Notes to Consolidated Financial Statements......................... F-9
CONSOLIDATION CAPITAL CORPORATION
Report of Independent Accountants.................................. F-17
Supplemental Consolidated Balance Sheet ........................... F-20
Supplemental Consolidated Statement of Income...................... F-21
Supplemental Consolidated Statement of Stockholders' Equity........ F-22
Supplemental Consolidated Statement of Cash Flows.................. F-23
Notes to Supplemental Consolidated Financial Statements............ F-25
CONSOLIDATION CAPITAL CORPORATION UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.. F-39
Unaudited Pro Forma Combined Balance Sheet......................... F-40
Unaudited Pro Forma Combined Statements of Operations.............. F-41
Notes to Unaudited Pro Forma Combined Financial Statements......... F-44
SERVICE MANAGEMENT USA, INC.
Report of Independent Accountants.................................. F-48
Combined Balance Sheet............................................. F-49
Combined Statement of Operations................................... F-50
Combined Statement of Stockholder's Equity......................... F-51
Combined Statement of Cash Flows................................... F-52
Notes to Combined Financial Statements............................. F-53
TRI-CITY ELECTRICAL CONTRACTORS, INC.
Report of Independent Accountants.................................. F-58
Consolidated Balance Sheets........................................ F-59
Consolidated Statements of Operations.............................. F-60
Consolidated Statements of Stockholders' Equity.................... F-61
Consolidated Statements of Cash Flows.............................. F-62
Notes to Consolidated Financial Statements......................... F-64
WILSON ELECTRIC COMPANY, INC.
Report of Independent Accountants.................................. F-72
Balance Sheet...................................................... F-73
Statements of Income and Retained Earnings......................... F-74
Statements of Cash Flows........................................... F-75
Notes to Financial Statements...................................... F-76
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
SKC ELECTRIC, INC. AND AFFILIATE
Report of Independent Accountants....................................... F-81
Combined Balance Sheet.................................................. F-82
Statement of Income..................................................... F-83
Statement of Cash Flows................................................. F-84
Notes to Financial Statements........................................... F-86
RIVIERA ELECTRIC CONSTRUCTION CO.
Report of Independent Accountants....................................... F-93
Balance Sheets.......................................................... F-94
Statements of Income.................................................... F-95
Statements of Stockholders' Equity...................................... F-96
Statements of Cash Flows................................................ F-97
Notes to Financial Statements........................................... F-98
TOWN & COUNTRY ELECTRIC, INC.
Report of Independent Accountants....................................... F-103
Balance Sheet........................................................... F-104
Statements of Earnings.................................................. F-106
Statements of Stockholders' Equity...................................... F-107
Statements of Cash Flows................................................ F-108
Notes to Financial Statements........................................... F-109
GARFIELD ELECTRIC COMPANY
Report of Independent Accountants....................................... F-114
Balance Sheet........................................................... F-115
Statements of Earnings.................................................. F-116
Statements of Stockholders' Equity...................................... F-117
Statements of Cash Flows................................................ F-118
Notes to Financial Statements........................................... F-119
INDECON, INC.
Report of Independent Accountants....................................... F-124
Balance Sheet........................................................... F-125
Statements of Earnings.................................................. F-126
Statements of Stockholders' Equity...................................... F-127
Statements of Cash Flows................................................ F-128
Notes to Financial Statements........................................... F-129
UNITED SERVICE SOLUTIONS, INC.
Report of Independent Accountants....................................... F-134
Balance Sheet........................................................... F-135
Statements of Income.................................................... F-136
Statement of Stockholders' Equity (Deficit)............................. F-137
Statement of Cash Flows................................................. F-138
Notes to Financial Statements........................................... F-140
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
TAYLOR ELECTRIC, INC.
Report of Independent Accountants....................................... F-148
Balance Sheet........................................................... F-149
Statements of Earnings and Retained Earnings............................ F-150
Statement of Cash Flows................................................. F-151
Notes to Financial Statements........................................... F-152
WALKER ENGINEERING, INC.
Independent Auditors' Report............................................ F-155
Balance Sheet........................................................... F-156
Statement of Income and Changes in Retained Earnings.................... F-157
Statement of Cash Flows................................................. F-158
Notes to Financial Statements........................................... F-159
G.S. GROUP, INC.
Independent Auditors' Report............................................ F-165
Consolidated Balance Sheets............................................. F-166
Consolidated Statements of Operations................................... F-167
Consolidated Statements of Stockholder's Equity......................... F-168
Consolidated Statements of Cash Flows................................... F-169
Notes to Consolidated Financial Statements.............................. F-170
NATIONAL NETWORK SERVICES, INC.
Independent Auditors' Report............................................ F-177
Balance Sheet........................................................... F-178
Statement of Income and Retained Earnings............................... F-179
Statement of Cash Flows................................................. F-180
Notes to Financial Statements........................................... F-181
REGENCY ELECTRIC COMPANY, INC.
Independent Auditors' Report............................................ F-184
Consolidated Balance Sheets............................................. F-185
Consolidated Statements of Income....................................... F-186
Consolidated Statements of Changes in Stockholder's Equity.............. F-187
Consolidated Statements of Cash Flows................................... F-188
Notes to Consolidated Financial Statements.............................. F-189
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC.
Independent Auditors' Report............................................ F-194
Balance Sheets.......................................................... F-195
Statements of Income.................................................... F-196
Statements of Members' Equity........................................... F-197
Combined Statements of Cash Flows....................................... F-198
Notes to Financial Statements........................................... F-199
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Consolidation Capital
Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Consolidation Capital Corporation
at December 31, 1997, and the results of its operations and its cash flows for
the period from inception (February 27, 1997) through December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 27, 1998
F-4
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $528,392 $424,462
Accounts receivable, net........ 82,755
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 7,934
Prepaid expenses and other
current assets................. 434 5,965
Deferred tax asset.............. 219 568
-------- --------
Total current assets.......... 529,045 521,684
Intangible assets, net............ 175,002
Property and equipment, net....... 20 10,664
Other assets...................... 2,859
-------- --------
Total assets.................. $529,065 $710,209
======== ========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities:
Short-term debt................. $ 5,796
Accounts payable................ $ 156 21,588
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 27,977
Income taxes payable............ 283 4,407
Accrued compensation............ 1,042 6,902
Accrued liabilities--other...... 287 8,254
-------- --------
Total current liabilities..... 1,768 74,924
Long-term debt.................... 3,414
Other liabilities................. 1,917
-------- --------
Total liabilities............. 1,768 80,255
======== ========
Stockholders' equity:
Common Stock, $.001 par,
250,000,000 shares authorized,
30,150,000 and 35,238,049
shares issued and outstanding,
respectively................... 30 35
Convertible Non-Voting Common
Stock, $.001 par, 500,000
shares authorized, issued and
outstanding.................... 1 1
Additional paid-in capital...... 527,259 624,648
Retained earnings............... 7 5,270
-------- --------
Total stockholders' equity.... 527,297 629,954
-------- --------
Total liabilities and
stockholders' equity......... $529,065 $710,209
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 27, 1997 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues..................................... $ $ 37,497
Cost of revenues............................. 30,245
--------- ----------
Gross profit............................... 7,252
Selling, general, and administrative
expenses.................................... 1,985 4,595
Intangible asset amortization................ 324
--------- ----------
Operating income (loss).................... (1,985) 2,333
Other income
Interest income............................ (2,056) (6,652)
--------- ----------
Income before taxes.......................... 71 8,985
Provision for income taxes................... 64 3,722
--------- ----------
Net income................................... $ 7 $ 5,263
========= ==========
Net income per share--Basic.................. $ -- $ 0.17
========= ==========
Net income per share--Diluted................ $ -- $ 0.16
========= ==========
Weighted average common shares outstanding--
Basic ...................................... 4,911,401 31,696,546
========= ==========
Weighted average common shares outstanding--
Diluted .................................... 4,990,500 32,670,033
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NON-VOTING
COMMON STOCK COMMON STOCK
------------------ ------------------------- ADDITIONAL TOTAL
SHARES SHARES PAID-IN- RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY
----------- ------ ------------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception
(February 27, 1997).... -- $ -- -- $ -- $ -- $ -- $ --
Capital contribution.. 2,300,000 2 124 126
Issuance of common
stock................ 27,850,000 28 500,000 1 527,135 527,164
Net income............ 7 7
---------- ----- ------------ ---------- -------- ------ --------
Balance, December 31,
1997................... 30,150,000 30 500,000 1 527,259 7 527,297
Issuance of common
stock for
acquisitions
(unaudited).......... 5,088,049 5 97,389 97,394
Net Income
(unaudited).......... 5,263 5,263
---------- ----- ------------ ---------- -------- ------ --------
Balance, March 31, 1998
(unaudited)............ 35,238,049 $ 35 500,000 $ 1 $624,648 $5,270 $629,954
========== ===== ============ ========== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 27, 1997 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net income................................ $ 7 $ 5,263
Depreciation and amortization............. 625
Changes in operating assets and
liabilities:
Accounts receivable................... (10,106)
Costs and estimated earnings in excess
of billings.......................... 2,405
Prepaid expenses and other current
assets............................... (653) (1,125)
Billings in excess of costs and
estimated earnings................... 5,552
Accounts payable...................... 156 2,141
Accrued liabilities................... 1,612 2,812
Change in other assets.................. (525)
-------- ---------
Net cash provided by operating
activities............................... 1,122 7,042
-------- ---------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash
acquired............................... (111,840)
Purchases of property and equipment..... (20) (532)
Proceeds on sale of equipment........... 450
Payments received on Notes Receivable... 304
-------- ---------
Net cash used in investing activities..... (20) (111,618)
-------- ---------
Cash flows from financing activities:
Proceeds from initial public offering,
net.................................... 527,164
Net proceeds (payments) on short-term
debt................................... (396)
Payments on long-term debt.............. (158)
Proceeds on long-term debt.............. 1,200
Contributions by founding stockholder... 126
-------- ---------
Net cash provided by financing
activities............................... 527,290 646
-------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 528,392 (103,930)
Cash and cash equivalents, beginning of
period................................... 528,392
-------- ---------
Cash and cash equivalents, end of period.. $528,392 $ 424,462
======== =========
</TABLE>
The Company issued shares of Common Stock and cash in connection with
certain business combinations during the three months ended March 31, 1998.
The fair values of the assets acquired and liabilities assumed at the dates of
acquisition are as follows:
<TABLE>
<S> <C>
Accounts receivable............................................... $ 73,351
Inventories....................................................... 1,022
Costs & estimated earnings in excess of billings.................. 10,426
Prepaid expenses and other current assets......................... 3,660
Property and Equipment............................................ 11,520
Intangible assets................................................. 175,132
Other assets...................................................... 2,526
Short-term debt................................................... (7,113)
Accounts payable.................................................. (19,103)
Accrued liabilities............................................... (14,052)
Billings in excess of costs & estimated earnings.................. (22,425)
Long-term debt.................................................... (2,909)
Other long-term liabilities....................................... (2,801)
--------
Net assets acquired............................................. $209,234
========
These acquisitions were funded as follows:
Common Stock, 5,088,049 shares.................................... $ 97,394
Cash, net of cash acquired........................................ 111,840
--------
$209,234
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION
Consolidation Capital Corporation, a Delaware corporation (the "Company"),
was incorporated in September 1997. Ledecky Brothers L.L.C., ("LLC"), a
limited liability corporation formed in February 1997, merged with and into
the Company in September 1997 (the "Merger"). The sole member of LLC received,
in connection with the Merger, 2,300,000 shares of Common Stock of the Company
which represents all of its issued and outstanding Common Stock, in exchange
for 100% of his ownership interest in the LLC. The Merger was implemented to
facilitate a public offering of securities. Because both of the organizations
were under control of the one sole owner, the Merger has been accounted for on
a historical cost basis.
The Company intends to consolidate the facilities management industry to
become a national single-source provider of facilities management services.
Through December 31, 1997, the Company's operations consisted of
organizational activities, research and analysis with respect to industry
consolidations and acquisition opportunities, efforts to refine the Company's
business strategy and meetings and negotiations with potential acquisition
candidates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. The Company's temporary cash investments
consist of readily marketable, investment grade financial instruments of a
nature which should reduce risk of loss. Additionally, concentration of credit
risk with respect to trade receivables results from these amounts not being
collateralized and, as a result, management continually monitors the financial
condition of its customers to reduce risk of loss.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximate fair value. The
Company's cash equivalents are comprised of readily marketable, interest-
bearing, investment grade securities.
Revenue Recognition
Revenues and earnings from long-term construction contracts are recognized
on the percentage-of-completion method, primarily based on contract costs
incurred to date compared with total estimated contracts costs. Revenue on
short-term contracts and time and material projects is recognized upon the
substantial completion of each contract, or monthly, as the work is performed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. General and administrative costs
are charged to expense as incurred. Changes in job performance, job
conditions, estimated profitability, and final contract settlements may result
in revisions to costs and revenues and recognized in the period in which the
revisions are determined.
F-9
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset.
Goodwill
Goodwill, which represents the excess of cost over the fair value of assets
acquired in business combinations accounted for under the purchase method, is
being amortized on a straight-line basis over 40 years which is the estimated
period benefited. The recoverability of the unamortized balance of goodwill is
assessed on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
Income Taxes
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying the enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. During 1997, the primary difference between the U.S. federal
statutory rate and the Company's effective income tax rate related to the
exclusion from taxable income of the accumulated losses of LLC during the
period preceding the Merger. LLC was a nontaxable entity and the tax benefits
associated with its losses flowed through to the member.
Net Income Per Share
Basic net income per share is determined by net income available to common
stockholders by the weighted average number of common shares outstanding
during the periods. Diluted net income per share reflects the potential
dilution that could occur if securities and other contracts to issue Common
Stock were exercised or converted into Common Stock at the beginning of the
period.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1998, and
the results of its operations and its cash flows for the three months ended
March 31, 1998, as presented in the accompanying unaudited interim financial
statements.
Activity for the period from inception to March 31, 1997 consisted only of
minimal operating expenses and, accordingly, statements of income and cash
flows for the period of inception to March 31, 1997 would not provide
meaningful information and have therefore not been presented.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires that all items required to be
recognized under accounting standards as
F-10
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS No. 130 in the
first quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. It also requires related disclosures
about products, geographic areas, and major customers. SFAS 131 is effective
for fiscal years beginning after December 15, 1997. The Company intends to
adopt SFAS No. 131 for the year ending December 31, 1998. Implementation of
this disclosure standard will not affect the Company's financial position or
results of operations.
NOTE 3--BUSINESS COMBINATIONS (UNAUDITED)
During the three months ended March 31, 1998, the Company acquired all of
the outstanding stock of Service Management USA, Inc.; Garfield Electric
Company; Indecon, Inc.; Riviera Electric Construction Co.; SKC Electric, Inc.
and affiliate; Town & Country Electric, Inc., Tri-City Electrical Contractors,
Inc., Walker Engineering, Inc. and Wilson Electric Company. Inc. (the
"Purchased Companies") in business combinations accounted for under the
purchase method of accounting.
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company and the
Purchased Companies from their respective acquisition dates.
The aggregate consideration paid for these acquisitions consisted of
5,088,049 shares of Common Stock and $118,368 in cash including professional
fees.
This purchase price does not include contingent consideration of up to
$80,000 in cash and in shares of Common Stock based upon the performance of
the various acquisitions.
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $175,000. Such allocations are
preliminary in nature, pending the outcome of a detailed analysis being
performed by the Company of the assets and liabilities acquired. For purposes
of computing the estimated purchase price for accounting purposes the value of
the shares was determined in consideration of restrictions on the sale and
transferability of the shares issued. The shares generally will be subject to
the following restrictions on resale: up to one-third of the shares may be
resold twelve months after their date of acquisition, the first one-third and
an additional one-third may be resold beginning eighteen months after their
date of acquisition and the first two-thirds and the remaining one-third may
be resold beginning twenty-four months after their date of acquisition.
F-11
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--BUSINESS COMBINATIONS UNAUDITED (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and the three month periods ended
March 31, 1997 and 1998, respectively, as if all of the Purchased Companies
had been acquired as of January 1, 1997. The pro forma results of operations
reflect certain pro forma adjustments.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
FOR THE YEAR ENDED ENDED
ENDED MARCH 31, MARCH 31,
DECEMBER 31, 1997 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
Revenues.......................... $438,195 $96,117 $102,810
Net income........................ $ 15,420 $ 1,947 $ 4,545
Net income per share--Basic....... $ 1.00 $ 0.14 $ 0.13
Net income per share--Diluted..... $ 0.99 $ 0.14 $ 0.13
</TABLE>
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisitions occurred as of January 1, 1997 or the results that may occur
in the future.
NOTE 4--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C>
Costs incurred on uncompleted contracts....................... $292,261
Estimated earnings............................................ 45,068
--------
337,329
Less: Billings to date........................................ 357,372
--------
$(20,043)
========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 7,934
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 27,977
--------
$(20,043)
========
</TABLE>
NOTE 5--STOCKHOLDERS' EQUITY
Common Stock
On November 25, 1997, the Company effected a one-for-1.918159 reverse stock
split of the Company's Common Stock. Accordingly, all share data reflected in
these financial statements have been retroactively restated.
On September 19, 1997, the sole member of LLC received 2,300,000 shares of
Common Stock of the Company in connection with the Merger in exchange for his
100% ownership interest in LLC. The sole member made contributions to LLC from
time to time to fund expenses in the aggregate amount of $126. These
contributions were included in common stock and additional paid-in capital.
F-12
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
The Company completed its initial public offering ("IPO") in December 1997,
selling 27,850,000 shares of Common Stock and 500,000 shares of Convertible
Non-Voting Common Stock and raising net proceeds of approximately $527,000.
Proceeds from the IPO, net of underwriting fees and other stock issuance
costs, were included in common stock and additional paid-in capital.
Convertible Non-Voting Common Stock
In connection with the IPO, the Company sold 500,000 shares of Convertible
Non-Voting Common Stock to Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the
representative of the underwriters in the Company's IPO, for $20 per share.
After one year, the shares on Convertible Non-Voting Common Stock will
automatically convert into an equivalent number of shares of Common Stock.
Accordingly, 500,000 shares of Common Stock have been reserved for issuance
upon the conversion of these securities, which shares will be eligible for
resale beginning on November 25, 1998.
Common Stock Warrants
There are 1,130,000 shares of Common Stock reserved for issuance upon
exercise of warrants issued to FBR. The warrants have an exercise price per
share equal to the IPO price per share ($20). These warrants will be
exercisable on or after the first anniversary and until the fifth anniversary
of the IPO. FBR will have the right, beginning November 25, 1998, to require
the Company to register such shares for sale.
Additionally, 1,950,000 shares of Common Stock have been reserved for
issuance upon the exercise of warrants issued to Jonathan Ledecky at the time
of the IPO. These warrants are exercisable for a period of ten years at an
exercise price equal to the IPO price ($20). The Company has agreed that, at
Jonathan Ledecky's request, it will register the shares underlying his
warrants for a ten-year period following the IPO. In addition, the Company has
agreed to give Jonathan Ledecky the right to request that the Company include
the shares underlying his warrants on a registration statement filed by the
Company during a twelve-year period following the IPO.
1997 Long-Term Incentive Plan
The Company's Board of Directors has adopted, and the Company's stockholder
has approved, the Company's 1997 Long-Term Incentive Plan (the "Incentive
Plan"). The terms of the option awards will be established by the Compensation
Committee of the Company's Board of Directors. The Company has filed a
registration statement on Form S-8 under the Securities Act of 1933 with
respect to the shares of Common Stock issuable pursuant to such plan. The
maximum number of shares that may be issued under the Incentive Plan is equal
to 9% of the number of shares of Common Stock outstanding from time to time.
Options to purchase 1,500,000 shares of Common Stock under the Incentive
Plan were granted at the time of the IPO at an exercise price equal to the IPO
price per share ($20). These options will vest 25% each on the first four
anniversaries of the date of grant and will expire on the tenth anniversary of
the grant date. In the event of a change in control of the Company prior to
normal vesting, all options not already exercisable will become fully vested
and exercisable.
1997 Non-Employee Directors' Stock Plan
The Company's Board of Directors has adopted, and the Company's stockholder
has approved, the 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which provides for the automatic grant to each nonemployee director of
an option to purchase 20,000 shares on the later of the effective date of the
registration
F-13
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
statement for the initial public offering of the Company's Common Stock or the
date that such person commences services as a director. Thereafter, each non-
employee director will be entitled to receive, on the day after each annual
meeting of the Company's stockholders, an option to purchase 5,000 shares of
Common Stock. A maximum of 300,000 shares of Common Stock may be issued under
the Directors' Plan. Options to purchase 60,000 shares of Common Stock under
the Directors' Plan were granted at the time of the IPO at an exercise price
equal to the IPO price per share ($20).
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant. Options
will expire at the earlier of 10 years from the date of grant or 90 days after
termination of service as a director. Options will vest and become exercisable
ratably as to 50% of the shares underlying the option on the first and second
anniversaries of the date of grant, subject to acceleration by the Board. In
the event of a change in control of the Company prior to normal vesting, all
options not already exercisable will become fully vested and exercisable.
1997 Employee Stock Purchase Plan
The Company has adopted, and the Company's stockholder has approved, the
1997 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
permits eligible employees of the Company and its subsidiaries (generally all
full-time employees who have completed one year of service) to purchase shares
of Common Stock at a discount. Employees who elect to participate will have
amounts withheld through payroll deduction during purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to
purchase stock at a price equal to 85% of the market price at the beginning of
the period or the end of the period, whichever is lower. Stock purchased under
the Purchase Plan will be subject to a one-year holding period. The Company
has reserved 1,000,000 shares of Common Stock for issuance under the Purchase
Plan.
NOTE 6--STOCK PURCHASE AND AWARD PLANS
In connection with the IPO and under the provisions of the Incentive Plan
and the Directors' Plan, stock warrants and options were granted to officers
and directors of the Company. None of the warrants or options were exercised
during 1997.
At December 31, 1997, warrants and options granted to officers and directors
were outstanding as follows:
<TABLE>
<CAPTION>
PRICE NUMBER OF EXPIRATION
PER SHARE SHARES DATE
--------- --------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1997.............. $20.00 3,510,000 2002-2007
</TABLE>
The 3,510,000 shares outstanding consists of options to purchase 1,560,000
shares of Common Stock and 1,950,000 shares of Common Stock reserved for
issuance upon exercise of warrants.
In 1997, the company adopted the Statement of Financial Accounting Standards
("SFAS") No. 123 "Accounting for Stock-Based Compensation" which encourages,
but does not require companies to recognize compensation cost for stock-based
compensation plans over the vesting period based upon the fair value of awards
on the date of the grant. However, the statement allows the alternative of the
continued use of the intrinsic value method as prescribed in Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Therefore, as permitted, the Company has applied APB No. 25, and
related interpretations in accounting for its stock based compensation plans.
Accordingly, no compensation expense has been recognized by the Company for
warrants granted in connection with the IPO or for options granted under the
Incentive Plan and the Directors' Plan.
F-14
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--STOCK PURCHASE AND AWARD PLANS (CONTINUED)
Had compensation expense for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Net income (loss)
As reported....................................................... $ 7
Pro forma......................................................... (9,379)
Net income (loss) per share--Basic
As reported....................................................... $ --
Pro forma......................................................... (2.28)
Net income (loss) per share--Diluted
As reported....................................................... $ --
Pro forma......................................................... (2.28)
</TABLE>
The weighted average fair value per option and warrant at the date of grant
for options granted in 1997 was $7.46. The fair value of options and warrants
granted (which is amortized to expense over the option vesting period in
determining the pro forma impact) is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997:
<TABLE>
<CAPTION>
1997
-----------------
OPTIONS WARRANTS
------- --------
<S> <C> <C>
Expected life of option................................... 5 years 2 years
Risk-free interest rate................................... 5.76% 5.69%
Expected volatility factor................................ 45.0% 45.0%
</TABLE>
NOTE 7--SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to March 31, 1998, the Company has completed seven business
combinations accounted for under the purchase method for an aggregate purchase
price of approximately $206,000, consisting of approximately $68,000 of cash,
$34,000 of assumed debt and approximately 4,516,886 shares of the Company's
Common Stock valued at approximately $104,000. These amounts do not include
contingent consideration of up to $23,050 in cash and in shares of the
Company's Common Stock based upon the performance of various acquisitions. The
Company preliminarily estimates the goodwill to be recorded in connection with
these purchase business combinations will approximate $172,000.
Additionally, during the second quarter of 1998, the Company issued
2,836,828 shares of Common Stock to acquire four companies in business
combinations accounted for under the pooling-of-interests method.
Additionally, one of the Pooled Companies had previously existing vested stock
options which were converted into stock options for 403,389 shares of the
Company's Common Stock (the "Replacement Options"). The Replacement Options
are fully vested and have an exercise price of $4.84 per share.
In addition to the Replacement Options, in connection with business
combinations consummated during the period from January 1, 1998 through July
1, 1998, the Company has granted options for approximately 765,846 shares of
the Company's Common Stock, and is expected to issue options for an additional
999,374 shares of the Company's Common Stock, under the Company's Long-term
Incentive Plan. These options have been, or will be, granted with an exercise
price equal to the fair value share price of the Company's Common Stock at the
date of grant. All options will vest over a four year period from date of
grant.
F-15
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--SUBSEQUENT EVENTS (CONTINUED) (UNAUDITED)
In addition to those business combinations consummated during the period
from January 1, 1998 through July 1, 1998, the Company has signed letters of
intent to acquire three janitorial maintenance management services businesses,
one electrical installation and maintenance services business and three
mechanical installation and maintenance services businesses. The total
consideration which is expected be issued in connection with these pending
acquisitions is approximately $156,500 in cash and shares of Common Stock.
Additionally, there is the potential for the payment of up to an additional
$5,375 in cash and shares of Common Stock in connection with contingent
consideration agreements.
During 1996, one of the Pooled Companies ("Lewis") entered into a contract
to provide electrical design, engineering and installation services for a
power plant in Argentina (the "Argentina Project"). A dispute developed as to
the amount to be paid to Lewis in connection with certain project scope
changes. The disputed matters were submitted to a binding arbitration process.
Because of the uncertainty surrounding the outcome of the litigation, Lewis
wrote off a substantial amount of the receivables related to this project in
1996. In May 1998, Lewis was awarded $12,400 by the arbitration panel and this
amount was received in June 1998. Lewis is finalizing an analysis of the
settlement award for the Argentina Project, but anticipates recognizing an
after tax gain ranging from $1,000 to $1,500 during the second quarter of 1998
in connection with this matter.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Consolidation Capital Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying supplemental, consolidated balance sheet and the related
supplemental consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Consolidation Capital Corporation and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain wholly-owned
subsidiaries, which statements reflect total assets of $5.3 million and $4.7
million at December 31, 1997 and 1996, respectively, and total revenues of
$36.0 million, $11.1 million and $8.0 million for the years ended December 31,
1997, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for those
wholly-owned subsidiaries, is based solely on the reports of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for the opinion expressed above.
As described in Note 1, subsequent to March 31, 1998, Consolidation Capital
Corporation merged with Perimeter Maintenance Corporation and its affiliates,
Crest International LLC, Spann Building Maintenance and The Lewis Companies,
Inc. in transactions accounted for under the pooling-of-interests method. The
accompanying supplemental consolidated financial statements give retroactive
effect to these mergers.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 27, 1998, except as
to Note 1, which is as of
June 26, 1998
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Perimeter Maintenance Corporation
Atlanta, Georgia
We have audited the accompanying balance sheets of Perimeter Maintenance
Corporation (an S Corporation) as of December 31, 1997 and 1996, and the
related statements of operations, retained earnings, and cash flows for the
year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Perimeter Maintenance
Corporation as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Frazier & Deeter, LLC
Frazier & Deeter, LLC
Atlanta, Georgia
February 19, 1998
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Crest International, LLC
Green Bay, Wisconsin
We have audited the accompanying balance sheets of Crest International, LLC
(a Wisconsin limited liability company) as of December 31, 1997 and 1996, and
the related statements of income, accumulated deficit and cash flows for the
years ended December 31, 1997, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crest International, LLC
as of December 31, 1997 and 1996, and the results of its operations and cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ Shinners, Hucovski & Company, S.C.
Shinners, Hucovski & Company, S.C.
Green Bay, Wisconsin
February 17, 1998
F-19
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,112 $530,568 $429,338
Marketable securities.................. 2,746 2,897 3,406
Accounts receivable, less allowance for
doubtful accounts of
$161, $5,415 and $6,464,
respectively.......................... 24,802 23,446 114,233
Costs and estimated earnings in excess
of billings on
uncompleted contracts................. 1,764 2,781 10,292
Prepaid expenses and other current
assets................................ 1,643 2,823 7,574
Deferred tax asset..................... -- 219 568
------- -------- --------
Total current assets................. 32,067 562,734 565,411
Property and equipment, net.............. 6,760 6,411 16,688
Intangible assets, net................... 234 152 175,155
Deferred tax asset....................... 1,658 597 --
Other assets............................. 1,976 1,370 3,896
------- -------- --------
Total assets......................... $42,695 $571,264 $761,150
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................ $13,889 $ 3,967 $ 19,832
Accounts payable....................... 8,153 6,541 34,261
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 4,479 1,225 28,645
Deferred income taxes.................. 759 1,009 1,009
Accrued compensation................... 834 2,237 8,246
Income taxes payable................... 7 351 5,152
Accrued liabilities--other............. 1,546 2,107 10,126
------- -------- --------
Total current liabilities............ 29,667 17,437 107,271
Long-term debt........................... 3,136 13,794 4,914
Other liabilities........................ 932 1,486 4,821
------- -------- --------
Total liabilities.................... 33,735 32,717 117,006
------- -------- --------
Stockholders' equity:
Common stock, $.001 par value,
250,000,000 shares authorized,
2,916,581, 32,986,828 and 38,074,877
shares issued and outstanding,
respectively.......................... 3 33 38
Convertible Non-Voting Common Stock,
$.001 par, 500,000 shares authorized,
issued and outstanding................ -- 1 1
Additional paid-in capital............. 1,199 528,613 625,758
Unrealized gain on marketable
securities............................ 400 292 939
Retained earnings...................... 7,358 9,608 17,408
------- -------- --------
Total stockholders' equity........... 8,960 538,547 644,144
------- -------- --------
Total liabilities and stockholders'
equity.............................. $42,695 $571,264 $761,150
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 100,804 $ 124,457 $ 115,309 $ 30,714 $ 70,230
Cost of revenues........ 84,692 112,867 94,382 25,636 56,159
---------- ---------- ---------- ---------- -----------
Gross profit...... 16,112 11,590 20,927 5,078 14,071
Selling, general and
administrative
expenses............... 14,264 15,274 17,770 4,285 10,886
---------- ---------- ---------- ---------- -----------
Operating income
(loss)........... 1,848 (3,684) 3,157 793 3,185
Other (income) expense:
Interest income....... (287) (386) (2,366) (131) (7,001)
Interest expense...... 492 969 1,672 588 457
Minority interest..... 262 234 848 181 767
Other, net............ (2) (1,057) (2,170) (1,170) (1,922)
---------- ---------- ---------- ---------- -----------
Income (loss) before
taxes.................. 1,383 (3,444) 5,173 1,325 10,884
Provision (benefit) for
income taxes........... 653 (1,582) 1,487 422 4,508
---------- ---------- ---------- ---------- -----------
Net income (loss)....... $ 730 $ (1,862) $ 3,686 $ 903 $ 6,376
========== ========== ========== ========== ===========
Net income (loss) per
share--Basic........... $ 0.26 $ (0.64) $ 0.53 $ 0.31 $ 0.18
========== ========== ========== ========== ===========
Net income (loss) per
share--Diluted......... $ 0.26 $ (0.64) $ 0.50 $ 0.28 $ 0.18
========== ========== ========== ========== ===========
Weighted average shares
outstanding--Basic..... 2,857,529 2,908,573 7,007,335 2,942,137 34,533,373
========== ========== ========== ========== ===========
Weighted average shares
outstanding--Diluted... 2,857,529 3,151,573 7,383,315 3,251,586 35,820,461
========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
NON-VOTING
COMMON STOCK COMMON STOCK
------------------- ------------------ ADDITIONAL OTHER TOTAL TOTAL
SHARES SHARES PAID-IN- RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL EARNINGS INCOME EQUITY INCOME
----------- ------ ----------- ------ ---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994.......... 2,727,626 $ 3 $-- $ 1,034 $ 8,715 $ (48) $ 9,704 $ --
Transactions of
Pooled Companies:
Distributions
paid............ (210) (210)
Common Stock
Issued.......... 138,925 217 217
Treasury stock
purchased....... (9,409) (52) (52)
Unrealized gain on
marketable
securities....... 218 218 218
Net income
(loss)........... (190) 920 730 730
-------
Total
comprehensive
income........... 948
---------- --- ------- ---- -------- ------- ----- -------- =======
Balance, December
31, 1995.......... 2,857,142 3 799 9,635 170 10,607
Transactions of
Pooled Companies:
Distributions
paid............ (140) (140)
Common stock
issued.......... 67,621 179 179
Treasury stock
purchased....... (8,182) (54) (54)
Unrealized gain on
marketable
securities....... 230 230 230
Net income
(loss)........... 415 (2,277) (1,862) (1,862)
-------
Total
comprehensive
loss............. (1,632)
---------- --- ------- ---- -------- ------- ----- -------- =======
Balance, December
31, 1996.......... 2,916,581 3 1,199 7,358 400 8,960
Transactions of
Pooled Companies:
Distributions
paid............ (831) (831)
Treasury stock
purchased....... (79,753) (449) (449)
Capital
contribution..... 2,300,000 2 124 126
Common stock
issued........... 27,850,000 28 500,000 1 527,134 527,163
Unrealized loss on
marketable
securities....... (108) (108) (108)
Net income........ 1,436 2,250 3,686 3,686
-------
Total
comprehensive
income........... 3,578
---------- --- ------- ---- -------- ------- ----- -------- =======
Balance, December
31, 1997.......... 32,986,828 33 500,000 1 528,613 9,608 292 538,547
Transactions of
Pooled Companies:
Distributions
paid............ (62) (62)
Adjustment to
conform year ends
of Pooled
Company.......... 1,242 76 1,318
Common stock
issued........... 5,088,049 5 97,389 97,394
Unrealized gain on
marketable
securities....... 571 571 571
Net income
(loss)........... (182) 6,558 6,376 6,376
-------
Total
comprehensive
income........... $ 6,947
---------- --- ------- ---- -------- ------- ----- -------- =======
Balance, March 31,
1998 (unaudited).. 38,074,877 $38 500,000 $ 1 $625,758 $17,408 $ 939 $644,144
========== === ======= ==== ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ --------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 730 $ (1,862) $ 3,686 $ 903 $ 6,376
Depreciation and
amortization......... 1,321 1,445 1,425 357 1,155
Deferred income
taxes................ 47 (1,595) 1,342 899 735
Gain on sale of
equipment............ (53) (52) (128)
Minority interest..... 261 234 848 1,450
Unrealized/realized
gain on investments.. (76) (1,949) (1,392) (1,932)
Changes in operating
assets and
liabilities:
Accounts
receivable......... 1,458 (12,776) 1,372 (2,235) (18,138)
Costs and estimated
earnings in excess
of billings........ (759) 2,978 (3,759) 1,764 2,271
Prepaid expenses and
other current
assets............. 250 (782) (1,367) (2,064) (951)
Billings in excess
of costs and
estimated
earnings........... 5,552
Income taxes
payable............ 245
Accounts payable.... 609 1,796 (1,613) 760 9,121
Accrued
compensation....... 36 375 298 408 149
Accrued
liabilities........ 323 (149) 1,955 1,050 2,841
Change in other
assets............... (36) 39 (24) (3) 80
---------- ----------- ----------- -------- ----------
Net cash provided
by (used in)
operating
activities....... 4,432 (10,373) 2,162 319 8,709
---------- ----------- ----------- -------- ----------
Cash flows from
investing activities:
Cash paid for
acquisitions, net of
cash acquired........ (111,840)
Purchases of property
and equipment........ (1,918) (1,081) (1,213) (261) (1,401)
Proceeds on sale of
equipment............ 320 88 464 288 3,266
Purchase of
investments.......... (276)
Proceeds received on
sale of investments.. 498 107 1,611 1,603
Payments received on
notes receivable..... 304
Other................. (292) (70) 51 796 131
---------- ----------- ----------- -------- ----------
Net cash provided
by (used in)
investing
activities....... (1,392) (1,232) 913 2,426 (109,540)
---------- ----------- ----------- -------- ----------
Cash flows from
financing activities:
Proceeds from initial
public offering,
net.................. 527,163
Proceeds from issuance
of common stock...... 178
Net proceeds
(payments) on short-
term debt............ (220) (140) 146 507 8
Payments on long-term
debt................. (1,281) (1,147) (1,323) (156) (3,157)
Proceeds on long-term
debt................. 100 12,039 1,400 759 1,570
Purchase of treasury
stock................ (52) (54)
Contributions of
capital by
stockholders of
Pooled Companies..... 217
Contributions by
founding
stockholder.......... 126
Distributions to
Stockholders of
Pooled Companies..... (300) (235) (1,131) (62)
Adjustment to conform
fiscal year ends of
certain Pooled
Companies............ 1,242
---------- ----------- ----------- -------- ----------
Net cash provided
by (used in)
financing
activities....... (1,536) 10,641 526,381 1,110 (399)
---------- ----------- ----------- -------- ----------
Net increase in cash and
cash equivalents....... 1,504 (964) 529,456 3,855 (101,230)
Cash and cash
equivalents, beginning
of period.............. 572 2,076 1,112 1,112 530,568
---------- ----------- ----------- -------- ----------
Cash and cash
equivalents, end of
period................. $ 2,076 $ 1,112 $ 530,568 $ 4,967 $ 429,338
========== =========== =========== ======== ==========
Supplemental cash flow
information:
Cash paid for
interest............. $ 562 $ 1,163 $ 1,815 $ 454 $ 467
Cash paid for income
taxes................ 475 545 6 2
</TABLE>
F-23
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company issued common stock and cash in connection with certain business
combinations during the three months ended March 31, 1998. The fair values of
the assets acquired and liabilities assumed at the dates of acquisition are as
follows:
<TABLE>
<S> <C>
Accounts receivable................................................... $ 73,351
Inventories........................................................... 1,022
Costs and earnings in excess of billings.............................. 10,426
Prepaid expenses and other current assets............................. 3,660
Property and equipment................................................ 11,520
Intangible assets..................................................... 175,132
Other assets.......................................................... 2,526
Short-term debt....................................................... (7,113)
Accounts payable...................................................... (19,103)
Accrued liabilities................................................... (14,052)
Billings in excess of costs and estimated earnings.................... (22,425)
Long-term debt........................................................ (2,909)
Other long-term liabilities........................................... (2,801)
--------
Net assets acquired................................................. $209,234
========
These acquisitions were funded as follows:
Common stock, 5,088,049 shares...................................... $ 97,394
Cash, net of cash acquired.......................................... 111,840
--------
$209,234
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLINGS
Subsequent to March 31, 1998, Consolidation Capital Corporation
("Consolidation Capital" or the "Company") acquired all of the outstanding
common stock of Perimeter Maintenance Corporation; Crest International LLC;
Spann Building Maintenance; and The Lewis Companies, Inc. (collectively, the
"Pooled Companies" or the "Poolings") in exchange for 2,386,828 shares of
Common Stock of the Company. The acquisitions have been accounted for under
the pooling-of-interests method and, accordingly, the accompanying
supplemental consolidated financial statements give retroactive effect to the
Poolings for all periods presented.
NOTE 2--BUSINESS AND ORGANIZATION
Consolidation Capital Corporation, a Delaware corporation, was incorporated
in September 1997. Ledecky Brothers L.L.C., ("LLC"), a limited liability
corporation formed in February 1997, merged with and into the Company in
September 1997 (the "Merger"). The sole member of LLC received, in connection
with the Merger, 2,300,000 shares of Common Stock of the Company which
represents all of its issued and outstanding Common Stock, in exchange for
100% of his ownership interest in the LLC. The Merger was implemented to
facilitate a public offering of securities. Because both of the organizations
were under control of the one sole owner, the Merger has been accounted for on
a historical cost basis.
The Company intends to consolidate the facilities management industry to
become a national single-source provider of facilities management services.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated supplemental financial statements and related
notes to supplemental consolidated financial statements include the accounts
of Consolidation Capital, and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the Poolings for
all periods presented.
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. Investments in less than 50%
owned entities are accounted for under the equity method. All significant
intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
F-25
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. The Company's temporary cash investments
consist of readily marketable, investment grade financial instruments of a
nature which should reduce risk of loss. Additionally, concentration of credit
risk with respect to trade receivables results from these amounts not being
collateralized and, as a result, management continually monitors the financial
condition of its customers to reduce risk of loss.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximate fair value. The
Company's cash equivalents are comprised of readily marketable, interest-
bearing, investment grade securities.
Marketable Securities
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards "SFAS" No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Marketable securities consisted of investments in equity securities and are
classified as available for sale. At December 31, 1997 and 1996, the fair
market value of the funds exceed the adjusted cost. The unrealized gains, net
of income taxes, are reported as an increase to stockholders' equity.
Marketable securities consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Adjusted cost.................................. $ 2,136 $ 2,425
Unrealized holding gains....................... 610 472
------------ ------------
Fair market value.............................. $ 2,746 $ 2,897
============ ============
</TABLE>
Realized gains and losses are included in other income. The cost of
securities sold is based on the specific identification method.
Revenue Recognition
Revenues and earnings from long-term construction contracts are recognized
on the percentage-of-completion method, primarily based on contract costs
incurred to date compared with total estimated contracts costs. Revenue on
short-term contracts and time and material projects is recognized upon the
substantial completion of each contract, or monthly, as the work is performed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. General and administrative costs
are charged to expense as incurred. Changes in job performance, job
conditions, estimated profitability, and final contract settlements may result
in revisions to costs and revenues and recognized in the period in which the
revisions are determined.
F-26
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The asset, "Costs and estimated earnings in excess of billings on contracts
in progress," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on contracts in
progress," represents billings in excess of revenues recognized.
Maintenance and other service revenues are recognized as the services are
performed.
Property and Equipment
Property and equipment are stated at cost and depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
estimated useful lives range from 7-40 years for buildings and its components
and 5-7 years for equipment, vehicles, and furniture and fixtures. Leasehold
improvements and capital leases are capitalized and amortized over the lesser
of the life of the lease or the estimated useful life of the asset.
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. No impairment has been recognized
through March 31, 1998.
Goodwill
Goodwill, which represents the excess of cost over the fair value of assets
acquired in business combinations accounted for under the purchase method, is
being amortized on a straight-line basis over 40 years which is the estimated
period benefited. The recoverability of the unamortized balance of goodwill is
assessed on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
Income Taxes
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Certain companies acquired in pooling-of-interests transactions
elected to be taxed as subchapter S corporations and, accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by Consolidation Capital.
Net Income Per Share
Basic net income per share is determined by dividing net income by the
weighted average number of common shares outstanding during the periods.
Diluted net income per share reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock at the beginning of the period.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1998, and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1997, as presented in the accompanying unaudited interim
financial statements.
F-27
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
adopted SFAS No. 130 in the first quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. It also requires related disclosures
about products, geographic areas, and major customers. SFAS 131 is effective
for fiscal years beginning after December 15, 1997. The Company intends to
adopt SFAS No. 131 for the year ending December 31, 1998. Implementation of
this disclosure standard will not affect the Company's financial position or
results of operations.
NOTE 4--BUSINESS COMBINATIONS
Pooling-of-Interests Method
Subsequent to March 31, 1998, the Company issued 2,836,828 shares of Common
Stock to acquire four companies in business combinations accounted for under
the pooling-of-interests method. Additionally, one of the Pooled Companies had
previously existing vested stock options which were converted into stock
options for 403,389 shares of the Company's Common Stock (the "Replacement
Options"). The Replacement Options are fully vested and have an exercise price
of $4.84 per share.
The Company's supplemental consolidated financial statements give
retroactive effect to the acquisitions of the Pooled Companies for all periods
presented. The Lewis Companies, Inc. ("Lewis") previously reported on a fiscal
year ending June 30. As such, the fiscal 1995, 1996 and 1997 accounts of Lewis
have been combined in the Company's accounts for the calendar years 1995, 1996
and 1997, respectively. The net income of Lewis for the six months July 1,
1997 to December 31, 1997 are reflected as an adjustment to retained earnings
during the three-month period ended March 31, 1998. This net adjustment of
$1,242 is comprised of $30,774 of revenues, partially offset by $28,532 of
costs and expenses. Commencing on January 1, 1998, the year end of Lewis was
changed to December 31.
F-28
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following presents the separate results, in each of the periods
presented, of Consolidation Capital (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up
to the dates on which they were acquired:
<TABLE>
<CAPTION>
CONSOLIDATION POOLED
CAPITAL COMPANIES COMBINED
------------- --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1995
Revenues................................. $ -- $100,804 $100,804
Net income............................... -- 730 730
For the year ended December 31, 1996
Revenues................................. $ -- $124,457 $124,457
Net loss................................. -- (1,862) (1,862)
For the year ended December 31, 1997
Revenues................................. $ -- $115,309 $115,309
Net income............................... 7 3,679 3,686
For the three months ended March 31, 1997
(unaudited)
Revenues................................. $ -- $ 30,714 $ 30,714
Net income............................... -- 903 903
For the three months ended March 31, 1998
(unaudited)
Revenues................................. $37,497 $ 32,733 $ 70,230
Net income............................... 5,263 1,113 6,376
</TABLE>
Purchase Method (Unaudited)
During the period January 1, 1998 through July 1, 1998, the Company has
completed 16 business combinations for an aggregate purchase price of
approximately $434,000, consisting of approximately $181,000 of cash, $34,000
of assumed debt and approximately 9.6 million shares of the Company's Common
Stock valued at approximately $219,000. These amounts do not include
contingent consideration of up to $100,000 in cash and in shares of Common
Stock of the Company based upon the performance of the various acquisitions.
The accompanying supplemental consolidated financial statements and related
notes to consolidated financial statements include the accounts of the Company
and the Purchased Companies from their respective acquisition dates.
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $347,000. Such allocations are
preliminary in nature, pending the outcome of a detailed analysis being
performed by the Company of the assets and liabilities acquired. For purposes
of computing the estimated purchase price for accounting purposes the value of
the shares was determined in consideration of restrictions on the sale and
transferability of the shares issued. The shares generally will be subject to
the following restrictions on resale: up to one-third of the shares may be
resold twelve months after their date of acquisition, the first one-third and
an additional one-third may be resold beginning eighteen months after their
date of acquisition and the first two-thirds and the remaining one-third may
be resold beginning twenty-four months after their date of acquisition.
F-29
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and the three month periods ended
March 31, 1997 and 1998, respectively, as if all of the Purchased Companies
had been acquired as of January 1, 1997. The pro forma results of operations
reflect certain pro forma adjustments primarily related to goodwill
amortization and compensation adjustments for shareholders.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................. $790,911 $ 179,379 $ 206,126
Net income................................ $ 31,174 $ 4,826 $ 8,978
Net income per share-basic................ $ 1.12 $ 0.18 $ 0.21
Net income per share-diluted.............. $ 1.10 $ 0.18 $ 0.20
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisitions occurred as of January 1, 1997 or the results that may occur
in the future.
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996 1997
------------ --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............ $ 133 $ 181 $ 161
Additions to costs and expenses........... 204 142 5,346
Write-offs................................ (156) (162) (92)
-------- --------- ---------
Balance at end of period.................. $ 181 $ 161 $ 5,415
======== ========= =========
</TABLE>
NOTE 6--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997 MARCH 31, 1998
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts.... $75,103 $30,606 $341,286
Estimated earnings......................... 3,742 6,474 56,165
------- ------- --------
78,845 37,080 397,451
Less: Billings to date..................... 81,560 35,524 415,804
------- ------- --------
$(2,715) $ 1,556 $(18,353)
======= ======= ========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997 MARCH 31, 1998
------- ------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts......... $ 1,764 $2,781 $ 10,292
Billings in excess of costs and estimated
earnings on uncompleted contracts......... 4,479 1,225 28,645
------- ------ --------
$(2,715) $1,556 $(18,353)
======= ====== ========
</TABLE>
F-30
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Equipment............................................... $ 6,217 $ 6,657
Office furniture and equipment.......................... 2,105 2,248
Autos and trucks........................................ 630 593
Buildings and improvements.............................. 4,610 4,492
Land.................................................... 623 607
------- -------
14,185 14,597
Less: Accumulated depreciation.......................... (7,425) (8,186)
------- -------
$ 6,760 $ 6,411
======= =======
</TABLE>
Depreciation expense for years 1995, 1996 and 1997 was $1,138, $1,268 and
$1,284, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.......................................... $ 92 $ 151 $175,477
Non-compete agreements............................ 835 835 835
Other............................................. 64 64 64
----- ------ --------
991 1,050 176,376
Less: Accumulated amortization.................... (757) (898) (1,221)
----- ------ --------
Net intangible assets.......................... $ 234 $ 152 $175,155
===== ====== ========
</TABLE>
Amortization expense for years 1995, 1996 and 1997 was $183, $177 and $141,
respectively, and $324 for the three months ended March 31, 1998 (unaudited).
NOTE 9--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Credit facilities with banks, average interest rate of
10.25% at December 31, 1996 and 10.75% at December 31,
1997................................................... $12,620 $1,133
Payable to Pooled Company stockholder................... 151 151
Current maturities of long-term debt.................... 1,118 2,683
------- ------
Total short-term debt................................. $13,889 $3,967
======= ======
</TABLE>
F-31
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Notes payable to banks with average interest rates
ranging from 9.75%-11%............................... $ 1,217 $13,495
Mortgage notes payable, secured by certain properties
of the Company, with average interest rates ranging
from
9.75%-10.25%,........................................ 1,850 1,610
Notes payable, secured by certain assets of the
Company, with average interest rates ranging from 8%-
16%.................................................. 1,039 1,304
Capital lease obligations............................. 26 46
Other................................................. 122 22
------- -------
4,254 16,477
Less: Current portion................................. (1,118) (2,683)
------- -------
Total long-term debt............................... $ 3,136 $13,794
======= =======
</TABLE>
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,683
1999.............................................................. 12,230
2000.............................................................. 363
2001.............................................................. 286
2002.............................................................. 284
Thereafter........................................................ 631
-------
$16,477
=======
</TABLE>
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) are comprised as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------------------- ----------
<S> <C> <C> <C>
Income taxes currently payable:
Federal............................... $ 544 $ 5 $ 134
State................................. 63 2 11
-------- ----------- ----------
607 7 145
-------- ----------- ----------
Deferred income taxes:
Federal............................... 41 (1,424) 1,202
State................................. 5 (165) 140
-------- ----------- ----------
46 (1,589) 1,342
-------- ----------- ----------
Total tax expense (benefit)............. $653 $(1,582) $ 1,487
======== =========== ==========
</TABLE>
The deferred tax liabilities reflected on the balance sheet relate primarily
to the financial basis of marketable securities in excess of their tax basis.
F-32
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The deferred tax assets reflected on the balance sheet reflect the expected
utilization of net operating loss carryforwards through future taxable
earnings.
At December 31, 1997, net operating loss carryforwards of approximately
$1,500, expiring in 2011, are available to reduce income taxes in future
years. The timing of the utilization of this net operating loss will be
affected by the taxable income of Lewis under separate return limitation
rules.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal statutory rate......... 34.0% 34.0% 34.0%
State income taxes, net of federal
tax benefit........................ 4.5 4.4 3.0
Subchapter S corporation income not
subject to corporate level
taxation........................... 5.9 3.8 (9.1)
Other............................... 2.8 3.7 .8
---------- ---------- ----------
Effective income tax rate........... 47.2% 45.9% 28.7%
========== ========== ==========
</TABLE>
Certain of the Pooled Companies were organized as subchapter S corporations
prior to being acquired by the Company and, as a result, the federal tax on
their income was the responsibility of their individual stockholders.
Accordingly, the Pooled Companies provided no federal income tax expense prior
to these acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109 as if the Pooled Companies had been subject to
federal income taxes for the year ended December 31, 1997:
<TABLE>
<S> <C>
Net income per income statement................................... $3,686
Pro forma income tax adjustment................................... (574)
------
Pro forma net income.............................................. $3,112
======
</TABLE>
NOTE 11--LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, furnitures and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998.................................................... $31 $ 714
1999.................................................... 12 485
2000.................................................... 4 284
2001.................................................... 132
2002.................................................... 46
Thereafter.............................................. 70
--- ------
Total minimum lease payments............................ 47 $1,731
======
Less: Amounts representing interest..................... (1)
---
Present value of net minimum lease payments............. $46
===
</TABLE>
Rent expense for all operating leases for 1995, 1996 and 1997 was $823, $671
and $536, respectively.
F-33
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996 one customer provided approximately 18%
of the Company's consolidated revenues.
NOTE 13--COMMITMENTS AND CONTINGENCIES
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this
litigation will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Postemployment Benefits
The Company has entered into employment agreements with several employees
that would result in severance payments to these employees upon a change of
control or certain other events. No amounts have been accrued at December 31,
1996 or 1997 related to these agreements.
NOTE 14--RELATED PARTY TRANSACTIONS FOR POOLED COMPANIES
At December 31, 1996 and 1997, the Company has a receivable from a
stockholder of $350 which receivable is included in other non-current assets.
The Company paid management fees to affiliates of $298, $466, and $954 for
the years ended December 31, 1995, 1996, and 1997, respectively.
The Company has an unsecured demand note payable to a stockholder for $151,
dated January 1, 1994, bearing interest at 12% with interest paid monthly.
NOTE 15--STOCKHOLDERS' EQUITY
Common Stock
On November 25, 1997, the Company effected a one-for-1.918159 reverse stock
split of the Company's Common Stock. Accordingly, all share data reflected in
these financial statements have been retroactively restated.
On September 19, 1997, the sole member of LLC received 2,300,000 shares of
Common Stock of the Company in connection with the Merger in exchange for his
100% ownership interest in LLC. The sole member made contributions to LLC from
time to time to fund expenses in the aggregate amount of $126. These
contributions were included in common stock and additional paid-in capital.
The Company completed its initial public offering ("IPO") in December 1997,
selling 27,850,000 shares of Common Stock and 500,000 shares of Convertible
Non-Voting Common Stock at $20.00 per share and raising net proceeds of
approximately $527,000. Proceeds from the IPO, net of underwriting fees and
other stock issuance costs, were included in common stock and additional paid-
in capital.
Convertible Non-Voting Common Stock
In connection with the IPO, the Company sold 500,000 shares of Convertible
Non-Voting Common Stock to Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the
representative of the underwriters in the Company's IPO, for $20 per share.
After one year, the shares on Convertible Non-Voting Common Stock will
automatically
F-34
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
convert into an equivalent number of shares of Common Stock. Accordingly,
500,000 shares of Common Stock have been reserved for issuance upon the
conversion of these securities, which shares will be eligible for resale
beginning on November 25, 1998.
There are 1,130,000 shares of Common Stock reserved for issuance upon
exercise of warrants issued to FBR. The warrants have an exercise price per
share equal to the IPO price. These warrants will be exercisable on or after
the first anniversary and will expire on the fifth anniversary of the IPO. FBR
will have the right, beginning November 25, 1998, to require the Company to
register such shares for sale.
Additionally, 1,950,000 shares of Common Stock have been reserved for
issuance upon the exercise of warrants issued to Jonathan Ledecky at the time
of the IPO. These warrants are exercisable for a period of ten years at an
exercise price equal to the IPO price. The Company has agreed that, at
Jonathan Ledecky's request, it will register the shares underlying his
warrants for a ten-year period following the IPO. In addition, the Company has
agreed to give Jonathan Ledecky the right to request that the Company include
the shares underlying his warrants on a registration statement filed by the
Company during a twelve-year period following the IPO.
1997 Long-Term Incentive Plan
The Company's Board of Directors has adopted, and the Company's stockholder
has approved, the Company's 1997 Long-Term Incentive Plan (the "Incentive
Plan"). The terms of the option awards will be established by the compensation
committee of the Company's Board of Directors. The Company has filed a
registration statement on Form S-8 under the Securities Act of 1933 with
respect to the shares of Common Stock issuable pursuant to such plan. The
maximum number of shares that may be issued under the Incentive Plan is equal
to 9% of the number of shares of Common Stock outstanding from time to time.
Options to purchase 1,500,000 shares of Common Stock under the Incentive
Plan were granted at the time of the IPO at an exercise price equal to the IPO
price. These options will vest 25% each on the first four anniversaries of the
date of grant and will expire on the tenth anniversary of the grant date. In
the event of a change in control of the Company prior to normal vesting, all
options not already exercisable will become fully vested and exercisable.
1997 Non-Employee Directors' Stock Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which provides for the automatic grant to each non-employee director
of an option to purchase 20,000 shares on the later of the effective date of
the registration statement for the initial public offering of the Company's
Common Stock or the date that such person commences services as a director.
Thereafter, each non-employee director will be entitled to receive, on the day
after each annual meeting of the Company's stockholders, an option to purchase
5,000 shares of Common Stock. A maximum of 300,000 shares of Common Stock may
be issued under the Directors' Plan. Options to purchase 60,000 shares of
Common Stock under the Directors' Plan were granted at the time of the IPO at
an exercise price equal to the IPO price.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant options
and will expire at the earlier of 10 years from the date of grant or 90 days
after termination of service as a director. Options will vest and become
exercisable ratably as to 50% of the shares underlying the option on the first
and second anniversaries of the date of grant, subject to acceleration by the
Board. In the event of a change in control of the Company prior to normal
vesting, all options not already exercisable will become fully vested and
exercisable.
F-35
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 Employee Stock Purchase Plan
The Company has adopted, and the Company's stockholders have approved, the
1997 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
permits eligible employees of the Company and its subsidiaries (generally all
full-time employees who have completed one year of service) to purchase shares
of Common Stock at a discount. Employees who elect to participate will have
amounts withheld through payroll deduction during purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to
purchase stock at a price equal to 85% of the market price at the beginning of
the period or the end of the period, whichever is lower. Stock purchased under
the Purchase Plan will be subject to a one-year holding period. The Company
has reserved 1,000,000 shares of Common Stock for issuance under the Purchase
Plan.
NOTE 16--STOCK PURCHASE AND AWARD PLANS
During 1996, one of the Pooled Companies issued options to purchase 418,730
shares of its common stock at an exercise price of $4.84 per share (share and
exercise price data adjusted for the share exchange ratio associated with the
business combination). The exercise price was deemed to be equivalent to the
fair value of the Pooled Company's common stock at the date the options were
granted. These options were fully vested at the time of issuance and had no
expiration date. Subsequently during 1996, 15,341 shares of the Company's
common stock were issued in connection with the exercise of a portion of these
options. None of these options were exercised during 1997. Accordingly, of the
options granted in 1996, options to purchase 403,389 shares of the Company's
Common Stock remained outstanding at December 31, 1996 and 1997.
In connection with the IPO and under the provisions of the Incentive Plan
and the Directors' Plan, options were granted for the purchase of 1,560,000
shares and warrants were granted for the purchase of 1,950,000 shares of the
Company's Common Stock. These options and warrants were issued to officers and
directors of the Company, have an exercise price equal to the IPO price
($20.00 per share) and expire between 2002 and 2007. None of the options or
warrants granted during 1997 had been exercised as of December 31, 1997. All
of the warrants and none of the options were exercisable at December 31, 1997.
In 1997, the Company adopted the SFAS No. 123 "Accounting for Stock-Based
Compensation," which encourages, but does not require companies to recognize
compensation cost for stock-based compensation plans over the vesting period
based upon the fair value of awards on the date of the grant. However, the
statement allows the alternative of the continued use of the intrinsic value
method as prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." Therefore, as permitted, the
Company has applied APB No. 25, and related interpretations in accounting for
its stock based compensation plans. Accordingly, no compensation expense has
been recognized by the Company for warrants granted in connection with the IPO
or for options granted under the Incentive Plan and the Directors' Plan.
Had compensation expense for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Net income (loss):
As reported....................................... $(1,862) $ 3,686
Pro forma......................................... (2,409) (3,538)
Net income (loss) per share--basic:
As reported....................................... $ (0.64) $ 0.53
Pro forma......................................... (0.83) $ (0.50)
Net income (loss) per share--diluted
As reported....................................... $ (0.64) $ 0.50
Pro forma......................................... (0.83) (0.50)
</TABLE>
F-36
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The weighted average fair value per option and warrant at the date of grant
for options granted in 1997 and 1996 was $7.46 and $2.21, respectively. The
fair value of options and warrants granted (which is amortized to expense over
the option vesting period in determining the pro forma impact) is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997:
<TABLE>
<CAPTION>
1997 1996
----------------- --------
OPTIONS WARRANTS OPTIONS
------- -------- --------
<S> <C> <C> <C>
Expected life of option.................. 5 years 2 years 10 years
Risk-free interest rate.................. 5.76% 5.69% 6.18%
Expected volatility factor............... 45.0% 45.0% --
</TABLE>
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data of the
Company:
<TABLE>
<CAPTION>
1996 QUARTERS
-------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues...................... $26,323 $28,855 $37,394 $31,885 $124,457
Gross profit.................. (1,692) 3,523 4,855 4,904 11,590
Operating income (loss)....... (5,145) (458) 610 1,309 (3,684)
Net income (loss)............. (3,462) 540 352 708 (1,862)
Net income (loss) per share--
Basic........................ (1.19) 0.19 0.12 0.24 (0.64)
Net income (loss) per share--
Diluted (1).................. (1.19) 0.17 0.11 0.22 (0.64)
<CAPTION>
1997 QUARTERS
-------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues...................... $27,871 $28,670 $28,349 $30,419 $115,309
Gross profit.................. 4,933 5,743 5,143 5,108 20,927
Operating income (loss)....... 706 2,079 1,437 (1,065) 3,157
Net income.................... 368 1,215 807 1,296 3,686
Net income per share--Basic
(1).......................... 0.13 0.23 0.16 0.09 0.53
Net income per share--Diluted
(1).......................... 0.11 0.22 0.15 0.09 0.50
</TABLE>
- --------
(1) The arithmetic total of the individual quarterly net income per share
amounts does not reconcile to the annual amount of net income per share
due to the timing of net income (loss) in relation to the issuance of
common shares during the course of the year.
F-37
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In addition to the Replacement Options (see Note 4, "Business
Combinations"), in connection with business combinations consummated during
the period from January 1, 1998 through July 1, 1998, the Company has granted
options for approximately 765,846 shares of the Company's Common Stock, and is
expected to issue options for an additional 999,374 shares of the Company's
Common Stock, under the Company's Long-Term Incentive Plan. All options vest
over a four year period from date of grant. These options have been, or will
be, granted with an exercise price equal to the fair value share price of the
Company's Common Stock at the date of grant.
In addition to those business combinations consummated during the period
from January 1, 1998 through July 1, 1998, the Company has signed letters of
intent to acquire three janitorial maintenance management services businesses,
one electrical installation and maintenance services business and three
mechanical installation and maintenance services businesses. The total
consideration which is expected to be issued in connection with these pending
acquisitions is approximately $156,500 in cash and shares of Common Stock.
Additionally, there is the potential for the payment of up to an additional
$5,375 in cash and shares of Common Stock in connection with contingent
consideration agreements.
During 1996, Lewis entered into a contract to provide electrical design,
engineering and installation services for a power plant in Argentina (the
"Argentina Project"). A dispute developed as to the amount to be paid to Lewis
in connection with certain project scope changes. The disputed matters were
submitted to a binding arbitration process. Because of the uncertainty
surrounding the outcome of the litigation, Lewis wrote off a substantial
amount of the receivables related to this project in 1996. In May 1998, Lewis
was awarded $12,400 by the arbitration panel and this amount was received in
June 1998. Lewis is finalizing an analysis of the settlement award for the
Argentina Project, but anticipates recognizing an after tax gain ranging from
$1,000 to $1,500 during the second quarter of 1998 in connection with this
matter.
F-38
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The financial statements of Consolidation Capital Corporation (the
"Company") included in the following unaudited pro forma combined financial
statements of the Company represent the supplemental consolidated financial
statements of the Company, which are included elsewhere in this Prospectus.
The supplemental consolidated financial statements give retroactive effect,
for all periods presented, to four acquisitions consummated during the second
quarter of 1998 accounted for under the pooling-of-interests method. These
four acquisitions were Perimeter Maintenance Corporation and affiliates; Crest
International, LLC; Spann Building Maintenance and affiliate; and The Lewis
Companies, Inc. and affiliates (collectively, the "Pooled Companies").
The following unaudited pro forma combined balance sheet of Consolidation
Capital Corporation (the "Company") gives effect to the recent acquisition of
United Service Solutions, Inc ("USS") on April 27, 1998; Taylor Electric, Inc.
("Taylor") and G.S. Group, Inc. ("Gulf States") on May 22, 1998; National
Network Services Inc. ("National Network") on June 15, 1998; Riviera Electric
of California, Inc. ("Riviera of California") on June 17, 1998; and Chambers
Electronic Communications LLC ("Chambers") on July 1, 1998; (the "Subsequent
Acquisitions"), as if they had been consummated as of the Company's most
recent balance sheet date, March 31, 1998.
The unaudited pro forma combined statements of operations give effect to (i)
the nine acquisitions completed during the three months ending March 31, 1998
("First Quarter 1998 Acquisitions") which were business combinations accounted
for under the purchase method of accounting, and (ii) the Subsequent
Acquisitions as if all such acquisitions had been consummated on January 1,
1997.
The pro forma combined statement of operations for the year ended December
31, 1997 includes (i) audited supplemental consolidated financial statements
of the Company, and (ii) audited financial statements for the First Quarter
1998 Acquisitions and the Subsequent Acquisitions.
The pro forma combined statement of operations for the three months ended
March 31, 1998 and March 31, 1997 includes (i) the unaudited interim
supplemental financial information for the Company, and (ii) the unaudited
interim financial information for the First Quarter 1998 Acquisitions and the
Subsequent Acquisitions.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data does not purport to represent what the
Company's consolidated financial position and results of operations would
actually have been if such transactions in fact had occurred on the assumed
dates and are not necessarily representative of the Company's consolidated
financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
F-39
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSEQUENT
ACQUISITIONS
CONSOLIDATION -------------------------------
CAPITAL TAYLOR REGENCY COMBINED PRO FORMA PRO FORMA
CORPORATION ELECTRIC ELECTRIC INSIGNIFICANT TOTAL ADJUSTMENTS COMBINED
------------- -------- -------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $429,338 $2,943 $15,002 $ 2,205 $449,488 $(119,430) $330,058
Investments............ 3,406 -- 3,918 -- 7,324 (3,918) 3,406
Accounts receivable,
net.................... 114,233 4,159 13,294 24,211 155,897 155,897
Inventories............ 649 199 -- 645 1,493 1,493
Cost and estimated
earnings in excess of
billings on
uncompleted
contracts.............. 10,292 45 2,259 2,682 15,278 15,278
Deferred income
taxes.................. 568 -- 345 913 913
Related party
receivables............ 173 20 193 193
Prepaid expenses and
other current assets... 6,752 37 331 803 7,923 (8) 7,915
-------- ------ ------- ------- -------- --------- --------
Total current
assets............... 565,411 7,383 34,804 30,911 638,509 (123,356) 515,153
Property and equipment,
net..................... 16,688 406 3,467 6,537 27,098 (3,280) 23,818
Other assets............ 3,896 8 -- 3,898 7,802 7,802
Intangible assets, net.. 175,155 -- -- 26,079 201,234 145,337 346,571
-------- ------ ------- ------- -------- --------- --------
Total assets......... $761,150 $7,797 $38,271 $67,425 $874,643 $ 18,701 $893,344
======== ====== ======= ======= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt........ $ 19,832 $ -- $ -- $ 3,625 $ 23,457 $ (1,520) $ 21,937
Current maturities,
capital leases......... -- -- -- 451 451 451
Accounts payable....... 34,261 1,093 3,803 5,551 44,708 (14) 44,694
Accrued compensation... 8,246 280 1,547 4,525 14,598 14,598
Accrued liabilities
and other.............. 10,126 43 1,168 4,409 15,746 15,746
Deferred taxes......... 1,009 -- -- -- 1,009 1,009
Income taxes payable... 5,152 -- -- 289 5,441 5,441
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.............. 28,645 1,896 7,846 2,662 41,049 41,049
-------- ------ ------- ------- -------- --------- --------
Total current
liabilities.......... 107,271 3,312 14,364 21,512 146,459 (1,534) 144,925
Long-term debt.......... 4,914 -- -- 25,479 30,393 (22,106) 8,287
Notes payable to related
parties................. -- -- -- 9,067 9,067 (9,067)
Deferred taxes.......... -- -- -- 35 35 35
Other................... 4,821 -- -- 505 5,326 5,326
-------- ------ ------- ------- -------- --------- --------
Total liabilities.... 117,006 3,312 14,364 56,598 191,280 (32,707) 158,573
Stockholders' equity:
Common Stock........... 38 456 -- 19 513 (470) 43
Convertible Non-Voting
common stock........... 1 -- -- -- 1 1
Treasury Stock......... -- -- -- (8,372) (8,372) 8,372 --
Additional paid-in
capital................ 625,758 -- 1,359 8,847 635,964 80,416 716,380
Retained earnings
(deficit).............. 17,408 4,029 22,548 10,333 54,318 (36,910) 17,408
Unrealized gain on
investments............ 939 939 939
-------- ------ ------- ------- -------- --------- --------
Total stockholders'
equity .............. 644,144 4,485 23,907 10,827 683,363 51,408 734,771
-------- ------ ------- ------- -------- --------- --------
Total liabilities and
stockholders'
equity............... $761,150 $7,797 $38,271 $67,425 $874,643 $ 18,701 $893,344
======== ====== ======= ======= ======== ========= ========
</TABLE>
F-40
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST QUARTER 1998 ACQUISITIONS
---------------------------------------------------------------------------------------
GARFIELD TOWN &
CONSOLIDATION SERVICE AND RIVIERA TRI-CITY COUNTRY WILSON WALKER
CAPITAL MANAGEMENT SKC INDECON ELECTRIC ELECTRICAL ELECTRIC ELECTRIC ENGINEERING
CORPORATION USA, INC. ELECTRIC COMBINED CONSTRUCTION CONTRACTORS CO. CO. INC.
------------- ---------- -------- -------- ------------ ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $ 115,309 $26,266 $23,482 $24,498 $37,049 $79,493 $48,726 $71,009 $127,672
Cost of
revenues........ 94,382 19,856 16,971 19,587 31,607 63,551 39,701 59,036 106,346
--------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit.... 20,927 6,410 6,511 4,911 5,442 15,942 9,025 11,973 21,326
Selling, general
and
administrative
expenses........ 17,770 3,832 4,200 2,981 3,999 9,925 7,006 10,514 21,786
Intangible asset
amortization....
--------- ------- ------- ------- ------- ------- ------- ------- --------
Operating income
(loss)......... 3,157 2,578 2,311 1,930 1,443 6,017 2,019 1,459 (460)
Other (income)
expense:
Interest
expense........ 1,672 53 102 229 53 75 110 36
Interest
income......... (2,366) (168) (156) (328)
Minority
Interest....... 848
Other, net...... (2,170) 6 (40) (16) (119) 26 (113) 77
--------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss)
before provision
for income
taxes........... 5,173 2,519 2,351 1,844 1,333 6,106 2,057 1,428 (168)
Provision for
income taxes.... 1,487 52 1,150 771 462 894 625
--------- ------- ------- ------- ------- ------- ------- ------- --------
Net income
(loss).......... $ 3,686 $ 2,467 $ 1,201 $ 1,073 $ 1,333 $ 5,644 $ 1,163 $ 803 $ (168)
========= ======= ======= ======= ======= ======= ======= ======= ========
Net income per
share--Basic.... $ 0.53
=========
Net income per
share--Diluted.. $ 0.50
=========
Weighted average
shares
outstanding--
Basic (Note 4).. 7,007,335
=========
Weighted average
shares
outstanding--
Diluted
(Note 4)........ 7,383,315
=========
<CAPTION>
SUBSEQUENT ACQUISITIONS
---------------------------------
TAYLOR REGENCY COMBINED PRO FORMA PRO FORMA
ELECTRIC ELECTRIC INSIGNIFICANT TOTAL ADJUSTMENTS COMBINED
--------- --------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......... $19,193 $60,283 $157,931 $790,911 $ $ 790,911
Cost of
revenues........ 13,799 44,338 126,592 635,766 635,766
--------- --------- ------------- --------- ----------- -----------
Gross profit.... 5,394 15,945 31,339 155,145 155,145
Selling, general
and
administrative
expenses........ 1,272 7,163 27,015 117,463 (24,921) 92,542
Intangible asset
amortization.... 8,662 8,662
--------- --------- ------------- --------- ----------- -----------
Operating income
(loss)......... 4,122 8,782 4,324 37,682 16,259 53,941
Other (income)
expense:
Interest
expense........ 654 2,984 2,984
Interest
income......... (113) (1,296) (359) (4,786) 872 (3,914)
Minority
Interest....... 848 848
Other, net...... (43) (717) (3,109) (3,109)
--------- --------- ------------- --------- ----------- -----------
Income (loss)
before provision
for income
taxes........... 4,278 10,078 4,746 41,745 15,387 57,132
Provision for
income taxes.... 873 6,314 19,644 25,958
--------- --------- ------------- --------- ----------- -----------
Net income
(loss).......... $ 4,278 $10,078 $ 3,873 $ 35,431 $(4,257) $ 31,174
========= ========= ============= ========= =========== ===========
Net income per
share--Basic.... $ 1.12
===========
Net income per
share--Diluted.. $ 1.10
===========
Weighted average
shares
outstanding--
Basic (Note 4).. 27,879,034
===========
Weighted average
shares
outstanding--
Diluted
(Note 4)........ 28,255,014
===========
</TABLE>
F-41
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST QUARTER 1998 ACQUISITIONS
------------------------------------------------------------------------------------------
SKC TOWN &
CONSOLIDATION SERVICE ELECTRIC GARFIELD RIVIERA TRI-CITY COUNTRY WILSON WALKER
CAPITAL MANAGEMENT & AND INDECON ELECTRIC ELECTRICAL ELECTRIC ELECTRIC ENGINEERING
CORPORATION USA, INC. AFFILIATE COMBINED CONSTRUCTION CONSTRACTORS CO. CO. INC.
<S> ------------- ---------- --------- ----------- ------------ ------------ -------- -------- -----------
Revenues......... $30,714 $5,197 $3,852 $5,329 $7,642 $14,753 $10,900 $18,311 $30,133
Cost of
revenues........ 25,636 4,285 3,119 3,698 6,631 11,713 8,786 15,336 25,693
--------- ------ ------ ------ ------ ------- ------- ------- -------
Gross profit.... 5,078 912 733 1,631 1,011 3,040 2,114 2,975 4,440
Selling, general
and
administrative
expenses........ 4,285 753 1,005 1,260 650 1,989 1,920 2,093 1,551
Intangible asset
amortization....
--------- ------ ------ ------ ------ ------- ------- ------- -------
Operating income
(loss)......... 793 159 (272) 371 361 1,051 194 882 2,889
Other (income)
expense:
Interest
expense........ 588 42 19 24 9 55
Interest
income......... (131) (42) (45)
Minority
interest....... 181
Other, net...... (1,170) 9 (42) 14 (54) (90)
--------- ------ ------ ------ ------ ------- ------- ------- -------
Income (loss)
before provision
for income
taxes........... 1,325 159 (272) 362 361 1,060 224 963 2,879
Provision for
income taxes.... 422 18 145 399 227
--------- ------ ------ ------ ------ ------- ------- ------- -------
Net income
(loss).......... $ 903 $ 141 $ (272) $ 217 $ 361 $ 661 $ 224 $ 736 $ 2,879
========= ====== ====== ====== ====== ======= ======= ======= =======
Net income per
share--Basic.... 0.31
=========
Net income per
share--Diluted.. 0.28
=========
Weighted average
shares
outstanding--
Basic (Note 4).. 2,942,137
=========
Weighted average
shares
outstanding--
Diluted (Note
4).............. 3,251,586
=========
<CAPTION>
SUBSEQUENT ACQUISITIONS
-------------------------------
TAYLOR REGENCY COMBINED PRO FORMA PRO FORMA
ELECTRIC ELECTRIC INSIGNIFICANT TOTAL ADJUSTMENTS COMBINED
-------- -------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......... $4,071 $12,465 $36,012 $179,379 $ $ 179,379
Cost of
revenues........ 3,288 9,003 29,601 146,789 146,789
-------- -------- ------------- --------- ----------- -----------
Gross profit.... 783 3,462 6,411 32,590 32,590
Selling, general
and
administrative
expenses........ 278 1,050 5,651 22,485 (1,381) 21,104
Intangible asset
amortization.... 2,165 2,165
-------- -------- ------------- --------- ----------- -----------
Operating income
(loss)......... 505 2,412 760 10,105 (784) 9,321
Other (income)
expense:
Interest
expense........ 587 120 1,444 1,444
Interest
income......... (14) (60) (292) (292)
Minority
interest....... 181 181
Other, net...... 2 (17) (1,348) (1,348)
-------- -------- ------------- --------- ----------- -----------
Income (loss)
before provision
for income
taxes........... 517 1,825 717 10,120 (784) 9,336
Provision for
income taxes.... 61 1,272 3,238 4,510
-------- -------- ------------- --------- ----------- -----------
Net income
(loss).......... $ 517 $ 1,825 $ 656 $ 8,848 $(4,022) $ 4,826
======== ======== ============= ========= =========== ===========
Net income per
share--Basic.... $ 0.18
===========
Net income per
share--Diluted.. $ 0.18
===========
Weighted average
shares
outstanding--
Basic (Note 4).. 26,663,052
===========
Weighted average
shares
outstanding--
Diluted (Note
4).............. 26,972,501
===========
</TABLE>
F-42
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SUBSEQUENT ACQUISITIONS
CONSOLIDATION FIRST -------------------------------
CAPITAL QUARTER 1998 TAYLOR REGENCY COMBINED PRO FORMA PRO FORMA
CORPORATION ACQUISITIONS ELECTRIC ELECTRIC INSIGNIFICANT TOTAL ADJUSTMENTS COMBINED
------------- ------------ -------- -------- ------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 70,230 $65,313 $4,782 $20,451 $45,350 $206,126 $ $ 206,126
Cost of revenues........ 56,159 55,830 4,099 15,384 37,349 168,821 168,821
---------- ------- ------ ------- ------- -------- ------- ----------
Gross profit........... 14,071 9,483 683 5,067 8,001 37,305 37,305
Selling, general and
administrative
expenses............... 10,562 8,185 297 1,131 4,646 24,821 (1,093) 23,728
Intangible asset
amortization........... 324 172 496 1,669 2,165
---------- ------- ------ ------- ------- -------- ------- ----------
Operating income....... 3,185 1,298 386 3,936 3,183 11,988 (576) 11,412
Other (income) expense:
Interest expense....... 457 98 526 739 1,820 (675) 1,145
Interest income........ (7,001) (65) (31) (21) (7,118) 2,853 (4,265)
Minority interest...... 767 767 767
Other, net............. (1,922) (29) 17 (263) (2,197) (2,197)
---------- ------- ------ ------- ------- -------- ------- ----------
Income before provision
for income taxes....... 10,884 1,294 400 3,410 2,728 18,716 (2,754) 15,962
Provision for income
taxes.................. 4,508 497 5,005 1,979 6,984
---------- ------- ------ ------- ------- -------- ------- ----------
Net income.............. $ 6,376 $ 1,294 $ 400 $ 3,410 $ 2,231 $ 13,711 $(4,733) $ 8,978
========== ======= ====== ======= ======= ======== ======= ==========
Net income per share--
Basic.................. $ 0.18 $ 0.21
========== ==========
Net income per share--
Diluted................ $ 0.18 $ 0.20
========== ==========
Weighted average shares
outstanding--Basic
(Note 4)............... 34,533,373 42,591,763
========== ==========
Weighted average shares
outstanding--Diluted
(Note 4)............... 35,820,461 43,878,851
========== ==========
</TABLE>
F-43
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--GENERAL
During the first quarter ended March 31, 1998, Consolidation Capital
Corporation (the "Company") acquired Service Management USA, Tri-City
Electrical Contractors, Inc., Garfield Electric Company, Indecon, Inc.,
Riviera Electric Construction Co., SKC Electric, Inc., Town & Country
Electric, Inc., Wilson Electric Company, Inc. and Walker Engineering Inc.
("First Quarter 1998 Acquisitions"), in business combinations accounted for
under the purchase method of accounting. Since March 31, 1998 the Company has
acquired the Subsequent Acquisitions.
The Unaudited Pro Forma Combined Balance Sheet gives effect to the
Subsequent Acquisitions as if they had been consummated on March 31, 1998.
The Unaudited Pro Forma Combined Statements of Operations give effect to the
First Quarter 1998 Acquisitions and the Subsequent Acquisitions as if they had
been consummated as of January 1, 1997.
NOTE 2--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The unaudited pro forma combined balance sheet reflects the following
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
-------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $(70,378) $(32,693) $(15,032) $(1,327) $(119,430)
Marketable securities..... (3,918) (3,918)
Prepaid and other current
assets................... (8) (8)
-------- -------- -------- ------- ---------
Total current assets...... (70,378) (32,693) (18,958) (1,327) (123,356)
Property and equipment,
net....................... (3,280) (3,280)
Intangible assets, net..... 145,337 145,337
-------- -------- -------- ------- ---------
Total assets.............. $ 74,959 $(32,693) $(22,238) $(1,327) $ 18,701
======== ======== ======== ======= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities, long-
term debt ............... $ (1,520) $ (1,520)
Accounts payable.......... $ (14) (14)
-------- -------- -------- ------- ---------
Total current
liabilities ............. (1,520) (14) (1,534)
Long-term debt, less
current maturities........ (22,106) (22,106)
Notes payable.............. (9,067) (9,067)
-------- -------- -------- ------- ---------
Total liabilities......... (32,693) (14) (32,707)
-------- -------- -------- ------- ---------
Stockholders' equity.......
Common Stock.............. $ (470) (470)
Additional paid-in
capital.................. 80,416 80,416
Treasury stock............ 8,372 8,372
Retained earnings......... (13,359) (22,224) (1,327) (36,910)
-------- -------- -------- ------- ---------
Total stockholders'
equity................... 74,959 (22,224) (1,327) 51,408
-------- -------- -------- ------- ---------
Total liabilities and
stockholders' equity..... $ 74,959 $(32,693) $(22,238) $(1,327) $ 18,701
======== ======== ======== ======= =========
</TABLE>
- --------
(A) Gives effect to the purchase of the Subsequent Acquisitions for
consideration of approximately $67,798 in cash (excluding related
professional fees) and 4,516,886 shares of common stock resulting in
excess purchase price over the fair value of net assets acquired of
$145,337. Such allocations are preliminary in nature, pending the outcome
of a detailed analysis being performed by the Company of the assets and
liabilities acquired. For purposes of computing the estimated purchase
price for business combinations accounted for under the purchase method of
accounting, the value of the shares was determined in consideration of
restrictions on the transferability of the shares issued. The shares
generally will be subject to the following restrictions on resale: up to
one-third of the shares may be resold beginning twelve months after their
date of acquisition, the first one-third and an additional one-third may
be resold beginning eighteen months after their date of acquisition and
the first two-thirds and the remaining one-third may be resold beginning
twenty-four months after their date of acquisition.
(B) Reflects the use of cash to pay debt assumed in the acquisition of USS.
(C) Adjustment to reflect the distribution of S-corporation earnings
distributed subsequent to March 31, 1998 and certain property not acquired
in connection with the Regency acquisition.
(D) Adjustment to reflect the distribution of S-corporation earnings
distributed subsequent to March 31, 1998 in connection with the National
Network acquisition.
F-44
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The unaudited pro forma combined statements of operations reflect the
following adjustments:
For the year ended December 31, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
-------- ------- ------- ----- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative
expenses............... $(24,190) $(3,291) $ 2,560 $(24,921)
Intangible asset
amortization........... $ 8,662 8,662
-------- ------- ------- ----- ------- -------- --------
Operating income
(loss)............... 24,190 (8,662) 3,291 (2,560) 16,259
Other (income) expense:
Interest expense......
Interest income....... $ 872 872
Other, net............
-------- ------- ------- ----- ------- -------- --------
Income (loss) before
provision for income
taxes.................. 24,190 (8,662) 3,291 (872) (2,560) 15,387
Provision for income
taxes.................. $ 19,644 19,644
-------- ------- ------- ----- ------- -------- --------
Net income (loss)....... $ 24,190 $(8,662) $ 3,291 $(872) $(2,560) $(19,644) $ (4,257)
======== ======= ======= ===== ======= ======== ========
For the quarter ended March 31, 1997:
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
-------- ------- ------- ----- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative
expenses............... $ (2,021) $ 640 $ (1,381)
Intangible asset
amortization........... $ 2,165 2,165
-------- ------- ------- ----- ------- -------- --------
Operating income
(loss)............... 2,021 (2,165) (640) (784)
Other (income) expense:
Interest expense......
Interest income.......
Other, net............
-------- ------- ------- ----- ------- -------- --------
Income (loss) before
provision for income
taxes.................. 2,021 (2,165) (640) (784)
Provision for income
taxes.................. 3,238 3,238
-------- ------- ------- ----- ------- -------- --------
Net income (loss)....... $ 2,021 $(2,165) $ (640) $ (3,238) $ (4,022)
======== ======= ======= ===== ======= ======== ========
</TABLE>
F-45
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(CONTINUED)
For the quarter ended March 31, 1998:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
------- ------- ----- ------- --- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative
expenses............... $(1,093) $(1,093)
Intangible asset
amortization........... $ 1,669 1,669
------- ------- ----- ------- --- ------- -------
Operating income
(loss)............... 1,093 (1,669) (576)
Other (income) expense:
Interest expense...... $(675) (675)
Interest income....... $ 2,853 2,853
Other, net............
------- ------- ----- ------- --- ------- -------
Income (loss) before
provision for income
taxes.................. 1,093 (1,669) 675 (2,853) (2,754)
Provision for income
taxes.................. $ 1,979 1,979
------- ------- ----- ------- --- ------- -------
Net income (loss)....... $ 1,093 $(1,669) $ 675 $(2,853) $(1,979) $(4,733)
======= ======= ===== ======= === ======= =======
</TABLE>
- --------
(A) Reflects the modifications in salaries, bonuses and benefits to owners of
the First Quarter 1998 Acquisitions, the Subsequent Acquisitions to which
they have agreed prospectively.
(B) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the First Quarter 1998
Acquisitions and the Subsequent Acquisitions.
(C) Adjustment to eliminate expense recorded in connection with certain of the
First Quarter 1998 acquisitions' Employee Stock Ownership Plans for the
year ended December 31, 1997 and March 31, 1997. These plans were
converted to profit sharing plans as part of the acquisitions, and no
further contributions will be made. Adjustment for March 31, 1998 reflects
reduction in interest expense associated with debt paid in conjunction
with the acquisition of one of the Subsequent Acquisitions.
(D) Adjustment to eliminate interest income relating to the cash consideration
used in the acquisition of the First Quarter 1998 Acquisitions and the
Subsequent Acquisitions.
(E) Reflects an increase in general and administrative expenses associated
with Consolidation Capital Corporation's management and corporate
activities.
(F) Reflects the incremental provision for federal and state income taxes
assuming a combined federal and state statutory rate of approximately 40%
and the non-deductibility of certain goodwill amortization.
F-46
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--SHARES USED TO COMPUTE EARNINGS PER SHARE
The weighted average shares outstanding used to calculate pro forma earnings
per share for the year ended December 31, 1997 and the three months ended
March 31, 1997 and 1998 are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1997:
Shares issued to the founding stockholder of the Company........... 2,300,000
Weighted average shares of the Company, including shares issued in
conjunction
with the initial public offering................................. 1,215,982
Shares issued in conjunction with the acquisition of the First
Quarter 1998 Acquisitions......................................... 5,088,049
Shares issued in conjunction with the Subsequent Acquisitions...... 7,353,714
Shares sold in the initial public offering consider outstanding to
fund the cash
consideration of the First Quarter 1998 Acquisitions and the Sub-
sequent Acquisitions............................................ 11,921,289
----------
Pro Forma weighted average shares outstanding--Basic............... 27,879,034
Dilution attributable to stock options and warrants................ 375,980
----------
Pro Forma weighted average shares outstanding--Diluted............. 28,255,014
==========
Three months ended March 31, 1997:
Shares issued to the founding stockholder of the Company........... 2,300,000
Shares issued in conjunction with the acquisition of the First
Quarter 1998 Acquisitions......................................... 5,088,049
Shares issued in conjunction with the Subsequent Acquisitions...... 7,353,714
Shares sold in the initial public offering consider outstanding to
fund the cash
consideration of the First Quarter 1998 Acquisitions and the Sub-
sequent Acquisitions............................................ 11,921,289
----------
Pro Forma weighted average shares outstanding--Basic............... 26,663,052
Dilution attributable to stock options and warrants................ 309,449
----------
Pro Forma weighted average shares outstanding--Diluted............. 26,972,501
==========
Three months ended March 31, 1998:
Outstanding shares of the Company, prior to First Quarter Pur-
chases............................................................ 30,150,000
Shares issued in conjunction with the First Quarter 1998 Acquisi-
tions............................................................. 5,088,049
Shares issued in conjunction with the Subsequent Acquisitions...... 7,353,714
----------
Pro Forma weighted average shares outstanding--Basic............... 42,591,763
Dilution attributable to stock options and warrants................ 1,287,088
----------
Pro forma weighted average shares outstanding--Diluted............. 43,878,851
==========
</TABLE>
F-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Service Management USA, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of Service
Management USA, Inc. and its affiliates (the "Company") at December 31, 1996
and 1997 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 19, 1998
F-48
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 425 $ 4
Marketable securities............................................ 36 128
Accounts receivable, net of an allowance for doubtful accounts of
$295 and $333, respectively..................................... 1,614 4,044
Other receivable................................................. 46 88
Related party receivable......................................... 169
Employee receivables............................................. 5 75
Prepaid expenses................................................. 92 59
------ ------
Total current assets......................................... 2,218 4,567
Property and equipment, net...................................... 1,159 2,333
Deposits......................................................... 26 27
Intangibles...................................................... 167 202
------ ------
Total assets................................................. $3,570 $7,129
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Bank line of credit.............................................. $ $1,250
Current maturities, long-term debt............................... 165 373
Current obligations, capital leases.............................. 43
Accounts payable................................................. 954 1,738
Accrued liabilities.............................................. 452 503
Federal payroll tax payable...................................... 341
Income taxes payable............................................. 19 53
------ ------
Total current liabilities.................................... 1,974 3,917
Long-term debt................................................... 94 730
Capital lease obligations........................................ 100
------ ------
Total liabilities............................................ 2,168 4,647
Commitments
Stockholder's equity:
Common stock, Service Management USA, Inc., $1 par value, 1,000
shares authorized, issued and outstanding..................... 1 1
Common stock, Diversified Management Services USA, Inc., no par
value, 200 shares authorized, issued and outstanding.......... 152 152
Interstate Building Services, LLC.............................. 27
Additional paid-in capital..................................... 110 110
Retained earnings.............................................. 1,139 2,192
------ ------
Total stockholder's equity................................... 1,402 2,482
------ ------
Total liabilities and stockholder's equity................... $3,570 $7,129
====== ======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-49
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenues........................................... $4,964 $12,074 $26,266
Cost of revenues................................... 3,650 8,735 19,856
------ ------- -------
Gross profit................................... 1,314 3,339 6,410
Selling, general and administrative expenses....... 617 2,169 3,832
------ ------- -------
Operating income............................... 697 1,170 2,578
Other (income) expense:
Interest expense................................. 2 4 53
Realized and unrealized (gains) losses on trading
securities...................................... 40 (64) 6
------ ------- -------
Income before income taxes......................... 655 1,230 2,519
Provision for state income taxes................... 19 52
------ ------- -------
Net income......................................... $ 655 $ 1,211 $ 2,467
====== ======= =======
Unaudited pro forma information (see Note 2):
Income before provision for income taxes......... $ 655 $ 1,230 $ 2,519
Provision for income taxes....................... 262 492 1,008
------ ------- -------
Pro forma net income............................. $ 393 $ 738 $ 1,511
====== ======= =======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-50
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN- RETAINED STOCKHOLDER'S
SERVICE DIVERSIFIED INTERSTATE LLC CAPITAL EARNINGS EQUITY
------- ----------- -------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ 1 $ 42 $ 316 $ 359
Net income............ 655 655
Dividends............. (186) (186)
--- ---- --- ---- ------- -------
Balance, December 31,
1995................... 1 42 785 828
Issuance of common
stock, Diversified
Management Services
USA, Inc............. 152 152
Capital contribution.. 68 68
Net income............ 1,211 1,211
Dividends............. (857) (857)
--- ---- --- ---- ------- -------
Balance, December 31,
1996................... 1 152 110 1,139 1,402
Capital contribution.. 27 27
Net income............ 2,467 2,467
Dividends............. (1,312) (1,312)
Distribution of cer-
tain equipment to
stockholder.......... (102) (102)
--- ---- --- ---- ------- -------
Balance, December 31,
1997 .................. $ 1 $152 $27 $110 $ 2,192 $ 2,482
=== ==== === ==== ======= =======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-51
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 655 $ 1,211 $ 2,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchases of marketable trading securities.......... (104) (173)
Proceeds from sale of marketable trading securi-
ties............................................... 175 74
Provision for doubtful accounts..................... 98 197 233
Depreciation and amortization....................... 24 245 709
Loss on write-off of assets......................... 21
Unrealized/realized (gain) loss of marketable
trading securities................................. 40 (64) 6
Changes in operating assets and liabilities:
Accounts receivable................................ (346) (1,224) (2,873)
Prepaid expenses and other current assets.......... (2) (129) (126)
Accounts payable and accrued liabilities........... 138 1,468 494
Income taxes payable............................... 19 34
----- ------- -------
Net cash provided by operating activities......... 607 1,815 845
----- ------- -------
Cash flow from investing activities:
Purchases of equipment.............................. (222) (1,017) (1,835)
Purchase of contract rights......................... (70)
----- ------- -------
Net cash used in investing activities............. (222) (1,017) (1,905)
----- ------- -------
Cash flow from financing activities:
Proceeds from bank line of credit................... 1,250
Principal payments on long-term debt................ (14) (76) (512)
Proceeds from long-term debt........................ 25 148 1,356
Payments on capital lease obligations............... (18) (143)
Proceeds from issuance of common stock.............. 152
Proceeds from stockholder contribution.............. 68
Dividends to stockholder............................ (186) (857) (1,312)
----- ------- -------
Net cash used in financing activities............. (175) (583) 639
----- ------- -------
Net increase (decrease) in cash and cash equivalents.. 210 215 (421)
Cash and cash equivalents, beginning of year.......... -- 210 425
----- ------- -------
Cash and cash equivalents, end of year................ $ 210 $ 425 $ 4
===== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2 $ 4 $
Supplemental disclosure of non-cash transactions:
Marketable securities exchanged for accounts
receivable......................................... $ 84
Capital lease obligations........................... $ 162
Purchase of net assets of Diversified for Note
Payable............................................ 175
Distribution of certain equipment to stockholder.... $ 102
Contribution of certain equipment................... 27
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-52
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION
Service Management USA, Inc., and its affiliated entities provide contract
facility management and janitorial services to commercial establishments
located throughout the United States.
The accompanying financial statements represent the financial position,
operating results and cash flows of Service Management USA, Inc., and its
subsidiary Interstate Building Services, LLC, and Diversified Management
Services USA, Inc., collectively "Service Management" or the "Company", which
have been presented on a combined basis due to common ownership and common
management. All intercompany activity and balances have been eliminated.
Service Management USA, Inc. was incorporated in October 1994. Prior to
incorporation, the entity was operated as a sole proprietorship. Diversified
Management Services USA, Inc. was incorporated in November 1996 via the
purchase of the net assets of an operating business. Interstate Building
Services, LLC was formed in October of 1997.
On February 6, 1998, all of the issued and outstanding common stock of
Service Management USA, Inc., Diversified Management Services USA, Inc. and
ownership interest in Interstate Building Services, LLC was acquired by
Consolidation Capital Corporation ("CCC") for $9,000 in cash and 142,857
shares of CCC common stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are performed.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the date
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are depreciated using straight-line and accelerated
methods over their estimated useful lives ranging from three to seven years.
Intangibles
Intangible assets consist of amounts allocated to customer contracts
purchased and are being amortized straight-line basis over a period of five
years, which is deemed to be the estimated period benefited. Accumulated
amortization was $6 and $45 at December 31, 1996 and 1997 respectively.
F-53
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable Securities
The Company's marketable securities consist of investments in certain
equities and mutual funds and are classified as trading. Accordingly, any
realized or unrealized gains and losses are recorded in the period incurred.
As of ended December 31, 1997, the net unrealized loss for these investments
was $5.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of short-term and long-term debt
approximates fair value as the interest rates approximate market rates for
debt with similar terms and average maturities.
Income Taxes
The Company has elected to be treated as a cash basis S-Corporation for
federal income tax purposes and accordingly, any liabilities for income taxes
are the direct responsibility of the stockholder. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements. The Company is subject to income and franchise taxes in certain
states, which has been appropriately reflected in the financial statements.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities primarily related to accounts
receivable and accounts payable. At December 31, 1997, the Company's net
assets for financial reporting purposes exceeds the tax basis by approximately
$2,453.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables
are not collateralized and, accordingly, the Company performs on-going credit
evaluations to reduce the risk of loss.
During 1996 revenues derived from one customer were approximately 45.0% of
total revenues. At December 31, 1996, the accounts receivable balance for this
customer was $469. During 1997 revenues derived from three customers were
approximately 17.5%, 14.3%, and 11.1%, respectively, of total revenues. At
December 31, 1997, the accounts receivable balances for these customers were
$1,178, $603 and $305, respectively.
F-54
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS OF PERIOD
---------- ---------- ------ ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995........ $ 0 $ 98 $ 0 $ 98
Year ended December 31, 1996........ $ 98 $197 $ 0 $295
Year ended December 31, 1997........ $295 $233 $(195) $333
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Cleaning equipment........................................... $1,096 $2,581
Automobiles.................................................. 230 356
Computer equipment........................................... 58 108
Office equipment............................................. 25 93
Furniture and fixtures....................................... 8 26
------ ------
1,417 3,164
Accumulated depreciation..................................... (258) (831)
------ ------
$1,159 $2,333
====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $24, $223 and $586, respectively.
NOTE 5--CREDIT FACILITIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Equipment term note, payable in monthly installments of $25
including interest at 7.7%, through January, 2001............ $ $ 809
Equipment term note, payable in monthly installments of $6
including interest at 7.7%, through December, 2000........... 187
Note payable, due in monthly installments of $13.............. 55
Notes payable, vehicles, various monthly payments including
interest at rates ranging from 8% to 18%, maturing at various
dates from December 1997 through 2001........................ 122 52
Note payable, issued in connection with the purchase of net
assets for Diversified Management Services USA, Inc., monthly
principal payments of $20 beginning December 1, 1996,
interest of 8%............................................... 137
Current maturities............................................ (165) (373)
----- -----
$ 94 $ 730
===== =====
</TABLE>
F-55
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--CREDIT FACILITIES (CONTINUED)
Principal payments required under long-term debt obligations are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 373
1999.................................................................. 345
2000.................................................................. 370
2001.................................................................. 15
------
$1,103
======
</TABLE>
Line of Credit
In April 1997, the Company obtained a revolving line of credit for
borrowings of up to $1,000. The line of credit, which expires on April 30,
1998, bears interest at LIBOR plus 2% (7.49% at December 31, 1997), and is
limited to 80% of eligible trade accounts receivable.
Additionally, in December 1997 an additional $250 facility was obtained with
a maturity of two months at an interest rate of LIBOR plus 2%. This line of
credit was paid in January, 1998.
Equipment Facility
In April 1997, the Company obtained an equipment facility which provides for
the Company to borrow up to $1,500 under term notes until April 30, 1998. As
of December 1997, approximately $1,000 had been utilized under this facility
to purchase equipment. These $1,000 term notes bear interest at 7.7% and
require 36 monthly installments of principal and interest of approximately
$31.
Both the line of credit and the equipment notes contain, among other
provisions, maintenance of certain financial covenants and ratios including
tangible net worth and cash flow coverage, restrictions on dividends and
indebtedness, and are collateralized by the majority of the Company's assets,
and are personally guaranteed by the stockholder and spouse. The Company was
in violation of certain debt covenants as of December 31, 1997 for which
appropriate waivers were obtained.
NOTE 6--COMMITMENTS
Lease Commitments
In January 1998, the Company began leasing its primary office facility from
a company owned by the Company's stockholder. The lease agreement requires
monthly payments of approximately $8, escalating 3.5% annually through 2002.
The Company also leases office space in various states on a month-to-month
basis. Rent expense under these lease arrangements for December 31, 1995, 1996
and 1997 were $16, $28 and $15, respectively.
Additionally, in November 30, 1996, the Company acquired approximately $162
of equipment under leases qualifying as capital in connection with the
purchase of Diversified Management Services USA, Inc. The balance on these
capital lease obligations were paid in full in fiscal 1997.
F-56
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--COMMITMENTS (CONTINUED)
Guarantee
The Company's stockholder has obtained a mortgage of $1,280 in connection
with the acquisition of a building. Service Management USA, Inc. is a
guarantor of this obligation. Under the terms of the transaction with CCC (see
Note 1), Service Management USA, Inc. was released from this guarantee.
NOTE 7--EMPLOYEE BENEFIT PLAN
In November 1997, the Company established a profit sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code. Virtually all
employees are eligible to participate in the plan. Employees can contribute up
to 15% of their gross salary to the plan, and the Company makes matching
contributions of up to 3%. The Company recorded matching contributions of $8
for the year ended December 31, 1997.
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Tri-City Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Tri-City
Electrical Contractors, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-City
Electrical Contractors, Inc. as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orlando, Florida
February 16, 1998
F-58
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,734,000 $ 1,333,571
Certificates of deposit............................ 46,101 --
Accounts receivable (note 2)....................... 13,423,658 16,873,473
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3)................. 1,116,186 2,401,919
Inventories........................................ 287,136 379,543
Prepaid expenses................................... 588,310 831,859
Deferred income taxes (note 6)..................... 443,972 --
Refundable income taxes............................ 1,276 658,698
------------ -----------
Total current assets............................... 18,640,639 22,479,063
------------ -----------
Property, plant and equipment, at cost (note 5):
Leasehold improvements............................. 1,012,292 1,098,838
Autos, trucks and trailers......................... 1,681,540 1,618,478
Office furniture and equipment..................... 1,932,148 2,543,219
Shop tools and equipment........................... 1,065,898 860,513
Capitalized equipment leases (notes 5 and 13)...... 712,596 705,758
------------ -----------
6,404,474 6,826,806
Less accumulated depreciation and amortization..... (3,841,367) (4,313,431)
------------ -----------
Net property, plant and equipment.................. 2,563,107 2,513,375
------------ -----------
Other assets:
Advances to stockholders (note 9).................. 550,768 607,168
Other ............................................. 66,141 230,553
Advances to joint venture partner (note 12)........ 60,000 --
------------ -----------
676,909 837,721
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (note 4)............................. $ 2,530 $ 30
Current maturities of long-term debt and
capitalized lease obligations
(note 5).......................................... 490,374 237,544
Accounts payable................................... 3,630,900 5,414,432
Accrued salaries and wages......................... 1,332,014 1,527,555
Accrued expenses................................... 1,708,451 1,406,199
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 3)................. 4,375,530 7,045,641
Due to stockholders................................ 155,253 --
------------ -----------
Total current liabilities.......................... 11,695,052 15,631,401
Long-term debt and capitalized lease obligations,
less current maturities (note 5)................... 556,139 252,238
Deferred income taxes (note 6)...................... 45,025 --
------------ -----------
Total liabilities.................................. 12,296,216 15,883,639
------------ -----------
Minority interest in joint ventures (note 12)....... 184,072 135,832
------------ -----------
Stockholders' equity:
Common stock, 10,000 shares authorized, issued and
outstanding, at $1 par value...................... 10,000 10,000
Additional paid-in capital......................... 111,827 111,827
Retained earnings.................................. 9,278,540 9,688,861
------------ -----------
Total stockholders' equity......................... 9,400,367 9,810,688
Commitments and contingencies (notes 7 and 9).......
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned............... $71,977,018 $63,852,151 $79,492,578
Cost of revenues earned................ 63,321,626 51,904,661 63,550,836
----------- ----------- -----------
Gross profit......................... 8,655,392 11,947,490 15,941,742
Selling, general and administrative
expenses.............................. 6,994,448 9,017,708 8,986,018
Depreciation expense................... 949,800 944,325 939,103
----------- ----------- -----------
Income from operations............... 711,144 1,985,457 6,016,621
----------- ----------- -----------
Other income (expense):
Interest income....................... 66,979 67,318 168,039
Interest expense...................... (223,389) (196,604) (52,983)
Other income (expense), net........... 477,561 (50,455) (25,576)
----------- ----------- -----------
Other income (expense), net.......... 321,151 (179,741) 89,480
----------- ----------- -----------
Income before income taxes........... 1,032,295 1,805,716 6,106,101
Income tax expense (note 6)............ 487,252 679,856 461,879
----------- ----------- -----------
Net income before minority interest.. 545,043 1,125,860 5,644,222
Minority interest in joint venture
income (note 12)...................... (71,419) (104,584) (134,535)
----------- ----------- -----------
Net income .......................... $ 473,624 $ 1,021,276 $ 5,509,687
=========== =========== ===========
Unaudited pro forma information (Note
1):
Income before income taxes............. $ 6,106,101
Pro forma provision for income taxes... 2,442,440
-----------
Pro forma net income (unaudited)....... $ 3,663,661
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995...... $10,000 $111,827 $ 7,783,640 $ 7,905,467
Net income....................... -- -- 473,624 473,624
------- -------- ----------- -----------
Balances at December 31, 1995.... 10,000 111,827 8,257,264 8,379,091
Net income....................... -- -- 1,021,276 1,021,276
------- -------- ----------- -----------
Balances at December 31, 1996.... 10,000 111,827 9,278,540 9,400,367
Net income....................... -- -- 5,509,687 5,509,687
Distributions to stockholders.... -- -- (5,099,366) (5,099,366)
------- -------- ----------- -----------
Balances at December 31, 1997.... $10,000 $111,827 $ 9,688,861 $ 9,810,688
======= ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 473,624 $ 1,021,276 $ 5,509,687
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss (gain) on sale of property, plant
and equipment......................... (47,561) (62,346) 29,982
Depreciation........................... 949,800 944,325 939,103
Deferred tax (benefit) expense......... (1,047,291) 6,132 461,879
Minority interest in net income........ 71,419 104,584 134,535
Cash provided by (used for) changes in:
Accounts receivable................... (48,982) 1,111,307 (3,449,815)
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................ 298,752 1,006,354 (1,285,733)
Inventories........................... 3,939 (53,420) (92,407)
Prepaid expenses...................... (38,111) (468,671) (243,549)
Refundable income taxes............... 488,931 (1,276) (657,422)
Due to (from) stockholders............ (55,907) 189,645 (211,653)
Other assets.......................... 180,633 338,065 (164,412)
Accounts payable...................... (857,493) (1,050,987) 1,783,532
Accrued expenses...................... 69,004 1,448,411 (169,644)
Income tax payable.................... 1,309,269 (1,309,269) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ (794,451) (31,711) 2,670,111
---------- ----------- -----------
Net cash provided by operating
activities........................... 955,575 3,192,419 5,254,194
---------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................. (1,296,299) (624,426) (959,179)
Redemption of certificate of deposit... 42,465 223,074 46,101
Proceeds from sale of property, plant
and equipment......................... 122,827 142,711 39,827
Repayment from (payments to) joint
venture partner....................... (50,000) -- (122,775)
---------- ----------- -----------
Net cash used in investing activi-
ties................................. (1,181,007) (258,641) (996,026)
---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on long-term debt.... (867,966) (1,781,913) (556,731)
Proceeds from equipment notes payable... 1,375,137 127,913 --
Proceeds from installment note payable.. -- 500,000 --
Proceeds from sale-leaseback back of as-
sets................................... -- 734,013 --
Proceeds from (repayment of)
notes payable.......................... 249,180 (1,081,500) (2,500)
Distributions to shareholders........... -- -- (5,099,366)
---------- ----------- ----------
Net cash provided by (used in)
financing activities................. 756,351 (1,501,487) (5,658,597)
---------- ----------- ----------
Net increase (decrease) in cash and
cash
equivalents.......................... 530,919 1,432,291 (1,400,429)
Cash and cash equivalents at beginning of
year.................................... 770,790 1,301,709 2,734,000
---------- ----------- ----------
Cash and cash equivalents at end of
year.................................... $1,301,709 $ 2,734,000 $1,333,571
========== =========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest.............................. $ 223,389 $ 196,604 $ 52,983
========== =========== ==========
Income taxes.......................... $ 225,274 $ 1,984,369 $ 720,355
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Tri-City Electrical Contractors, Inc. (the Company) is an electrical
contractor engaged in designing and installing electrical systems in the
commercial, industrial and residential construction markets. The Company is
headquartered in Altamonte Springs, Florida and operates branch locations in
Pompano Beach, Tampa and Fort Myers, Florida. The Company conducts all of its
business within the state of Florida.
As further described in Note 14, the Company entered into a Letter of Intent
with Consolidation Capital Corporation for the potential sale of the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
B&S Diversified, Inc. and B&S Diversified, Inc. #2. B&S Diversified, Inc. and
B&S Diversified, Inc. #2 are joint ventures in which the Company has a 75%
interest as to profits and losses. All significant intercompany transactions
between the entities have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both
readily convertible into known amounts of cash and are so near their maturity
that they present insignificant risk of changes in value because of changes in
interest rates. For purposes of the statement of cash flows, the Company
considers such investments with a maturity of three months or less to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
(e) Income Taxes
Until December 31, 1996, the Company followed the asset and liability method
in which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Effective January 1, 1997, the Company's stockholders elected to be taxed
under the provisions of sub-chapter S of the Internal Revenue Code. Under
these provisions, the stockholders will include in their individual income tax
returns their pro rata shares of the Company's revenue and expenses.
The unaudited pro forma federal and state income tax information included in
the Statements of Operations is presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", as if
the Company had been subject to federal and state income taxes as a C
corporation rather than under the provisions of a sub-chapter S corporation
for 1997.
(f) Contract Revenue Recognition and Contract Costs
Contract revenues are recognized on the percentage-of-completion method.
Under this method, the percentage of completion of each job is the portion of
the costs incurred to date compared to current estimates of total cost. This
percentage is applied to the total contract price to determine the amounts of
revenue earned on fixed price contracts. Revenues from cost plus contracts are
recognized on the basis of costs incurred during the period plus the fee
earned. At the time a loss on a contract becomes known, the entire amount of
the estimated loss is recorded. The Company does not recognize any gross
profit amounts related to change order work performed until such time as those
change orders have been approved by the customer.
F-64
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Contract costs include all direct and indirect costs related to job
performance. Selling, general and administrative costs are charged to expense
as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents contract billings in excess of revenues
recognized.
(g) Depreciation and Amortization
Depreciation and amortization is provided in amounts sufficient to allocate
the cost of depreciable or amortizable assets to operations over their
estimated service lives using the straight-line method for financial statement
reporting purposes. The straight-line, declining balance, Accelerated Cost
Recovery System and Modified Accelerated Cost Recovery System methods are used
for income tax reporting.
The estimated service lives for financial reporting purposes are generally
as follows:
<TABLE>
<S> <C>
Leasehold improvements......................................... 3-15 years
Autos, trucks and trailers..................................... 5 years
Office furniture and equipment................................. 3-10 years
Shop tools and equipment....................................... 5 years
</TABLE>
(h) Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform with the 1997 presentation.
(i) Significant Group Concentration of Credit Risk
As of December 31, 1997 and 1996, substantially all of the Company's
receivables are obligations of companies in the construction business. The
Company does not require collateral or other security on most of these
accounts. The credit risk on these accounts is controlled through credit
approvals, lien rights and payment bonds issued on behalf of general
contractors, limits and monitoring procedures.
(j) Use of Estimates
In conformity with generally accepted accounting principles, management of
the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of these consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates (see note 3).
(k) Financial Instruments
BALANCE SHEET FINANCIAL INSTRUMENTS--The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, certificates of
deposit, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for the Company's
notes payable and long-term debt approximate fair value because the
instruments are variable rate notes which reprice frequently.
F-65
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(2) ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts including retentions........... $ 1,329,411 $ 1,356,146
Contracts in progress:
Current billings................................. 8,325,388 10,649,975
Retentions....................................... 3,681,338 5,069,366
Other.............................................. 97,621 162,399
----------- -----------
13,433,758 17,237,886
Less allowance for doubtful accounts............... (10,100) (364,413)
----------- -----------
$13,423,658 $16,873,473
=========== ===========
</TABLE>
The provisions for doubtful accounts of $113,100, $10,000 and $354,313 have
been included in selling, general and administrative expenses in the
accompanying consolidated 1995, 1996 and 1997 statements of operations,
respectively.
(3) CONTRACTS IN PROGRESS
Contracts in progress are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $71,670,443 $73,320,138
Estimated earnings................................. 9,327,198 11,651,629
----------- -----------
80,997,641 84,971,767
Less billings to date.............................. 84,256,985 89,615,489
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
F-66
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) CONTRACTS IN PROGRESS--(CONTINUED)
Included in the consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 1,116,186 $ 2,401,919
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (4,375,530) (7,045,641)
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
As of December 31, 1995, 1996 and 1997, the Company had unapproved change
orders of approximately $3,284,000, $3,162,000 and $3,163,000, respectively,
which are recorded without profit recognition as a component of contract
revenue in the accompanying consolidated statements of operations.
(4) NOTES PAYABLE
The Company has lines of credit arrangements with two banks under which it
may borrow, on an unsecured basis, up to an aggregate of $3,000,000 as of
December 31, 1997, with interest that approximates the banks' prime rate (8
1/2% at December 31, 1997). As of December 31, 1997, the Company also has a
line of credit arrangement with one bank under which it can borrow up to an
additional $1,000,000 with interest that approximates the bank's prime rate
plus 1% (8 1/2% at December 31, 1997, the total balances outstanding under
these lines of credit were $2,530 and $30 at December 31, 1996 and 1997,
respectively.
These note agreements each contain a provision restricting the payment of
dividends and transfer of ownership of the Company without the prior written
consent of the lenders. Written consent of the lenders was obtained by the
Company subsequent to December 31, 1997.
(5) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt and capitalized lease obligations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
---------- --------
<S> <C> <C>
Capitalized equipment lease obligations, related to
certain vehicles and equipment, payable in 26 to 51
equal monthly principal installments plus interest at
the commercial paper rate plus .9% maturing on
various dates through February, 2001................. $ 734,013 $489,782
Installment note payable to a bank with original
balance of $500,000 payable in 24 equal monthly
installments of $20,833 with interest at bank's prime
rate plus 1/2% (8 1/4% at December 31, 1996). The
balance of the note payable was repaid during 1997... 312,500 --
---------- --------
1,046,513 489,782
Less current maturities.............................. 490,374 237,544
---------- --------
$ 556,139 $252,238
========== ========
</TABLE>
F-67
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS--(CONTINUED)
Maturities of and capitalized lease obligations for years ending after
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $237,932
1999................................................................ 198,097
2000................................................................ 51,910
2001................................................................ 1,843
--------
$489,782
========
</TABLE>
(6) INCOME TAXES
The provision for income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
----------- -------- --------
<S> <C> <C> <C>
CURRENT:
Federal.................................... $ 1,310,717 $575,502 $ --
State...................................... 223,826 98,222 --
----------- -------- --------
1,534,543 673,724 --
----------- -------- --------
DEFERRED:
Federal.................................... (891,740) 5,235 415,690
State...................................... (155,551) 897 46,189
----------- -------- --------
(1,047,291) 6,132 461,879
----------- -------- --------
Total income tax expense..................... $ 487,252 $679,856 $461,879
=========== ======== ========
</TABLE>
The tax effect of temporary differences between the income tax basis of
assets and liabilities and the financial statement reporting amounts which
result in the recognition of deferred tax assets and liabilities as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Deferred tax assets:
Bad debts................................................ $ 3,434
Accrued losses on long-term construction contracts....... 503
Workers' compensation self insurance reserves............ 380,387
Deferred compensation.................................... 128,727
Reserve for loss contracts............................... 84,520
Tax reported asset sale-gains............................ 8,059
---------
Total deferred tax assets.............................. 605,630
---------
Deferred tax liabilities:
Deferred profit on contracts............................. (153,599)
Depreciation............................................. (19,362)
Other.................................................... (33,722)
---------
Total deferred tax liabilities......................... (206,683)
---------
Net deferred tax assets................................ $ 398,947
=========
</TABLE>
F-68
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES--(CONTINUED)
Presented in the accompanying consolidated balance sheet as of December 31,
1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Current assets............................................ $443,972
Noncurrent liabilities.................................... (45,025)
--------
$398,947
========
</TABLE>
No valuation allowance has been recognized in the accompanying consolidated
financial statements for the deferred tax assets as of December 31, 1996 or
1995 because the Company has sufficient taxable income within the statutory
carryback periods.
Effective January 1, 1997, the Company elected, by consent of its
stockholders, to be taxed under the provisions of subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal or
state corporate income taxes on its taxable income. Instead, the stockholders
include in their individual income tax return the Company's taxable income or
loss.
The Company incurred an income tax liability associated with built-in gains
at the time of the conversion to "S" corporation status. Built-in gains
represent the excess of the fair market value of the S corporation's assets at
the effective date of the S corporation election over the aggregate adjusted
tax basis of those assets at that date. Taxes associated with the built-in
gains were charged to operations during the year ended December 31, 1997.
The balances of deferred tax assets and liabilities as of December 31, 1996,
net of the tax associated with the built-in gains referred to above, were also
charged to operations during the year ended December 31, 1997 resulting in the
1997 provision for income taxes.
The actual expense for 1995 and 1996 differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
income before income taxes) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Computer "expected" tax expense........................ $350,980 $613,978
Nondeductible expenses................................. 17,309 39,867
State income taxes, net of federal tax effect.......... 45,062 63,291
Settlement of investment in partnerships at amounts
different than accrued................................ 86,220 --
Computed taxes attributable to minority interest
portion of income before taxes........................ (24,282) (35,559)
Other, net............................................. 11,963 (1,721)
-------- --------
$487,252 $679,856
======== ========
</TABLE>
(7) LEASES
The Company leases their Pompano Beach and Fort Myers facilities from third
parties. The remainder of the facilities are leased from a related party, as
more fully described in note 9. These leases have been classified as operating
leases.
F-69
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) LEASES--(CONTINUED)
The Company also leases a portion of their fleet vehicles for a period of
five years from acquisition of the vehicles. These leases are cancelable after
one year and, accordingly, are classified as operating leases.
The following is a schedule of future minimum lease payments required under
operating leases, including those with related parties as more fully described
in note 9, that have initial or remaining noncancelable lease terms in excess
of one year at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $863,214
1999.............................................................. 523,419
2000.............................................................. 410,068
2001.............................................................. 269,205
2002 and thereafter............................................... 83,487
----------
$2,149,393
==========
</TABLE>
Rental expense for operating leases was $474,668, $683,594 and $902,239 for
the years ended December 31, 1995, 1996 and 1997, respectively.
(8) 401(K) EMPLOYEES' PROFIT SHARING PLAN
The Company has a 401(K) profit sharing plan under which voluntary employee
contributions are permissible from eligible employees who elect to participate
in the plan. The Company's contribution is determined annually by the Board of
Directors. Contributions made by the Company were $23,263, $104,888 and
$116,768 for the years ended December 31, 1995, 1996, and 1997, respectively.
(9) RELATED PARTY TRANSACTIONS
The Company leases its Altamonte Springs and Tampa facilities from its
principal shareholder. The Altamonte Springs lease agreement requires base
monthly payments of $30,509. For each year after the first year, the lease
payment will be upwardly adjusted by the greater of the increase in the
Consumer Price Index or three percent. The lease requires the Company to
provide insurance, repairs and maintenance, and taxes on the leased property.
The lease expires in 1998. The Tampa lease agreement requires monthly payments
of $3,000 and expires in 1999.
The Company is guarantor of two loans in the name of the principal
stockholder to finance the Company's Altamonte Springs and Tampa facilities.
The total amount borrowed under the two loan agreements was $1,274,000. The
principal amounts of the loans outstanding at December 31, 1996 and 1997 were
$823,600 and $732,150, respectively.
Amounts due from a trust in the name of its principal stockholder at
December 31, 1996 and 1997, were $550,768 and $607,168, respectively. These
amounts are included in advances from stockholders on the accompanying
consolidated balance sheets and arise from the Company paying expenses on
behalf of the trust.
F-70
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) BACKLOG
The following is a reconciliation of backlog work to be performed under
signed contracts in existence at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
(MILLIONS)
----------
<S> <C>
Balance, December 31, 1996........................................ $ 37.0
Contract adjustments and new contracts............................ 117.1
Less: Contract revenue earned, 1997............................... 79.5
------
Balance, December 31, 1997........................................ $ 74.6
======
</TABLE>
In addition, between January 1 and January 31, 1998, the Company entered
into additional contracts totaling approximately $8.3 million.
(11) ENVIRONMENTAL REMEDIATION
During 1993, the Company incurred costs for remediation in connection with
efforts to clean up a petroleum product contamination at its Altamonte
Springs, Florida facilities. The Company applied for and received approval for
reimbursement of $302,890 under the Florida Petroleum Liability Insurance and
Restoration program. As of December 31, 1996 and 1997, $222,299 of the total
approved reimbursement has been collected and $80,591 remains outstanding and
is included in accounts receivable in the accompanying consolidated balance
sheet.
(12) MINORITY INTEREST
The Company is party to two joint ventures with B&S Diversified, Inc., in
connection with two specified contracts. The venture agreements provide for
sharing of profits at 75% to the Company and 25% to the joint venture partner.
All transactions related to the ventures have been consolidated in the
accompanying consolidated financial statements and all significant
intercompany balances have been eliminated.
(13) SALE-LEASEBACK TRANSACTIONS
On December 31, 1996 the Company completed a transaction wherein seventy-
five of the vehicles the Company had owned with a net book value of $712,596
at the date of the transaction, were sold to a leasing company for the sum of
$734,013 resulting in a gain of $21,417.
The Company immediately entered into individual lease agreements for each of
the vehicles with terms ranging from twenty-six to fifty-one months and with
interest accruing at .9% over the commercial paper rate (5.8% at December 31,
1997) payable monthly on the outstanding unamortized cost of the leased asset.
The gain realized on the transaction is to be amortized over the respective
lease terms for each of the individual vehicles.
(14) SUBSEQUENT EVENT
Subsequent to December 31, 1997, the stockholders of the Company entered
into an agreement to sell their shares of the Company to Consolidation Capital
Corporation ("CCC"), a public company, for cash and shares of CCC common
stock. Simultaneous with the transaction, the Company will become a C-
corporation and its income will be taxed at the corporate level (as it was in
1996 and prior years) rather than be included in the income tax returns of the
stockholders.
F-71
<PAGE>
To the Board of Directors and Stockholders of Wilson Electric Company, Inc.
We have audited the accompanying balance sheet of Wilson Electric Company,
Inc. as of November 30, 1995, 1996 and 1997, and the related statements of
income and retained earnings, and cash flows for each of the three years in
the period ended November 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilson Electric Company,
Inc. as of November 30, 1995, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended November
30, 1997, in conformity with generally accepted accounting principles.
Barry and Moore, P.C.
Phoenix, Arizona
January 30, 1998
F-72
<PAGE>
WILSON ELECTRIC COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------------- FEBRUARY
1995 1996 1997 28, 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................... $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 20,193
Contracts receivable
(Notes 3 and 5)......... 8,542,419 11,308,641 14,085,329 11,665,106
Costs and estimated earn-
ings in excess of bill-
ings on
uncompleted contracts
(Note 4)................ 565,702 1,225,288 1,301,651 2,916,870
Notes receivable......... 37,975 -- 59,824 57,410
Deferred income taxes
(Note 11)............... -- -- 115,760 115,760
Prepaid expenses and
other current assets.... 13,579 105,835 57,866 242,137
----------- ----------- ----------- -----------
Total current assets... 10,917,627 16,025,230 16,662,215 15,017,476
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
(Note 5)
Equipment................ 161,328 223,263 340,632 376,251
Automobiles & trucks..... 474,589 521,007 564,579 566,054
Office equipment......... 60,834 97,093 126,525 154,512
Furniture................ 7,904 16,318 23,630 23,630
Computer equipment &
software................ 130,015 138,923 415,226 445,590
Leasehold Improvements... -- -- 15,090 --
----------- ----------- ----------- -----------
834,670 996,604 1,485,682 1,566,037
Less accumulated depre-
ciation............... (430,028) (562,403) (781,312) (851,119)
----------- ----------- ----------- -----------
Property and equipment,
net................... 404,642 434,201 704,370 714,918
SHW JOINT VENTURE, (Note
10)....................... 468,408 422,641 -- --
OTHER ASSETS............... 19,651 23,227 136,160 977,346
GOODWILL, (net of $13,500,
$10,500 and $7,500 of am-
ortization) (Note 9)...... 16,500 13,500 10,500 9,750
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......... $ 2,242,295 $ 4,875,340 $ 4,588,823 $ 3,936,028
Billings in excess of
costs and estimated
earnings on
uncompleted contracts
(Note 4)................ 2,312,092 3,211,141 3,401,706 2,320,983
Accrued liabilities...... 292,637 468,575 428,838 463,965
Accrued payroll and re-
lated taxes............. 2,785,396 2,348,590 2,914,098 1,868,262
Accrued contribution to
Employee Stock Ownership
Plan (Note 6)........... 665,410 1,358,147 536,299 1,558,757
Note Payable ((Notes 5
and 6).................. -- -- 183,333 1,100,000
Employee Stock Ownership
Plan note payable (Note
6)...................... 149,625 2,000,000 -- --
Less--Accrued
contribution included
above................. (149,625) (1,358,147) -- --
----------- ----------- ----------- -----------
Total current
liabilities......... 8,297,830 12,903,646 12,053,097 11,247,995
----------- ----------- ----------- -----------
COMMITMENTS (Notes 5 and
7)........................ -- -- --
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par
value; authorized
1,000,000 shares, issued
and outstanding 10,000.. 10,000 10,000 10,000 10,000
Additional paid-in capi-
tal..................... 265,950 265,950 265,950 265,950
Retained earnings........ 3,253,048 4,381,056 5,184,198 5,195,545
Employee Stock Ownership
Plan note payable (Note
6)...................... (149,625) (2,000,000) -- --
Accrued contribution in-
cluded in current lia-
bilities................ 149,625 1,358,147 -- --
----------- ----------- ----------- -----------
Total stockholders'
equity.............. 3,528,998 4,015,153 5,460,148 5,471,495
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-73
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED FEBRUARY 28,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES....... $ 40,279,206 $ 49,790,214 $ 71,008,958 $ 15,436,341 $ 17,243,732
COST OF CONTRACT
REVENUES............... (29,935,382) (37,729,341) (59,036,426) (12,719,276) (14,568,353)
------------ ------------ ------------ ------------ ------------
GROSS PROFIT............ 10,343,824 12,060,873 11,972,532 2,717,065 2,675,379
------------ ------------ ------------ ------------ ------------
EXPENSES:
General and
administrative
expenses ............ 6,317,716 7,281,252 8,093,230 1,385,359 1,654,772
ESOP contribution
(Note 6)............. 1,981,828 2,957,797 2,421,164 656,114 1,014,546
------------ ------------ ------------ ------------ ------------
Total expenses...... 8,299,544 10,239,049 10,514,394 2,041,473 2,669,318
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS.. 2,044,280 1,821,824 1,458,138 675,592 6,061
OTHER INCOME (EXPENSE):
Interest income....... 20,919 89,593 157,634 96,703 90,040
Interest expense...... (4,439) (82,404) (109,581) (38,952) (13,122)
Other income
(expense)............ 6,235 101,820 (78,548) 36,558 17,143
------------ ------------ ------------ ------------ ------------
Net other income
(expense).......... 22,715 109,009 (30,495) 94,309 94,061
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES.................. 2,066,995 1,930,833 1,427,643 769,901 100,122
PROVISION FOR INCOME
TAXES (Note 11)........ (811,730) (802,825) (624,501) (212,500) (88,775)
------------ ------------ ------------ ------------ ------------
NET INCOME.............. 1,255,265 1,128,008 803,142 557,401 11,347
RETAINED EARNINGS,
Beginning of year...... 1,997,783 3,253,048 4,381,056 4,381,056 5,184,198
------------ ------------ ------------ ------------ ------------
RETAINED EARNINGS, End
of year................ $ 3,253,048 $ 4,381,056 $ 5,184,198 4,938,457 5,195,545
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED FEBRUARY 28,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........... $ 1,255,265 $ 1,128,008 $ 803,142 $ 557,401 $ 11,347
----------- ----------- ----------- ----------- -----------
Adjustments to
reconcile net income
to net cash provided
by (used for)
operations--
Depreciation and
amortization...... 104,364 154,621 232,324 42,944 71,307
(Gain) Loss on sale
of assets......... 12,780 (1,447) 2,255 -- --
SHW Joint Venture
(income) loss..... -- (96,733) 80,641 -- --
(Increase) decrease
in:
Contracts
receivable........ (1,108,920) (2,766,221) (2,776,688) 65,155 2,420,223
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts......... 64,168 (659,586) (76,363) (289,265) (1,615,219)
Notes receivable... 14,275 37,975 (59,824) (50,000) 2,414
Prepaid expenses... 20,695 (92,256) 47,969 93,449 (184,271)
Other assets....... (5,325) (3,651) (113,008) (496,352) (841,186)
Deferred Income
Taxes............. -- -- (115,760) -- --
Increase (decrease)
in:
Accounts payable... (933,811) 2,633,045 (286,517) (122,397) (652,795)
Billings in excess
of costs and
estimated earnings
on uncompleted
contracts......... 1,403,358 899,049 190,565 336,567 (1,080,723)
Accrued
liabilities....... (180,580) 175,938 (39,737) 14,076 35,127
Accrued payroll and
related taxes..... 1,149,901 (436,806) 565,508 (205,815) (1,045,836)
Accrued pension
contribution...... (1,101,364) 692,737 (821,848) (1,663,021) 1,022,458
----------- ----------- ----------- ----------- -----------
Net adjustments to
reconcile net income
to net cash (used
for) provided by
operations.......... (560,459) 536,665 (3,170,483) (2,274,659) (1,868,501)
----------- ----------- ----------- ----------- -----------
Net cash (used
for) provided by
operating
activities...... 694,806 1,664,673 (2,367,341) (1,717,258) (1,857,154)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of
equipment........... (243,149) (181,509) (502,423) (80,201) (81,105)
Distribution from SHW
Joint Venture....... -- 142,500 342,000 -- --
Proceeds on sale of
equipment........... 8,093 1,850 750 -- --
Loan to ESOP......... -- -- (2,000,000) (2,000,000) --
Repayments of loan to
ESOP................ -- -- 2,000,000 2,000,000 --
----------- ----------- ----------- ----------- -----------
Net cash flows
used for
investing
activities...... (235,056) (37,159) (159,673) (80,201) (81,105)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings........... -- -- 2,000,000 2,000,000 1,100,000
Repayment of
borrowings.......... -- -- (1,816,667) (333,333) (183,333)
----------- ----------- ----------- ----------- -----------
Net cash flows
provided by
financing
activities........ -- -- 183,333 1,666,667 916,667
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH............... 459,750 1,627,514 (2,343,681) (130,792) (1,021,592)
CASH AND CASH
EQUIVALENTS, Beginning
of year............... 1,298,202 1,757,952 3,385,466 3,385,466 1,041,785
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, End of
year.................. $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 3,254,674 $ 20,193
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Wilson Electric Company, Inc. (the "Company") was incorporated on May 24,
1988 and performs electrical contracting services throughout Arizona. The
significant accounting policies of the Company are as follows:
Cash and Cash Equivalents--
Cash equivalents consist of investments in highly liquid investments with
maturities of three months or less, and at November 30, 1996 and 1997,
included restricted cash of $184,330 and $770,297, respectively.
Revenue and Cost Recognition--
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the actual costs incurred to date compared to
estimated total cost for each contract. Revenue recognition commences only
after contract progress reaches a state where experience is sufficient to
estimate a profit on the contract. At the time a loss on a contract becomes
known, the entire amount of the estimated loss is recognized.
Contract costs include all direct material, labor and employee benefit costs
and indirect costs related to contract performance, such as indirect labor,
equipment rentals, insurance and tools. Selling and most general and
administrative costs are charged to expense as incurred. Changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and revenues, and are recognized in the period in which the
revisions are determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
Depreciation--
Property and equipment are carried at cost. Depreciation of property and
equipment is determined using straight-line and accelerated methods of
depreciation for financial statement purposes at rates based on the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures......................................... 5-10 years
Computer equipment and software................................ 3- 5 years
Shop equipment................................................. 3- 5 years
Automotive equipment........................................... 3- 5 years
</TABLE>
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repair are charged to expense as incurred.
Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-76
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Advertising Expense--
The Company expenses advertising costs as incurred. Advertising expenses
were $61,438, $96,441 and $127,303 in 1995, 1996 and 1997, respectively.
Unaudited Interim Financial Statements--
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustment, necessary for a fair
presentation of the financial position of the Company at February 28, 1998,
and the results of its operations and its cash flows for the three months
ended February 28, 1997 and February 28, 1998, as presented in the
accompanying unaudited interim financial statements.
(2) SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes paid................ $ 921,180 $ 876,819 $ 752,833
Interest paid.................... $ 4,439 $ 82,404 $ 84,581
(3) CONTRACTS RECEIVABLE:
Contracts receivable consist of the following:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Completed contracts.............. $ 1,873,011 $ 897,193 $ 779,037
Contracts in progress............ 5,065,980 8,632,012 10,698,107
Unbilled completed contracts..... 56,668 152,600 143,000
Retainages....................... 1,556,760 1,636,836 2,475,185
Less: Allowance for doubtful
accounts........................ (10,000) (10,000) (10,000)
------------ ------------ ------------
$ 8,542,419 $11,308,641 $14,085,329
============ ============ ============
(4) CONTRACTS IN PROCESS:
Information with respect to contracts in process follows:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expenditures on uncompleted
contracts....................... $18,300,419 $22,081,105 $50,660,947
Estimated earnings thereon....... 4,095,848 3,920,520 6,378,912
------------ ------------ ------------
22,396,267 26,001,625 57,039,859
Less billings applicable
thereto......................... 24,142,657 27,987,478 59,139,914
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
Included in the accompanying balance sheet under the following captions:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... $ 565,702 $ 1,225,288 $ 1,301,651
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... (2,312,092) (3,211,141) (3,401,706)
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
</TABLE>
F-77
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
(5) NOTE PAYABLE AND LINE OF CREDIT:
As of November 30, 1995, 1996 and 1997, the Company had a line of credit
with Norwest Bank in the amount of $2,500,000, $3,000,000 and $4,000,000,
respectively. Interest was 9.75%, 9.25% and 8.50% at November 30, 1995, 1996
and 1997, respectively. The collateral for the line of credit is a first lien
position on all accounts and contracts receivable, inventory, equipment,
vehicles, furniture and fixtures. There were no borrowings against this line
at November 30, 1995, 1996 and 1997, respectively.
The agreement requires the Company to maintain certain ratios and minimums.
In January, 1997, the Company borrowed $2,000,000 and then loaned the
proceeds to the Employee Stock Ownership Plan. The loan is payable in minimum
monthly payments of $83,333, together with interest at the prime rate.
(6) EMPLOYEE STOCK OWNERSHIP PLAN:
Effective December 1, 1992 the Company established an employee stock
ownership Plan (ESOP) covering substantially all of its employees. Company
contributions to the Plan are determined annually by management.
During fiscal year 1994, the ESOP used the proceeds of a loan guaranteed by
the Company to purchase 1,900 shares of the Company's common stock for
$2,280,000. The loan was paid in full during the fiscal year 1995.
During fiscal year 1996, the ESOP purchased 2,500 shares of the Company's
common stock for $3,500,000. The ESOP made cash payments totaling $1,500,000
and issued $2,000,000 of notes due November 1, 1997.
In January, 1997, the Company borrowed $2,000,000 and loaned the funds to
the ESOP for the repayment of its $2,000,000 of notes. During the year ended
November 30, 1997, the Company accrued contributions to the ESOP sufficient to
allocate the remaining shares, and accordingly reduced the loan to the ESOP to
zero.
Generally accepted accounting principles require the following:
1) For loans made to the ESOP by someone other than the Company (a direct
loan), the loan balance is reported as a liability and a deduction in the
stockholders' equity section of the Company. At November 30, 1996, the loan
to the ESOP was a direct loan, as the loan was payable to the selling
shareholders.
2) For loans made to the ESOP by the Company, the Company does not report a
loan receivable from the ESOP. Instead, the loan receivable is reported as
a deduction in the stockholder's equity section and is reduced to the
extent accrued Company contributions to the ESOP releases shares.
Information with respect to the allocation of common shares is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Allocated........................................... 4,900.0 5,971.4 7,400.0
Committed to be released............................ -- 1,428.6 0.0
------- ------- -------
Total............................................. 4,900.0 7,400.0 7,400.0
======= ======= =======
</TABLE>
F-78
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
(6) EMPLOYEE STOCK OWNERSHIP PLAN:--(CONTINUED)
The fair values for shares allocated and committed to be released is based
upon the latest appraisal available.
During the years ended November 30, 1995, 1996 and 1997, contributions
charged to expense amounted to $1,981,828, $2,957,797 and $2,421,164,
respectively. In addition, in 1995 and 1996, the Company paid interest of
$81,734 and $65,338, respectively, on the ESOP's notes payable.
(7) COMMITMENTS:
The Company leases its offices, warehouse facilities and vehicles under
operating leases.
Minimum annual rental commitments are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
1996.............................................. $250,907 $ -- $ --
1997.............................................. 191,618 307,994 --
1998.............................................. 109,734 138,318 309,421
1999.............................................. -- 61,857 143,360
2000.............................................. -- 45,356 131,081
2001.............................................. -- 25,256 116,934
Thereafter........................................ -- -- 38,915
-------- -------- --------
$552,259 $578,781 $739,711
======== ======== ========
</TABLE>
(8) RELATED PARTY TRANSACTIONS:
The Company leased office space from one of its shareholders for $6,249 per
month. This lease expired on December 31, 1996, and is on a month-to-month
basis.
The Company performs contracting activities with a company which is owned by
an employee. Total revenue for the years ended November 30, 1995, 1996 and
1997 were $291,806, $137,027 and $0, respectively. Amounts included in
Accounts Receivable from such activities at November 30, 1996 and 1995, were
$131,528 and $42,654, respectively. There were no amounts included in Accounts
Receivable at November 30, 1997.
(9) GOODWILL:
During 1993, the Company acquired assets and assumed leases and contracts-
in-process of Adkins Cabling Systems (Adkins). The amount assigned to goodwill
represents the excess of the amount paid over the fair value of assets
received, and is being amortized over eight years which is the term of related
employment and non-competition agreements with the sole Adkins shareholder.
(10) SHW JOINT VENTURE:
The Company had a minority interest in a general partnership joint venture
formed to construct a freeway management system. Related costs included in the
Company's contract revenue earned and cost of revenues earned were $80,000,
$7,000 and $0 for the years ended November 30, 1995, 1996 and 1997. The
investment was accounted on the equity method of accounting wherein the
Company recognized it's share of the joint ventures net assets.
The joint venture was completed in 1997.
F-79
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1995, 1996 AND 1997
(11) INCOME TAXES:
Deferred income taxes arise because of timing differences between financial
and income tax reporting.
At November 30, 1997, the only significant timing difference relates to
accrued vacation pay, that is not tax deductible unless paid within 2 1/2
months after year-end. The provision for income taxes for 1997 differed from
the amount computed by applying the statutory income tax rates because of non-
deductible expenses.
F-80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
SKC Electric, Inc. and Affiliate
In our opinion, the accompanying combined balance sheet at December 31, 1997
and 1996, and the related combined statements of income and of cash flows for
the years ended December 31, 1997 and 1996 and the three months ended December
31, 1995 of SKC Electric, Inc. and Affiliate, and the consolidated statements
of income and of cash flows of Lovecor, Inc. and subsidiaries for the year
ended September 30, 1995, present fairly, in all material respects, the
financial position of SKC Electric, Inc. and Affiliate, at December 31, 1997
and 1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, for the three months ended December
31, 1995, and for the year ended September 30, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 17, 1998
F-81
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 719,316 $1,686,037
Accounts receivable:
Contracts........................................... 4,688,121 5,161,512
Other............................................... 75,761 138,708
Costs and estimated earnings in excess of billings.... 125,597 134,759
Materials............................................. 85,438 161,338
Deferred income taxes................................. -- 150,000
---------- ----------
Total current assets.............................. 5,694,233 7,432,354
Property and equipment................................ 251,363 553,957
Receivable--related party............................. 250,000 250,000
Other assets.......................................... 131,375 131,790
---------- ----------
$6,326,971 $8,368,101
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 3,495 $ 196,490
Accounts payable...................................... 963,534 1,414,869
Due to stockholders................................... 3,101 --
Billings in excess of costs and estimated earnings.... 1,555,592 1,652,288
Accrued expenses...................................... 545,450 825,818
Accrued ESOP liability................................ 350,000 --
Accrued income taxes.................................. 105,000 1,195,900
---------- ----------
Total current liabilities......................... 3,526,172 5,285,365
---------- ----------
Long-term debt, less current portion.................... -- 982,449
ESOP common stock purchase obligation (Note 8).......... -- 3,000,000
Unearned ESOP common stock (Note 8)..................... -- (1,178,939)
Commitments and contingencies (Notes 7 and 10)..........
STOCKHOLDERS' EQUITY (NOTE 9)
Common stock:
SKC Electric, Inc., $.01 par value, 100,000 shares
authorized, 63,491 issued and outstanding at December
31, 1997; no par value, 1,000 shares authorized,
100 shares issued and outstanding at December 31,
1996................................................. 10,000 635
SKCE, Inc., $10 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding...... 10,000 10,000
Additional paid-in capital............................ 15,000 --
Retained earnings..................................... 2,765,799 268,591
---------- ----------
Total stockholders' equity........................ 2,800,799 279,226
---------- ----------
$6,326,971 $8,368,101
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF INCOME
<TABLE>
<CAPTION>
LOVECOR, INC. SKC ELECTRIC, INC. AND AFFILIATE--
CONSOLIDATED COMBINED
------------- ---------------------------------------
FOR THE FOR THE THREE FOR THE FOR THE
YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
construction and
service contracts...... $11,261,874 $3,012,185 $16,811,224 $23,482,722
Costs from construction
and service contracts.. 8,556,644 2,205,404 12,565,452 16,970,948
----------- ---------- ----------- -----------
Gross profit............ 2,705,230 806,781 4,245,772 6,511,774
Selling, general and
administrative
expenses............... 1,900,327 426,680 2,906,523 4,199,645
----------- ---------- ----------- -----------
Operating income........ 804,903 380,101 1,339,249 2,312,129
Other income............ 25,853 6,459 60,322 38,381
----------- ---------- ----------- -----------
Income before income
taxes.................. 830,756 386,560 1,399,571 2,350,510
Provision for income
tax.................... 277,984 -- -- 1,150,000
----------- ---------- ----------- -----------
Net income.............. $ 552,772 $ 386,560 $ 1,399,571 $ 1,200,510
=========== ========== =========== ===========
Unaudited pro forma
information:
Income before provision
for income taxes...... $ 386,560 $ 1,399,571 $ 2,350,510
Provision for income
taxes................. 150,758 545,833 916,582
---------- ----------- -----------
Pro forma net income... $ 235,802 $ 853,738 $ 1,433,928
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
SKC ELECTRIC AND AFFILIATE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
LOVECOR, INC. SKC ELECTRIC, INC. AND AFFILIATED--
CONSOLIDATED COMBINED
------------- ----------------------------------------
FOR THE FOR THE THREE FOR THE FOR THE
YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income............... $ 552,772 $ 386,560 $ 1,399,571 $1,200,510
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation............ 70,750 18,165 75,534 124,339
Provision for doubtful
accounts............... -- -- -- 161,127
Gain on sale of fixed
assets................. -- -- (540) 3,502
Deferred income taxes... (305,000) -- -- (150,000)
ESOP compensation
expense................ -- -- -- 270,648
(Increase) decrease in
assets:
Accounts receivable--
contracts.............. (637,735) (169,078) (1,900,371) (634,518)
Accounts receivable--
other.................. 4,064 4,904 (50,820) (62,947)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts.............. 31,226 (3,322) (63,236) (9,162)
Materials............... 49,572 (18,751) (47,260) (75,900)
Other assets............ (251,135) 362 (77,810) (415)
Increase (decrease) in
liabilities:
Accounts payable........ 238,944 654,921 658,374 451,335
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. (370,863) (238,685) 394,852 96,696
Accrued expenses and
ESOP liability......... 239,104 (320,693) 721,457 (69,632)
Accrued income taxes.... 106,724 (254,087) (68,397) 1,090,900
--------- --------- ----------- ----------
Net cash provided (used)
by operating
activities.............. (271,577) 60,296 1,041,354 2,396,483
Cash flows used by
investing activities
Capital expenditures.... (102,108) (18,416) (97,711) (431,610)
Proceeds from
disposition of fixed
assets................. -- -- 540 1,175
--------- --------- ----------- ----------
Net cash used by
investing activities.... (102,108) (18,416) (97,171) (430,435)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
SKC ELECTRIC AND AFFILIATE
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
LOVECOR, INC. SKC ELECTRIC, INC. AND AFFILIATE--
CONSOLIDATED COMBINED
------------- ---------------------------------------
FOR THE FOR THE THREE FOR THE FOR THE
YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows used by
financing activities
Distributions to
stockholders.......... (3,633) -- (654,172) (799,342)
Principal payments on
long-term debt........ (30,288) (5,063) (29,453) (199,985)
Borrowings to finance
ESOP.................. -- -- -- 1,375,429
Loan to ESOP........... -- -- -- (1,375,429)
--------- -------- --------- -----------
Net cash used by
financing activities... (33,921) (5,063) (683,625) (999,327)
Net increase (decrease)
in cash and cash
equivalents............ (407,606) 36,817 260,558 966,721
Cash and cash
equivalents--beginning
of period.............. 829,547 421,941 458,758 719,316
--------- -------- --------- -----------
Cash and cash
equivalents--end of
period................. $ 421,941 $458,758 $ 719,316 $ 1,686,037
========= ======== ========= ===========
Income taxes paid....... $ 469,994 $ -- $ 68,397 $ 210,400
========= ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's activities and operating cycle
SKC Electric, Inc., its subsidiary, Cramar Electric, Inc., and its
affiliate, SKCE, Inc. (the Company) are electrical specialty contractors and
electrical service companies operating primarily in the commercial markets in
Kansas and Missouri. The Company is headquartered in Lenexa, Kansas, and
operates branch offices in Branson and Columbia, Missouri. During 1996, the
Company acquired an exclusive franchise for TEGG services which provides
preventive maintenance contracts for end user facilities located throughout
the same geographic areas. The stock of Cramar Electric, Inc. was acquired in
September 1997 for approximately $35,000 and will allow the Company to enter
the residential and multifamily construction market.
The length of the Company's construction contracts varies but is typically
less than one year. Therefore, the contract-related assets and liabilities are
classified as current. Other items in the balance sheet are classified as
current or noncurrent depending on whether their realization and liquidation
period extend beyond one year.
The Company grants credit, generally without collateral, but is usually
eligible for filing a contractor's lien against the property on which work was
performed. Most of the Company's contracts are in the Kansas and Missouri
regions. Consequently, the Company's ability to collect the amounts due from
customers is affected by the economic fluctuations in these geographic areas.
During 1997, approximately 17% of the Company's revenues were from one
customer.
Principles of combination and consolidation
The combined financial statements include the consolidated accounts of SKC
Electric, Inc. and its subsidiary, Cramar Electric, Inc., combined with its
affiliate, SKCE, Inc. all of which are under common control and management and
stock ownership effective October 1, 1995. Prior to October 1, 1995, SKC
Electric, Inc. and its affiliate were owned by a separate corporation,
Lovecor, Inc., which had the same stock ownership as SKC Electric, Inc. and
its affiliate. Immediately following the close of business on September 30,
1995, the consolidated group was terminated as a result of the tax-free spin
off of SKC Communications, Inc. (now SKCE, Inc.) and the subsequent tax-free
merger of Lovecor, Inc. into SKC Electric, Inc.
The fiscal year of the Company was September 30 prior to October 1, 1995, at
which time a December 31 year end was adopted. All significant intercompany
transactions and balances have been eliminated from the combined and
consolidated financial statements.
Revenue and cost recognition
The Company utilizes the percentage-of-completion method of accounting for
the recognition of revenues and costs of all significant construction
contracts. Revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions
are determined.
Balances billed but not paid pursuant to retainage provisions under
provisions under construction contracts generally become due upon completion
of the contracts and acceptance by the customers.
Revenue earned on specific contracts in excess of billings and billings in
excess of revenue earned are shown as current assets and liabilities,
respectively, in the accompanying balance sheet. Revenues from service
contracts and maintenance work are recognized when earned.
F-86
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Direct costs on construction contracts include all direct material,
equipment, subcontractor, and labor costs. Where costs such as tools, travel,
licenses and fees, and utilities can be charged to a specific job, the Company
also considers these direct costs. Certain indirect costs for both
construction and service contracts are allocated to jobs based on an overhead
burden rate developed by the Company. This rate is based on the relationship
between these indirect costs and labor expense incurred on the contracts.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
Property and equipment and depreciation
Property and equipment is stated at cost. Expenditures for renewals and
betterments are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Upon sale or retirement, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss is included in or charged against income.
Income taxes
During the period October 1, 1994 through September 30, 1995, Lovecor, Inc.
was a C corporation and used the liability method of accounting for income
taxes. Deferred income taxes are recorded to reflect the tax consequences of
future years of differences between the basis of assets and liabilities for
income tax and financial reporting purposes.
For the period October 1, 1995 to December 31, 1996, the companies'
stockholders elected S corporation status under the Internal Revenue Code,
thereby consenting to include the income or losses in their individual tax
returns. At the time of the election, the Company was subject to a potential
built-in gains tax based on the gross profit recognized on uncompleted
contracts determined on a percentage-of-completion method. This tax totaling
$105,000 was accrued at September 30, 1995 and subsequently paid. There is no
provision for income taxes reflected in the financial statements during the
period the companies elected S Corporation status.
Subsequent to December 31, 1996, SKC Electric, Inc. terminated its S
Corporation status and began using the liability method of accounting for
income taxes. At this time, SKC Electric, Inc. was required to change its
method of accounting for tax purposes from the completed contract method to
the percentage-of-completion method.
The unaudited pro forma information included in the Statement of Income is
presented as if the Company had been subject to federal and state income taxes
for all periods presented.
Materials
Materials consist of electrical supplies used on the contracts or for
service work. The materials are valued at the lower of original cost or net
realizable value. A residual value remains for materials used but not consumed
on the jobs.
Use of estimates
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from these estimates.
F-87
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be a cash equivalent.
2. CONTRACT RECEIVABLES
The contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Current............................................... $4,108,444 $4,679,185
Retainage............................................. 579,677 622,327
Less allowance for doubtful accounts.................. -- (140,000)
---------- ----------
$4,688,121 $5,161,512
========== ==========
</TABLE>
At December 31, 1996, the Company considered the receivables to be fully
collectible; therefore, no allowance for doubtful accounts was recorded.
Retainages are due upon completion of the contracts and all are expected to be
collected in the next 12 months.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 4,901,213 $ 9,916,098
Estimated earnings................................. 798,890 4,033,573
----------- ------------
5,700,103 13,949,671
Less--Billings to date............................. (7,130,098) (15,467,200)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 125,597 $ 134,759
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (1,555,592) (1,652,288)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
</TABLE>
F-88
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The property and equipment balance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Office furniture......................................... $ 51,123 $ 53,452
Computers................................................ 304,600 384,772
Communication equipment.................................. 22,650 35,515
Construction equipment................................... 235,954 358,264
Trucks and vehicles...................................... 378,061 384,398
Leasehold improvements................................... -- 151,226
--------- ----------
992,388 1,367,627
Less--Accumulated depreciation........................... (741,025) (813,670)
--------- ----------
$ 251,363 $ 553,957
========= ==========
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company has a line of credit agreement with a bank with a borrowing
limit of $500,000 which matures April 30, 1998. The interest rate is prime and
is payable monthly. This line of credit is collateralized by the Company's
contract receivables, materials, fixed assets and personal guaranties of the
stockholders. There were no outstanding borrowings under this agreement as of
December 31, 1996 or 1997.
In 1997, the Company entered into an agreement with a bank for a $1,375,429
term loan which was used to finance the purchase by the SKC Electric, Inc.
Employee Stock Ownership Plan of 30% of the shares of the Company's common
stock from the majority shareholder. The term loan provides for interest
payable quarterly at the prime rate, which was 8.5% at December 31, 1997, and
annual payments of $196,490 due each December 31 with the balance due December
31, 2001. The term loan is secured by unallocated ESOP stock pledged as
collateral. The balance outstanding at December 31, 1997 was $1,178,939, of
which $196,490 was the current portion of the term loan.
The Company had other long-term debt comprised of obligations under notes
payable on vehicles and other assets due to various financial institutions
with interest rates ranging from 6% to 10% outstanding at December 31, 1996.
These obligations were repaid in 1997.
6. INCOME TAXES
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1997
------------- -------------
<S> <C> <C>
Current
Federal........................................ $ 472,984 $1,085,000
State.......................................... 110,000 215,000
--------- ----------
582,984 1,300,000
Deferred
Federal........................................ (252,700) (125,000)
State.......................................... (52,300) (25,000)
--------- ----------
(305,000) (150,000)
--------- ----------
Total........................................ $ 277,984 $1,150,000
========= ==========
</TABLE>
F-89
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES--(CONTINUED)
The difference between the effective tax rate and the federal statutory
income tax rate (34%) is:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1997
------------- ------------
<S> <C> <C>
Statutory federal income tax provision............ $ 282,457 $ 799,173
State taxes net of federal benefit................ 38,082 125,400
Contract accounting method change................. -- 202,675
Other, net........................................ (42,555) 22,752
--------- ----------
$ 277,984 $1,150,000
========= ==========
</TABLE>
The Company's deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Allowance for doubtful accounts................................. $ 54,600
Employee compensation........................................... 54,686
Other expenses.................................................. 40,714
--------
$150,000
========
</TABLE>
7. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company was a guarantor on a personal loan of the stockholders in the
amount of $109,000 at December 31, 1996 and had given a security interest in
its accounts receivables and materials as collateral on that debt. Such
guarantee no longer exists at December 31, 1997.
The Company received advances from a stockholder totaling $3,101 at December
31, 1996.
During 1995, SKC Electric, Inc. loaned $250,000 to an unrelated corporation.
The loan is secured by a second mortgage on a commercial building. During
1996, the majority shareholder of SKC Electric, Inc. acquired the stock of the
corporation which owned the building collateralizing the loan. SKC Electric,
Inc.'s security position remains the same following the acquisition. The loan
is non-interest bearing and has no stated maturity date.
In December 1996, the Company entered into an operating lease agreement with
a company that is owned by the shareholders for the lease of new office and
warehouse space. The lease is for five years and expires December 2001. The
agreement calls for monthly payments of $8,095. No expense was incurred on
this lease during the year ended December 31, 1996, and $97,140 was expensed
during the year ended December 31, 1997. Future minimum lease payments total
$97,140 for each of the next 5 years. Management believes that the rental
expense under this lease is equivalent to that which could have been
experienced in an unrelated arms-length transaction.
The Company is party to an operating lease agreement for its former office
and warehouse space with an unrelated third party. The lease is for five
years, expiring March 1998. Lease expense under this agreement was $46,150,
$11,544, $42,355 and $46,177 for the periods ended September 30, 1995,
December 31, 1995, December 31, 1996, and December 31, 1997, respectively. The
facility in Branson, Missouri is leased under an operating lease agreement
with an unrelated third party. The lease is for two years, expiring in August
1996,
F-90
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with an additional two year option which the Company exercised. Lease expense
under this agreement was $13,750, $2,850, $14,452 and $15,365 for the periods
ended September 30, 1995, December 31, 1995, December 31, 1996, and December
31, 1997, respectively. In June 1997, the Company entered into a two year
operating lease with an unrelated third party for a new facility. Future
minimum lease payments under these leases will be $22,944 and $7,750 for the
years ending December 31, 1998 and 1999.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution employee benefit plan which includes
a qualified profit sharing plan funded through a trust. As a part of the
profit sharing plan, the Company offers a salary deferral program under
Section 401 of the Internal Revenue Code. Under this plan, the Company matches
certain contributions of the eligible participants. In addition, the Company's
annual discretionary contribution, if any, is determined by the Board of
Directors and may be any amount not in excess of 15% of the total
participant's compensation and not to exceed $30,000 for any individual
participant. The Company's expense under this plan totaled $217,051, $3,506,
$30,613 and $31,019, for the periods ended September 30, 1995, December 31,
1995, December 31, 1996, and December 31, 1997, respectively.
The Company also contributes to a Voluntary Employee Beneficiary Association
(VEBA) established under 501(c)(9) of the Internal Revenue Code. The VEBA,
which is a trust, provides various health and welfare benefits to the members,
which are the employees of the Company. Contributions are determined as a
percentage of payroll. The Company contributed $401,153, $111,432, $555,114
and $1,043,211 to the VEBA for the periods ended September 30, 1995, December
31, 1995, December 31, 1996 and December 31, 1997, respectively.
On December 24, 1996, the Company formed the SKC Electric, Inc. Employee
Stock Ownership Plan (ESOP). Management prefunded the ESOP with the maximum
allowable contribution, which for 1996 totaled approximately $350,000. This
amount was accrued by the Company in December of 1996 when it was authorized
by the Company's Board of Directors. During 1996, the ESOP did not acquire any
common stock of the Company.
On September 30, 1997, the Company borrowed $1,375,429 and loaned this
amount to the ESOP (see Note 5). The ESOP used this amount together with the
Company's $350,000 cash contribution to purchase 30% of the SKC Electric,
Inc.'s common stock from the majority stockholder at appraised value. Of the
19,047 shares of common stock purchased, 3,727 were allocated to participant
accounts representing the contribution for 1996. For 1997, management
contributed $196,496 representing 2,189 shares. For the year ended December
31, 1997, the Company recognized $270,648 of expense representing compensation
expense for the year based on the estimated average fair value of the 2,189
shares.
The Company has recorded a $3,000,000 ESOP common stock purchase obligation
on the combined balance sheet at December 31, 1997 representing the estimated
fair value of the 19,047 shares held by the ESOP which are puttable to SKC
Electric, Inc. by the participants upon distribution. Unearned ESOP common
stock represents the historical cost of shares for which compensation expense
has not been accrued at December 31, 1997.
On January 30, 1998, The Company announced a business combination in which
all of the common stock of the Company would be acquired. If consummated, this
transaction could result in a termination of the ESOP and all remaining
unallocated shares held by the ESOP could be allocated to participant
accounts. The Company would repay the outstanding balance on the term loan and
recognize compensation expense in 1998 representing the transaction value of
remaining common shares allocated at that time.
F-91
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY
Subsequent to December 31, 1996, SKC Electric Inc.'s Board of Directors
increased the number of authorized shares to 100,000 with a par value of $.01.
In addition, the Company split the 100 shares outstanding into 63,491 shares
which remain issued and outstanding at December 31, 1997.
The changes in the capital stock, additional paid-in capital and retained
earnings balances are summarized as follows:
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN RETAINED
COMBINED CAPITAL EARNINGS
--------- ---------- -----------
<S> <C> <C> <C>
Balance, September 30, 1994............. $ 634,913 $ -- $ 481,155
Net income.............................. -- -- 552,772
--------- -------- -----------
Balance, September 30, 1995............. 634,913 -- 1,033,927
Lovecor, Inc. merger into SKC Electric,
Inc.................................... (614,913) 15,000 599,913
Net income.............................. -- -- 386,560
--------- -------- -----------
Balance, December 31, 1995.............. 20,000 15,000 2,020,400
Net income.............................. -- -- 1,399,571
Stockholder distributions............... -- -- (654,172)
--------- -------- -----------
Balance, December 31, 1996.............. 20,000 15,000 2,765,799
Net income.............................. -- -- 1,200,510
SKC Electric, Inc. stock split.......... (9,365) 9,365 --
Other--ESOP compensation................ -- 74,158 --
ESOP common stock purchase obligation... -- (98,523) (2,901,477)
Stockholder distributions............... -- -- (796,241)
--------- -------- -----------
Balance, December 31, 1997.............. $ 10,635 $ -- $ 268,591
========= ======== ===========
</TABLE>
10. CONTINGENCIES
During the year ended December 31, 1996, the National Labor Relations Board
and International Brotherhood of Electrical Workers Local Union, Local No.
124, brought suit against the Company alleging unfair hiring practices and
threatening or terminating employees due to their union affiliation. In March
1997, an out-of-court settlement was reached. The settlement calls for the
Company to pay to the union $155,000, which was accrued in the fourth quarter
of calendar 1996, and paid in 1997.
The Company has legal matters pending which arose in the ordinary course of
business. It is management's opinion that these legal matters will not result
in liabilities that would have a material adverse effect on the Company's
financial position or results of operations.
F-92
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Riviera Electric Construction Co.
Englewood, Colorado
We have audited the accompanying balance sheets of RIVIERA ELECTRIC
CONSTRUCTION CO. as of December 31, 1997 and 1996, and the related statements
of income, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RIVIERA ELECTRIC
CONSTRUCTION CO. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Baird, Kurtz & Dobson
Denver, Colorado
February 18, 1998
F-93
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS -----------------------
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash......................................... $ 103,182 $ 295,184
----------- -----------
Receivables:
Contracts.................................... 6,910,281 7,093,367
Retainage.................................... 1,711,153 1,611,347
Unbilled on completed contracts.............. 284,859 495,611
Related parties.............................. 102,006 40,170
Other........................................ 14,280 112,998
----------- -----------
9,022,579 9,353,493
Less allowance for uncollectible accounts.... 8,000 65,000
----------- -----------
9,014,579 9,288,493
----------- -----------
Prepaid expenses............................. 5,774 30,026
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts........... 457,293 189,818
----------- -----------
Total current assets........................ 9,580,828 9,803,521
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Land......................................... 106,500 106,500
Buildings and improvements................... 1,217,928 1,217,928
Leasehold improvements....................... 124,356 163,646
Automobiles and trucks....................... 401,528 423,729
Office furniture and equipment............... 466,038 592,419
Tools and equipment.......................... 277,386 290,480
----------- -----------
2,593,736 2,794,702
Less accumulated depreciation and
amortization................................ 974,532 1,186,294
----------- -----------
1,619,204 1,608,408
----------- -----------
DEPOSITS AND OTHER ASSETS..................... 116,598 246,294
----------- -----------
$11,316,630 $11,658,223
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, stockholder................... $ 790,000 $ 415,000
Notes payable................................ 1,000,000 990,000
Current maturities of long-term debt......... 118,665 119,230
Accounts payable............................. 2,546,410 3,589,392
Accrued expenses............................. 1,073,852 1,554,276
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 2,289,817 1,088,368
----------- -----------
Total current liabilities................... 7,818,744 7,756,266
----------- -----------
LONG-TERM DEBT................................ 638,216 522,577
----------- -----------
NOTES PAYABLE--STOCKHOLDERS................... -- 2,275,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares
authorized, issued and outstanding,
1997--320,200 shares, 1996--310,200 shares.. 1,233,764 1,350,988
Retained earnings (deficit).................. 1,625,906 (246,608)
----------- -----------
2,859,670 1,104,380
----------- -----------
$11,316,630 $11,658,223
=========== ===========
</TABLE>
See Notes to Financial Statements
F-94
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Contract revenues..................... $29,464,580 $30,879,445 $31,845,921
Service revenues...................... 3,005,879 4,955,771 5,203,331
----------- ----------- -----------
32,470,459 35,835,216 37,049,252
----------- ----------- -----------
DIRECT COSTS OF REVENUES EARNED
Contract costs........................ 26,164,454 27,462,760 27,051,842
Service costs......................... 2,682,071 4,226,942 4,555,202
----------- ----------- -----------
28,846,525 31,689,702 31,607,044
----------- ----------- -----------
GROSS PROFIT........................... 3,623,934 4,145,514 5,442,208
INDIRECT SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES............... 2,666,836 2,883,829 3,999,543
----------- ----------- -----------
INCOME FROM OPERATIONS................. 957,098 1,261,685 1,442,665
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense...................... (170,552) (257,402) (228,751)
Interest income....................... 269 8,161 283
Other, net............................ 55,561 24,195 119,218
----------- ----------- -----------
(114,722) (225,046) (109,250)
----------- ----------- -----------
NET INCOME............................. $ 842,376 $ 1,036,639 $1,333,415
=========== =========== ===========
UNAUDITED PRO FORMA INFORMATION (SEE
NOTE 1)
Income before provision for income
taxes................................ $ 842,376 $ 1,036,639 $1,333,415
Provision for income taxes............ 314,206 386,666 497,364
----------- ----------- -----------
PRO FORMA NET INCOME (UNAUDITED)....... $ 528,170 $ 649,973 $ 836,051
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-95
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
RETAINED
EARNINGS
SHARES DOLLARS (DEFICIT) TOTAL
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994......... 377,800 $1,485,880 $2,045,212 $3,531,092
Net income........................ -- -- 842,376 842,376
Stockholders' distributions....... -- -- (1,734,539) (1,734,539)
Issuance of common stock.......... 3,000 18,750 -- 18,750
Redemption of common stock........ (73,600) (289,616) (173,825) (463,441)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995......... 307,200 1,215,014 979,224 2,194,238
Net income........................ -- -- 1,036,639 1,036,639
Stockholders' distributions....... -- -- (389,957) (389,957)
Issuance of common stock.......... 3,000 18,750 -- 18,750
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996......... 310,200 1,233,764 1,625,906 2,859,670
Net income........................ -- -- 1,333,415 1,333,415
Stockholders' distributions....... -- -- (3,164,999) (3,164,999)
Issuance of common stock ......... 25,200 212,224 -- 212,224
Redemption of common stock........ (15,200) (95,000) (40,930) (135,930)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997......... 320,200 $1,350,988 $ (246,608) $1,104,380
======= ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-96
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 842,376 $ 1,036,639 $1,333,415
Items not requiring (providing) cash:
Depreciation and amortization.......... 119,040 169,157 212,632
Loss from partnership.................. 21,222 -- --
Income from joint venture.............. (9,722) -- --
Loss from sale of property and
equipment............................. 4,925 17,701 380
Changes in:
Receivables............................ 245,664 (3,580,164) (348,834)
Related party receivables.............. (324,128) 327,461 74,920
Other current assets................... (2,679) 14,609 (24,252)
Costs and estimated earnings in excess
of billings on uncompleted contracts.. (25,442) (196,050) 267,475
Other assets........................... 62,246 -- --
Accounts payable....................... (1,552,104) 1,192,347 1,042,982
Accrued expenses....................... (164,219) (9,565) 480,424
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 423,796 1,562,081 (1,201,449)
Related party payables................. 255,118 (255,118) --
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. (103,907) 279,098 1,837,693
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.... (720,411) (385,106) (202,316)
Proceeds from sales of property and
equipment............................. 8,101 1,700 100
Investments in joint ventures and other
assets................................ (12,500) (46,523) (129,696)
Cash provided for note receivable...... (100,000) -- --
Payments received on note receivable... 30,000 -- --
----------- ----------- ----------
Net cash used in investing
activities........................... (794,810) (429,929) (331,912)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of
credit................................ 1,480,000 (250,000) (10,000)
Payments on long-term debt............. (69,806) (457,066) (115,074)
Proceeds from notes payable--
stockholders.......................... 462,000 435,000 --
Repayments on notes payable--
stockholders.......................... -- -- (375,000)
Proceeds from long-term borrowings..... -- 680,983 --
Issuance of common stock for cash...... 18,750 18,750 212,224
Distributions to stockholders.......... (1,734,539) (389,957) (889,999)
Distribution of cash for spinoff....... (51,620) -- --
Redemption of Common Stock............. -- -- (135,930)
----------- ----------- ----------
Net cash (used in) provided by
financing activities................. 104,785 37,710 (1,313,779)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH............. (793,932) (113,121) 192,002
CASH, BEGINNING OF PERIOD............... 1,010,235 216,303 103,182
----------- ----------- ----------
CASH, END OF PERIOD..................... $ 216,303 $ 103,182 $ 295,184
=========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-97
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged in the construction of electrical systems for
industrial and commercial buildings. The Companies' operations are
predominately in Colorado. The Company grants credit to its customers which
are primarily commercial general contractors in Colorado.
The Company derives most of its revenues from guaranteed maximum price
contracts. The remainder of the contracts are fixed price contracts. The
length of the Company's contracts varies, but contracts are typically
completed in one year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION
Revenues are recognized on the percentage of completion method, measured by
the percentage of costs incurred to date to estimated total costs for each
contract, commonly referred to as the cost-to-cost method.
Contract costs include all direct material and labor costs and certain
indirect costs related to contract performance such as supplies, tools,
supervisory salaries, and repairs. Selling, general, and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to costs and income which
are recognized in the period in which the revisions are determined. An amount
equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenue recognized.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful lives of
each asset. Leasehold improvements are depreciated over the shorter of the
lease term or the estimated useful lives of the improvements. Annual
depreciation is primarily computed using declining balance methods.
INCOME TAXES
The Company, with its stockholders' consent, has elected to be taxed as an S
Corporation under the Internal Revenue Code. In lieu of corporate income
taxes, the stockholders of an S Corporation are taxed on their proportionate
share of the corporation's taxable income. Therefore, no provision for income
taxes has been included in these financial statements.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities primarily related to property
and equipment, and contracts in progress. At December 31, 1997, the Company's
net assets for financial reporting purposes exceeds the tax basis by
approximately $70,000.
F-98
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The unaudited pro forma income tax information included in the Statement of
Income is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the years presented.
NOTE 2: REORGANIZATION AND CORPORATE SEPARATION
As of April 1, 1995, the Company entered into an agreement with Riviera
Electric of California, Inc., a California corporation, to separate the
California division from the Colorado division of the Company. The Company
transferred the assets identified as related to California; and Riviera
Electric of California, Inc. agreed to assume all liabilities, debts,
contracts and obligations of the California division and to issue 460 shares
of common stock to the Company. The Company then exchanged the stock of
Riviera Electric of California, Inc. in exchange for 368 shares of its own
common stock of the Company. The Company's majority stockholder maintains a
controlling interest in Riviera Electric of California, Inc. This transaction
was reported as a transaction between entities under common control using the
historical cost basis of assets and liabilities. The assets net of liabilities
transferred to Riviera Electric of California, Inc. as of April 1, 1995 were
$463,441. The statements of income and cash flows for the year ended December
31, 1995, are reflected as if the transaction occurred January 1, 1995.
NOTE 3: COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts......... $ 16,086,014 $ 13,741,951
Estimated earnings.............................. 2,149,180 2,046,994
------------ ------------
18,235,194 15,788,945
Less billings to date........................... 20,067,718 16,687,495
------------ ------------
$ (1,832,524) $ (898,550)
============ ============
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............. $ 457,293 $ 189,818
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (2,289,817) (1,088,368)
------------ -----------
$ (1,832,524) $ (898,550)
============ ===========
</TABLE>
NOTE 4: JOINT VENTURE
Included in other assets at December 31, 1997, is an investment of $125,000
in a joint venture. The joint venture was formed to acquire land and to
develop condominium units on the property. As of December 31, 1997, the
venture had little activity.
F-99
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: NOTES PAYABLE
An agreement with a bank provides for borrowing up to $1,800,000, due May 1,
1998, unsecured, with an assignment up to $500,000 of a life insurance policy
on the majority stockholder. The agreement bears interest at prime, 8.5
percent, at December 31, 1997. The average interest rate for the years ended
December 31, 1997, 1996 and 1995 was approximately 8.25, 8.5 and 9.0 percent
respectively. The loan requires a $50,000 compensating balance. The agreement
also contains working capital and debt restrictions. The loan is guaranteed by
the president and majority stockholder.
NOTE 6: LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Bank note payable (A)................................... $ 143,390 $ 103,430
Bank note payable (B)................................... 520,783 483,804
Bank note payable (C)................................... 72,913 40,826
Bank note payable (D)................................... 19,795 13,747
--------- ---------
756,881 641,807
Less current maturities................................. 118,665 119,230
--------- ---------
$ 638,216 $ 522,577
========= =========
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1997 are:
<TABLE>
<S> <C>
1998............................................................... $ 119,230
1999............................................................... 89,220
2000............................................................... 57,438
2001............................................................... 375,919
---------
$ 641,807
=========
</TABLE>
(A) Due July 15, 2000; payable $3,330 monthly plus accrued interest at prime
plus 1%, secured by a deed of trust on certain property.
(B) Due January 15, 2001; payable $3,082 monthly plus monthly interest at
prime plus 1%; remaining principal and interest due at maturity; secured by a
deed of trust on certain property and guaranteed by the majority stockholder
of the Company.
(C) Due February 1, 1999; payable $2,917 monthly plus accrued interest at
9.5%; secured by vehicles.
(D) Due October 1, 1999; payable in monthly installments of $678 including
interest at prime plus .5%; payment subject to change if the prime rate
changes; secured by a vehicle.
NOTE 7: COMMON STOCK
During 1997, the Company increased its common stock shares authorized from
50,000 to 1,000,000 and issued 199 shares of Common Stock to its stockholders
for each share then held by the stockholders. These actions are reflected in
the financial statements as if they happened at the earliest period presented.
F-100
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: OPERATING LEASES
The Company has entered into noncancellable operating leases for facilities
and equipment expiring in various years through March, 2003. The Company also
leases several vehicles under operating leases which expire through October,
2000.
Future minimum lease payments at December 31, 1997, were:
<TABLE>
<S> <C>
1998............................................................... $440,565
1999............................................................... 252,056
2000............................................................... 159,080
2001............................................................... 61,982
2002............................................................... 59,220
Thereafter......................................................... 4,935
--------
Future minimum lease payments...................................... $977,838
========
</TABLE>
Rental expenses for all operating leases was $617,000, $517,800, and
$360,284, during 1997, 1996, and 1995, respectively.
NOTE 9: PROFIT SHARING PLANS
The Company has a 401(k) savings and retirement plan which covers all
eligible employees. The plan provides benefits based on earnings of each
participant. The plan allows the Company to make an additional discretionary
contribution. Participants' interests are 100% vested when they enter the
plan. For the years ended December 31, 1997, 1996, and 1995, the Company made
no additional discretionary contributions to the plan.
In December, 1996, the Company established a new profit sharing plan. In
September, 1997, the Company decided to make a $300,000 contribution to the
new plan for 1996. The Company has also approved a $300,000 contribution for
1997. During the year ended December 31, 1997, $600,000 has been recorded as
profit sharing expense.
NOTE 10: RELATED PARTY TRANSACTIONS
The Company performs various administrative functions, shares certain costs,
and pays certain bills, for a company related through common ownership (see
Note 2). During the years ended December 31, 1997 and 1996, this related
entity reimbursed the Company $241,727, and $193,559, respectively for
expenses the Company paid on behalf of this related entity. During the year
ended December 31, 1995, substantially all of the entity's operating expenses
were paid by the Company. As of December 31, 1997 and 1996 $10,302 and
$48,637, respectively, was owed to the Company by this related entity.
During 1995, the Company sold a partnership interest to the Company's
majority stockholder for $78,412. The Partnership billed the Company
$1,600,190 for services rendered during the year ended December 31, 1995. The
Company provided and was reimbursed for health insurance, miscellaneous tools
and other services to the partnership during 1995 in the amount of $74,156.
At December 31, 1997 and 1996, the Company had a note payable to its
majority stockholder of $265,000 and $643,000, and notes payable of $150,000
and $150,000 to other stockholders, respectively. The notes are unsecured, due
on demand, and bear interest at a bank's prime rate plus one percent. The
average interest rates for the years ended December 31, 1997, 1996 and 1995
were approximately 9.25, 9.5 and 10.0 percent respectively.
F-101
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: RELATED PARTY TRANSACTIONS (CONTINUED)
In December 1997, distributions totaling $2,275,000 were made to
stockholders in the form of notes payable. The notes are unsecured, bear
interest at a bank's prime rate plus one percent, and are subordinated to the
Company's bank debt. Principal is due April 1, 1999. Interest expense for all
notes payable to stockholders was $54,548, $51,012 and $55,309, for the years
ended December 31, 1997, 1996, and 1995, respectively.
The Company maintains a $1 million life insurance policy on its president
and majority stockholder.
The Company rents various office equipment and employee lodging facilities
under operating leases with a director of the Company. The leases expire in
1998. Total lease expense paid for 1997, 1996, and 1995, was $74,952, $113,177
and $89,896, respectively.
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Those matters include the following:
Contracts in Process
The Company recognizes revenue on contracts under the percentage-of-
completion method, which involves estimates of total contract costs and the
percentage of a contract's completion. The methodology used is described as
part of Note 1.
Bonding and Regulations
The Company currently is involved in long-term construction contracts. As
part of these contracts, the Company must meet certain requirements and obtain
an appropriate level of bonding.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities
During 1995, the Company redeemed 368 shares of common stock in exchange for
460 shares of its affiliate with a fair value of $463,441. The transaction is
detailed at Note 2.
During 1997, the Company issued notes payable of $2,275,000 to stockholders
as distributions.
Additional Cash Payment Information
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest paid (net of amount capitalized)....... $222,686 $253,191 $170,728
</TABLE>
NOTE 13: SUBSEQUENT EVENT
In February 1998, the Company and its stockholders signed a letter of intent
to sell the Company. The Company's outstanding stock will be acquired by, and
the Company will be simultaneously merged into a wholly-owned subsidiary of
Consolidated Capital Corporation. If the transaction is completed, the
existing stockholders intend to purchase land and a building from the Company
and to contribute the $2,275,000 notes payable discussed in Note 10, to the
Company as additional paid-in capital.
F-102
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Town & Country Electric Inc.
We have audited the accompanying balance sheets of Town & Country Electric
Inc. (a Wisconsin corporation) as of December 31, 1997 and 1996, and the
related statements of earnings, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town & Country Electric
Inc. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Appleton, Wisconsin
February 6, 1998
F-103
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 253,462 $ 198,051
Contract receivables .............................. 9,331,072 10,604,699
Other receivables ................................. 23,302 267,662
----------- -----------
9,354,374 10,872,361
Inventories........................................ 260,872 294,829
Prepaid expenses................................... 98,298 112,656
Costs and estimated earnings in excess of billings
on contracts in progress.......................... 1,465,108 1,705,125
Deferred income tax................................ 378,800 349,400
----------- -----------
Total current assets............................. 11,810,914 13,532,422
PROPERTY AND EQUIPMENT--AT COST
Equipment.......................................... 1,261,582 1,431,590
Furniture and fixtures............................. 552,206 561,394
Computer equipment................................. 543,073 587,283
Vehicles........................................... 1,351,576 1,643,078
Leasehold improvements............................. 161,493 194,174
Building........................................... 161,124 162,357
----------- -----------
4,031,054 4,579,876
Less accumulated depreciation..................... 2,380,179 2,969,891
----------- -----------
1,650,875 1,609,985
Land............................................... 16,216 16,216
----------- -----------
1,667,091 1,626,201
OTHER ASSETS
Cash surrender value of life insurance............. 83,482 98,898
Goodwill........................................... 203,586 203,586
Less accumulated amortization..................... (18,098) (31,669)
----------- -----------
185,488 171,917
Investments........................................ 338 338
----------- -----------
269,308 271,153
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt................. $ 156,269 $ 320,644
Accounts payable..................................... 1,650,744 2,206,393
Accrued liabilities
Salaries, wages and vacation........................ 1,729,140 1,792,164
Property, payroll and other taxes................... 314,323 396,442
Profit sharing...................................... 340,049 407,824
Health and disability insurance..................... 67,605 58,597
Other............................................... 296,241 207,547
Income taxes........................................ 345,000 241,000
----------- -----------
3,092,358 3,103,574
Billings in excess of costs and estimated earnings on
contracts in progress............................... 579,683 1,265,955
----------- -----------
Total current liabilities.......................... 5,479,054 6,896,566
LONG-TERM DEBT, less current maturities................ 1,149,468 197,014
COMMITMENTS............................................ -- --
STOCKHOLDER'S EQUITY
Common stock
Class A--authorized 200,000 shares of $.005 par
value, issued and 47,307 and 48,461 shares at
December 31, 1996 and September 30, 1997,
respectively...................................... 236 242
Class B--authorized 400,000 shares of no par value,
issued 263,900 and 264,710 shares at December 31,
1996 and September 30, 1997, respectively......... 1,320 1,324
Additional paid-in capital........................... 461,396 515,944
----------- -----------
462,952 517,510
Retained earnings...................................... 6,655,839 7,818,686
----------- -----------
7,118,791 8,336,196
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned................ $43,306,306 $51,219,799 $48,725,990
Cost of revenues earned................. 34,569,800 41,156,211 39,701,121
----------- ----------- -----------
Gross profit.......................... 8,736,506 10,063,588 9,024,869
General and administrative expenses..... 5,638,605 6,547,518 7,006,235
----------- ----------- -----------
Operating profit...................... 3,097,901 3,516,070 2,018,634
Other income (expense)
Interest expense...................... (206,474) (153,433) (74,988)
Miscellaneous income, net............. 58,303 106,915 113,446
----------- ----------- -----------
(148,171) (46,518) 38,458
----------- ----------- -----------
Earnings before income taxes........ 2,949,730 3,469,552 2,057,092
Provision for income taxes.............. 1,155,024 1,413,716 894,245
----------- ----------- -----------
NET EARNINGS............................ $ 1,794,706 $ 2,055,836 $ 1,162,847
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-106
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ISSUED
-------------------------------
CLASS A CLASS B
(NONVOTING) (VOTING) ADDITIONAL TOTAL
--------------- --------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 54,880 $274 287,000 $1,466 $239,516 $3,464,716 $3,705,972
Retirement and
redemption of stock.... (14,140) (70) (29,020) (145) -- (656,964) (657,179)
Issuance of stock....... 2,000 10 4,000 (10) 97,360 -- 97,360
Net earnings............ -- -- -- -- -- 1,794,706 1,794,706
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1995................... 42,740 214 261,980 1,311 336,876 4,602,458 4,940,859
Retirement and
redemption of stock.... (134) (1) -- -- -- (2,455) (2,456)
Issuance of stock....... 4,701 23 1,920 9 124,520 -- 124,552
Net earnings............ -- -- -- -- -- 2,055,836 2,055,836
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1996................... 47,307 236 263,900 1,320 461,396 6,655,839 7,118,791
Retirement and
redemption of stock.... (48) -- -- -- (1,370) -- (1,370)
Issuance of stock....... 1,154 6 810 4 55,918 -- 55,928
Net earnings for the
year ended December 31,
1997................... -- -- -- -- -- 1,162,847 1,162,847
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1997................... 48,413 $242 264,710 $1,324 $515,944 $7,818,686 $8,336,196
======= ==== ======= ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-107
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings........................... $ 1,794,706 $ 2,055,836 $ 1,162,847
Adjustments to reconcile net earnings
to net cash provided by operating
activities............................
Depreciation expense................... 517,363 647,192 690,665
Loss on sale of property and
equipment............................. 5,218 16,442 34
Amortization of goodwill............... -- 13,573 13,571
Decrease (increase) in accounts
receivable............................ 376,430 (1,992,514) (1,517,987)
Decrease (increase) in inventories..... (43,847) 8,118 (33,957)
Increase in prepaid expenses........... (47,717) (25,354) (14,358)
(Increase) decrease in costs and
estimated earnings in excess of
billings on contracts in progress..... 300,173 (304,357) (240,017)
Increase in deferred income taxes...... (96,000) (15,800) 29,400
Increase (decrease) in accounts
payable............................... (74,592) 127,869 555,649
Increase (decrease) in accrued
liabilities........................... 206,510 683,036 11,216
Decrease (increase) in billings in
excess of costs and estimated
earnings on contracts in progress..... (175,362) (123,360) 686,272
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,762,882 1,090,681 1,343,335
Cash flows from investing activities
Purchase of property and equipment..... (812,013) (971,003) (660,656)
Proceeds from sale of property and
equipment............................. 35,219 36,792 10,847
Increase in cash surrender value of
life insurance........................ (11,122) (13,371) (15,416)
Acquisition of assets of electrical
contractor............................ (203,586) -- --
----------- ----------- -----------
Net cash used in investing
activities.......................... (991,502) (947,582) (665,225)
Cash flows from financing activities
Proceeds from borrowings............... 2,420,770 199,253 2,486,646
Issuance of common stock............... 97,360 124,552 55,928
Payments on borrowings................. (2,702,418) (1,233,676) (3,274,725)
Retirement and redemption of stock..... (657,179) (2,456) (1,370)
----------- ----------- -----------
Net cash used in financing
activities.......................... (841,467) (912,327) (733,521)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ 929,913 (769,228) (55,411)
Cash and cash equivalents at beginning
of period.............................. 92,777 1,022,690 253,462
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 1,022,690 $ 253,462 $ 198,051
----------- ----------- -----------
Supplemental disclosures of cash flow
information
Cash paid during period for:
Interest............................... $ 204,017 $ 158,191 $ 72,207
Income taxes........................... 1,226,603 1,063,726 1,288,604
</TABLE>
The accompanying notes are an integral part of these statements.
F-108
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Town & Country Electric Inc. ("Company") is engaged in electrical
contracting for industrial, commercial, residential and institutional
customers. The majority of the contracts are in the midwestern United States.
On January 30, 1998, the Company entered into a Letter of Intent with
Consolidation Capital Corporation ("CCC") for the potential sale of the
Company to CCC.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies used in the
preparation of the financial statements follows.
1. Revenue and Cost Recognition
Revenues from fixed-price contracts are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. This method is used because
management believes costs to be the best available measure of progress on
these contracts. Contracts are considered completed when the work is
substantially complete and accepted. Revenues from time and material contracts
are recognized on the basis of costs incurred during the period plus fees
earned.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts, if material, are made in the period in which such
losses are determined. It is reasonably possible that changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and income, and are recognized in the period in which the
revisions are determined.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
3. Inventories
Inventories, consisting of electrical materials and supplies, are stated at
the lower of cost, determined on the first-in, first-out method, or market.
4. Property and Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized while replacements, maintenance and repairs which
do not improve or extend the lives of the respective assets are expensed
currently as incurred. Properties sold, or otherwise disposed of, are removed
from the property accounts, with gains or losses on disposal credited or
charged to the results of operations.
F-109
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--CONTINUED
Depreciation is provided over the estimated useful lives of the respective
assets, using straight-line and accelerated methods, as follows:
<TABLE>
<S> <C>
Equipment....................................................... 7 years
Furniture and fixtures.......................................... 7 years
Computer equipment.............................................. 5 years
Vehicles........................................................ 5 years
Leasehold improvements.......................................... 15 years
Building........................................................ 19-39 years
</TABLE>
5. Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. The deferred taxes relate primarily to differences between the
financial and tax basis of accounts receivable, inventories, accrued vacation,
and other accrued liabilities. The deferred taxes represent the future tax
return consequences of those differences.
6. Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired
and is being amortized by the straight-line method over 15 years.
7. Financial Instruments
The carrying amount of financial instruments at December 31, 1997
approximates fair value.
NOTE B--CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at two financial institutions.
Accounts at each institution are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate to $98,051 at
December 31, 1997. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
NOTE C--CONTRACT RECEIVABLES
Contract receivables consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Contract receivables currently due............... $8,805,476 $ 9,732,792
Retention........................................ 649,302 997,407
---------- -----------
9,454,778 10,730,199
Less: Allowance for doubtful accounts............ (123,706) (125,500)
---------- -----------
$9,331,072 $10,604,699
========== ===========
</TABLE>
F-110
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--CONTRACTS IN PROCESS
Information relative to contracts in process at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Included in the balance sheet as:
Costs and estimated earnings in excess of
billings on contracts in progress............... $1,465,108 $1,705,125
Billings in excess of costs and estimated
earnings on contracts in progress............... (579,683) (1,265,955)
---------- ----------
$ 885,425 $ 439,170
========== ==========
</TABLE>
NOTE E--INDEBTEDNESS
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Note payable to bank, 7.75% interest, with land and a
building pledged as collateral. Payable in monthly in-
stallments of $1,024, including interest, to December
1998.................................................. $ 94,543 $ 89,949
Note payable to bank, 8.18% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $6,275, including interest, to January 1999........ 142,422 76,460
Note payable to bank, 8.45% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $8,424, including interest, to January 2000........ -- 192,251
Note payable to bank, 8.15% interest, with a vehicle
pledged as collateral. Payable in monthly installments
of $1,765, including interest, to October 1998........ 38,370 19,656
Note payable to former shareholder for redemption of
stock, 6.46% interest, quarterly payments of $7,329
including interest, last payment due February 1998.... 35,472 7,324
Note payable to Dory Electric, Inc., 7.5% interest for
purchase of Dory Electric, Inc. Payable in one
installment of $80,000 made January 1996 and monthly
installments of $4,008, including interest, to January
2001.................................................. 165,747 132,018
1996 Notes payable, paid off in 1997................... 829,183 --
---------- --------
1,305,737 517,658
Less current maturities............................ 156,269 320,644
---------- --------
$1,149,468 $197,014
========== ========
</TABLE>
The aggregate maturities on long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................... $320,644
1999............................................................... 138,316
2000............................................................... 58,697
--------
$517,657
========
</TABLE>
F-111
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--INDEBTEDNESS--CONTINUED
REVOLVING LINE OF CREDIT
The Company has available a $3,667,000 revolving line of credit with M&I
Bank Fox Valley of Appleton which runs through March 31, 2000. Under the terms
of the agreement the Company is required to make monthly interest payments at
prime less .25% (effectively 8.25% (effectively 8.25% at December 31, 1997).
The terms of the agreement contain various restrictive covenants including the
maintenance of certain levels of working capital and net worth, redemption of
stock and issuance of stock. The Company is in compliance with these covenants
as of December 31, 1997. At December 31, 1997, there was no outstanding
balance on the revolver note.
NOTE F--INCOME TAXES
The provision (credit) for income taxes for the years ended December 31,
1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current
Federal................................. $ 990,507 $1,112,556 $ 751,935
State................................... 260,517 316,960 171,710
Deferred.................................. (96,000) (15,800) (29,400)
---------- ---------- ---------
$1,155,024 $1,413,716 $ 894,245
========== ========== =========
</TABLE>
The reconciliation of statutory to actual tax provision is as follows for
the year ended December 31:
<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
---------- ---- ---------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory
rate.................... $1,002,908 34.0% $1,179,648 34.0% $699,411 34.0%
State income taxes, net
of federal benefit...... 171,941 5.8 209,194 6.0 113,329 6.0
Other.................... (19,825) (0.6) 24,874 0.7 81,505 3.0
---------- ---- ---------- ---- -------- ----
Tax provision
recorded.............. $1,155,024 39.2% $1,413,716 40.7% $894,245 43.0%
========== ==== ========== ==== ======== ====
</TABLE>
The tax effect of items that comprise a significant portion of deferred tax
assets at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Vacation pay............................................... $198,966 $202,945
Accrued continued employment............................... 61,386 60,195
Allowance for bad debts.................................... 48,245 48,945
Other...................................................... 70,202 37,315
-------- --------
Total current deferred tax asset......................... 378,799 $349,400
======== ========
</TABLE>
F-112
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company leases its home office building under an operating lease in
effect through July, 2004. During the term of the lease, the Company has the
option to purchase the building. The Company also leases other office space
and a vehicle under operating leases. Future minimum rental payments under
these leases consist of the following at December 31, 1996:
<TABLE>
<S> <C>
1998............................................................ $ 237,655
1999............................................................ 216,184
2000............................................................ 161,277
2001............................................................ 141,960
2002............................................................ 141,960
Thereafter........................................................ 223,720
----------
Total......................................................... $1,122,756
==========
</TABLE>
Total rent expense for all operating leases was $234,180, $197,202, and
$116,818 for the years ended December 31, 1997, 1996 and 1995, respectively.
In addition, the Company rents equipment as needed. The Company treats these
rents as contract costs.
NOTE H--PROFIT SHARING AND 401(K) PLAN
The Company has a profit sharing and 401(k) plan covering substantially all
employees, which includes the provisions of Section 401(k) of the Internal
Revenue Code. The Plan allows for tax deferred employee contributions.
Participants may make voluntary contributions of between 1% and 15% of their
annual compensation to the Plan. This contribution may be 100% matched by the
Company, up to a maximum of $950 per employee for the years ended December 31,
1997, 1996, and 1995. Matching and any additional Company contributions to the
Plan are determined annually by the Board of Directors. Company contributions
to the Plan for the years ended December 31, 1997, 1996 and 1995 amounted to
$380,488, $315,874, and $277,720, respectively.
Beginning in 1995, participants were allowed to elect that up to 33% of
their matching contribution could be allocated to purchase Company stock.
These amounts have been deposited with the asset custodian.
NOTE I--STOCK REDEMPTION AGREEMENT
The Company's Articles of Incorporation include provisions concerning the
purchase of a stockholder's stock by the Company when such stockholder is no
longer an employee or director of the Company. Under the terms of this
agreement, the price paid for the stock is to be the Company's appraised value
as of the end of the fiscal year immediately preceding the date of the
termination of the stockholder as an employee or director.
F-113
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Garfield Electric Company
We have audited the accompanying balance sheets of Garfield Electric Company
as of December 31, 1996 and 1997, and the related statements of earnings,
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garfield Electric Company
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-114
<PAGE>
GARFIELD ELECTRIC COMPANY
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash........................................................... $ 3 $ 1
Accounts receivable:
Trade (including retainages of $55 and $67 in 1996 and
1997)....................................................... 971 1,664
Affiliates................................................... 297 158
Officer...................................................... 28 37
Allowance.................................................... (30) (30)
------ ------
1,266 1,829
Inventory...................................................... 42 54
Cost and estimated earnings in excess of billings on uncom-
pleted contracts.............................................. 615 1,211
Prepaid expenses............................................... 20 21
Deferred Federal income tax.................................... 6 37
------ ------
Total current assets....................................... 1,952 3,153
Equipment--net................................................. 328 294
Investment in affiliate........................................ -- 75
Deposits....................................................... 2 3
Cash surrender value of life insurance......................... 70 83
------ ------
Total assets............................................... $2,352 $3,608
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable--bank............................................ $ 474 $ 838
Current maturities of long-term debt........................... 5 15
Bank overdraft................................................. 141 218
Accounts payable:
Trade........................................................ 405 624
Affiliate.................................................... 20 21
Other........................................................ 7 7
------ ------
432 652
Billings in excess of costs and estimated earnings on uncom-
pleted contracts.............................................. 113 186
Accrued income taxes........................................... 156 228
Accrued expenses
Payroll and payroll taxes.................................... 118 181
Workers compensation......................................... 65 6
Dividends.................................................... 42 --
------ ------
Total accrued expenses..................................... 225 187
------ ------
Total current liabilities.................................. 1,546 2,324
Long-term debt obligations..................................... 2 18
STOCKHOLDERS' EQUITY
Common stock (5,000 shares authorized, 1,666 issued, with 933
shares outstanding in 1996 and 1997, without par value, at
aggregate stated value)..................................... 503 503
Retained earnings............................................ 496 958
Less 733 treasury shares at cost in 1996 and 1997............ (195) (195)
------ ------
Total stockholders' equity................................. 804 1,266
------ ------
Total liabilities and stockholders' equity................. $2,352 $3,608
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-115
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Contract revenue....................................... $11,792 $8,766 $10,826
Contract costs (net of affiliated company labor
transactions of $235, $505, and $472 for the years
ended December 31, 1995, 1996 and 1997................ 9,683 6,908 8,286
------- ------ -------
Gross profit....................................... 2,109 1,858 2,540
Selling and administrative expenses (net of affiliated
company reimbursement of $235, $488 and $360 for the
years ended December 31, 1995, 1996 and 1997.......... 1,325 1,394 1,593
Note receivable charge off............................. 564 -- 12
------- ------ -------
Total selling and administrative expense........... 1,889 1,394 1,605
------- ------ -------
Operating profit................................... 220 464 935
Other expense (income)
Interest expense..................................... 130 46 69
Interest income...................................... (16) -- --
Other................................................ -- 18 24
------- ------ -------
Earnings before income taxes....................... 106 400 842
Income taxes........................................... 27 185 319
------- ------ -------
Net earnings....................................... $ 79 $ 215 $ 523
======= ====== =======
Net earnings per share............................. $ 85 $ 230 $ 561
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-116
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995................. $503 $278 $(195) $ 586
Dividends, $36 per share................. -- (34) -- (34)
Net earnings............................. -- 79 -- 79
---- ---- ----- ------
BALANCE, DECEMBER 31, 1995............... 503 323 (195) 631
Dividends, $45 per share................. -- (42) -- (42)
Net earnings............................. -- 215 -- 215
---- ---- ----- ------
BALANCE, DECEMBER 31, 1996............... 503 496 (195) 804
Dividends, $65 per share................. -- (61) -- (61)
Net earnings............................. -- 523 -- 523
---- ---- ----- ------
BALANCE, DECEMBER 31, 1997 $503 $958 $(195) $1,266
==== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-117
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings.............................................. $ 79 $ 215 $523
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Gain) on disposal of asset.............................. (5) (2) (4)
Deferred Federal income tax.............................. (1) (5) (31)
Depreciation and amortization............................ 102 101 144
Changes in assets and liabilities:
Accounts receivable..................................... (301) 815 (563)
Note receivable charge off.............................. 564 -- --
Inventory............................................... (7) 41 (12)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (487) 354 73
Cost and estimated earnings on uncompleted contracts in
excess of billings..................................... (78) (100) (596)
Prepaid expenses........................................ 16 (16) (2)
Accounts payable........................................ 222 (612) 220
Accrued income taxes.................................... 77 150 72
Accrued expenses........................................ 110 (33) (38)
----- ----- ----
Net cash provided by (used in) operating activities.... 291 908 (214)
Cash flows provided by (used in) investing activities:
Purchases of equipment.................................... (94) (214) (109)
Investment in Affiliate................................... -- -- (75)
Proceeds from disposal of equipment....................... 5 2 3
Increase in cash surrender value of life insurance........ (15) (16) (13)
Note receivable........................................... 59 -- --
----- ----- ----
Net cash used in investing activities.................. (45) (228) (194)
Cash flows provided by (used in) financing activities:
Dividends paid............................................ (33) (42) (61)
Proceeds (payment) of note payable........................ (502) (332) 26
Change in bank overdraft and line of credit............... 290 (305) 441
----- ----- ----
Net cash provided by (used in) financing activities.... (245) (679) 406
----- ----- ----
Net increase (decrease) in cash............................ 1 1 (2)
Cash at beginning of year.................................. 1 2 3
----- ----- ----
Cash at end of year........................................ $ 2 $ 3 $ 1
===== ===== ====
Supplemental disclosure of cash transactions:
Interest paid............................................. $ 130 $ 46 $ 69
===== ===== ====
Taxes paid................................................ $ 16 $ 39 $247
===== ===== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-118
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Company is a non-union electrical contractor performing services
primarily in the Midwest area of the United States. A summary of significant
accounting policies consistently applied in the preparation of the
accompanying financial statements follows:
1. Income Recognition
The accompanying financial statements have been prepared using the
percentage-of-completion method of accounting and, therefore, take into
account the cost, estimated earnings and revenue to date on contracts not yet
completed.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears in relation to the
anticipated final total cost, based on current estimates of cost to complete.
Actual results may vary from anticipated amounts.
Contract cost includes all direct labor and benefits, materials unique to or
installed in the project, subcontract costs, and allocated indirect
construction costs.
As long-term contracts extend over one or more years, revisions in estimates
of cost and earnings during the course of the work are reflected in the
accounting period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Inventory
Inventory is stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
3. Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service
lives, approximately three to ten years, principally on accelerated methods.
4. Income Taxes
Deferred income taxes have been provided for timing differences primarily
relating to currently non-deductible state tax accruals which completely
reverse in the subsequent year.
Permanent differences result from officers life insurance expense and meals
and entertainment expense.
5. Major Customers
Approximately 36% of 1995 revenues were derived from two customers (20% and
16% respectively). Approximately 35% of 1996 revenues were derived from three
customers (13%, 11% and 11% respectively). Approximately 31% of 1997 revenues
were derived from two customers (20% and 11% respectively).
6. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
F-119
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
7. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
8. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
9. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period. Weighted average common shares outstanding were
933 shares for all periods persented.
NOTE B--EQUIPMENT--LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
------ ------
<S> <C> <C>
Automobiles and trucks........................................ $ 393 $ 400
Equipment..................................................... 658 718
Fixtures...................................................... 114 115
------ ------
1,165 1,233
Accumulated depreciation...................................... 837 939
------ ------
$ 328 $ 294
====== ======
</TABLE>
Depreciation expense was $102, $101 and $144 for the years ended December
31, 1995, 1996 and 1997.
NOTE C--EMPLOYEE BENEFIT PLANS
The Company has a contributory profit-sharing plan covering all full time
employees. Contributions are made at the discretion of the Board of Directors.
Effective March 1, 1989, the plan was amended to include a 401(k) plan, to
which contributions may be made by the Corporation. Contributions to the plan
totaled $20 and $22, and $57 in December 31, 1995, 1996 and 1997.
F-120
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE D--LEASES
The Company occupies premises owned by related parties under month-to-month
leases at monthly rentals of approximately $4 in 1995, 1996, and 1997. Total
rental expense was $92, $89, and $139 for December 31, for 1995, 1996 and
1997.
NOTE E--DEBT
The Company has a $1,250 revolving credit note with interest at prime (8.75%
at December 31, 1997) plus .5% of which $474, and $838 are outstanding at
December 31, 1996, and 1997. The note is secured by inventory, equipment and
contract rights. This is guaranteed by stockholders of the company and there
are cross guarantees in place with Indecon, Inc. a related company.
Equipment obligations are payable in monthly installments of approximately
$1 including interest at December 31, 1997. This obligation matures in 2000.
NOTE F--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
------ ------
<S> <C> <C>
Costs incurred on uncompleted contracts...................... $2,324 $3,934
Estimated earnings........................................... 761 1,268
------ ------
3,085 5,202
Less billings to date...................................... 2,583 4,177
------ ------
$ 502 $1,025
====== ======
Presented on the balance sheet as follows:
Costs and estimated earnings in excess of billings......... $ 615 $1,211
Billings in excess of costs and estimated earnings......... (113) (186)
------ ------
$ 502 $1,025
====== ======
</TABLE>
The backlog of contracts yet to be completed at December 31, 1997 includes
revenue, costs and gross profit of approximately $3,201, $2,235 and $966,
respectively.
F-121
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE G--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current................................................... $22 $134 $285
Deferred.................................................. (1) (5) (31)
State and local........................................... 6 56 65
--- ---- ----
$27 $185 $319
=== ==== ====
Components of effective income tax rate:
Federal:
Statutory rate............................................ 22% 34% 34%
Permanent differences..................................... (3) (1) --
Other..................................................... -- (1) --
State and local........................................... 6 14 8
--- ---- ----
Net effective income tax rate............................ 25% 46% 42%
=== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997
----- -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual........................ $ 6 $ 32
</TABLE>
NOTE H--RELATED PARTIES
The Company receives a management fee from related companies as a
reimbursement of the cost of performance of administrative functions. This
amounted to approximately $235, $488 and $360 in December 31, 1995, 1996 and
1997 which has been reflected as a reduction of selling and administrative
expenses.
The Company and its related party, from time to time provide workers to each
other during peak labor needs. These charges are recorded at cost, including
benefits and related payroll taxes. The totals charged to the related party by
the Company for work performed by its workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively. The totals charged to the
Company for work performed by the related party's workers was $40, $34 and $5
for the years ended 1995, 1996 and 1997 respectively.
F-122
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE I--TREASURY STOCK
The Company has repurchased the shares of a former shareholder for a total
of $132. This amount is being repaid in twelve quarterly installments of
approximately $11 plus interest at 10%. The note is reflected in the financial
statements at $132 less payments made to date. The financial instrument is
recorded at cost which approximates fair value. As of December 31, 1997 all
payments have been made.
NOTE J--UNCOLLECTIBLE NOTE RECEIVABLE
The Company advanced money to and performed services for another
construction company from time to time. During the year ended December 31,
1995, it became known to the Company that the amounts advanced would be
uncollectible and the asset was written off.
NOTE K--COMMITMENT
On January 29, 1998 the Corporation entered into a letter of intent with
Consolidation Capital Corporation (CCC) for the potential sale of Garfield
Electric Company to CCC.
NOTE L--CONTINGENCIES
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations. In addition, a shareholder resigned from the Company on
April 30, 1993 and his stock was redeemed in accordance with the shareholders
agreement. He has refused to accept the amount paid by the Company and asserts
that a larger amount is due. No suit has been filed.
NOTE M--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Company the option to
purchase the shares at book value as of the last audited financial statement.
F-123
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Indecon, Inc.
We have audited the accompanying balance sheets of Indecon, Inc. as of
December 31, 1996 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indecon, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-124
<PAGE>
INDECON, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Accounts receivable:
Trade (including retainages of $4 and $0 in 1996 and 1997 and
net of allowances of $0 and $40 in 1996 and 1997)........... $1,427 $1,876
Affiliates................................................... 20 183
Notes receivable--affiliate.................................... 259 743
Inventory...................................................... 137 39
Unbilled receivables on completed contracts.................... 418 373
Cost and estimated earnings in excess of billings on uncom-
pleted contracts.............................................. 464 56
Prepaid expenses............................................... 1 3
Deferred Federal income tax.................................... 15 42
------ ------
Total current assets....................................... 2,741 3,315
Equipment--net................................................. 126 200
Deposits....................................................... 1 1
------ ------
Total assets............................................... $2,868 $3,516
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................. $ 71 $ 728
Bank overdraft................................................. 382 16
Accounts payable:
Trade........................................................ 388 209
Affiliate.................................................... 297 302
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 4 134
Accrued income taxes........................................... 186 164
Deferred federal income tax.................................... -- 8
Accrued expenses:
Payroll...................................................... 365 388
Other........................................................ 110 51
------ ------
Total current liabilities.................................. 1,803 2,000
STOCKHOLDERS' EQUITY
Common stock (750 shares authorized and issued, with 500
shares outstanding in 1996 and 1997, with a stated value of
$4 per share)............................................... 3 3
Retained earnings............................................ 1,095 1,546
Less 250 treasury shares at cost in 1995 and 1996............ (33) (33)
------ ------
Total stockholders' equity................................. 1,065 1,516
------ ------
Total liabilities and stockholders' equity................. $2,868 $3,516
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-125
<PAGE>
INDECON, INC.
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Contract revenue..................................... $7,425 $11,291 $13,672
Contract costs (net affiliated company labor
transactions of $235, $505 and $472 for the years
ended December 31, 1995, 1996 and 1997.............. 5,886 9,199 11,301
------ ------- -------
Gross profit..................................... 1,539 2,092 2,371
Selling and administrative expenses (including
administrative expense reimbursement to affiliate of
$210, $441and $360 for the years ended December 31,
1995, 1996 and 1997)................................ 1,006 1,244 1,376
------ ------- -------
Operating profit................................. 533 848 995
Other expense (income)
(Gain) on disposal of asset........................ (2) -- (1)
Interest--expense.................................. 22 24 33
Interest income.................................... (17) (16) (40)
------ ------- -------
Earnings before income taxes..................... 530 840 1,003
Income taxes......................................... 214 356 452
------ ------- -------
Net earnings..................................... $ 316 $ 484 $ 551
====== ======= =======
Net earnings per common share--primary........... $ 632 $ 968 $ 1,102
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-126
<PAGE>
INDECON, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............... $ 3 $ 335 $(31) $ 307
Net earnings........................... -- 316 -- 316
--- ------ ---- ------
BALANCE, DECEMBER 31, 1995............. 3 651 (31) 623
Dividends, $80 per share............... -- (40) -- (40)
Purchase price adjustment on treasury
shares................................ -- -- (2) (2)
Net earnings........................... -- 484 -- 484
--- ------ ---- ------
BALANCE, DECEMBER 31, 1996............. 3 1,095 (33) 1,065
Dividends, $200 per share.............. -- (100) -- (100)
Net earnings........................... -- 551 -- 551
--- ------ ---- ------
BALANCE, DECEMBER 31, 1997............. $ 3 $1,546 $(33) $1,516
=== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-127
<PAGE>
INDECON, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings............................................. $ 316 $ 484 $ 551
Adjustments to reconcile net earnings to net cash pro-
vided by (used in) operating activities:
(Gain) on disposal of asset............................. (2) -- (1)
Deferred Federal income tax............................. 3 (11) (19)
Depreciation and amortization........................... 59 65 81
Changes in assets and liabilities
Accounts receivable.................................... (411) (477) (612)
Inventory.............................................. -- (136) 98
Unbilled receivables on completed contracts............ (394) 157 45
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 62 (58) 130
Cost and estimated earnings on uncompleted contracts in
excess of billings.................................... 130 (441) 408
Prepaid expenses....................................... 1 1 (2)
Accounts payable....................................... 267 305 (174)
Accrued income taxes................................... 5 58 (22)
Accrued expenses....................................... 239 101 (36)
----- ----- -----
Net cash provided by operating activities............. 275 48 447
Cash flows (used in) investing activities:
Proceeds from sale of equipment.......................... -- -- 1
Purchases of equipment................................... (71) (61) (155)
Increase in notes receivable affiliate................... (167) (91) (484)
----- ----- -----
Net cash used in investing activities................. (238) (152) (638)
Cash flows provided by (used in) financing activities:
Increase in purchase price of treasury stock............. -- (2) --
Dividends paid........................................... -- (40) (100)
(Proceeds) payment of note payable....................... (288) 42 657
Increase (decrease) in bank overdraft.................... 251 104 (366)
----- ----- -----
Net cash provided by (used in) financing activities... (37) 104 191
----- ----- -----
Net decrease in cash...................................... -- -- --
Cash at beginning of year................................. -- -- --
----- ----- -----
Cash at end of year....................................... $ -- $ -- $ --
===== ===== =====
Supplemental disclosure of cash transactions:
Interest paid............................................ $ 22 $ 20 $ 33
===== ===== =====
Taxes paid............................................... $ 205 $ 309 $ 297
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-128
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Corporation is an industrial electrical contractor whose work is
primarily in Ohio and Kentucky. A summary of significant accounting policies
applied in the preparation of the accompanying financial statements follows:
1. Income Recognition
The Corporation recognizes income on the percentage of completion method.
The percentage of completion is calculated on the cost to cost method using
cost to date and total estimated cost on a job by job basis. Actual results
may vary from estimates. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is accrued. The current asset
caption "unbilled receivables on completed contracts" includes revenues earned
in excess of billings for time and materials contracts as of December 31, 1996
and 1997. Contract Revenues include $4,520, $8,122, and $10,936 in 1995, 1996,
and 1997 derived from time and material jobs.
2. Inventory
Inventory represents materials purchased for jobs which have not commenced
at December 31. The inventory is carried at the lower of cost or market on a
FIFO basis.
3. Equipment
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
approximately three to ten years, principally on accelerated methods.
4. Income Taxes
The provision for tax is charged to current earnings. Deferred taxes have
been recorded for timing differences in deductibility of state income taxes
which completely reverse in the subsequent year and differences in
depreciation methods for book and tax purposes.
5. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
6. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
F-129
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
7. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
8. Earnings Per Share
Basic earnings per share is computed based upon weighted-average shares
outstanding during the period. Weighted-average shares outstanding for all
periods was 500 shares.
NOTE B--NOTES RECEIVABLE--AFFILIATE
The notes receivable--affiliate result from cash advances to two different
affiliated Companies which have common ownership with this Company. The notes
are due on demand and bear interest at a rate equal to the Corporations line
of credit. The notes are unsecured.
NOTE C--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Office equipment............................................. $ 108 $ 142
Construction equipment....................................... 249 364
------ ------
357 506
Accumulated depreciation................................... (231) (306)
------ ------
$ 126 $ 200
====== ======
</TABLE>
Depreciation expense for the year ended December 31, 1995, 1996 and 1997 was
$59, $65 and $81, respectively.
NOTE D--NOTE PAYABLE
The Corporation used at December 31, 1996 and 1997 $71 and $728 of a $1,200
revolving note from the bank. The interest rate is 1% over the prime rate
(currently 8.25%) as of December 31, 1997. The note is secured by inventory
and accounts receivable and is guaranteed by the stockholders. There are also
guarantees in place with Garfield Electric Company, a related company.
F-130
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE E--OPERATING LEASES
The Corporation entered into an agreement in June 1997 which leases office
space under an operating lease. The following is a schedule, by years, of the
future minimum rental payments which expire January 31, 2003:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER 31,
-----------
<S> <C>
1998 $59,316
1999 $59,952
2000 $59,952
2001 $59,952
2002 $59,952
2003 $ 4,996
</TABLE>
Total rent expense under the operating lease was $66,761 for 1997.
NOTE F--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current.................................................. $162 $282 $352
Deferred................................................. 3 (11) (19)
State and local.......................................... 49 85 119
---- ---- ----
$214 $356 $452
==== ==== ====
Components of effective income tax rate:
Federal:
Statutory................................................ 34% 34% 34%
Permanent differences.................................... -- -- --
Other.................................................... (3) -- --
State and local.......................................... 10 6 12
---- ---- ----
Net effective income tax rate.......................... 41% 40% 46%
==== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
------ -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual....................... $ 15 $ 42
====== =====
Deferred tax liability depreciation.......................... $ -- $ 8
====== =====
</TABLE>
NOTE G--RELATED PARTIES
Two of the stockholders of Indecon, Inc. are stockholders of a related
company to which payments are made to perform some of the administrative
functions of Indecon. The total of this administrative fee paid to reimburse
F-131
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE G--RELATED PARTIES (CONTINUED)
the cost of the services provided was $210, $441 and $360, in 1995, 1996 and
1997, respectively. The Corporation and its' related party from time to time
provide workers to each other during peak labor needs. These charges are
recorded at cost, including benefits and payroll taxes. The totals charged to
the related party for work performed by its' workers was $40, $34 and $5 for
the years ended 1995, 1996 and 1997, respectively. The totals charged to the
Corporation for work performed by its' workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively.
In 1997, the company separated its Data Network Solutions Cabling division
and sold its net assets at book value to a separate company owned
substantially by Indecon's shareholders.
NOTE H--MAJOR CUSTOMERS
The Corporation had sales to one customer totaling for 79% of total revenue
in 1995, and sales to three customers for 40% of total revenues (15%, 13% and
12%) in 1996 and sales to one customer for 56% of total revenues in 1997.
NOTE I--PROFIT-SHARING PLAN
As of January 1, 1991, the Corporation implemented a 401(k) profit-sharing
plan for all eligible employees. Employer contributions are made at the
discretion of the Board of Directors, with all costs funded as accrued.
Contributions by the Corporation in 1995, 1996 and 1997 totaled $40, $65 and
$44.
NOTE J--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
----- ------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 442 $163
Estimated earnings.......................................... 145 17
----- ------
587 180
Less billings to date....................................... 127 258
----- ------
$ 460 $ (78)
===== ======
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $ 464 $ 56
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... (4) (134)
----- ------
$ 460 $ (78)
===== ======
</TABLE>
NOTE K--SETTLEMENT OF STOCKHOLDER LAWSUIT
In February 1996, a lawsuit with a stockholder was settled. The Corporation
was directed to pay a total of $27 for the stockholder's one hundred twenty-
five shares, pursuant to the Corporation's stock repurchase agreement. An
additional $2 was paid to the stockholder.
F-132
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE L--COMMITMENT
On January 29, 1998 the Corporation entered into a Letter of Intent with
Consolidation Capital Corporation (CCC) for the potential sale of Indecon,
Inc. to CCC.
NOTE M--LITIGATION
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE N--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Corporation the option to
purchase shares at book value as of the last audited financial statement.
F-133
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Service Solutions, Inc.:
We have audited the accompanying balance sheet of UNITED SERVICE SOLUTIONS,
INC. (the "Company") as of December 31, 1997, and the related statements of
income, stockholders' equity (deficit) and cash flows for the period from
inception (October 17, 1997) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Service Solutions,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the period from inception (October 17, 1997) to December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 16, 1998 (except with respect
to the matter discussed in Note 7,
as to which the date is April 6,
1998).
F-134
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 16,752 $ 920,010
Accounts receivable, net of allowance
for doubtful accounts of $227,000 and
$227,000, respectively................ 1,658,011 6,433,201
Unbilled services...................... 2,420,675 1,713,307
Supply inventory....................... 131,802 126,563
Current deferred tax asset............. 17,518 17,518
Prepaid expenses and other current
assets................................ 30,478 366,077
Employee receivables................... 19,060 18,579
Income tax receivable.................. -- 231,465
----------------- --------------
Total current assets................. 4,294,296 9,826,720
EQUIPMENT, net of accumulated
depreciation of $49,572 and $228,381,
respectively............................ 1,962,234 2,811,367
INTANGIBLE ASSETS, net of accumulated
amortization of $33,309 and $194,984,
respectively............................ 7,363,563 26,078,747
DEBT ISSUANCE COSTS, net of accumulated
amortization of $3,570 and $56,160,
respectively............................ 243,704 573,116
OTHER ASSETS............................. -- 220,038
----------------- --------------
Total assets......................... $ 13,863,797 $ 39,509,988
================= ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdrafts........................ $ 74,423 $ --
Accounts payable....................... 1,180,958 2,358,737
Equipment financing obligation......... 725,754 398,432
Accrued expenses....................... 579,605 2,826,033
Accrued interest....................... 73,319 357,871
Income taxes payable................... 83,509 --
Due to related parties................. 508,367 350,000
Current portion of long-term debt...... 500,000 1,520,000
Deferred revenue....................... -- 1,326,356
----------------- --------------
Total current liabilities............ 3,725,935 9,137,429
LONG-TERM DEBT........................... 8,255,925 22,105,545
LONG-TERM DEBT--RELATED PARTY............ 4,042,222 9,067,221
DEFERRED INCOME TAX LIABILITY--
NONCURRENT.............................. 35,285 35,285
----------------- --------------
Total liabilities.................... 16,059,367 40,345,480
WARRANTS WITH PUT OPTION................. 303,733 504,503
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value,
1,500,000 shares authorized, 1,000,000
and 1,060,996 issued and outstanding,
respectively.......................... 1,000 1,061
Common stock--Class A, $0.001 par
value, 0 and 53,530 shares authorized,
issued and outstanding, respectively.. -- 54
Common stock--Class B, non-voting,
$0.001 par value, 0 and 62,541 shares
authorized, issued and outstanding,
respectively.......................... -- 63
Additional paid-in capital............. 4,018 806,818
Accumulated deficit.................... (2,504,321) (2,147,991)
----------------- --------------
Total stockholders' equity
(deficit)........................... (2,499,303) (1,339,995)
----------------- --------------
Total liabilities and stockholders'
equity (deficit).................... $ 13,863,797 $ 39,509,988
================= ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-135
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
OCTOBER 17, 1997
(INCEPTION) TO
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Service revenues, net..................... $ 4,458,195 $15,746,844
Lease revenues............................ 40,689 185,409
----------------- --------------
Total operating revenues................ 4,498,884 15,932,253
OPERATING EXPENSES:
Subcontractor expenses.................... 3,028,328 10,996,500
Supply costs.............................. 358,226 1,094,315
Salaries, wages and benefits.............. 369,543 1,201,842
Selling, general and administrative
expenses................................. 211,134 845,077
Insurance expenses........................ 11,561 49,239
Depreciation and amortization............. 82,881 340,484
Management fees to related party.......... 27,777 124,998
----------------- --------------
Total operating expenses................ 4,089,450 14,652,455
----------------- --------------
OPERATING INCOME............................ 409,434 1,279,798
OTHER INCOME (EXPENSE):
Interest expense.......................... (142,316) (685,916)
Other..................................... 837 --
----------------- --------------
Total other expense..................... (141,479) (685,916)
----------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES.... 267,955 593,882
PROVISION FOR INCOME TAXES:
Current................................... (83,509) (237,552)
Deferred.................................. (17,767) --
----------------- --------------
NET INCOME.................................. $ 166,679 $ 356,330
================= ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-136
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 17, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON COMMON STOCK
------------- ------------- ---------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
------ ------ ------ ------ --------- ------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 17,
1997 (Inception)....... -- $-- -- $-- -- $ -- $ -- $ -- $ --
Issuance of stock to
BACE Capital
Partners............. -- -- -- -- 800,000 800 4,218 -- 5,018
Issuance of stock to
selling shareholder.. -- -- -- -- 200,000 200 (200) -- --
Deemed dividend to
selling shareholder.. -- -- -- -- -- -- -- (2,671,000) (2,671,000)
Net income............ -- -- -- -- -- -- -- 166,679 166,679
------ ---- ------ ---- --------- ------ -------- ----------- -----------
BALANCE, December 31,
1997................... -- -- -- -- 1,000,000 1,000 4,018 (2,504,321) (2,499,303)
Issuance of stock to
subordinated debt
holders (unaudited).. 53,530 54 62,541 63 -- -- 173,991 -- 174,108
Issuance of stock
(unaudited).......... -- -- -- -- 60,996 61 628,809 -- 628,870
Net income
(unaudited).......... -- -- -- -- -- -- -- 356,330 356,330
------ ---- ------ ---- --------- ------ -------- ----------- -----------
BALANCE, March 31, 1998
(unaudited)............ 53,530 $ 54 62,541 $ 63 1,060,996 $1,061 $806,818 $(2,147,991) $(1,339,995)
====== ==== ====== ==== ========= ====== ======== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-137
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 17, 1997
(INCEPTION) TO
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 166,679 $ 356,330
Adjustments to reconcile net income to cash
provided by operating activities--
Depreciation and amortization............. 82,881 340,484
Amortization of debt issuance costs....... 3,570 52,590
Noncash interest charges.................. 51,880 185,496
Deferred tax provision.................... 17,767 --
Change in operating assets and
liabilities--
Accounts receivable and unbilled
services............................... (885,645) 343,992
Accounts payable and accrued expenses... 556,938 421,767
Supply inventory........................ (81,802) 5,239
Accrued interest........................ 73,319 284,552
Income taxes payable.................... 83,509 (314,974)
Deferred revenue........................ -- 220,296
Prepaid expenses and other assets....... (29,337) (539,283)
----------- ------------
Cash provided by operating activities... 39,759 1,356,489
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment...................... (42,910) (394,087)
Purchase of California Professional Cleaning
Services, Inc and related entities, net of
cash acquired.............................. (8,682,212) --
Purchase of Sullivan Service Company........ -- (15,063,268)
----------- ------------
Cash used in investing activities....... (8,725,122) (15,457,355)
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-138
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 17, 1997
(INCEPTION) TO
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................. $ 74,423 $ (74,423)
Proceeds from long--term debt.............. 8,750,000 15,073,380
Debt issuance costs........................ (247,274) (382,002)
Payments on equipment financing
obligation................................ (180,052) (327,322)
Payment on term loan....................... -- (230,000)
Proceeds from issuance of stock............ 5,018 802,978
Proceeds from issuance of warrants......... 300,000 141,513
---------- -----------
Cash provided by financing activities...... 8,702,115 15,004,124
INCREASE IN CASH AND CASH EQUIVALENTS........ 16,752 903,258
CASH AND CASH EQUIVALENTS, beginning of
period...................................... -- 16,752
---------- -----------
CASH AND CASH EQUIVALENTS, end of period..... $ 16,752 $ 920,010
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................. $ 17,117 $ 163,278
========== ===========
Taxes paid................................. $ -- $ 552,526
========== ===========
SUPPLEMENTAL DISCLOSURE OF NON--CASH
FINANCING AND INVESTING ACTIVITIES:
Note to selling shareholder................ $4,000,000 $ 4,925,000
========== ===========
Deferred purchase consideration............ $ 500,000 $ --
========== ===========
Deemed dividend to selling shareholder..... $2,671,000 $ --
========== ===========
Equipment financed through equipment
financing obligation...................... $ 56,991 $ --
========== ===========
Equipment acquired in acquisition.......... $1,911,905 $ 633,855
========== ===========
Working capital acquired................... $2,276,742 $ 332,237
========== ===========
Equipment financing obligation assumed..... $ 848,815 $ --
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-139
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) BUSINESS AND OPERATIONS
United Service Solutions, Inc. (the "Company") was incorporated on October
17, 1997 in Delaware. Operations began on November 22, 1997 when the Company
purchased the principal operating assets and assumed certain liabilities of
California Professional Cleaning Services, Inc. ("CPCS") and related entities
(the "Acquisition"). The Company is a subsidiary of the members of BACE
Capital Partners LLC, a venture capital fund organized in Colorado.
The Company is engaged in the business of contract facilities management
services primarily to regional and national chain retailers in various regions
of the continental United States. The services the Company manages generally
involve the sweeping, stripping, scrubbing and buffing of facility floors. The
Company's principal customers are in the grocery, pharmacy and consumer
products businesses. Additionally, the Company leases floor maintenance
equipment to certain customers and subcontractors.
A significant portion of the Company's operations are in California. The
Company also operates in Arizona, Colorado, Florida, Idaho, Nebraska, Nevada,
New Mexico, New York, Oregon, Texas, Utah, Washington, West Virginia and
Wyoming.
The Acquisition
On November 22, 1997, the Company acquired certain net assets of CPCS for
$6.7 million in cash, subordinated purchase money notes payable of $4 million
and 200,000 shares of the Company's common stock. In addition, the Company
paid $2.0 million for covenants not to compete ranging from 5 to 15 years. The
Company will be required to pay an additional $0.5 million in December 1998,
assuming CPCS's operating income does not decline from the prior year's
levels. This additional amount has been accrued at the date of acquisition
because payment is reasonably assured. The acquisition was accounted for using
the purchase method. Accordingly, the purchase price was allocated to the net
assets acquired based upon their estimated fair values for the 80% acquired by
new equity interests and based upon predecessor cost for the 20% interest
retained by the seller. The excess of the consideration received by the
selling shareholder over the predecessor cost of the assets contributed
relating to the 20% interest retained has been charged to equity as a deemed
dividend in accordance with Emerging Issues Task Force (EITF) Issue No. 88-16.
This treatment resulted in approximately $5.4 million of cost in excess of net
assets acquired as of November 22, 1997. Such excess is being amortized on a
straight-line basis over 40 years. CPCS results of operations have been
included since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
year ended December 31, 1997 assume the acquisition occurred as of the
beginning of the period:
<TABLE>
<CAPTION>
1997
-------------
(IN MILLIONS)
<S> <C>
Total revenues............................................. $32.1
Net income................................................. 0.9
</TABLE>
The preliminary allocation to property and equipment, goodwill and other
intangibles is contingent upon the Company finalizing its appraisal of the
assets acquired from CPCS.
In connection with the Acquisition, the Company entered into an employment
and consulting agreement with the seller. The employment agreement and
subsequent consulting agreement each have six month terms. Cash remuneration
paid under the employment agreement was approximately $13,000 in 1997.
F-140
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments not subject to market
risk, with a maturity of three months or less at the date of purchase, to be
cash equivalents.
Equipment
Equipment is stated at cost. The Company uses the straight-line method of
depreciation for financial reporting purposes. Following is a summary of
estimated useful lives:
<TABLE>
<CAPTION>
ASSET YEARS
----- -----
<S> <C>
Automobiles and trucks.............................................. 5-7
Machinery and equipment............................................. 3-5
Office equipment.................................................... 5-7
</TABLE>
At December 31, 1997, equipment consisted of the following:
<TABLE>
<S> <C>
Machinery and equipment........................................ $ 678,843
Equipment leased to customers and subcontractors (Note 6)...... 1,119,490
Automobiles and trucks......................................... 152,780
Office equipment............................................... 60,693
----------
2,011,806
Less--accumulated depreciation................................. (49,572)
----------
$1,962,234
==========
</TABLE>
Long-Lived Assets
The Company evaluates its long-lived assets for recoverability whenever
changes in its business or other events warrant such a review. A long-lived
asset is considered impaired when projected undiscounted cash flows are
insufficient to recover the carrying amount. As of December 31, 1997,
management believes there has not been any impairment of the Company's long-
lived assets.
Intangible Assets
The Company amortizes its intangible assets over the following periods:
<TABLE>
<S> <C>
Organizational costs................. 5 years
Noncompete agreements................ Term of the agreement (5 to 15 years)
Goodwill............................. 40 years
</TABLE>
At December 31, 1997 intangible assets consisted of the following:
<TABLE>
<S> <C>
Organizational costs........................................... $ 5,000
Noncompete agreements.......................................... 1,959,513
Goodwill....................................................... 5,432,359
----------
7,396,872
Less--Accumulated amortization................................. (33,309)
----------
$7,363,563
==========
</TABLE>
F-141
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Deferred Income Taxes
The Company accounts for income taxes according to the liability method.
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and income tax purposes in
different periods. Deferred taxes are classified as current or noncurrent,
depending on the classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or noncurrent depending on
the periods in which the temporary differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
Concentration of Credit Risk
In 1997, the Company derived approximately 32%, 16% and 9% of its revenue
from three regional and national chain customers. These customers comprised
22%, 19% and 19%, respectively, of the accounts receivable balance as of
December 31, 1997.
In 1997, two vendors comprised approximately 27% and 23% of total
subcontractor expenses.
Revenue Recognition
Service revenue represents revenue for servicing customer floors and is
recognized when the service is provided. Services provided but which have not
yet been billed are included in unbilled services in the accompanying balance
sheet. Leasing revenue for leasing floor maintenance equipment is recognized
on a straight-line basis over the minimum lease term, regardless of payment
terms.
Advertising
The Company expenses advertising costs as incurred.
Supply Inventory
Supply inventory is recorded at the lower of cost or market, with cost
determined under a first-in, first-out method.
Stock Options and Warrants
Employee stock options are accounted for using the intrinsic value method
under which no compensation is generally recognized if the exercise price
equals or exceeds the fair value of the stock at the date of grant. Stock
options and warrants issued to non-employees are accounted for at their fair
value at date of grant. Fair value for non-employee grants is determined using
the Black-Scholes option pricing model or the value of the services received,
whichever is more readily determinable. Subsequent to yearend, the Company
established a stock option plan for key employees. There are 30,000 shares of
stock available for issuance under the plan and each stock option is evidenced
by a stock option agreement, the terms of which are at the discretion of the
board of directors. The exercise period of any grant can be up to 10 years.
Options will be granted with exercise prices at least equal to fair market
value at the date of grant. On February 25, 1998, pursuant to the stock option
plan
F-142
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
for key employees, the Company granted incentive stock options to key
employees for 7,300 shares of the Company's common stock with an exercise
price of $10.31 per share, a five year ratable vesting period and a ten year
life.
Financial Instruments
Substantially all of the Company's financial instruments (which includes
cash equivalents, accounts receivable and payable and borrowings) have been
issued or revalued in connection with the Acquisition. As such, their carrying
amounts reflect fair value December 31, 1997.
The fair value of the warrants with a put option to the Company for cash
beginning in 2002 is $303,733 at December 31, 1997. Each warrant is putable at
a price determined by valuing the Company's net assets at six times the
trailing twelve month EBITDA (net earnings before interest, tax, depreciation
and amortization expenses), less borrowings and dividing by the total number
of common shares and warrants outstanding. At December 31, 1997, the minimum
put amount is approximately $500,000. The redemption price may change in the
future depending upon the future results of operations. The Company is
accreting these putable warrants to their estimated redemption value at the
earliest put date. The accretion is charged to interest expense. As of
December 31, 1997, a total of $3,733 has been charged to interest expense
related to these warrants.
Unaudited Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 1998 and the results of operations and
cash flows for the period presented. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations. The results of operations for the period
presented are not necessarily indicative of the results for the full year.
(3) BORROWINGS
Borrowings at December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
DUE YEAR ENDED DECEMBER 31,
------------------------------ UNAMORTIZED
BY PRIORITY 1998 1999 2000 2001 2002 THEREAFTER DISCOUNT
----------- ---- ---- ------ ------ ------ ---------- -----------
(IN $000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
Term Loan................ $500 $750 $1,000 $1,000 $3,800 $ -- $ --
Notes payable............ -- -- -- -- 2,000 -- (294)
Related party note....... -- -- -- -- -- 4,042 --
---- ---- ------ ------ ------ ------ -----
$500 $750 $1,000 $1,000 $5,800 $4,042 $(294)
==== ==== ====== ====== ====== ====== =====
</TABLE>
FINANCING FACILITY WITH A FINANCIAL INSTITUTION
Revolving Line of Credit
The Company has a revolving line of credit with a financial institution
("Lender") for up to $2.0 million. The revolving line of credit is
collateralized by substantially all of the assets of the Company and ranks
pari passu with the Term Loan. The term of the line is for 5 years with
automatic one-year renewal periods. Interest is at the institution's base rate
plus 0.75% (9.0% at December 31, 1997) and is payable monthly in arrears.
Principal on the line of credit is paid by daily collections on the Company's
accounts receivable, which first pay any outstanding amounts on the line of
credit. A LIBOR option is available to the Company, periodically, for all or
portions of the outstanding principal balance. The rate is based upon the
Company's achieved level of EBITDA, as defined in the agreement, and ranges
from LIBOR plus 2.5% to LIBOR plus 3.0%. The Company must pay a fee for the
unused portion of the line of credit equal to 0.375% of the average monthly
unused principal balance. The fee is payable monthly in arrears. There were no
amounts drawn on the line of credit at December 31, 1997.
F-143
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Term Loan
The Company has a term loan with the Lender for $7.05 million. The term loan
bears interest at the financing institution's base rate plus 1% (9.25% at
December 31, 1997). A LIBOR option is available to the Company, periodically,
for all or a portion of the outstanding principal balance. The rate is based
upon the Company's achieved level of EBITDA, as defined in the agreement, and
ranges from LIBOR plus 2.75% to LIBOR plus 3.25%. The term loan is
collateralized by substantially all of the assets of the Company and ranks
pari passu with the revolving line of credit. Interest is payable monthly in
arrears. Principal is payable quarterly, beginning March 1, 1998, with
quarterly amounts ranging from $125,000 to $250,000. Additionally the Company
must pay additional principal each year equal to 75% of excess cash flow,
defined as 75% of the amount derived by EBITDA less fixed charges and accrued
management fees, which is applied in inverse order of maturity.
If the Company terminates the revolving line of credit or term loan, a
termination charge of 0% to 1.0% of the total credit facility will be assessed
to the Company (0% through December 31, 1998).
The Company is subject to certain financial and nonfinancial covenants
related to the term loan and revolving line of credit. The financial covenants
specify minimum EBITDA levels, an EBITDA to fixed charges ratio, maximum
collateral levels, limitations on additional indebtedness and capital
expenditure limits. As of December 31, 1997 the Company was in compliance with
all covenants.
Notes Payable
The Company entered into note agreements with three financial institutions
for a total of $2.0 million. The notes are subordinated to the term loan and
revolving line of credit. Principal is due in November 2002. Interest is
payable quarterly in arrears at 12%. The notes payable are collateralized by
substantially all of the assets of the Company, although subordinated to the
above revolving line of credit and term loan. The notes were issued with the
warrants discussed in Note 4 which results in an effective interest rate of
approximately 18% on the notes.
The Company is subject to certain financial and nonfinancial covenants
substantially the same as in the credit facility described above.
Equipment Financing Obligation
The Company has an equipment financing arrangement for 263 buffers and 33
auto scrubbers. The obligation at December 31, 1997 was $725,754. Payment
terms are 180 days, without interest, from the invoice date. The amounts due
are as follows: approximately $380,000 is due March 1998, approximately
$312,000 is due May 1998 and approximately $34,000 is due June 1998.
Related Party Note Payable
In connection with the acquisition of the net assets of California
Professional Cleaning Services, Inc. and related entities, the Company issued
a note to the seller for $4.0 million. The principal balance is due in 4 equal
quarterly payments beginning March 1, 2003 or earlier if the Company files a
registration statement under the Securities and Exchange Commission Act of
1933 and issues shares in an initial public offering. Accrued interest at 10%
per annum for the first year is added to the principal balance, thereafter,
interest is payable annually in arrears. The related party note is
subordinated to the Company's other borrowings and is uncollateralized.
F-144
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(4) EQUITY
Stock Split
On January 27, 1998, the Company effected a 1,000-for-1 split of the
Company's common stock. The number of common shares, the capital accounts and
stock options and warrants have been restated to give retroactive effect to
the stock split.
Stock Options
The Company grants stock options to employees at a price equal to the
estimated fair value of the stock on the date of grant. The options vest
ratably over a five year period. Options granted in 1997 are as follows:
<TABLE>
<CAPTION>
REMAINING
EXERCISE CONTRACTUAL
SHARES PRICE LIFE
------ -------- -----------
<S> <C> <C> <C>
Granted.......................................... 40,000 $.0001
Exercised........................................ -- --
Cancelled........................................ -- --
------ ------
Outstanding...................................... 40,000 $.0001 9.9 years
Exercisable...................................... -- --
</TABLE>
The fair value of the options granted during 1997 had a nominal value and
would not have affected reported net income if recorded at fair value and
amortized over their vesting period as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Fair
value was estimated using the minimum value method available for private
companies under which no volatility was assumed for the stock price. A risk
free interest rate of 5.39% and no dividends were assumed in estimating fair
value.
Warrants
The Company has issued warrants to purchase common stock to the three
financial institutions providing debt financing during 1997. The 103,000
warrants have an aggregate exercise price of $300 and because of the put
feature described below, had an estimated fair value of $300,000 at the time
of issuance. The warrants are exercisable at the earliest of November 21, 2001
or a triggering event, as defined in the agreement, and expire in 2002. The
warrants can be put to the Company beginning in November 2002 for a cash
redemption value based on valuing the Company's net assets at six times the
trailing twelve month EBITDA, less borrowings and dividing by the total number
of common shares and warrants outstanding. The Company is accreting the
warrants to the estimated cash redemption value at the earliest redemption
date.
(5) INCOME TAXES
At December 31, 1997, the provision for taxes includes:
<TABLE>
<CAPTION>
FEDERAL STATE
------- -------
<S> <C> <C>
Current...................................................... $67,874 $15,635
Deferred..................................................... 14,441 3,326
------- -------
$82,315 $18,961
======= =======
</TABLE>
F-145
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
The difference in income taxes provided and the amounts determined by
applying the federal statutory rate to income before income taxes result from
the following:
<TABLE>
<S> <C>
Income tax provision using federal statutory rate.................... 35.0%
Effect of graduated federal rates.................................... (2.7)
State income taxes, net of federal benefit........................... 4.6
Meals and entertainment.............................................. 0.9
----
37.8%
====
</TABLE>
Temporary differences giving rise to deferred taxes at December 31, 1997 are
as follows:
<TABLE>
<S> <C>
Current deferred tax asset and liability:
Vacation accrual.............................................. $ 21,828
Prepaid insurance............................................. (4,310)
--------
Net deferred tax asset--current............................. $ 17,518
========
Noncurrent deferred tax liability:
Basis difference of tangible and intangible assets............ $(35,285)
========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has various operating leases in effect for office space and
equipment. The leases have initial terms ranging from one month to five years,
with renewal options generally being available.
Minimum commitments under all operating leases at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998............................................................... $ 5,700
1999............................................................... 4,521
2000............................................................... 4,128
2001............................................................... 996
-------
Total............................................................ $15,345
=======
</TABLE>
Rental expense amounted to approximately $10,600 for the year ended December
31, 1997.
Operating Lease Contracts
The Company leases floor maintenance equipment to customers and
subcontractors under a three year lease. If the customer terminates the
related service contract earlier than three years from the date of acquisition
of the equipment, the Company may put the leased asset to the customer for its
fair market value. Minimum future rentals receivable on noncancelable leases
are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998............................................................ $ 739,140
1999............................................................ 739,140
2000............................................................ 491,225
----------
Total......................................................... $1,969,505
==========
</TABLE>
F-146
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Legal Matters
Prior to the Acquisition, CPCS has been a party to various legal actions and
claims arising in the normal course of business. The Company is not presently
subject to any such legal actions or claims.
Management Fee
The Company has a management agreement with its majority stockholder. Under
the agreement, the Company receives consulting services concerning business
planning, acquisitions, financing and other management matters. The fee is
$250,000 per year increased by the consumer price index beginning in 1999.
Additionally, beginning in 1998, the management agreement contains an
incentive bonus of up to $250,000 if agreed upon performance is achieved. The
agreement continues as long as the majority stockholder owns greater than 50%
of the outstanding stock of the Company.
Year 2000
Management is currently addressing the Year 2000 issue and its impacts on
the Company and the Company's customers and vendors. The Company is currently
quantifying the costs of becoming Year 2000 compliant but believes such costs
will not be material to its financial position or results of operations.
(7) SUBSEQUENT EVENTS
On January 27, 1998, the Company purchased all of the outstanding stock of
Sullivan Service Company ("SSC") for $14.825 million in cash and $4.925
million in subordinated debt from the seller. SSC provides similar contract
facilities management services to regional and national retailers in the
eastern and mid-west portions of the United States and in Puerto Rico. The
acquisition was accounted for using the purchase method.
On April 6, 1998, the Company entered into a definitive agreement to merge
with Consolidation Capital Corporation with closing of the transaction
scheduled in early April.
(8) QUARTERLY INFORMATION (UNAUDITED)
On January 27, 1998, the Company purchased SSC for total consideration of
$19.75 million. The quarterly information presented includes the net assets
purchased and the income from the operations of SSC from the acquisition date
through the end of the quarter. The Company acquired working capital of
$332,237 and equipment of $633,855 in the acquisition.
The excess of the purchase price over the fair value of identifiable assets
acquired of $18.8 million was tentatively allocated to goodwill and will be
amortized over forty years. The final allocation of purchase price will be
determined upon completion of an appraisal of the acquired assets.
The acquisition was financed through the issuance of $15.1 million in debt,
seller financing of $4.9 million and the sale of 53,530 shares of Class A
common and 62,541 shares of Class B Nonvoting common stock for total proceeds
of approximately $174,000. In connection with the issuance of the debt, the
Company issued warrants to purchase 94,342 shares of common stock valued at
approximately $142,000.
During March 1998, the Company issued 60,996 shares of common stock to
related parties for $628,870 in cash.
F-147
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Taylor Electric, Inc.
We have audited the accompanying balance sheet of Taylor Electric, Inc. as
of December 31, 1997, and the related statements of earnings, retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taylor Electric, Inc. as
of December 31, 1997 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
LEVERICH, PHILLIPS, RASMUSON & COMPANY
Salt Lake City, Utah
February 20, 1998
F-148
<PAGE>
TAYLOR ELECTRIC, INC.
BALANCE SHEET
<TABLE>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (Note F)............................... $ 1,158,324 $ 2,942,591
Contracts receivable (including retentions
of $1,370,552)
(Note A5).................................. 3,918,633 4,159,332
Employee receivable......................... 1,315 3,011
Inventory (Note A6)......................... 113,778 198,805
Prepaid expenses............................ 55,097 33,117
Costs and estimated profits in excess of
billings on uncompleted contracts (Note
B)......................................... 316,191 44,999
----------------- --------------
TOTAL CURRENT ASSETS...................... 5,563,338 7,381,855
PROPERTY AND EQUIPMENT, net of accumulated
depreciation (Note C)........................ 420,591 405,575
OTHER ASSETS
Deposits.................................... 9,125 9,449
----------------- --------------
TOTAL ASSETS............................ $ 5,993,054 $ 7,796,879
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Including retentions of
$44,304 and $27,174)....................... $ 505,664 $ 1,092,520
Accrued expenses............................ 493,821 323,281
Billings in excess of costs and estimated
profits on uncompleted contracts (Note B).. 908,277 1,895,733
----------------- --------------
TOTAL CURRENT LIABILITIES................. 1,907,762 3,311,534
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized
50,000 shares, issued and outstanding
1,222 shares............................... 425,986 425,986
Retained earnings........................... 3,659,306 4,059,359
----------------- --------------
TOTAL STOCKHOLDERS' EQUITY................ 4,085,292 4,485,345
----------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $ 5,993,054 $ 7,796,879
================= ==============
</TABLE>
The accompanying notes are an integral part of this statement.
F-149
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
<TABLE>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31,
----------------- ----------------------
1997 1998
---------- ----------
<S> <C> <C> <C>
Construction revenue........... $ 19,192,685 $4,070,974 $4,782,343
Construction costs............. 13,799,340 3,287,914 4,099,057
----------------- ---------- ----------
Gross Profit............... 5,393,345 783,060 683,286
General and administrative
expenses...................... 1,271,756 278,129 296,912
----------------- ---------- ----------
Earnings from Operations... 4,121,589 504,931 386,374
Other income/(expense)
Miscellaneous income
(expense)................... 41,458 (8,582) (23,013)
Interest income.............. 112,759 13,680 30,509
Interest expense............. (31) -- (18)
Gain on sale of assets....... 1,298 6,771 6,201
----------------- ---------- ----------
NET EARNINGS............... 4,277,073 516,800 400,053
Retained earnings--beginning of
year.......................... 2,610,579 2,610,578 3,659,306
Shareholder distributions...... (3,228,346) -- --
----------------- ---------- ----------
Retained earnings--end of
year.......................... $ 3,659,306 $3,127,378 $4,059,359
================= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-150
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF CASH FLOWS
INCREASE/(DECREASE) IN CASH
<TABLE>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31,
----------------- ----------------------
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings................... $ 4,277,073 $ 516,800 $ 400,053
Adjustment to reconcile net
earnings to net cash provided
by operating activities:
Depreciation.................. 125,043 29,539 27,614
Gain on sale of assets........ (1,298) -- --
Changes in operating assets
and liabilities:
(Increase)/Decrease in:
Contracts receivable........ (420,127) 309,622 (218,719)
Inventory................... 135,510 (43,515) (85,027)
Costs and estimated profits
in excess of billings on
uncompleted contracts...... (291,089) -- 271,192
Employee receivable......... 8,119 3,546 (1,696)
Prepaid expenses............ (4,190) -- --
Deposits.................... 694 619 (325)
(Decrease)/Increase in:
Billings in excess of costs
and estimated profits on
uncompleted contracts...... 22,989 -- 987,456
Accounts payable............ (210,170) 95,028 509,272
Accrued expenses............ (96,491) (16,403) (92,956)
----------------- ---------- ----------
Total adjustment to net
earnings.................. (731,010) 378,436 1,396,811
----------------- ---------- ----------
Net Cash Provided by
Operating Activities..... 3,546,063 895,236 1,796,864
Cash flows from investing
activities:
Purchase of equipment.......... (118,112) (37,193) (12,598)
Proceeds from sale of assets... 6,832 -- --
----------------- ---------- ----------
Net Cash Used by Investing
Activities............... (111,280) (37,193) (12,598)
Cash flows from financing
activities:
Shareholder distributions...... (3,228,346) -- --
----------------- ---------- ----------
Net Cash Used by Financing
Activities............... (3,228,346) -- --
----------------- ---------- ----------
Net increase in cash............ 206,437 858,043 1,784,266
Cash--beginning of year......... 951,887 951,887 1,158,325
----------------- ---------- ----------
Cash--end of year............... $ 1,158,324 $1,809,930 $2,942,591
================= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-151
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Method of accounting for long-term construction contracts
The Company is engaged in electrical contracting under long-term
construction contracts in Utah and surrounding areas. The accompanying
financial statements have been prepared using the percentage-of-completion
method measured by percentage of cost incurred to date to estimated total cost
for each contract and, therefore, take into account the cost, estimated
earnings, and revenue to date on the contracts not yet complete. That method
is used because management considers total cost to be the best available
measure of progress on the contracts.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final total costs, based on current estimates of cost to complete. It is not
related to the progress billings to customers.
Revenue earned on contracts in process in excess of billings (underbillings)
is classified as a current asset. Amounts billed in excess of revenue earned
(overbillings) are classified as current liabilities.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Use of estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, and the reported revenues and expenses.
3. Operating cycle
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheet, as
they will be liquidated in the normal course of contract completion, although
this may be more than one year.
4. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. During the year ended December 31, 1997, the Company paid
interest of $31, none of which was required to be capitalized. There were no
non-cash investing or financing activities for the year ended December 31,
1997.
5. Allowance for doubtful accounts
The Company considers contracts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts has been provided. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
The Company also expects all retention receivables to be collected within
the normal course of contract completion.
F-152
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
6. Inventory
The inventory of the Company consists of electrical materials and supplies
used on construction contracts. Inventory is stated at the lower of cost or
market using the first-in, first-out (FIFO) method of accounting. At December
31, 1997, the inventory was valued at $113,778.
7. Income taxes
The income taxes on the net operations for the year are payable personally
by the shareholders pursuant to an election under Subchapter S of the Internal
Revenue Code not to have the Company taxed as a corporation. Accordingly, no
provision has been made for taxes. The tax liability would be approximately
$1,668,058 had such taxes been payable by the Corporation at December 31,
1997.
NOTE B--COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts......................... $ 8,797,615
Estimated earnings.............................................. 3,563,703
-----------
12,361,318
Less: Billings to date.......................................... 12,953,404
-----------
(592,086)
===========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated profits in excess of billings on uncompleted
contracts...................................................... 316,191
Billings in excess of costs and estimated profits on uncompleted
contracts...................................................... (908,277)
--------
(592,086)
========
</TABLE>
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED BOOK
COST DEPRECIATION VALUE
--------- ------------ ---------
<S> <C> <C> <C>
Leasehold improvements.................... $ 169,205 $ 43,904 $ 125,301
Furniture and fixtures.................... 177,986 102,175 75,811
Construction equipment.................... 256,116 154,249 101,867
Vehicles.................................. 339,179 221,567 117,612
--------- -------- ---------
$ 942,486 $521,895 $ 420,591
========= ======== =========
</TABLE>
Depreciation expense is computed using the straight-line method in amounts
sufficient to write off the cost of depreciable assets over their estimated
useful lives. Depreciation expense for the year ended December 31, 1997
amounted to $125,043. Of this amount, $90,184 was included in direct equipment
costs and $34,859 was included in general and administrative expenses.
F-153
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
NOTE D--BACKLOG
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997:
<TABLE>
<S> <C>
Balance--beginning of year...................................... $ 8,181,324
New contracts and change orders................................. 30,601,370
-----------
38,782,694
Less contract revenue earned at December 31, 1997............... 19,192,685
-----------
Balance--end of year............................................ $19,590,009
===========
</TABLE>
NOTE E--SALARY REDUCTION AND PROFIT SHARING PLAN
The Company maintains a defined contribution retirement plan pursuant to the
Internal Revenue Code 401(k). All employees that work over 1,000 hours and
have completed one year of service are eligible to enter the plan on the
plan's entry date. Participants are 100% vested in the employer's
contributions upon admission to the plan. The plan allows for a maximum
employee contribution of 10% of compensation up to the maximum amount allowed
by law. The Company matches 45% of employee contributions. For the year ended
December 31, 1997, the Company contributed $137,290 to the plan.
NOTE F--CONCENTRATIONS OF CREDIT RISK
The Company verifies sources of payment and has legal lien rights on all
significant private and commercial jobs. In compliance with state laws, the
Company pursues and perfects its mechanical lien rights against all
significant projects.
As of December 31, 1997, the Company held cash in demand accounts at banks
in excess of the federally insured amounts.
NOTE G--RELATED PARTY TRANSACTIONS
The Company rents the buildings it occupies from Jerald M. Taylor, president
and majority shareholder of the Company. Total rents paid to Mr. Taylor for
the year ended December 31, 1997 amounted to $56,100.
NOTE H--MAJOR CUSTOMERS
Construction contracts with three major customers accounted for 58% of
current year revenues.
F-154
<PAGE>
INDEPENDENT AUDITORS' REPORT
Walker Engineering, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Walker Engineering, Inc.,
(an S Corporation) as of December 31, 1997, and the related statement of
income and changes in retained earnings and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Walker Engineering, Inc.,
as of December 31, 1997, and the results of its operations and changes in
retained earnings, and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
Hutton, Patterson & Company
February 27, 1998
Dallas, Texas
F-155
<PAGE>
WALKER ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash.............................................................. $ 5,074,179
Contracts receivable.............................................. 19,059,634
Notes receivable, employees....................................... 31,202
Investment in life insurance contracts............................ 284,188
Unbilled revenues................................................. 281,404
-----------
TOTAL CURRENT ASSETS............................................ 24,730,607
-----------
PROPERTY AND EQUIPMENT
Automotive equipment.............................................. 1,459,259
Operating equipment............................................... 1,134,603
Office furniture and equipment.................................... 423,321
Computer and software............................................. 459,209
Leasehold improvements............................................ 69,211
-----------
3,545,603
Less accumulated depreciation and amortization.................... 1,790,274
-----------
NET PROPERTY AND EQUIPMENT...................................... 1,755,329
-----------
OTHER ASSETS.................................................... 180,530
-----------
$26,666,466
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $ 5,751,485
Accrued expenses.................................................. 4,291,921
Excess billings................................................... 7,435,796
Capital leases payable, current portion........................... 126,332
Notes payable, shareholder........................................ 4,000,000
-----------
TOTAL CURRENT LIABILITIES....................................... 21,605,534
-----------
LONG-TERM LIABILITIES
Capital leases payable, net of current portion.................... 76,334
-----------
TOTAL LIABILITIES............................................... 21,681,868
-----------
SHAREHOLDERS' EQUITY
Common stock (no par value; 1,000,000 shares authorized; 116,452
shares issued and outstanding)................................... 11,645
Paid-in capital................................................... 917,869
Retained earnings................................................. 4,055,084
-----------
TOTAL SHAREHOLDERS' EQUITY...................................... 4,984,598
-----------
$26,666,466
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE>
WALKER ENGINEERING, INC.
STATEMENT OF INCOME AND CHANGES IN RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES EARNED................................................... $127,672,430
COSTS OF REVENUES EARNED.......................................... 106,346,712
------------
GROSS PROFIT...................................................... 21,325,718
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 21,785,658
------------
LOSS FROM OPERATIONS.............................................. (459,940)
------------
OTHER INCOME (LOSS)
Interest income................................................. 327,992
Loss on sale of assets.......................................... (35,720)
------------
292,272
------------
NET LOSS.......................................................... (167,668)
RETAINED EARNINGS, beginning...................................... 4,222,752
------------
RETAINED EARNINGS, ending......................................... $ 4,055,084
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE>
WALKER ENGINEERING, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................... $ (167,668)
Adjustments to reconcile net loss to net cash flows used in
operating activities
Loss on sale of assets....................................... 35,720
Depreciation and amortization................................ 391,468
Changes in assets and liabilities
Increase in contracts receivable........................... (1,891,690)
Decrease in unbilled revenues.............................. 31,061
Increase in accounts payable............................... 213,798
Increase in accrued expenses............................... 2,429,709
Decrease in excess billings................................ (470,531)
-----------
Net cash flows provided by operating activities................ 571,867
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............................. (1,314,417)
Proceeds from sale of property and equipment................... 34,439
Increase in investment in life insurance contracts............. (23,356)
Employee loans advanced........................................ (5,082)
Payments received on employee loans............................ 31,724
Other asset additions.......................................... (96,175)
-----------
Net cash flows used in investing activities.................. (1,372,867)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on lease obligations.................................. (126,296)
Proceeds from shareholder loan................................. 5,000,000
Payments on shareholder loan................................... (3,000,000)
-----------
Net cash flows provided by financing activities.............. 1,873,704
-----------
NET INCREASE IN CASH............................................. 1,072,704
CASH, beginning.................................................. 4,001,475
-----------
CASH, ending..................................................... $ 5,074,179
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for Interest......................................... $ 230,598
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--HISTORY AND BUSINESS
Walker Engineering, Inc. (the Company) was incorporated in Texas on June 1,
1981. The principal business activity of the Company is electrical engineering
in the commercial/ industrial field and the specialized area of airport
lighting contracts. Large contracts typically require ten to twenty-four
months to complete. The Company conducts these activities primarily within the
state of Texas.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Federal Income Taxes
Effective July 1, 1996, the Company, with the consent of its shareholders,
elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the shareholders are
liable for individual federal income tax on the Company's taxable income.
Therefore, no provision or liability for federal income taxes has been
included in the financial statements. The adoption of Subchapter S status
necessitated changing from a fiscal year ending June 30 to a calendar year
ending December 31.
Revenue and Cost Recognition
Earned revenues are recognized on the percentage-of-completion method
measured on the basis of labor costs incurred to date to total estimated labor
costs for airport contracts and total costs incurred to date to total
estimated costs for all other contracts. Management considers total costs to
be the best available measure of progress on the majority of the Company's
contracts. However, management considers labor to be a more accurate measure
of progress on airport contracts since FAA regulations require the purchase of
all materials prior to commencement of the work and the inclusion of prepaid
material costs would accelerate the recognition of income beyond actual
progress. Adjustments to cost estimates are made periodically.
Contract costs include all direct labor and material costs. Indirect costs
related to contract performance, such as insurance, supplies, repairs and
depreciation costs are charged to cost of sales during the period in which
they are incurred. Selling, general and administrative costs are charged to
expense as incurred. Provision for estimated losses on uncompleted contracts
is made in the period in which such losses are determined.
The asset "Unbilled revenues" represents revenues recognized on contracts
for which billings have not been rendered. The liability "Excess billings"
represents billings in excess of revenues recognized.
Revenue and expense on time and material jobs are recognized when the job is
billed. Unbilled time and material costs are included in prepaid expenses;
however, at December 31, 1997, all costs associated with time and material
jobs had been billed.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost.
Expenditures for maintenance and repairs are charged against operations.
Renewals and betterments that materially extend the lives of the assets are
capitalized at cost.
F-159
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The cost of assets sold, retired, or otherwise disposed of and the related
allowance for depreciation are eliminated from the accounts, and any resulting
gain or loss is included in operations for the period in which the disposal
occurred.
Property and equipment are depreciated over the estimated useful lives of
the assets using principally accelerated methods for both federal income tax
and financial reporting purposes.
Leasehold improvements are amortized over the life of the related lease. The
rates used to depreciate property and equipment are based on the following
estimated useful lives:
<TABLE>
<S> <C>
Automotive equipment........................................... 15 years
Operating equipment............................................ 5-7 years
Office furniture and equipment................................. 5-7 years
Computer and software.......................................... 3-5 years
Leasehold improvements......................................... 39 years
</TABLE>
Total depreciation and amortization expense for the year ended December 31,
1997, amounted to $391,468.
Investment in Life Insurance Contracts
The Company's investment in life insurance contracts is stated at cash
surrender value as of the balance sheet date.
The Company maintains two insurance policies on the life of a key officer in
the face amounts of approximately $445,000 and $325,000, respectively. The
Company is the sole beneficiary of the $445,000 policy. The Company may borrow
on the cash surrender value of the policies at any time; therefore, management
classifies the investments as current assets.
Allowance for Doubtful Accounts
The Company's policy is to expense accounts receivable which are considered
to be uncollectible; therefore, no allowance is provided.
Concentration of Credit
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments in government
securities. Concentrations of credit risk with respect to trade receivables
are limited due to the industry practice of requiring performance bonds on
long-term contracts. The Company's customer base consists of general
construction contractors concentrated in Dallas-Fort Worth and surrounding
areas.
The Company maintains operating cash accounts and interest bearing accounts
with various financial institutions. The total amount of these accounts at
December 31, 1997, in excess of the federally insured limits was $126,579. At
any point in time, the current balance exceeding the federally insured limits
would be at risk in the event the institution is unable to continue business.
F-160
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--CONTRACTS RECEIVABLE
The Company's contracts receivable were as follows at December 31, 1997:
<TABLE>
<S> <C>
Completed contracts........................................... $ 624,545
Contracts in progress......................................... 11,746,133
Time and material jobs........................................ 3,554,357
Retention..................................................... 3,134,599
-----------
$19,059,634
===========
</TABLE>
NOTE D--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts (including job
costs prepaid (payable) on airport contracts)............. $75,932,591
Gross profit from inception................................ 13,086,972
-----------
89,019,563
Less billed to date........................................ 96,173,955
-----------
$(7,154,392)
===========
</TABLE>
These amounts are included in the accompanying balance sheet under the
following captions:
<TABLE>
<S> <C>
Unbilled revenues............................................. $ 281,404
Excess billings............................................... (7,435,796)
-----------
$(7,154,392)
===========
</TABLE>
NOTE E--OTHER ASSETS
Other assets consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Deposits......................................................... $ 2,780
Country club membership deposit.................................. 3,675
Country club initiation deposit.................................. 138,775
Dallas Cowboys bonds and options................................. 20,100
Texas Rangers bonds and options.................................. 15,200
--------
$180,530
========
</TABLE>
F-161
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--COMMITMENTS AND CONTINGENCIES
Operating Leases
In November 1997, the Company entered into a 60 month lease on a building
owned by the president (NOTE G). Monthly rental payments are $16,000. The
Company also maintains various lease agreements for the rental of additional
office space and pickup trucks for use in the Company's operations. The
Company expects to renew these leases in the ordinary course of business.
Future minimum rental payments under these operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $346,904
1999.............................................................. $216,886
2000.............................................................. $192,000
2001.............................................................. $192,000
2002.............................................................. $160,000
</TABLE>
Total rent charged to selling, general and administrative expense for the
year ended December 31, 1997, totaled $240,951.
Line of Credit
At December 31, 1997, the Company had an unused line of credit of $1,000,000
available to be drawn upon as needed at 1% above the bank prime rate.
Capital Leases
During the current year, the Company acquired automotive equipment totaling
$237,537 under capital leases. Additionally, the Company has operating
equipment totaling $192,604 which was acquired under capital leases in prior
years. Future minimum rental payments under these capital leases are as
follows for the years ended December 31:
<TABLE>
<S> <C>
1998............................................................ $ 47,958
1999............................................................ 72,026
---------
Total minimum lease payments.................................... 219,984
Amount representing interest.................................... (17,318)
---------
Present value of future lease payments.......................... 202,666
Less current portion............................................ (126,332)
---------
$ 76,334
=========
</TABLE>
During the year ended December 31, 1997, the Company recorded $83,549 in
amortization expense related to leased operating equipment. Accumulated
amortization on leased operating equipment totaled $124,774 at December 31,
1997.
Retirement Plan
Substantially all employees of the Company are covered under the Company's
retirement plan which was adopted during the year ended June 30, 1982.
F-162
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective July 1, 1995, the Company amended its retirement plan and adopted
an arrangement pursuant to Section 401(k) of the Internal Revenue Code. The
Company has agreed to match fifty percent of employees contributions to the
plan up to six percent of employee gross wages. At the discretion of the Board
of Directors, the Company may also authorize additional contributions to the
plan. During the year ended December 31, 1997, the Company recorded matching
contributions to the plan totaling $407,989. No discretionary contributions
were made during the period then ended.
NOTE G--RELATED PARTY TRANSACTIONS
The Company conducts its operations from a building owned by the president
(NOTE F). During the year ended December 31, 1997, the Company paid rent of
$152,000 to the president.
In addition, during the year ended December 31, 1997, the president loaned
the Company $5,000,000. The Company repaid the outstanding loan balance of
$2,000,000 from December 31, 1996, and $1,000,000 of the current year loans,
including interest at 10% per annum, prior to December 31, 1997. The remaining
note payable of $4,000,000 bears interest at 10% per annum and is due on
demand or December 17, 1999. Total interest expense paid to the president
during the year ended December 31, 1997 was $210,525.
NOTE H--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Accrued salaries............................................... $ 395,303
Payroll taxes withheld and accrued............................. 2,189,093
Workers compensation insurance................................. 933,209
Other insurance premiums....................................... 212,969
Accrued vacation............................................... 311,908
Sales tax withheld............................................. 249,439
----------
$4,291,921
==========
</TABLE>
NOTE I--BACKLOG
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997:
<TABLE>
<S> <C>
Balance, December 31, 1996................................... $ 64,334,473
Contract adjustments......................................... 27,509,457
New contracts signed......................................... 75,645,770
------------
167,489,700
Less contract revenue earned in current period............... 113,188,860
------------
Balance, December 31, 1997................................... $ 54,300,840
============
</TABLE>
Subsequent to December 31, 1997, the Company executed new contracts and
received signed letters of intent totaling $22,343,000.
F-163
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--MAJOR CUSTOMERS
The Company derived 57% of its revenue for the year ended December 31, 1997,
from two general contractors (multiple contracts) and one major customer. The
total revenue from these contracts was approximately $64.5 million. Amounts
owed the Company by these entities at December 31, 1997, were $5,865,763.
NOTE K--SUBSEQUENT EVENT
Subsequent to year end, the Company entered into a letter of intent whereby
Consolidation Capital Corporation would acquire Walker Engineering, Inc.
F-164
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
G. S. Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of G. S. Group,
Inc. and Subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholder's equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of G. S.
Group, Inc. and Subsidiaries as of December 31, 1997 and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
WALLINGFORD, MCDONALD, FOX & CO., P.C.
Houston, Texas
May 8, 1998
F-165
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
ASSETS 1997 1998
------ ----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 115,205 $ 226,479
Accounts receivable, including retentions of $872,057 at
1997.................................................... 12,037,913 11,823,384
Costs and estimated earnings on uncompleted contracts in
excess of related billings (Note 2)..................... 380,135 401,849
Receivable from employees................................ 21,217 19,684
Deferred income tax benefit (Note 5)..................... 326,800 326,800
Prepaid expenses and other............................... 115,671 132,304
----------- -----------
Total current assets................................. 12,996,941 12,930,500
----------- -----------
PROPERTY AND EQUIPMENT
Construction equipment and vehicles...................... 1,767,587 1,764,618
Land and building........................................ 2,328,517 2,328,517
Leasehold improvements................................... 556,841 556,841
Shop equipment and tools................................. 334,388 334,388
Office furniture and equipment........................... 488,376 469,217
----------- -----------
5,475,709 5,453,581
Less accumulated depreciation and amortization........... 2,461,948 2,500,678
----------- -----------
Net property and equipment........................... 3,013,761 2,952,903
----------- -----------
OTHER ASSETS
Investment in insurance company, at cost (Note 3)........ 1,950,000 1,950,000
Notes receivable from related parties.................... -- 327,763
Deferred income tax benefit (Note 5)..................... 426,123 426,123
Miscellaneous............................................ 242,000 223,178
----------- -----------
Total other assets................................... 2,618,123 2,927,064
----------- -----------
$18,628,825 $18,810,467
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable--trade.................................. $ 4,024,319 $ 3,086,024
Current maturities of long-term debt (Note 4)............ 402,403 402,403
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 2).......................... 1,597,035 688,191
Federal income taxes payable............................. 164,500 288,498
Accruals:
Employee compensation and benefits..................... 2,393,073 3,799,539
Miscellaneous.......................................... 301,223 202,029
Other payables (Note 1).................................. 223,533 --
----------- -----------
Total current liabilities............................ 9,106,086 8,466,684
LONG-TERM DEBT
Long-term debt, net of current maturities (Note 4)....... 3,275,130 3,130,377
----------- -----------
Total liabilities.................................... 12,381,216 11,597,061
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 7, 8 and 10)
STOCKHOLDER'S EQUITY
Common stock:
Class A (voting)....................................... 12,676 12,676
Class B (nonvoting).................................... 3,241 3,241
Additional paid-in capital............................... 7,554,875 7,554,875
Retained earnings........................................ 7,048,459 8,014,256
----------- -----------
14,619,251 15,585,048
Treasury stock, at cost (Note 6)......................... (8,371,642) (8,371,642)
----------- -----------
Total stockholder's equity........................... 6,247,609 7,213,406
----------- -----------
$18,628,825 $18,810,467
=========== ===========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-166
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE THREE
YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31 MARCH 31 MARCH 31
1997 1998 1997
----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Contract revenue (Note 10)............ $64,121,575 $21,125,014 $15,518,808
----------- ----------- -----------
Contract costs:
Labor............................... 29,145,858 9,495,569 7,343,380
Material............................ 6,035,338 1,541,903 1,258,295
Other............................... 23,259,129 7,924,366 5,739,091
----------- ----------- -----------
Total contract costs.............. 58,440,325 18,961,838 14,340,766
----------- ----------- -----------
Gross profit...................... 5,681,250 2,163,176 1,178,042
Operating expenses.................... 3,505,213 913,723 920,390
----------- ----------- -----------
Operating income.................. 2,176,037 1,249,453 257,652
----------- ----------- -----------
Other income (expense):
Interest expense.................... (198,586) (55,096) (47,186)
Interest income..................... 48,843 6,958 7,402
Other income (expense), net (Notes 3
and 9)............................. 543,010 262,014 (39,896)
----------- ----------- -----------
Total other income and (expense),
net.............................. 393,267 213,876 (79,680)
----------- ----------- -----------
Income before income taxes........ 2,569,304 1,463,329 177,972
Provision for income taxes (Note 5)... 873,563 497,532 60,510
----------- ----------- -----------
Net income........................ $ 1,695,741 $ 965,797 $ 117,462
=========== =========== ===========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-167
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK (1) COMMON STOCK (1) TREASURY STOCK
----------------- ---------------- ----------------------
ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES (2) AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- --------- ------ ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 1,267,644 $12,676 324,033 $3,241 447,818 $(2,888,265) $7,554,875 $5,352,718 $10,035,245
Purchase of treasury
stock................. -- -- -- -- 677,018 (5,483,377) -- -- (5,483,377)
Net income for the
year.................. -- -- -- -- -- -- -- 1,695,741 1,695,741
--------- ------- ------- ------ --------- ----------- ---------- ---------- -----------
Balance, December 31,
1997................... 1,267,644 12,676 324,033 3,241 1,124,836 (8,371,642) 7,554,875 7,048,459 6,247,609
Net income for the
three months
(unaudited)........... -- -- -- -- -- -- -- 965,797 965,797
--------- ------- ------- ------ --------- ----------- ---------- ---------- -----------
Balance March 31, 1998
(unaudited)............ 1,267,644 $12,676 324,033 $3,241 1,124,836 $(8,371,642) $7,554,875 $8,014,256 $ 7,213,406
========= ======= ======= ====== ========= =========== ========== ========== ===========
</TABLE>
- -------
(1) $0.01 par--10,000,000 shares authorized.
(2) 802,172 shares of Class A and 322,664 shares of Class B at December 31,
1997.
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-168
<PAGE>
G. S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE THREE
YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31 MARCH 31 MARCH 31
1997 1998 1997
----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $1,695,741 $ 965,797 $ 117,462
Adjustment to reconcile net income to
net cash provided by operating ac-
tivities:
Depreciation and amortization....... 505,266 89,420 134,128
Deferred income tax benefit......... (168,585) -- (209,706)
Loss on sale and write-down of as-
sets............................... 214,772 2,397 190,128
Decrease in other receivables....... 160,714 -- 160,714
(Increase) decrease in accounts re-
ceivable........................... (3,311,905) 214,529 (206,239)
Decrease (increase) in costs and es-
timated profits on uncompleted con-
tracts in excess of billings....... 99,181 (21,714) 320,704
Decrease (increase) in prepaid ex-
penses and other current assets.... 93,570 (16,633) 962
(Increase) decrease in miscellaneous
long-term assets................... (30,794) -- 17,890
Increase (decrease) in accounts pay-
able............................... 1,188,572 (938,295) (1,193,128)
Decrease in billings in excess of
costs and estimated profits on un-
completed contracts................ (399,714) (908,844) (534,755)
Increase in accruals................ 462,623 1,307,272 958,953
(Decrease) increase in federal in-
come taxes payable................. (5,287) 123,998 --
Increase (decrease) in other
payables........................... 223,533 (223,533) --
---------- --------- ----------
Net cash provided by (used in) op-
erating activities............... 727,687 594,394 (242,887)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in notes pay-
able--officer........................ (74,481) (61,459) 55,949
Capital expenditures.................. (35,183) (33,631) (995)
Proceeds from sale of assets.......... 577,506 16,705 35,705
Net reduction (increase) in notes re-
ceivable from affiliates and related
parties.............................. 90,321 (321,441) 33,266
---------- --------- ----------
Net cash provided by (used in) in-
vesting activities................... 558,163 (399,826) 123,925
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank loan........... 2,127,596 (68,494) --
Repayments of bank loan and notes
payable.............................. (1,456,561) (14,800) (148,563)
Payments to purchase treasury stock... (4,298,702) -- (14,246)
---------- --------- ----------
Net cash used in financing activi-
ties............................. (3,627,667) (83,294) (162,809)
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................... (2,341,817) 111,274 (281,771)
CASH AND CASH EQUIVALENTS, at beginning
of period............................. 2,457,022 115,205 2,457,022
---------- --------- ----------
CASH AND CASH EQUIVALENTS, at end of
period................................ $ 115,205 $ 226,479 $2,175,251
========== ========= ==========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-169
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Organization
G.S. Group, Inc. & Subsidiaries (the "Company") is a holding company for
G.S. Financial, Inc., an investment company, and two industrial contractors,
Gulf States, Inc. and G.S.I. of California, Inc., specializing in industrial
construction and maintenance services nationwide. See Note 12 regarding
subsequent business combination agreement.
Principles of Consolidation
The consolidated financial statements include the accounts of G.S. Group,
Inc. ("the Company") and its wholly-owned subsidiaries, Gulf States, Inc.,
G.S. Financial, Inc. and G.S.I. of California, Inc. All significant
intercompany balances, transactions and stockholdings have been eliminated.
Unaudited Interim Financial Statement Information
In connection with the subsequent business combination agreement and related
Securities and Exchange Commission filing requirements, the management of the
Company has included unaudited interim financial statement information. In the
opinion of management, the Company has made all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
condition of the Company as of March 31, 1998 and 1997 and the results of
operations and cash flows for the three months ended March 31, 1998 and 1997,
and the statement of stockholder's equity as of and for the three months ended
March 31, 1998, as presented in the accompanying unaudited interim financial
statement information.
Change of Corporate Year-End
On December 31, 1996, the Company changed its corporate fiscal year-end from
June 30th to December 31st.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Income on long-term contracts is recognized on the basis of the Company's
estimates of the percentage-of-completion of individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Percentage-of-completion is determined on
the basis of the Company's engineering estimates of labor earned or on total
costs incurred as a percentage of total estimated costs. Inasmuch as these
long-term contracts extend over one or more years, any revisions in cost and
profit estimates required by changing facts and circumstances occurring after
issuance of the financial statements are reflected in the subsequent
accounting period. At the time a loss is anticipated, the entire amount of the
estimated ultimate loss on both short and long-term contracts is recognized
and accrued. The current asset caption, "Costs and estimated earnings in
excess of billings on uncompleted contracts," represents revenues recognized
in excess of amounts billed. The current liability caption, "Billings in
excess of costs and estimated earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
F-170
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Equipment, Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily on the straight line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Construction equipment and vehicles.............. 3-10
Leasehold improvements........................... 3-10
Shop equipment and tools......................... 3- 5
Office furniture and equipment................... 3- 7
Buildings........................................ 30-40
</TABLE>
Asset Valuation
The carrying amounts of long-life assets are reviewed periodically. If the
asset carrying amount is not recoverable, the asset is considered to be
impaired and the value is adjusted.
Retrospective Insurance Premiums--Other Payables
The Companies maintain insurance coverage through incurred loss
retrospective insurance agreements for their workers' compensation, general
liability, and automobile policies. The policies and related coverage are
provided through an affiliated insurance company as described in Note 3 to the
financial statements. Computations of the retrospective premium payable or
receivable are prepared by the insurance company at various valuation dates
beginning at eighteen months after the inception of the policy. Valuations and
any related adjustments continue at twelve month intervals thereafter through
seventy-eight months after the expiration of the policy. The estimated payable
totaling $223,533 at December 31, 1997 is based on preliminary claim loss
reports prepared by the insurance company and any additional amounts reserved
by the Company to cover both reported and incurred but unreported claims.
Periodic valuation adjustments to the policy premiums and the related effect
on the estimated receivable or payable are recorded in the period in which the
adjustment becomes known. The estimated insurance payable is included in
"other payables" on the balance sheet.
Intangibles
Included in other miscellaneous assets at December 31, 1997 are non-compete
agreements, net of accumulated amortization, totaling $204,884. The agreements
are amortized on a straight-line basis over periods ranging up to sixty months
through December 31, 2000. Amortization expense for the year ended December
31, 1997 totaled $83,290.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due under federal and
state income tax regulations plus deferred taxes related primarily to
differences between balance sheet accounts with different bases for financial
and income tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
F-171
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. UNCOMPLETED CONTRACTS
As of December 31, 1997, contracts totaling approximately $25,200,000 were
in process. Information with respect to these uncompleted contracts is
summarized as follows:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Costs incurred........................... $ 9,542,992
Estimated earnings....................... 1,597,395
------------
11,140,387
Progress billings........................ (12,357,287)
------------
$ (1,216,900)
============
</TABLE>
These amounts were included in the accompanying consolidated balance sheets
under the following captions:
<TABLE>
<CAPTION>
<S> <C>
Costs and estimated earnings on uncom-
pleted contracts in excess of related
billings................................ $ 380,135
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (1,597,035)
-----------
$(1,216,900)
===========
</TABLE>
NOTE 3. INVESTMENT IN INSURANCE COMPANY
The Company owns a less than 5% interest in an insurance company. The
Company's investment in the insurance company is accounted for on the cost
method. Ownership of the insurance company is held by various construction
contractors nationwide. The insurance company provides cost effective workers'
compensation and liability insurance for its shareholders. Premiums paid to
the insurance company for 1997 totaled approximately $1.2 million.
As a shareholder, the Company is generally entitled to voting rights and
distributions on the basis of individual underwriting profit and investment
income contributions to the insurance company. The Company may, with certain
limitations as delineated in the by-laws, elect to withdraw and liquidate its
equity interest in the insurance company for consideration equal to the book
value of the common shares of the insurance company multiplied by its
percentage of ownership. At December 31, 1997, the Company's carrying value on
these financial statements approximated its book value interest based on the
insurance company's audited December 31, 1997 financial statement report.
The by-laws also contain provisions relating to certain changes in ownership
of the member companies. Such changes in ownership are subject to review and
approval by the board of directors of the insurance company as it relates to
retaining shareholder interest in the insurance company.
Included in other income are dividend distributions from the insurance
company totaling $736,352 for the year ended December 31, 1997.
F-172
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. BANK LOANS AND LONG-TERM DEBT
Bank loans and long-term debt at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Bank line of credit, $5,000,000 available at December 31, 1997,
interest payable monthly at bank prime (approximately 8.5%)
plus 0.75%, principal and any unpaid interest due at maturity
on June 30, 1999.............................................. $2,127,596
Installment note payable to related party partnership due in
monthly installments of $12,500 plus interest at bank prime
rate (8.5%) plus 1%, payable through January 1, 2000;......... 300,000
Installment note payable to a former officer and shareholder
due in monthly installments of $23,458 including interest at
8.5%, payable through November 1, 2002........................ 1,151,485
Installment note payable to former officer and shareholder, due
in monthly installments of $4,296 including interest at 8.5%,
payable through January 17, 2000.............................. 98,452
----------
Total.......................................................... 3,677,533
Less current maturities........................................ 402,403
----------
Long-term debt................................................. $3,275,130
==========
</TABLE>
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1999...................................... $2,549,333
2000...................................... 242,782
2001...................................... 255,788
2002...................................... 227,227
----------
Total................................... $3,275,130
==========
</TABLE>
The bank loans are collateralized by substantially all of the Company's
assets, including its investment in subsidiaries, as well as a personal
guarantee of an officer of the Company.
The bank loan agreements contain certain restrictive covenants which, among
other things, require the maintenance of specified levels of working capital
and net worth, limit the incurrence of any additional indebtedness, liens,
loans or investments, and restrict the payment of cash dividends.
Additionally, the bank loan and notes to former shareholders contain
provisions relating to the sale, merger or change in ownership of the Company
which may cause the loans and notes to become due on demand.
NOTE 5. INCOME TAXES
The provision for income taxes consists of current and deferred taxes and
differs from amounts that would be calculated by applying federal statutory
rates to income before taxes, due to the effect of nondeductible items such as
officers' life insurance and entertainment limitations, as well as the effect
of the provision for state income taxes.
F-173
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current................................... $1,042,148
Deferred.................................. (168,585)
----------
Total provision......................... $ 873,563
==========
</TABLE>
At December 31, 1997, deferred tax assets and liabilities have been
recognized for the following temporary differences in tax and financial
accounting for:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Insurance reserves............................ $ 5,400
Vacation accruals............................. 130,000
Incentive bonus accruals...................... 191,400
Investment in insurance company............... 451,700
Other......................................... 9,423
--------
Subtotal.................................... 787,923
Deferred tax asset valuation allowance........ (35,000)
--------
Total....................................... $752,923
========
</TABLE>
The net deferred tax benefits in the accompanying balance sheets include the
following components:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Current deferred tax assets................... $326,800
--------
Noncurrent deferred tax assets................ 461,123
Deferred tax valuation allowance.............. (35,000)
--------
Subtotal--Net noncurrent deferred tax as-
sets....................................... 426,123
--------
Total....................................... $752,923
========
</TABLE>
NOTE 6. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
As of June 30,1996 the Company had an employee stock ownership plan (ESOP)
covering substantially all employees. Contributions were determined annually
by the Board of Directors and were limited to amounts deductible for federal
income tax purposes. Contributions were funded through the issuance of the
Company's common stock at fair value as determined at the last independent
valuation date and through cash contributions. On January 3, 1997 the Board of
Directors voted to terminate the ESOP and reacquire all stock held in the plan
as treasury stock. By December 31, 1997, all shares had been reacquired and
the plan terminated.
Incentive Stock Option Plans
The Company adopted the 1995 Incentive Stock Option Plan (the "1995 Plan")
in December 1995, whereby certain key officers and employees were granted
options to purchase 172,500 shares of the Company's
F-174
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Class A stock at prices ranging from $6.61 to $7.27 per share. During 1997,
the options for the 1995 plan were canceled. Concurrently with the
cancellation of the stock option plan, the Company established cash bonus
incentive plans for certain salaried personnel. The incentive plans provide
for quarterly cash bonuses based upon reaching various financial and operating
results. The plans may be discontinued in any subsequent quarter at the
discretion of the board of directors.
Salary Deferral Plan
On August 15, 1994, the Company established an Employee's Salary Deferral
Plan covering substantially all employees. The plan qualifies as a defined
contribution plan under Section 401(k) of the Internal Revenue Code. Each
employee can elect to defer up to 10% of their compensation and the Company
will match up to a maximum of 25% of the first 6% of the employee's salary
deferral contribution. The Plan also allows for additional contributions by
the Company at the discretion of the Board of Directors. Company matching
contributions vest over periods ranging to seven years. The Company's matching
expense was $176,759 for the year ended December 31, 1997.
NOTE 7. OPERATING LEASES
The Companies lease certain buildings, construction equipment and vehicles
under leases classified as operating leases.
A schedule by years of future minimum lease payments under remaining
operating leases as of December 31, 1997, is as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
1998....................................... $214,431
1999....................................... 162,039
2000....................................... 70,000
--------
$446,470
========
</TABLE>
Rental expense under operating leases for land, buildings and equipment and
vehicles for the year ended December 31, 1997 totaled approximately
$4,100,000.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company was named as a defendant in various lawsuits arising in the
normal course of business. It is the opinion of management that the outcome of
the suits will not materially affect the financial position of the Company.
Sales Tax
Periodically, the Company is subject to state sales and use tax audits. The
Company has been notified of an audit by the State of Texas for the years 1994
through 1997. Management of the Company believes that amounts due, if any, as
a result of the audit, would not be material.
F-175
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. OTHER INCOME AND EXPENSE
Included in Other Income and Expense for the year ended December 31, 1997
are the following individually significant items:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Dividend income from investment in insurance
company..................................... $736,352
Loss on disposal of assets................... (214,772)
Other miscellaneous income (expense)......... 21,430
--------
Total...................................... $543,010
========
</TABLE>
NOTE 10. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides industrial contracting and maintenance services
primarily to petrochemical companies in Texas and California. Approximately
62% of the annual revenues were derived from Texas contracts and 18% from
California contracts. The Company's financial instruments that are subject to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. Accounts receivable totaled approximately $12,038,000
at December 31, 1997. At December 31, 1997, approximately $9,300,000 was
receivable from two customers. The Company manages credit risk with its
various customers, as appropriate. Collateral is not required for credit
extended to the Company's customers. Additionally, the Company places its cash
and temporary investments in a high credit quality institution. At times, such
investments may be in excess of the FDIC limits.
During the year ended December 31, 1997, the Company recorded revenues
resulting from contracts with two major customer totaling approximately
$39,360,000.
NOTE 11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers demand
deposits in banks and all highly liquid investments purchased with a maturity
of three months or less to be cash and cash equivalents.
The company paid interest of $215,000 and income taxes of $1,066,000 during
the year ended December 31, 1997
During 1997, the Company acquired $1,184,675 of treasury stock from a former
officer/shareholder through a debt financing agreement.
NOTE 12. SUBSEQUENT EVENT--BUSINESS COMBINATION AGREEMENT
Subsequent to December 31, 1997, the Company and its stockholder have
entered into an agreement to be acquired by a subsidiary of Consolidation
Capital Corporation ("CCC"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of the CCC subsidiary's common
stock.
The business combination is expected to be effected and finalized in late
May 1998. These December 31, 1997 financial statements do not reflect any
adjustments or reclassifications related to the pending 1998 business
combination.
F-176
<PAGE>
Board of Directors
National Network Services, Inc.
Denver, Colorado
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of National Network Services,
Inc. as of December 31, 1997, and the related statement of income and retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Network Services,
Inc. as of December 31, 1997, and the results of operations and cash flows for
the year then ended in conformity with generally accepted accounting
principles.
May 20, 1998
F-177
<PAGE>
NATIONAL NETWORK SERVICES, INC.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
ASSETS ----------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash (Note 1)............................ $ 743,500 $1,122,185
Accounts receivable - trade, net of al-
lowance for doubtful accounts of
$10,000................................. 2,105,316 2,347,900
Work in process (Note 1)................. 655,932 308,944
Prepaid expenses......................... 5,370 --
Due from employees....................... -- 1,596
---------- ----------
Total current assets.................... 3,510,118 3,780,625
========== ==========
Property and equipment, at cost (Notes 1
and 3):
Computer equipment....................... 75,137 87,980
Furniture and fixtures................... 37,154 38,290
Leasehold improvements................... 26,485 26,485
Machinery and equipment.................. 165,040 165,105
Vehicles................................. 203,765 203,765
---------- ----------
507,581 521,625
Less accumulated depreciation and amorti-
zation.................................. 217,421 241,865
---------- ----------
290,160 279,760
---------- ----------
Other assets:
Deposits................................. 32,610 70,082
Distribution rights, net of accumulated
amortization of $1,000 and $3,000 (Note
1)...................................... 14,000 12,000
---------- ----------
46,610 82,082
---------- ----------
$3,846,888 $4,142,467
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of notes payable, banks
(Note 3)................................ $ 10,192 $ 10,313
Accounts payable, trade.................. 554,285 442,954
Accrued expenses......................... 197,307 260,413
Billings in excess of cost............... -- 84,462
---------- ----------
Total current liabilities............... 761,784 798,142
========== ==========
Long-term liabilities:
Notes payable, banks, net of current por-
tion (Note 3)........................... 29,927 27,325
---------- ----------
Commitments (Note 6)
Shareholders' equity:
Common stock, $.10 par value; authorized
20,000 shares, issued and outstanding
6,667 shares............................ 667 667
Paid-in capital.......................... 46,333 46,333
Retained earnings........................ 3,008,177 3,270,000
---------- ----------
3,055,177 3,317,000
---------- ----------
$3,846,888 $4,142,467
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-178
<PAGE>
NATIONAL NETWORK SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
------------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Earned revenues.............. $9,248,759 1,888,584 2,304,256
Cost of earned revenues...... 6,840,353 1,317,675 1,607,895
---------- --------- ---------
Gross profit................. 2,408,406 570,909 696,361
General and administrative
expenses.................... 1,091,367 236,668 379,949
---------- --------- ---------
Operating income............. 1,317,039 334,241 316,412
---------- --------- ---------
Other income (expense):
Interest expense............ (3,339) (41) (689)
Interest income............. 26,535 4,426 9,765
Gain on sale of assets...... -- -- 1,292
---------- --------- ---------
23,196 4,385 10,368
---------- --------- ---------
Net income (Note 1).......... 1,340,235 338,626 326,780
Retained earnings, begin-
ning........................ 1,951,475 1,951,475 3,008,177
Shareholder distributions.... ( 283,533) (25,333) (64,957)
---------- --------- ---------
Retained earnings, ending.... $3,008,177 2,264,768 3,270,000
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-179
<PAGE>
NATIONAL NETWORK SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
------------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net income................... $1,340,235 $338,626 $ 326,780
Non-cash items included in
net income:
Depreciation and amortiza-
tion....................... 87,824 17,579 26,444
(Increase) decrease in:
Accounts receivable,
trade..................... (531,001) 585,062 (242,584)
Due from employees......... -- (1,420) (1,596)
Work in process............ 249,279 (92,369) 346,988
Prepaid expenses........... 868 2,705 5,370
Increase (decrease) in:
Accounts payable, trade.... 210,920 82,194 (111,331)
Accrued expenses........... (65,701) (31,454) 63,106
Billings in excess of
costs..................... -- -- 84,462
---------- -------- ----------
Net cash provided by oper-
ating activities......... 1,292,424 900,923 497,639
---------- -------- ----------
Cash flows from investing ac-
tivities:
Acquisition of property and
equipment................... (198,385) (6,338) (14,044)
Payment of deposits.......... (28,385) (3,078) (37,472)
Acquisition of distribution
rights...................... (15,000)
---------- -------- ----------
Net cash used by investing
activities............... (241,770) (9,416) (51,516)
---------- -------- ----------
Cash flows from financing ac-
tivities:
Proceeds from long-term
debt........................ 53,227 -- --
Debt reduction, short-term... (68,400) (68,400) --
Debt reduction, long-term.... (13,108) -- (2,481)
Cash distributions to share-
holders..................... (283,533) (25,333) (64,957)
---------- -------- ----------
Net cash used by financing
activities............... (311,814) (93,733) (67,438)
---------- -------- ----------
Net increase in cash.......... 738,840 797,774 378,685
Cash, beginning............... 4,660 4,660 743,500
---------- -------- ----------
Cash, ending.................. $ 743,500 $802,434 $1,122,185
========== ======== ==========
Supplemental disclosures re-
garding cash flows:
Cash paid for:
Interest.................... $ 3,339 $ 41 $ 689
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-180
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1.NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations:
National Network Services, Inc. was incorporated in the State of Colorado
in March, 1992. The company provides installation and service of data,
video, and other communication cable and hardware in Colorado, Oregon,
California, and South Dakota.
Unaudited Interim Financial Statement Information:
In connection with the subsequent business combination agreement and
related Securities and Exchange Commission filing requirements, the
management of the Company has included unaudited interim financial
statement information. In the opinion of management the Company has made
all adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the financial condition of the Company as of March 31,
1998 and 1997 and the results of operations and cash flows for the three
months ended March 31, 1998 and 1997, and the statement of stockholder's
equity as of and for the three months ended March 31, 1998, as presented in
the accompanying unaudited interim financial statement information.
Revenue recognition:
The company follows the percentage-of-completion method of accounting for
contracts. Accordingly, income is recognized in the ratio that costs
incurred bears to estimated total costs. Adjustments to cost estimates are
made periodically, and losses expected to be incurred on contracts in
progress are charged to operations in the period such losses are
determined. The aggregate of costs incurred and income recognized on
uncompleted contracts in excess of related billings is shown as work in
process.
Cash equivalents:
The Company considers currency on hand, demand deposits with banks or other
financial institutions, treasury bills, commercial paper, money market
funds or other investments with original maturities of three months or less
to be cash and cash equivalents. At December 31, 1997, cash and cash
equivalents consisted of currency on hand, demand deposits with banks and
other financial institutions, and money market funds.
The company maintains its cash at a bank where accounts are insured up to
$100,000 by the Federal Deposit Insurance Corporation.
Property, equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation and amortization is
provided by use of the straight-line method over the estimated useful lives
of the related assets, ranging from five to seven years.
Repairs and maintenance are charged to operations as incurred. Major
renewals and betterments that extend the useful lives of property and
equipment are capitalized.
Distribution rights:
In November, 1997, the Company acquired the rights to use, sell and
distribute equipment that carries cable. The cost is being amortized on a
straight-line basis over thirty months, which is management's estimate of
the duration of use before sale of the rights to other parties. The
agreement requires the Company to remit royalties at 7.5% of the net
profits generated after the initial cost is recouped.
Income taxes:
The Company, with consent of its shareholders, has elected to be treated as
a Subchapter S Corporation. In lieu of corporate income taxes, the
shareholders are taxed on their proportionate share of the company's
taxable income. Therefore, no provision or liability for income taxes are
reflected in these financial statements.
F-181
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Advertising costs:
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of direct-
response advertising are capitalized and amortized over the period during
which future benefits are expected to be received. There was no direct
response advertising incurred in 1997. Total advertising expense for the
year ended December 31, 1997 was $26,351.
2.NOTE PAYABLE, BANK
The company has a line of credit and a term note with a bank under one loan
agreement. Under this agreement, the line and note are subject to certain
loan covenants, including current ratio, tangible net worth, and debt to
net worth requirements.
The company had no outstanding balance under the line of credit or the term
note at December 31, 1997.
3.LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
7.3% note, payable to a bank in monthly
installments of $424, including interest,
through May, 2001. Secured by vehicle. $15,366
7.3% note, payable to a bank in monthly
installments of $335, including interest,
through September, 2001. Secured by vehicle. 13,134
6.75% note, payable to a bank in monthly
installments of $300, including interest,
through August, 2001. Secured by vehicle. 11,619
-------
40,119
Less current portion 10,192
-------
$29,927
=======
</TABLE>
Annual maturities of long-term debt for years ending after December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
31
--------
<S> <C>
1998 $ 10,192
1999 10,941
2000 11,745
2001 7,241
--------
$ 40,119
========
</TABLE>
F-182
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
4.CONCENTRATION OF CREDIT RISK
The company grants credit to its customers who include both commercial and
governmental entities. At December 31, 1997, the Company had approximately
$1,119,300 concentrated into eight individual accounts receivable, ranging
from approximately $60,800 to $351,800. By February 20, 1998, approximately
$826,100 of the above amounts were paid.
5.MAJOR CUSTOMERS
For the year ended December 31, 1997, over 21% of sales were made to one
customer.
6.COMMITMENTS
Operating leases:
On April 1, 1997, the Company entered into a five-year lease agreement,
expiring in March, 2002, for office space at its primary location in
Colorado. The lease requires an initial base rent of $4,200 per month, plus
a proportionate share of common area maintenance charges. The monthly base
rent increases to $4,600, effective April 1, 2000. The common area charges
can be modified annually based on total charges incurred by the lessor to
the Company's percentage of total rentable square footage.
The Company has also executed other lease agreements for office space in
California, Oregon, and South Dakota. These lease agreements range from
$560 to $2,685 in monthly rent with expiration dates from November, 1998 to
February, 2000. The term of one agreement is one-year in length, with the
other two agreements for three-years each.
The minimum annual commitment under the terms of these leases for years
ending after December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
31
- --------
<S> <C>
1998 $ 107,220
1999 104,328
2000 80,651
2001 55,200
2002 13,800
---------
$ 361,199
=========
</TABLE>
The rent expense for the year ended December 31, 1997 was $87,515.
7.EMPLOYEE BENEFIT PLAN
Salary reduction profit sharing plan:
The Company has a salary reduction profit sharing plan covering all its
employees. Qualified participants must attain an age of at least twenty-one
years and have a least one year of service with the Company. Accrued
benefits vest at the rate of 20% per year from one to five years of
service. The contribution to the salary reduction profit sharing plan is
equal to 50% of the first 4% of pay deferred by the participant, but will
not exceed 2% of the participant's total annual compensation. Company
contributions to the salary reduction plan were approximately $18,300 for
the year ended December 31, 1997.
The company also has a Section 125 plan available to all employees that
includes day care, health insurance and disability coverage.
8.SUBSEQUENT EVENT
In April 1998, a Letter of Intent, which is non-binding to either party,
was executed whereby the Shareholders would sell 100% of the fully diluted
and outstanding shares to an unrelated third party. The parties are
presently in negotiation which, if successful, would result in an approval
of the agreement by June, 1998.
F-183
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Regency Electric Company, Inc.
We have audited the accompanying consolidated balance sheets of Regency
Electric Company, Inc. (an S corporation) and subsidiaries, as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholder's equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Regency Electric Company, Inc. and subsidiaries, as of December 31, 1997
and 1996 and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
Harbeson Beckerleg & Fletcher
Jacksonville, Florida
February 18, 1998
F-184
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 6,688,354 $11,337,758 $15,002,062
Short-term investments............... 4,511,541 3,726,007 3,918,438
Contract receivables (Note 2)........ 11,392,358 16,692,180 13,293,712
Costs and estimated earnings in
excess of billings on uncompleted
contracts (Note 3).................. 1,821,958 1,798,759 2,259,038
Deposits............................. 300,000 -- --
Prepaid expenses and other current
assets.............................. 200,156 282,202 330,653
----------- ----------- -----------
Total current assets............... 24,914,367 33,836,906 34,803,903
Property and equipment, less
accumulated depreciation (Note 4)..... 243,501 3,513,029 3,467,252
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Notes payable, due within one year
(Note 5)............................ $ 1,000 $ 1,000 --
Accounts payable..................... 2,300,601 3,218,620 3,803,910
Accrued expenses..................... 1,682,130 1,208,867 2,714,353
Billings in excess of costs and
estimated earnings on uncompleted
contracts (Note 3).................. 5,750,211 10,282,005 7,846,055
----------- ----------- -----------
Total current liabilities.......... 9,733,942 14,710,492 14,364,318
Stockholder's equity:
Common stock, $.01 par value, 10,000
shares authorized, issued and
outstanding......................... 70 100 100
Additional paid-in capital........... 1,358,800 1,358,800 1,358,800
Retained earnings.................... 14,065,056 21,280,543 22,547,937
----------- ----------- -----------
Total stockholder's equity......... 15,423,926 22,639,443 23,906,837
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-185
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
YEAR ENDED DECEMBER 31, MONTHS ENDED MONTHS ENDED
------------------------ 3/31/97 3/31/98
1996 1997 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Contract revenues earned
and contract
assignments............ $64,412,229 $66,161,538 14,405,500 21,307,430
Contract assignments
(Note 1)............... (4,099,877) (5,878,594) (1,940,134) (856,120)
----------- ----------- ---------- -----------
Contract revenues
earned................. 60,312,352 60,282,944 12,465,366 20,451,310
Cost of revenues
earned................. (43,688,707) (44,338,484) (8,964,767) (15,300,594)
----------- ----------- ---------- -----------
Gross profit.......... 16,623,645 15,944,460 3,500,599 5,150,716
Selling, general and
administrative
expenses............... (7,080,475) (7,162,763) (1,948,568) (2,095,422)
Other income (expense):
Interest and other.... 851,256 1,296,003 272,656 355,046
Minority interest in
joint venture........ (58,546) -- -- --
----------- ----------- ---------- -----------
Net income.............. $10,335,880 $10,077,700 $1,824,687 $ 3,410,340
=========== =========== ========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-186
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
RETAINED EARNINGS
------------------------------------
ADDITIONAL ACCUMULATED TAX TIMING
COMMON PAID-IN ADJUSTMENTS DIFFERENCES
STOCK CAPITAL ACCOUNT AND OTHER TOTAL
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995 $ 60 $ 500,000 $10,286,585 $(289,355) $ 9,997,230
Issuance of common
stock................ 10 -- -- -- --
Capital contribution.. -- 858,800 -- -- --
Taxable income........ -- -- 10,561,335 -- 10,561,335
Tax deferred income... -- -- -- (290,341) (290,341)
Nondeductible
expenses............. -- -- (13,668) -- (13,668)
Dividends............. -- -- (6,268,054) -- (6,268,054)
Nontaxable income..... -- -- -- 78,554 78,554
---- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1996 70 1,358,800 14,566,198 (501,142) 14,065,056
S corporation parent
election............. 30 -- -- -- --
Taxable income........ -- -- 8,489,798 -- 8,489,798
Tax deferred income... -- -- -- 1,310,037 1,310,037
Nondeductible
expenses............. -- -- (8,732) -- (8,732)
Dividends............. -- -- (2,727,264) -- (2,727,264)
Nontaxable income..... -- -- -- 151,648 151,648
---- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1997 100 1,358,800 20,320,000 960,543 21,280,543
Net income
(unaudited).......... -- -- 3,410,340 -- 3,410,340
Dividends
(unaudited).......... -- -- (2,142,946) -- (2,142,946)
---- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1998
(UNAUDITED) $100 $1,358,800 $21,587,394 $ 960,543 $22,547,937
==== ========== =========== ========= ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-187
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH FLOW FROM OPERATING
ACTIVITIES:
Cash received from
customers.............. $60,136,320 $59,538,115 $12,516,558 $20,953,549
Cash paid to
subcontractors,
suppliers and
employees.............. (54,188,057) (50,909,563) (10,605,680) (15,295,225)
Interest and other
income................. 508,284 648,637 272,656 355,046
Interest paid........... (5,332) (29,234) -- --
----------- ----------- ----------- -----------
Cash from operating
activities........... 6,451,215 9,247,955 2,183,534 6,013,370
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING
ACTIVITIES:
Sales (purchases) of
short-term investments,
net.................... (3,651,725) 1,253,389 2,280,185 (192,431)
Purchase of equipment... (357,691) (4,635,460) (10,602) (12,689)
Deposit on airplane..... (300,000) 300,000 -- --
Sale of equipment....... 1,639,108 1,359,500 -- --
----------- ----------- ----------- -----------
Cash (for) from
investing
activities........... (2,670,308) (1,722,571) 2,269,583 (205,120)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Dividends paid.......... (6,268,054) (2,876,010) (928,276) (2,142,946)
Capital contribution.... 858,800 -- -- --
Distribution to minority
partner................ (223,389) -- -- --
Issuance of common
stock.................. 10 -- --
S corporation parent
election............... -- 30 30 --
Repayment of debt....... -- (1,000)
----------- ----------- ----------- -----------
Cash used for
financing
activities........... (5,632,633) (2,875,980) (928,246) (2,143,946)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS.............. (1,851,726) 4,649,404 3,524,871 3,664,304
CASH AND CASH EQUIVALENTS:
Beginning of period..... 8,540,080 6,688,354 6,688,354 11,337,758
----------- ----------- ----------- -----------
End of period........... $ 6,688,354 $11,337,758 $10,213,225 $15,002,062
=========== =========== =========== ===========
RECONCILIATION OF NET
INCOME TO CASH PROVIDED
BY (USED FOR) OPERATING
ACTIVITIES
Net income................ $10,335,880 $10,077,700 $ 1,824,687 $ 3,410,340
Adjustments:
Depreciation............ 126,525 185,953 31,385 58,466
Gain on sale of fixed
assets................. (153,592) (179,521) -- --
Gain on short-term
investments............ (189,380) (467,845) -- --
Minority interest in
joint venture.......... 58,546 -- -- --
Changes in:
Contract receivables
and related billings
vs. earnings.......... (176,032) (744,829) 59,192 502,239
Prepaids and other
assets................ (7,247) (82,046) (143,804) (48,451)
Accounts payable and
accrued expenses...... (3,543,485) 458,543 420,074 2,090,776
Notes Receivable....... -- -- (8,000) --
----------- ----------- ----------- -----------
$ 6,451,215 $ 9,247,955 $ 2,183,534 $ 6,013,370
=========== =========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-188
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (UNAUDITED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated statements include Regency Electric Company, Inc. (REC),
Regency Electric Company Jacksonville Office, Inc. (REC Jacksonville), Regency
Electric Company Atlanta Office, Inc. (REC Atlanta), Regency Electric Company
Orlando Office, Inc. (REC Orlando), Regency Electric Company Charlotte Office,
Inc. (REC Charlotte), Regency Electric Company Projects Group, Inc. (REC
Proj.) and Regency Aviation Company, Inc. (RAC). All significant intercompany
accounts and transactions have been eliminated. In 1993, REC Orlando entered
into a joint venture agreement and became a 90% partner in Regency/Zap
Electrical Construction Team, a Joint Venture (Joint Venture). The sole
contract of the Joint Venture was completed during 1996 and the Joint Venture
was liquidated
REC became an S corporation parent effective January 1, 1997 when the
company's shareholder contributed the stock of the other entities and they
elected to become qualified S corporation subsidiaries. Consolidated financial
statements have been prepared as if the entities had always been parent and
subsidiary entities.
UNAUDITED INTERIM FINANCIAL STATEMENT INFORMATION
In connection with the subsequent business combination agreement and related
Securities and Exchange Commission filing requirements, the management of the
Company has included unaudited interim financial statement information. In the
opinion of management, the Company has made all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
condition of the Company as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1998 and 1997, and the
statements of stockholder's equity as of and for the three months ended March
31, 1998, as presented in the accompanying unaudited interim financial
statements information.
COMPANY'S ACTIVITIES AND OPERATING CYCLE
The companies are engaged in the construction industry as electrical
contractors, with the exception of RAC which provides aviation services to the
companies. The work is performed under fixed-price, cost plus and fixed-fee
contracts.
The length of the companies' contracts vary, but typically do not extend
beyond 18-24 months. Assets and liabilities are classified as current and
noncurrent because the contract-related items in the balance sheet have
realization and liquidation periods within the operating cycle.
ACCOUNTING ESTIMATES
The financial statements include various estimates and assumptions by
management 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.
REVENUE AND COST RECOGNITION
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the cost-to-cost method.
Contract assignments include material or equipment furnished to the
contractor by the owner in which the contractor assumes all obligations,
liabilities and responsibilities for the material or equipment including but
not limited to the following: risk of loss, cost of unloading, handling,
maintenance, insuring, storing, securing, protecting, installing, starting-up,
checking-out, and safeguarding such material and equipment.
F-189
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (UNAUDITED)
Contracts and costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization
is reasonably assured. Additional contract revenue relating to claims is
recognized only when realization is probable and the amount can be reliably
estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the companies consider all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
SHORT-TERM INVESTMENTS
The companies consider all short-term investments to be trading securities
as defined by SFAS 115 and as such are reported at fair value.
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided principally on the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
USEFUL
CLASSIFICATION LIVES
-------------- ---------
<S> <C>
Construction equipment.......................................... 3-5 years
Transportation equipment........................................ 3-5 years
Trailers........................................................ 5 years
Office furniture and equipment.................................. 3-5 years
Leasehold improvements.......................................... 2-5 years
</TABLE>
INCOME TAXES
The company, with the consent of its shareholder, elected under the Internal
Revenue Code to be an S corporation. In lieu of Federal corporation income
taxes, the shareholder will be taxed on the Company's taxable income. The
Companies pay state income taxes on behalf of the stockholder. Those payments
are reflected as dividends in the financial statements as the income tax is
paid.
STOCK APPRECIATION RIGHTS
Effective January 1, 1998 the Company adopted a Stock Appreciation Rights
Plan (the Plan) to reward personnel whose services are important to the
Company. The Plan provides that the award of Stock Appreciation Rights (SARs)
may be paid in cash or the issue of non-voting stock. The maximum number of
SARs outstanding at any time is 5,000. The SARs may have a fixed maturity date
of not less than twelve (12) months nor more than ten (10) years, however,
they will immediately mature and become payable upon a change in control of
the Company. Upon the maturity date an employee shall be entitled to receive
an amount equal to the sum of the excess of the fair market value over the
"Basis Value." On January 1, 1998 approximately 3,650 SARs were
F-190
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (UNAUDITED)
outstanding with a "Basis Value" of $4,437. This value was based on a
professional appraisal of the Company as of December 31, 1997, therefore,
there has been no compensation recorded to date under the Plan.
NOTE 2--CONTRACT RECEIVABLES:
Contract receivables are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts.............................. $ 150,790 $ 369,234
Contracts in progress............................ 8,040,244 13,763,133
Retained......................................... 3,201,324 2,559,813
----------- -----------
$11,392,358 $16,692,180
=========== ===========
</TABLE>
All amounts are expected to be collected within one year.
NOTE 3--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings on uncompleted contracts are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..... $ 73,300,607 $ 69,436,470
Estimated earnings.......................... 21,301,733 20,137,303
Less-billings to date....................... (98,530,593) (98,057,019)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... $ 1,821,958 $ 1,798,759
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (5,750,211) (10,282,005)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Construction equipment............................. $ 231,854 $ 231,854
Transportation equipment........................... 87,561 3,468,034
Office furniture and equipment..................... 313,578 351,004
Leasehold improvements............................. 117,653 147,759
--------- ----------
750,646 4,198,651
Less-accumulated depreciation...................... (507,145) (685,622)
--------- ----------
$ 243,501 $3,513,029
========= ==========
</TABLE>
Depreciation expense was $185,953 in 1997 and $126,525 in 1996.
F-191
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (UNAUDITED)
NOTE 5--NOTES PAYABLE:
The Company has $4,000,000 in various credit facilities available at
December 31, 1997. These facilities include (a) an unsecured $2,000,000 line
of credit, (b) an irrevocable standby letter of credit of $450,000 and (c)
$1,550,000 credit availability. The line of credit, due June 30, 1998, had an
outstanding balance of $1,000 at December 31, 1997 and 1996. The line of
credit provides for borrowings of up to $2,000,000 at the prime rate. The
credit facilities are guaranteed by all of the combined companies and are also
personally guaranteed up to $2,000,000 by Alan J. Green.
The Company has an irrevocable standby letter of credit of $450,000 at
December 31, 1997, which guarantees the Company's payment of workers'
compensation insurance claims.
Additionally, the Company has $1,550,000 of additional credit availability
at December 31, 1997 under an Advised Guidance Line. The option to obtain the
additional credit has not been exercised as of December 31, 1997.
NOTE 6--COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company may be a party to various claims, complaints and disputed
amounts arising in the normal course of its construction activities. In the
opinion of management such matters involve such amounts that the unfavorable
disposition would not have a material affect on the financial position of the
Company.
LEASE COMMITMENTS
The assets utilized under operating lease arrangements in various operations
are as follows: office facilities, warehouse, office equipment and
transportation equipment.
The following is a schedule of minimum lease commitments outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1998............................................................ $481,345
1999............................................................ 365,237
2000............................................................ 101,776
2001............................................................ 14,421
--------
$962,779
========
</TABLE>
Lease expense under operating leases was $506,018 in 1997 and $497,543 in
1996.
NOTE 7--BACKLOG:
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996.................................. $ 67,306,941
Contract adjustments and new contracts...................... 51,171,503
------------
118,478,444
Less contract revenue earned................................ (60,042,333)
------------
Balance, December 31, 1997.................................. $ 58,436,111
============
</TABLE>
F-192
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (UNAUDITED)
Contract adjustments include owner purchased materials of $5,878,594 in 1997
and $4,099,877 in 1996 (Note 1).
NOTE 8--PROFIT SHARING PLAN:
The Companies all participate in a 401(k) profit sharing plan covering
substantially all employees. The plan became effective January 1, 1990.
Employer's contributions charged to earnings were $87,866 in 1997 and $56,077
in 1996.
NOTE 9--RISKS AND UNCERTAINTIES:
The companies are subject to a concentration of credit risk on accounts
receivable balances (Note 2) since business operations are limited to a
specific industry and geographical area. To limit these risks, it is the
companies' policy to obtain references on potential customers and contractors
prior to granting credit.
At times, cash balances held at financial institutions were in excess of
FDIC insurance limits. The companies place temporary cash investments with
high-credit, quality financial institutions. The companies believe no
significant concentration of credit risk exists with respect to these cash
investments.
F-193
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members
Chambers Electronic Communications, LLC
Phoenix, Arizona
We have audited the accompanying balance sheets of Chambers Electronic
Communications, LLC (the "Company") as of September 30, 1997 and 1996, and the
related statements of income, members' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1997 and
1996, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
November 17, 1997
F-194
<PAGE>
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................. $ 53,904 $ 80,322 $ 2,800
Contract receivables (Notes 2, 7 and
11)................................. 1,613,122 1,953,909 2,097,154
Inventory (Notes 6 and 7)............ 269,417 189,665 207,827
Costs and estimated profits in excess
of billings on uncompleted contracts
(Note 3)............................ 262,713 201,039 351,670
Prepaid expenses and other........... 93,631 33,281 33,452
----------- ----------- -----------
Total current assets............... 2,292,787 2,458,216 2,692,903
PROPERTY AND EQUIPMENT -- Net (Notes 4,
6, 7 and 9)........................... 209,187 369,444 352,776
----------- ----------- -----------
TOTAL $ 2,501,974 $ 2,827,660 $ 3,045,679
=========== =========== ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable under line of credit
(Note 6)............................ $ 222,734 $ 322,219 545,190
Accounts payable..................... 160,295 121,711 241,587
Accrued salaries and benefits........ 374,976 596,061 270,584
Other accrued expenses............... 160,526 105,003 73,113
Billings in excess of costs and
estimated profits on uncompleted
contracts (Note 3).................. 8,670 136,732 56,683
Current portion of long-term debt
(Note 7)............................ 78,697 86,500 86,534
----------- ----------- -----------
Total current liabilities.......... 1,005,898 1,368,226 1,273,691
LONG-TERM DEBT -- Less current portion
(Note 7).............................. 102,449 168,916 185,949
----------- ----------- -----------
Total liabilities.................. 1,108,347 1,537,142 1,459,640
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7,
8, 9 and 10)
MEMBERS' EQUITY:
Common stock, no par value --
authorized, 250,000 shares; issued
and outstanding, 50,000 shares...... 100,000
Members' capital..................... 805,895 667,710
Retained earnings.................... 1,293,627 484,623 918,329
----------- ----------- -----------
Total members' equity.............. 1,393,627 1,290,518 1,586,039
----------- ----------- -----------
TOTAL.................................. $ 2,501,974 $ 2,827,660 $ 3,045,679
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-195
<PAGE>
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES (Note 11).......... $ 8,215,105 $ 9,391,430 $ 3,270,929 $ 4,323,539
COSTS OF REVENUES........... 5,125,842 6,039,700 2,217,626 2,811,151
----------- ----------- ----------- -----------
Gross profit.............. 3,089,263 3,351,730 1,053,303 1,512,388
OPERATING EXPENSES.......... 2,386,908 2,775,800 962,124 1,078,682
----------- ----------- ----------- -----------
INCOME BEFORE OTHER INCOME
(EXPENSE).................. 702,355 575,930 91,179 433,706
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of music
service contracts (Note
5)....................... 662,726 --
Interest (expense)
income................... (87,379) (73,767) 26 --
Other..................... (51,236) (17,540) (8,871) --
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE) --
Net........................ 524,111 (91,307) (8,845) --
----------- ----------- ----------- -----------
NET INCOME.................. $ 1,226,466 $ 484,623 $ 82,334 $ 433,706
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-196
<PAGE>
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC
STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND SIX MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- TOTAL TOTAL
SHARES MEMBERS' RETAINED STOCKHOLDERS' MEMBERS'
OUTSTANDING VALUE CAPITAL EARNINGS EQUITY EQUITY
----------- --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1995................... 50,000 $ 100,000 $ 1,190,917 $ 1,290,917
Net income............ 1,226,466 1,226,466
Cash distribution to
stockholder.......... (1,123,756) (1,123,756)
------- --------- ---------- ----------- ----------- ----------
BALANCE, SEPTEMBER 30,
1996................... 50,000 100,000 1,293,627 1,393,627
Change to limited
liability company.... (50,000) (100,000) $1,393,627 (1,293,627) (1,393,627) $1,393,627
Net income............ 484,623 484,623
Cash distribution to
members.............. (587,732) (587,732)
------- --------- ---------- ----------- ----------- ----------
BALANCE, SEPTEMBER 30,
1997................... 805,895 484,623 1,290,518
Net income............ 433,706 433,706
Cash and property
distribution to
stockholder.......... (138,185) (138,185)
------- --------- ---------- ----------- ----------- ----------
BALANCE, MARCH 31, 1998
....................... $ -- $ -- $ 667,710 $ 918,329 $ -- $1,586,039
======= ========= ========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-197
<PAGE>
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS MONTHS
FOR THE YEARS ENDED ENDED ENDED
SEPTEMBER 30, MARCH 31 MARCH 31
-------------------- ----------- -----------
1996 1997 1997 1998
---------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net income....................... $1,226,466 $484,623 $ 82,334 $ 433,706
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Gains on sale of music service
contracts...................... (662,726)
Depreciation and amortization... 87,820 120,470 42,620 66,988
Loss on disposal of equipment... 740 5,921 8,871
Changes in operating assets and
liabilities:
Contracts receivable........... 268,229 (340,787) (191,711) (143,245)
Inventory...................... 135,543 79,752 6,130 (18,162)
Costs and estimated profits in
excess of billings............ 86,571 61,674 76,627 (150,631)
Prepaid expenses and other..... (75,882) 60,350 (13,539) (171)
Accounts payable............... (235,876) (38,584) (6,722) 119,876
Accrued salaries and benefits.. 124,383 221,085 (250,082) (325,477)
Other accrued expenses......... 112,829 (55,523) (113,679) (31,890)
Billings in excess of costs and
estimated profits............. (55,121) 128,062 54,082 (80,049)
---------- -------- --------- ---------
Net cash provided by (used in)
operating
activities................... 1,012,976 727,043 (305,069) (129,055)
---------- -------- --------- ---------
Cash flows from investing activi-
ties:
Proceeds from sale of music
service contracts.............. 662,726
Purchases of property and equip-
ment........................... (30,285) (325,833) (166,001) (116,260)
Proceeds from sale of equip-
ment........................... 4,500 39,185 19,050 21,161
---------- -------- --------- ---------
Net cash provided by (used in)
investing
activities................... 636,941 (286,648) (146,951) (95,099)
---------- -------- --------- ---------
Cash flows from financing activi-
ties:
Net borrowings (repayments) on
note
payable under line of credit... (430,305) 99,485 515,266 222,971
Proceeds from long-term debt.... 161,562 100,000 60,099
Payments on long-term debt...... (75,820) (87,292) (48,135) (43,032)
Cash distributions to members/
stockholders................... (1,123,756) (587,732) (144,000) (93,406)
---------- -------- --------- ---------
Net cash used in (provided by)
financing
activities................... (1,629,881) (413,977) 423,131 146,632
---------- -------- --------- ---------
Net increase (decrease) in cash... 20,036 26,418 (28,889) (77,522)
Cash beginning of period.......... 33,868 53,904 53,904 80,322
---------- -------- --------- ---------
Cash end of period................ $ 53,904 $ 80,322 $ 25,015 $ 2,800
---------- -------- --------- ---------
Supplemental disclosure of cash
flow information
--Cash paid during the year for
interest ...................... $ 87,379 $ 73,767 $ 41,693 $ 27,269
========== ======== ========= =========
--Property and equipment dis-
tributed to members/
stockholders .................. $ 44,779
=========
</TABLE>
See notes to financial statements.
F-198
<PAGE>
CHAMBERS ELECTRONIC COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Effective December 31, 1996, Chambers, Inc., an Arizona
Corporation, was merged into Chambers Electronic Communications, LLC (the
"Company"). Both companies were located in Phoenix, Arizona. All of the
issued and outstanding shares of Chambers, Inc. were canceled on December
31, 1996. Chambers Electronic Communications, LLC is the surviving
corporation, an Arizona limited liability company, which is to dissolve
December 31, 2050, unless the members agree to renew. The effect of the
merger was recorded in a manner similar to a pooling of interest by
recording the net assets of $1,393,627 at December 31, 1996, acquired in
merger, at historical cost in the accompanying financial statements.
The Company is in the business of wholesale and direct sales and
installation of commercial electronic communication equipment, parts and
service sales.
SIGNIFICANT ACCOUNTING POLICIES followed by the Company are summarized
below:
a. Inventory consists of electronic communication equipment and parts and
is valued at the lower of cost or market. Cost has been determined using
the average cost method, which approximates the first-in, first- out
basis.
b. Property and equipment are stated at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful
lives of the related assets.
c. Revenue and Cost Recognition--The Company uses the percentage-of-
completion method of accounting for installation contracts. Accordingly,
income is recognized in the ratio that costs incurred bears to estimated
total costs. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of
costs incurred and profit recognized on uncompleted contracts in excess of
related billings is shown as a current asset, and the aggregate of
billings on uncompleted contracts in excess of related costs incurred and
profit recognized is shown as a current liability.
The Company also uses the percentage-of-completion method of accounting
for income tax purposes.
d. Income Taxes--Effective December 31, 1996, the Company elected to be
taxed as a limited liability company under provisions of the federal and
state tax codes. Under those provisions, the Company does not pay federal
or state corporate income taxes on its taxable income. Instead, the
members are liable for individual federal and state income taxes on the
Company's taxable income.
e. Concentration of Credit Risk--The majority of revenue is generated from
contracts with government agencies and other parties in the state of
Arizona.
The Company performs ongoing credit evaluations of its customers and
generally has the right to assert a lien should contract payments not be
made by project owners.
f. Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from
those estimates.
F-199
<PAGE>
2.CONTRACTS RECEIVABLE
Contracts receivable at September 30 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Contracts in progress................................ $1,167,356 $ 1,452,890
Completed contracts.................................. 392,457 361,153
Unbilled retention................................... 68,309 154,866
---------- -----------
Total contracts receivable........................... 1,628,122 1,968,909
Less allowance for doubtful accounts................. 15,000 15,000
---------- -----------
Net contracts receivable............................. $1,613,122 $ 1,953,909
========== ===========
</TABLE>
3.COSTS, ESTIMATED PROFITS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs, estimated profits and billings on uncompleted contracts at September
30 consist of the following:
<TABLE>
<S> <C> <C>
1996 1997
---------- ----------
Costs incurred on uncompleted contracts............. $2,798,550 $4,487,267
Estimated profits................................... 1,870,331 2,879,991
Billings on uncompleted contracts (4,414,838) (7,302,951)
---------- ----------
Total............................................... $ 254,043 $ 64,307
========== ==========
Included in the accompanying balance sheets under
the following captions;
Costs and estimated profit in excess of billings on
uncompleted contracts.............................. $ 262,713 $ 201,039
Billings in excess of costs and estimated profits on
uncompleted contracts.............................. (8,670) (136,732)
---------- ----------
Total............................................... $ 254,043 $ 64,307
========== ==========
</TABLE>
4.PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cost:
Transportation equipment.................................. $485,351 $627,079
Office furniture and equipment............................ 185,120 193,373
Machinery and equipment................................... 26,024 31,104
Leasehold improvements.................................... 40,245 40,244
-------- --------
Total..................................................... 736,740 891,800
Less accumulated depreciation and amortization............ 527,553 522,356
-------- --------
Property and equipment--net............................... $209,187 $369,444
======== ========
</TABLE>
5. SALE OF MUSIC SERVICE CONTRACTS
During 1996, the Company sold its music service contracts, including
property and equipment related to providing music service, to a company for
an aggregate price of $750,843, resulting in a gain of $662,762. Included
in the purchase price was $30,000 which represents a non-compete clause
which prohibits the Company from participating in the music service
industry for a period of four years. The non-compete clause is being
amortized to income over the term of the agreement.
F-200
<PAGE>
6.NOTE PAYABLE UNDER LINE OF CREDIT
Note payable under line of credit at September 30 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Line of credit for $1,500,000, due April 1998, interest at
bank's prime rate plus .25% (8.75% at September 30, 1997),
interest payable monthly, collateralized by contracts re-
ceivable, inventory, machinery and equipment, other rights
to payment and general intangibles, as well as security
interest in all other personal property of the Company $222,734 $322,219
======== ========
</TABLE>
7.LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
In the current year, the Company consolidated outstanding installment notes
into a single note payable. Long-term debt and capital lease obligation at
September 30 consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Installment note to bank, due in September 2000, bearing
interest at the bank's prime rate plus. 25% (8.75% at Sep-
tember 30, 1997), due in monthly installments of $5,100
plus accrued interest, collateralized by contract receiv-
ables, inventory, machinery and equipment, other rights to
payment and general intangibles, as well as security in-
terest in all other personal property of the Company...... $181,852
Capital lease obligation (Note 9).......................... $ 39,669 73,564
Installment notes to bank consolidated during 1997......... 141,477
-------- --------
Total...................................................... 181,146 255,416
Less current portion....................................... 78,697 86,500
-------- --------
Noncurrent portion $102,449 $168,916
======== ========
Required principal payments on long-term debt at September
30 are as follows:
1998....................................................... $ 86,500
1999....................................................... 88,476
2000....................................................... 80,440
--------
Total...................................................... $255,416
========
</TABLE>
The installment note to bank requires, among other things, the maintenance
of a minimum tangible net worth and minimum earnings ratios.
8.PROFIT SHARING PLAN
The Company has a profit sharing plan covering employees who meet specified
age and service requirements. Contributions are made at the discretion of
the Board of Directors. Contributions for the years ended September 30,
1997 and 1996 were $100,000 and $50,000, respectively. The trustees of the
profit sharing plan are two officers of the Company.
9.LEASES
The Company leases its Phoenix and Tucson locations from the majority
member of the Company under agreements accounted for as operating leases.
Rental expense charged to operations was $49,140 and $46,440 for the years
ended September 30, 1997 and 1996, respectively.
The Company also leases equipment under an agreement accounted for as a
capital lease. The cost of the equipment, $80,477 and $77,333 as of
September 30, 1997 and 1996, respectively, net of related accumulated
depreciation of $16,095 and $40,815 as of September 30, 1997 and 1996,
respectively, is included in property and equipment in the accompanying
balance sheets.
F-201
<PAGE>
The following is a schedule of the minimum rental payments due under leases
for the years ending September 30:
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
1998........................................................ $29,925 $ 78,840
1999........................................................ 29,925 78,840
2000........................................................ 21,577 78,840
2001........................................................ 78,840
2002........................................................ 72,270
------- --------
Total minimum lease payments................................ 81,427 $387,630
========
Less amounts representing interest.......................... 7,863
-------
Present value of net minimum lease payment.................. $73,564
=======
</TABLE>
10. CONTINGENCIES
In 1994, the Company discovered certain contamination caused by a leaking
underground fuel storage tank located on the Company's premises. Following
a plan approved by the Arizona Department of Environmental Quality
("ADEQ"), the Company commenced the clean-up of the contaminated site.
Clean-up costs incurred by the Company have been subject for reimbursement
from the Arizona State Assurance Fund ("ASAF"), subject to certain
deductible levels and approval by the ADEQ. During 1994, the Company paid
$30,000 which represented the Company's share of costs which were not
reimbursed by the ASAF. In 1995, the Company paid an additional $30,000
which was reimbursed during 1996. In 1996 and 1997, the Company paid
$22,400 and $47,800, respectively, of costs which are expected to be
reimbursed during 1998.
During the course of the contamination clean-up, further contamination may
be discovered. Further contamination would require additional costs to be
incurred. The Company cannot estimate the likelihood of discovering
additional contamination nor the amount of any future potential expenses,
11. SIGNIFICANT CUSTOMER
For the years ended September 30, 1997 and 1996, one customer (a purchasing
cooperative) represented approximately 40% and 39%, respectively, of
contract revenues.
At September 30, 1997 and 1996, approximately 53%, and 42%, respectively,
of the contract receivable balance was due from one customer (a purchasing
cooperative).
12.UNAUDITED INTERIM INFORMATION
The accompanying unaudited interim financial statements of the Company have
been prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of Management, all
adjustements and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending September 30, 1998.
13.SUBSEQUENT EVENTS
On May 6, 1998 the Company entered into a Definitive Agreement with
Consolidated Capital Corp. ("Consolidated") to sell all assets of the
Company in exchange for cash and stock of Consolidated. The sale is
scheduled to close July 1, 1998.
F-202
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth fees payable to the Securities and Exchange
Commission and other expenses incurred or expected to be incurred in
connection with issuance and distribution of securities being registered. All
such fees and expenses have been or will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $145,582
Nasdaq National Market Listing Fee................................. 260,000
Printing Expenses.................................................. 100,000
Accounting Fees and Expenses....................................... 50,000
Legal Fees and Expenses............................................ 100,000
Miscellaneous...................................................... 44,418
--------
Total............................................................ $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of
directors to the corporation or its stockholders for monetary damages for
breaches of fiduciary duty, except for liability (a) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.
Article 10 of the Company's Restated Certificate of Incorporation provides
that the personal liability of directors of the Company is eliminated to the
extent permitted by Section 102(b)(7) of the DGCL.
Section 145 of the DGCL (i) requires a corporation to indemnify for
expenses, including attorney's fees, incurred by a director or officers who
has been successful in defending any claim or proceeding in which the director
or officer is involved because of his or her position with the corporation,
(ii) permits indemnification (a) for judgments, fines, expenses and amounts
paid in settlement in the case of a claim by a party other than the
corporation or in the right of the corporation, even where a director or
officer has not been successful, in cases where the director or officer acted
in good faith and in a manner that he or she reasonably believed was in or not
opposed to the best interests of the corporation provided, in the case of a
criminal proceeding, that the director or officer had no reason to believe his
or her conduct was unlawful or (b) for expenses in the case of a claim or
proceeding by or in the right of the corporation, including a derivative suit
(but not judgments, fines or amounts in settlement), if the director or
officer acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation and has not been
adjudged liable to the corporation unless a court determines that, despite
such adjudication but in view of all of the circumstances, he or she is
entitled to indemnification, and (iii) permits the advancement of expenses to
directors and officers who are defending an action, lawsuit or proceeding upon
receipt of an undertaking for the repayment of such advance if it is
ultimately determined that the director or officer has not met the applicable
standard of conduct and is, therefore, not entitled to be indemnified. Section
145 also provides that the permissive indemnification described above is to be
made upon a determination that the director or officer has met the required
standard of conduct by (a) a majority of disinterested directors, (b) a
committee of disinterested directors designated by a majority of such
directors, (c) independent legal counsel or (d) the stockholders.
The Company has entered into Indemnity Agreements because the Board believes
that the Company's directors' and officers' insurance does not fully protect
the directors and executive officers and that the absence of Indemnity
Agreements may threaten the quality and stability of the governance of the
Company by reducing the Company's ability to attract and retain qualified
persons to serve as directors and executive officers of the
II-1
<PAGE>
Company, and by deterring such persons in the making of entrepreneurial
decisions for fear of later legal challenge. In addition, the Board of
Directors believes that the Indemnity Agreements complement the
indemnification rights and liability protections currently provided directors
and executive officers of the Company under the Amended and Restated Bylaws.
These rights and protections were designed to enhance the Company's ability to
attract and retain highly qualified individuals to serve as directors and
executive officers in view of the high incidence of litigation, often
involving large amounts, against publicly-held companies and the need to
provide such persons with reliable knowledge of the legal risks to which they
are exposed. The Indemnity Agreements complement these rights and protections
by providing directors and executive officers with contractual rights to
indemnification, regardless of any amendment to or repeal of the
indemnification provisions in the Bylaws. The Company's Amended and Restated
Bylaws provide that the Company shall indemnify to the fullest extent
authorized or permitted by law directors and officers of the Company who have
been made or threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Company.
The Indemnity Agreements are predicated upon Section 145(f) which recognizes
the validity of additional indemnity rights granted by contractual agreement.
The Indemnity Agreements alter or clarify statutory indemnity provisions, in a
manner consistent with the Company's Amended and Restated Bylaws, in the
following respects; (i) indemnification is mandatory, rather than optional, to
the full extent permitted by law, including partial indemnification under
appropriate circumstances, except that the Company is not obligated to
indemnify an indemnitee with respect to a proceeding initiated by the
indemnitee (unless the Board should conclude otherwise), payments made by an
indemnitee in a settlement effected without the Company's written consent,
payments that are found to violate the law, conduct found to constitute bad
faith or active and deliberate dishonesty or short-swing profit liability
under Section 16(b) of the Exchange Act or to the extent that indemnification
has been determined to be unlawful in an arbitration proceeding conducted
pursuant to the provisions of the Indemnity Agreement; (ii) prompt payment of
litigation expenses in advance is mandatory, rather than optional, provided
the indemnitee undertakes to repay such amounts if it is ultimately determined
that the indemnitee is not entitled to be indemnified and provided the
indemnitee did not initiate the proceeding; (iii) any dispute arising under
the Indemnity Agreement is to be resolved through an arbitration proceeding,
which will be paid for by the Company unless the arbitrator finds that the
indemnitee's claims or defenses were frivolous or in bad faith, unless such
arbitration is inconsistent with an undertaking given by the Company, such as
to the Securities and Exchange Commission, that the Company will submit to a
court the question of indemnification for liabilities under the Securities Act
of 1933, as amended, and be governed by the final adjudication of such issue;
and (iv) mandatory indemnification shall be paid within 45 days of the
Company's receipt of a request for indemnification unless a determination is
made that the indemnitee has not met the relevant standards for
indemnification by the Board of Directors, or if a quorum of the directors is
not obtainable, at the election of the Company, either by independent legal
counsel or a panel of arbitrators.
The Company maintains a directors' and officers' liability insurance policy
covering certain liabilities which may be incurred by directors and officers
in connection with the performance of their duties. The entire premium for
such insurance is paid by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1997, Jonathan J. Ledecky, the Company's Chairman and Chief
Executive Officer, founded the Company's predecessor, Ledecky Brothers L.L.C.
On September 19, 1997, Jonathan Ledecky exchanged his 100% interest in Ledecky
Brothers L.L.C. for 4,411,765 shares of the Company's Common Stock, or 100% of
the outstanding shares. The issuances of securities by Ledecky Brothers L.L.C.
and the Company to Jonathan Ledecky were made in reliance upon the exemption
from registration under the Securities Act of 1933, as amended, in Section
4(2).
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are or will be filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.01* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC2 Acquisition Co., SKC Electric, Inc. and the
stockholders named therein.
2.02* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC3 Acquisition Co., Riviera Electric, Inc. and
the stockholders named therein.
2.03* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC4 Acquisition Co., Garfield Electric Company and
the stockholders named therein.
2.04* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC5 Acquisition Co., Indecon, Inc. and the
stockholders named therein.
2.05* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC6 Acquisition Co., Tri-City Electrical
Contractors, Inc. and the stockholders named therein.
2.06* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC Acquisition Co., 6, Town & Country Electric,
Inc. and the stockholders named therein.
2.07* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC8 Acquisition Co., Wilson Electric, Inc. and the
stockholders named therein.
2.08 Agreement and Plan of Reorganization, dated January 29, 1998, by and
among the Company, CCC Acquisition Corp 1., Service Management USA and
the stockholder named therein (Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 4, 1997 is hereby incorporated by
reference).
2.09 Agreement and Plan of Reorganization, dated March 15, 1998, by and
among the Company, CCC Acquiring Co. No. 10, Walker Engineering, Inc.
and the shareholders named therein (Exhibit 2.09 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference).
2.10* Agreement and Plan of Reorganization, dated May 8, 1998, by and among
the Company, CCC 12 Acquisition Corporation, Taylor Electric, Inc. and
the shareholders named therein.
2.11 Agreement and Plan of Reorganization, dated June 1, 1998, by and among
the Company, RECI Acquisition Corp., Regency Electric Company, Inc.
and the stockholders named therein.
3.01 Restated Certificate of Incorporation of Consolidation Capital
Corporation (Exhibit 3.01 of the Company's Registration Statement on
Form S-1 (File No. 333-36193) is hereby incorporated by reference).
3.02 Amended and Restated Bylaws of Consolidation Capital Corporation
(Exhibit 3.02 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
5.01* Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
securities being registered.
10.01* Consolidation Capital Corporation 1997 Long-Term Incentive Plan.
10.02 Consolidation Capital Corporation 1997 Non-Employee Directors' Stock
Plan (Exhibit 10.02 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 by reference).
10.03 Consolidation Capital Corporation 1997 Employee Stock Purchase Plan
(Exhibit 10.03 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.04 Consolidation Capital Corporation 1997 Section 162(m) Bonus Plan
(Exhibit 10.04 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.05 Consolidation Capital Corporation Executive Deferred Compensation Plan
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.06 Employment Agreement between the Company and Jonathan J. Ledecky
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.07 Employment Agreement between the Company and Timothy C. Clayton
(Exhibit 10.06 of the Company's Registration Statement on Form S-1
(File No.333-36193) is hereby incorporated by reference).
10.08 Employment Agreement between the Company and F. Traynor Beck (Exhibit
10.07 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.09 Employment Agreement between the Company and David Ledecky (Exhibit
10.08 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.10 Form of Indemnity Agreement for Executive Officers and Directors of
the Company (Exhibit 10.09 of the Company's Registration Statement on
Form S-1 (File No.333-36193) is hereby incorporated by reference).
10.11 Employment Agreement between the Company and William P. Love, Jr.
(Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is hereby incorporated by
reference).
10.12 Form of Warrant Agreement, dated November 25, 1997, between
Consolidation Capital Corporation and Friedman, Billings, Ramsey &
Co., Inc. (Exhibit 4.10 of the Company's Registration Statement on
Form S-1 (File No. 333-36193) is hereby incorporated by reference).
10.13 Form of Warrant Agreement, dated November 25, 1997, between
Consolidation Capital Corporation and Jonathan J. Ledecky (Exhibit
10.10 of the Company's Registration Statement on Form S-1 (File No.
333-36193) is hereby incorporated by reference).
21.01 List of Subsidiaries of Consolidation Capital Corporation (Exhibit
21.01 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 is hereby incorporated by reference.)
23.01 Consents of Price Waterhouse LLP.
23.02 Consents of Grant Thorton LLP.
23.03 Consent of Baird, Kurtz & Dobson.
23.04 Consent of KPMG Peat Marwick LLP.
23.05 Consent of Barry & Moore P.C.
23.06 Consent of Arthur Andersen LLP.
23.07 Consent of Leverich, Phillips, Rasmuson & Co.
23.08 Consent of Wallingford, McDonald, Fox & Co., P.C.
23.09 Consent of Hutton, Patterson & Company.
23.10 Consent of Bradley, Allen & Associates, P.C.
23.11 Consent of Harbeson, Beckerleg & Fletcher.
23.12 Consent of Deloitte & Touche LLP.
23.13 Consent of Frazier & Deeter, LLC.
23.14 Consent of Shinners, Hucovski & Company, S.C.
24.01 Power of Attorney (included on signature page of this registration
statement).
27.01* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or accompanying notes.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which any offers or sales are being
made, a post-effective amendment to the registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any other material change to such information in the registration
statement.
(2) That for the purpose of determining any liability under the Act each
such post-effective amendment may be deemed to be a new registration
statement relating to the securities being offered therein and the offering
of such securities at the time may be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities which are being registered which remain unsold at the
termination of the offering.
(4) To supply by means of a post-effective amendment, Rule 424(c)
supplement or information incorporated by reference, all information
concerning a material transaction, and the company being acquired involved
there, that was not the subject of and included in the registration
statement when it became effective.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(6) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (5) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ON JULY 6, 1998.
Consolidation Capital Corporation
By: /s/ Jonathan J. Ledecky
-----------------------------------
JONATHAN J. LEDECKY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Jonathan J. Ledecky Chairman and Chief July 6, 1998
- ------------------------------------- Executive Officer
JONATHAN J. LEDECKY (Principal Executive
Officer)
* Executive Vice July 6, 1998
- ------------------------------------- President, Chief
TIMOTHY C. CLAYTON Financial Officer and
Treasurer (Principal
Financial and
Accounting Officer
* Executive Vice July 6, 1998
- ------------------------------------- President, Chief
DAVID LEDECKY Administrative
Officer and Director
* Director July 6, 1998
- -------------------------------------
VINCENT E. EADES
* Director July 6, 1998
- -------------------------------------
W. RUSSELL RAMSEY
* Director July 6, 1998
- -------------------------------------
M. JUDE REYES
*By: /s/ Jonathan J. Ledecky
---------------------------------
JONATHAN J. LEDECKY, ATTORNEY IN
FACT, PURSUANT TO POWERS OF
ATTORNEY PREVIOUSLY FILED AS PART
OF THIS REGISTRATION STATEMENT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.01* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC2 Acquisition Co., SKC Electric, Inc. and the
stockholders named therein.
2.02* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC3 Acquisition Co., Riviera Electric, Inc. and
the stockholders named therein.
2.03* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC4 Acquisition Co., Garfield Electric Company and
the stockholders named therein.
2.04* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC5 Acquisition Co., Indecon, Inc. and the
stockholders named therein.
2.05* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC6 Acquisition Co., Tri-City Electrical
Contractors, Inc. and the stockholders named therein.
2.06* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC Acquisition Co., 6, Town & Country Electric,
Inc. and the stockholders named therein.
2.07* Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC8 Acquisition Co., Wilson Electric, Inc. and the
stockholders named therein.
2.08 Agreement and Plan of Reorganization, dated January 29, 1998, by and
among the Company, CCC Acquisition Corp 1., Service Management USA and
the stockholder named therein (Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 4, 1997 is hereby incorporated by
reference).
2.09 Agreement and Plan of Reorganization, dated March 15, 1998, by and
among the Company, CCC Acquiring Co. No. 10, Walker Engineering, Inc.
and the shareholders named therein (Exhibit 2.09 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference).
2.10* Agreement and Plan of Reorganization, dated May 8, 1998, by and among
the Company, CCC 12 Acquisition Corporation, Taylor Electric, Inc. and
the shareholders named therein.
2.11 Agreement and Plan of Reorganization, dated June 1, 1998, by and among
the Company, RECI Acquisition Corp., Regency Electric Company, Inc.
and the stockholders named therein.
3.01 Restated Certificate of Incorporation of Consolidation Capital
Corporation (Exhibit 3.01 of the Company's Registration Statement on
Form S-1 (File No. 333-36193) is hereby incorporated by reference).
3.02 Amended and Restated Bylaws of Consolidation Capital Corporation
(Exhibit 3.02 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
5.01* Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
securities being registered.
10.01* Consolidation Capital Corporation 1997 Long-Term Incentive Plan.
10.02 Consolidation Capital Corporation 1997 Non-Employee Directors' Stock
Plan (Exhibit 10.02 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 by reference).
10.03 Consolidation Capital Corporation 1997 Employee Stock Purchase Plan
(Exhibit 10.03 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.04 Consolidation Capital Corporation 1997 Section 162(m) Bonus Plan
(Exhibit 10.04 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.05 Consolidation Capital Corporation Executive Deferred Compensation Plan
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.06 Employment Agreement between the Company and Jonathan J. Ledecky
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.07 Employment Agreement between the Company and Timothy C. Clayton
(Exhibit 10.06 of the Company's Registration Statement on Form S-1
(File No.333-36193) is hereby incorporated by reference).
10.08 Employment Agreement between the Company and F. Traynor Beck (Exhibit
10.07 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.09 Employment Agreement between the Company and David Ledecky (Exhibit
10.08 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.10 Form of Indemnity Agreement for Executive Officers and Directors of
the Company (Exhibit 10.09 of the Company's Registration Statement on
Form S-1 (File No.333-36193) is hereby incorporated by reference).
10.11 Employment Agreement between the Company and William P. Love, Jr.
(Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is hereby incorporated by
reference).
10.12 Form of Warrant Agreement, dated November 25, 1997, between
Consolidation Capital Corporation and Friedman, Billings, Ramsey &
Co., Inc. (Exhibit 4.10 of the Company's Registration Statement on
Form S-1 (File No. 333-36193) is hereby incorporated by reference).
10.13 Form of Warrant Agreement, dated November 25, 1997, between
Consolidation Capital Corporation and Jonathan J. Ledecky (Exhibit
10.10 of the Company's Registration Statement on Form S-1 (File No.
333-36193) is hereby incorporated by reference).
21.01 List of Subsidiaries of Consolidation Capital Corporation (Exhibit
21.01 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 is hereby incorporated by reference.)
23.01 Consents of PricewaterhouseCoopers LLP.
23.02 Consents of Grant Thorton LLP.
23.03 Consent of Baird, Kurtz & Dobson.
23.04 Consent of KPMG Peat Marwick LLP.
23.05 Consent of Barry & Moore P.C.
23.06 Consent of Arthur Andersen LLP.
23.07 Consent of Leverich, Phillips, Rasmuson & Co.
23.08 Consent of Wallingford, McDonald, Fox & Co., P.C.
23.09 Consent of Hutton, Patterson & Company.
23.10 Consent of Bradley, Allen & Associates, P.C.
23.11 Consent of Harbeson, Beckerleg & Fletcher.
23.12 Consent of Deloitte & Touche LLP.
23.13 Consent of Frazier & Deeter, LLC.
23.14 Consent of Shinners, Hucovski & Company, S.C.
24.01 Power of Attorney (included on signature page of this registration
statement).
27.01* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or accompanying notes.
2
<PAGE>
EXHIBIT 2.11
EXECUTION COPY
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
Consolidation Capital Corporation,
RECI Acquisition Corp.,
Regency Electric Company, Inc.
and
The Stockholder[s] Named Herein
made effective as of June 1, 1998.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C>
1. THE MERGER..................................................................1
1.1 The Merger.......................................................1
1.2 Effects of the Merger............................................1
1.3 Certificate of Incorporation; Bylaws, Directors and Officers.....2
2. CONVERSION AND EXCHANGE OF STOCK............................................2
2.1 Manner of Conversion.............................................2
2.2 Merger Consideration.............................................3
2.3 Contingent Merger Consideration..................................4
2.4 Exchange of Certificates and Payment of Cash.....................6
3. POST CLOSING ADJUSTMENT; PLEDGED ASSETS.....................................8
3.1 Post-Closing Adjustment..........................................8
3.2 Pledged Assets...................................................9
4. CLOSING.....................................................................10
4.1 Location and Date................................................10
4.2 Effect...........................................................10
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS................................................................10
5.1 Due Organization.................................................11
5.2 Authorization; Validity..........................................11
5.3 No Conflicts.....................................................11
5.4 Capital Stock of the Company.....................................12
5.5 Transactions in Capital Stock....................................13
5.6 Subsidiaries, Stock, and Notes...................................13
5.7 Predecessor Status...............................................13
5.8 Absence of Claims Against the Company............................13
5.9 Financial Statements.............................................13
5.10 Liabilities and Obligations......................................14
5.11 Accounts and Notes Receivable....................................14
5.12 Books and Records................................................15
5.13 Permits..........................................................15
5.14 Real Property....................................................15
5.15 Personal Property................................................16
5.16 Intellectual Property............................................17
5.17 Material Contracts and Commitments...............................17
5.18 Government Contracts.............................................18
5.19 Insurance........................................................19
5.20 Labor and Employment Matters.....................................19
5.21 Employee Benefit Plans...........................................20
5.22 Conformity with Law; Litigation..................................22
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.23 Taxes.........................................................22
5.24 Absence of Changes............................................24
5.25 Deposit Accounts; Powers of Attorney..........................26
5.26 Environmental Matters.........................................26
5.27 Relations with Governments....................................28
5.28 Disclosure....................................................28
5.29 CCC Prospectus; Securities Representations....................28
5.30 Affiliates....................................................28
5.31 Location of Chief Executive Offices...........................29
5.32 Location of Equipment and Inventory...........................29
5.33 FIRPTA........................................................29
5.34 Cross-Incorporation...........................................29
6. REPRESENTATIONS OF CCC AND NEWCO.........................................29
6.1 Due Organization..............................................29
6.2 CCC Common Stock..............................................30
6.3 Authorization; Validity of Obligations........................30
6.4 No Conflicts..................................................30
6.5 Capitalization of CCC and Ownership of CCC Stock..............31
6.6 Conformity with Law; Litigation...............................31
6.7 Disclosure....................................................31
6.8 CCC Prospectus................................................32
6.9 Registration Statement........................................32
6.10 Investment Intent.............................................32
7. COVENANTS................................................................32
7.1 Tax Matters...................................................32
7.2 Long Term Incentive Plan......................................34
7.3 Accounts Receivable...........................................34
7.4 401(k) Plan...................................................34
7.5 Related Party Agreements......................................34
7.6 Cooperation...................................................35
7.7 Conduct of Business Pending Closing...........................35
7.8 Access to Information.........................................36
7.9 Prohibited Activities.........................................36
7.9A Permitted Distributions, Etc..................................38
7.10 Notice to Bargaining Agents...................................39
7.11 Sales of CCC Common Stock.....................................39
7.12 CCC Stock Options.............................................40
7.13 Tax Covenant..................................................41
7.14 Tax Free Reorganization Protection............................41
7.15 Executive Employment Agreements...............................41
7.16 Director and Officer Indemnification..........................41
7.17 Indemnification of License Holders............................41
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CCC
AND NEWCO....................................................................42
8.1 Representations and Warranties; Performance of Obligations........42
8.2 No Litigation.....................................................42
8.3 No Material Adverse Change........................................42
8.4 Consents and Approvals............................................42
8.5 Opinion of Counsel................................................42
8.6 Charter Documents.................................................43
8.7 Quarterly Financial Statements....................................43
8.8 Affiliate Agreements..............................................43
8.9 Stockholders' Release.............................................43
8.10 Board Approval....................................................43
8.11 Green Employment Agreement........................................43
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY
AND THE STOCKHOLDERS.........................................................43
9.1 Representations and Warranties; Performance of Obligations........43
9.2 No Litigation.....................................................43
9.3 Consents and Approvals............................................44
9.4 No Material Adverse Change........................................44
9.5 Officers and Directors of Surviving Corporation...................44
9.6 Employment Agreements.............................................44
9.7 Registration Statement............................................44
10. INDEMNIFICATION..............................................................44
10.1 General Indemnification by the Stockholders.......................44
10.2 General Indemnification by CCC and Newco..........................45
10.3 Limitation and Expiration.........................................45
10.4 Indemnification Procedures........................................47
10.5 Survival of Representations Warranties and Covenants..............49
10.6 Exclusive Remedies................................................49
10.7 Right to Set Off..................................................49
11. NONCOMPETITION...............................................................49
11.1 Prohibited Activities.............................................49
11.2 Damages...........................................................50
11.3 Reasonable Restraint..............................................50
11.4 Severability; Reformation.........................................50
11.5 Independent Covenant..............................................50
11.6 Materiality.......................................................50
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................51
12.1 Stockholders..................................................51
12.2 CCC...........................................................51
12.3 Damages.......................................................51
13. GENERAL..................................................................51
13.1 Termination...................................................51
13.2 Effect of Termination.........................................52
13.3 Successors and Assigns........................................52
13.4 Entire Agreement; Amendment; Waiver...........................52
13.5 Counterparts..................................................53
13.6 Brokers and Agents............................................53
13.7 Expenses......................................................53
13.8 Specific Performance; Remedies................................53
13.9 Notices.......................................................53
13.10 Governing Law.................................................54
13.11 Severability..................................................55
13.12 Absence of Third Party Beneficiary Rights.....................55
13.13 Further Representations.......................................55
13.14 Accounting Terms..............................................55
13.15 Representative................................................55
13.16 Unanimous Written Consent of Stockholders.....................56
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of the 1st day of June, 1998, by and among Consolidation Capital
Corporation, a Delaware corporation ("CCC"), RECI Acquisition Corp., a Florida
---
corporation and a newly-formed, wholly-owned subsidiary of CCC ("Newco"),
-----
Regency Electric Company, Inc., a Florida corporation (the "Company"), and the
-------
stockholders identified on the signature page hereof (such stockholders and any
Person who becomes a stockholder of the Company after the date hereof and prior
to the Closing Date, the "Stockholders").
------------
BACKGROUND
WHEREAS, the Stockholders own all of the issued and outstanding capital
stock of the Company on the date hereof (the "Company Common Stock");
--------------------
WHEREAS, the respective Boards of Directors of Newco and the Company deem
it advisable and in the best interests of Newco and the Company (each of which
are sometimes herein referred to as the "Constituent Corporations") and their
------------------------
respective stockholders that the Company merge with and into Newco (the
"Merger") pursuant to this Agreement and the applicable provisions of the law of
------
the State of Florida; and
WHEREAS, the Boards of Directors of each of the Constituent Corporations
have approved and adopted this Agreement as a plan of reorganization (a "tax-
---
free reorganization") within the provisions of Sections 368(a) of the Internal
- -------------------
Revenue Code of 1986, as amended (the "Code").
----
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 4.2), the
Company shall be merged with and into Newco pursuant to this Agreement, and the
separate corporate existence of the Company shall cease. Newco, as it exists
from and after the Effective Time, is sometimes referred to as the "Surviving
---------
Corporation."
- -----------
1.2 EFFECTS OF THE MERGER. The Merger shall have the effects provided
therefor by the 1989 Business Corporation Act of the State of Florida (the
"State Corporate Laws"). Without limiting the generality of the foregoing, and
--------------------
subject thereto, at the Effective Time (i) all the rights, privileges,
immunities, powers and franchises, of a public as well as of a private nature,
and all property, real, personal and mixed, and all debts due on whatever
account, including without limitation subscriptions to shares, and all other
choses in action, and all and every other interest of or belonging to or due to
the Company or Newco shall be taken and deemed to be transferred to, and
1
<PAGE>
vested in, the Surviving Corporation without further act or deed; and all
property, rights and privileges, immunities, powers and franchises and all and
every other interest shall be thereafter as effectually the property of the
Surviving Corporation, as they were of the Company and Newco, and (ii) all
debts, liabilities, duties and obligations of the Company and Newco, subject to
the terms hereof, shall become the debts, liabilities and duties of the
Surviving Corporation and the Surviving Corporation shall thenceforth be
responsible and liable for all the debts, liabilities, duties and obligations of
the Company and Newco and neither the rights of creditors nor any liens upon the
property of the Company or Newco shall be impaired by the Merger, and may be
enforced against the Surviving Corporation.
1.3 CERTIFICATE OF INCORPORATION; BYLAWS, DIRECTORS AND OFFICERS. At the
Effective Time:
(a) The Certificate of Incorporation of the Surviving Corporation from
and after the Effective Time shall be the Certificate of Incorporation of Newco,
as amended pursuant to a certificate of merger filed with respect to the Merger,
and until thereafter amended in accordance with the provisions therein and as
provided by the applicable provisions of the State Corporate Laws.
(b) The name of the of the Surviving Corporation from and after the
Effective Time shall be "Regency Electric Company, Inc."
(c) The Bylaws of the Surviving Corporation from and after the
Effective Time shall be the Bylaws of Newco in effect immediately prior to the
Effective Time, continuing until thereafter amended in accordance with their
terms and the Certificate of Incorporation of the Surviving Corporation and as
provided by the State Corporate Laws.
(d) The initial directors of the Surviving Corporation shall be: F.
Traynor Beck, Timothy C. Clayton and Alan J. Green ("Green") in each case until
-----
their successors are elected and qualified, and the initial officers of the
Surviving Corporation shall be the officers of the Company immediately prior to
the Effective Time, with the addition of F. Traynor Beck as Vice President and
Assistant Secretary of the Surviving Corporation, until his successor is duly
elected and qualified.
2. CONVERSION AND EXCHANGE OF STOCK
2.1 MANNER OF CONVERSION. At the Effective Time, by virtue of the Merger
and without any action on the part of CCC, Newco, the Company or the
Stockholders, the shares of capital stock of each of the Constituent
Corporations shall be converted as follows:
(a) Capital Stock of Newco. Each issued and outstanding share of
----------------------
capital stock of Newco shall continue to be issued and outstanding and shall
represent shares of stock of the Surviving Corporation. Each stock certificate
of Newco evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
2
<PAGE>
(b) Cancellation of Certain Shares of Capital Stock of the Company.
--------------------------------------------------------------
All shares of capital stock of the Company that are owned directly or indirectly
by the Company shall be canceled and no stock of CCC or other consideration
shall be delivered in exchange therefor.
(c) Conversion of Capital Stock of the Company. Subject to Section
------------------------------------------
2.1(d), and Sections 2.2, 2.3, 2.4, and 3.1, each issued and outstanding share
of Company Common Stock (other than shares to be canceled pursuant to Section
2.1(b)), that is issued and outstanding immediately prior to the Effective Time
shall automatically be canceled and extinguished and converted, without any
action on the part of the holder thereof, into the right to receive at the time
and in the amounts described in this Agreement (i) an amount of cash equal to
the cash portion of the Base Merger Consideration (as described in Section
2.2(a)) divided by the number of shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to be
canceled pursuant to Section 2.1(b)), (ii) that number of shares of CCC common
stock, $.001 par value ("CCC Common Stock"), valued at the Merger Price (as
----------------
described in Section 2.2(a)), that is equal in value to the CCC Common Stock
portion of the Base Merger Consideration (as defined in Section 2.2(a)) divided
by the number of shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be canceled
pursuant to Section 2.1(b)), (iii) an amount of cash equal to 50% of the
Contingent Merger Consideration (as defined in Section 2.3(a)) divided by the
number of shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be canceled pursuant to
Section 2.1(b)), and (iv) that number of shares of CCC Common Stock, valued at
the Earn Out Period Average Price (as defined in Section 2.3(e)), that is equal
in value to 50% of the Contingent Merger Consideration divided by the number of
shares of Company Common Stock outstanding immediately prior to the Effective
Time (other than shares to be canceled pursuant to Section 2.1(b)). All such
shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the
consideration therefor upon the surrender of such certificate in accordance with
this Section and Sections 2.2, 2.3 and 2.4 of this Agreement.
(d) Fractional Shares. No fractional shares of CCC Common Stock shall
-----------------
be issued, but if the Stockholders would otherwise be entitled to receive a
fraction of a share of CCC Common Stock, the Stockholders shall receive from CCC
an amount of cash equal to the Merger Price, as defined in Section 2.2(a),
multiplied by the fraction of a share of CCC Common Stock to which the
Stockholders would otherwise be entitled.
2.2 MERGER CONSIDERATION.
(a) For purposes of this Agreement, the "Base Merger Consideration"
-------------------------
shall be $80,000,000. Of the Base Merger Consideration, $40,000,000 shall be
paid in cash at Closing (as defined in Section 4.1) in immediately available
funds. The remaining $40,000,000 of the Base Merger Consideration shall be paid
at Closing in shares of CCC Common Stock valued at a price per share (the
"Merger Price") equal to the quotient determined by dividing the sum of (i) the
------------
closing
3
<PAGE>
price of CCC Common Stock on May 12, 1998, plus (ii) the closing trading price
of CCC Common Stock on the date that is three trading days prior to the Closing
Date (as defined in Section 4.1 below), plus (iii) the "Interim Period Average"
----------------------
(as such term is defined below), by three. Interim Period Average means the sum
of the closing trading prices of CCC Common Stock on every trading day from and
including the date referenced in clause (i) above and through and including the
date referenced in clause (ii) above, divided by the number of trading days
included in such period. The shares of CCC Common Stock to be issued in respect
of the Base Merger Consideration shall be registered under the Securities Act of
1933, as amended (the "1933 Act"), and approved for quotation on the Nasdaq
--------
National Market.
(b) The Merger Consideration has been calculated based upon several
factors, including the assumption that the net worth of the Company, calculated
in accordance with generally accepted accounting principles ("GAAP")
----
consistently applied, but in any event excluding any material increase in
intangible assets of the Company since December 31, 1997, shall be equal to or
greater than $4,500,000 (the "Net Worth Target") as of the Closing.
----------------
(c) If, the Actual Closing Net Worth (as defined in Section 3.1), as
determined pursuant to the Post-Closing Audit (as defined in Section 3.1), is
less than the Net Worth Target, then following the Closing in accordance with
Section 3.1, the Base Merger Consideration delivered to the Stockholders will be
adjusted downward by the difference between the Net Worth Target and the Actual
Closing Net Worth (which reduction shall be made 50% in cash and 50% in CCC
Common Stock valued at the Merger Price) and the Stockholders shall transfer and
deliver to CCC that amount of cash and that number of shares CCC Common Stock
which together represent the adjustment.
(d) If, on or prior to the Effective Time, CCC should split or combine
the CCC Common Stock, or pay a stock dividend or other stock distribution in CCC
Common Stock or any other security, or otherwise change the CCC Common Stock
into any other securities, or make any other dividend or distribution on the CCC
Common Stock (other than normal quarterly dividends, as the same may be adjusted
from time to time and in the ordinary course), then the number of shares of CCC
Common Stock issuable as the Merger Consideration will be appropriately adjusted
to reflect such split, combination, dividend or other distribution or change.
2.3 CONTINGENT MERGER CONSIDERATION.
(a) For purposes of this Agreement the "Contingent Merger
-----------------
Consideration" shall mean the Actual Earn Out EBIT (hereinafter defined) of the
- -------------
Surviving Corporation for the twelve month period ending on May 31, 1999.
(b) For purposes of this Section 2.3, "Actual Earn Out EBIT" means for
--------------------
the twelve month period ending on May 31, 1999, the earnings of the Surviving
Corporation (A) plus interest expense, income taxes, extraordinary items, and
cumulative effect of accounting changes and discontinued operations and (B) less
interest income, calculated in accordance with generally accepted accounting
principles ("GAAP") consistently applied; provided however, that in any event
----
4
<PAGE>
Actual Earn Out EBIT shall exclude any increases in intangible assets of the
Surviving Corporation. CCC's Accountant (hereinafter defined) will calculate the
Contingent Merger Consideration and the Actual Earn Out EBIT applying the same
accounting principles applied by the Company, with all such computations made
(and definitions used) in the same way the computations were made (and
definitions were used) by the Company prior to the Closing and will conform to
the methods of accounting utilized consistently during the calendar years 1996
and 1997 for the Company, provided in each case that such computations were in
accordance with GAAP.
(c) Price Waterhouse LLP, CCC's independent accountant ("CCC's
-----
Accountant"), will determine the Actual Earn Out EBIT within sixty (60) days
- ----------
following the last day of the Actual Earn Out EBIT measuring period and deliver
prompt notice of such amount to the Stockholders (the "Earn Out EBIT Notice")
--------------------
with supporting documentation. The Stockholders (through the Representative as
defined in Section 13.15) shall have the right to inspect, audit and make
extracts from all of the records, files and books of account of CCC relating to
the Actual Earn Out EBIT for purposes of verifying the amount of the
consideration payable pursuant to Section 2.3, at reasonable times during
business hours, upon advance notice to CCC.
(d) The Stockholders (through the Representative) shall have thirty
(30) days from the receipt of the Earn Out EBIT Notice to notify CCC if they
dispute the amount of the Actual Earn Out EBIT. If CCC has not received notice
of any such dispute within such 30-day period, the Actual Earn Out EBIT
contained in the Earn Out EBIT Notice shall be final. If, however, the
Stockholders (through the Representative) have delivered notice of such a
dispute to CCC within such 30-day period, then CCC shall, pursuant to Section
2.3(e) below, pay such amount of the Contingent Merger Consideration that is not
subject to any dispute and CCC's Accountant shall select a mutually agreeable
partner at an independent accounting firm that has not represented any of the
parties hereto within the preceding two (2) years and is one of the six largest
accounting firms in the United States (each, a "New Accounting Firm") to review
-------------------
the amount of the disputed Actual Earn Out EBIT, the books of the Surviving
Corporation, and the Earn Out EBIT Notice (and related information) to determine
the amount, if any, that the Actual Earn Out EBIT is in error. The New
Accounting Firm shall make its determination of the Actual Earn Out EBIT (the
"Revised Earn Out EBIT") if any, within thirty (30) days of its selection. The
---------------------
Revised Earn Out EBIT shall be final and binding on the parties hereto, and,
upon such determination, CCC shall be entitled or required to adjust the Actual
Earn Out EBIT accordingly. If the Revised Earn Out EBIT is higher than the
Actual Earn Out EBIT, CCC shall pay to the Stockholders interest, at the Prime
Rate (defined below), on the deficiency from the date that is three months after
the end of the period with respect to which the disputed Actual Earn Out EBIT is
calculated. The costs of the New Accounting Firm shall be borne by CCC if the
Revised Earn Out EBIT is higher than the Actual Earn Out EBIT and by the
Stockholders in all other cases. For purposes of this Section, the term "Prime
-----
Rate" shall mean the annual rate of interest announced by Citibank, N.A. in New
- ----
York, New York as its prime rate in effect on the Contingent Merger
Consideration Payment Date.
(e) The Contingent Merger Consideration described in Section 2.3 (a),
will be paid 50% in cash and 50% in shares of CCC Common Stock and the cash
portion of the Contingent Merger Consideration will be paid in a single lump
payment by federal wire transfer of same day
5
<PAGE>
funds immediately following the determination of the Actual Earn Out EBIT by
CCC's Accountant. For purposes of determining the number of shares of CCC
Common Stock that are issuable as part of the Contingent Merger Consideration,
the value of each such share shall be equal to the Earn Out Period Average Price
(defined below). The "Earn Out Period Average Price" means the quotient
-----------------------------
determined by dividing the sum of the closing trading price of a share of CCC
Common Stock on the Nasdaq National Market on each trading day from and
including the date that is thirty (30) trading days prior to, and including, May
31, 1999, by thirty (30). The date or dates on which the Contingent Merger
Consideration is paid to the Stockholders is hereinafter referred to as the
"Contingent Merger Consideration Payment Date." The certificates evidencing CCC
Common Stock received as part of the Merger Consideration shall be issued in the
denominations and names of the Stockholders as set forth in written instructions
delivered by the Stockholders to CCC at least five (5) business days prior to
the Closing Date and the Contingent Merger Consideration Payment Date or Dates,
as applicable.
(f) If, on or prior to a Contingent Merger Consideration Payment Date
but after calculation of the Earn Out Period Average Price with respect thereto,
CCC should split or combine the CCC Common Stock, or pay a stock dividend or
other stock distribution in CCC Common Stock or any other security, or otherwise
change the CCC Common Stock into any other securities, or make any other
dividend or distribution on the CCC Common Stock (other than normal quarterly
dividends, as the same may be adjusted from time to time and in the ordinary
course), then the number of shares of CCC Common stock issuable as the
Contingent Merger Consideration will be appropriately adjusted to reflect such
split, combination, dividend or other distribution or change.
(g) The shares of CCC Common Stock to be issued as part of the
Contingent Merger Consideration shall be registered under the Securities Act and
approved for quotation on the Nasdaq National Market.
(h) CCC and Newco agree that separate books and records will be kept
for the Surviving Corporation from the Closing Date through the Contingent
Merger Consideration Payment Date.
2.4 EXCHANGE OF CERTIFICATES AND PAYMENT OF CASH.
(a) Delivery of Consideration. At Closing, in exchange for the
-------------------------
outstanding shares of capital stock of the Company, CCC shall cause to be made
available to the Stockholders the Base Merger Consideration (including cash in
an amount sufficient for payment in lieu of fractional shares pursuant to
Section 2.1(d)), with all cash payments to be made by federal wire transfer of
immediately available funds pursuant to wire transfer instructions provided by
the Stockholders at least two business days prior to Closing. The certificates
evidencing the CCC Common Stock component of the Base Merger Consideration and
the Contingent Merger Consideration (the cash and the CCC Common Stock
components of the Base Merger Consideration and the Contingent Merger
Consideration are referred to together as the "Merger Consideration") shall bear
--------------------
appropriate legends pursuant to the terms of this Agreement and any applicable
Affiliate Agreement (as described in Section 8.8), and CCC shall be entitled to
issue appropriate stop transfer instructions
6
<PAGE>
to its transfer agent consistent with the terms of this Agreement and any
applicable Affiliate Agreement.
(b) Certificate Delivery Requirements. At the Effective Time, the
---------------------------------
Stockholders shall deliver to CCC the certificates (the "Certificates")
------------
representing Company Common Stock owned by them, accompanied by blank stock
powers duly executed by each respective Stockholder and with all necessary
transfer tax and other revenue stamps, acquired at the Stockholder's expense,
affixed and canceled. Each Stockholder shall promptly cure any deficiencies
with respect to the stock powers accompanying such Certificates. The
Certificates so delivered shall forthwith be canceled. Until delivered as
contemplated by this Section 2.4(b), each Certificate shall be deemed at any
time after the Effective Time to represent the right to receive upon such
surrender the cash and number of shares of CCC Common Stock as provided by this
Article 2 and the applicable provisions of the State Corporate Laws.
(c) No Further Ownership Rights in Capital Stock of the Company. All
-----------------------------------------------------------
CCC Common Stock and cash to be delivered (including CCC Common Stock delivered
but withheld pursuant to Section 3.2(a)) upon the surrender for exchange of
shares of Company Common Stock in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such shares of Company Common Stock, and, following the Effective Time, the
Stockholders shall have no further rights to, or ownership in, shares of capital
stock of the Company. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Company
Common Stock which were issued and outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Section 2.4.
(d) Lost, Stolen or Destroyed Certificates. If any certificates
--------------------------------------
evidencing shares of Company Common Stock shall have been lost, stolen or
destroyed, then CCC shall cause payment to be made of such shares of CCC Common
Stock and cash as provided in Section 2.1 in exchange for such lost, stolen or
destroyed certificates, upon the delivery to CCC of an affidavit of that fact by
the holder thereof; provided, however that CCC may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to deliver an agreement of indemnity against
any claim that may be made against CCC with respect to the certificates alleged
to have been lost, stolen or destroyed.
(e) No Liability. Notwithstanding anything to the contrary in this
------------
Section 2.4, none of the Surviving Corporation or any party hereto shall be
liable to a holder of shares of Company Common Stock for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
7
<PAGE>
3. POST CLOSING ADJUSTMENT; PLEDGED ASSETS
3.1 POST-CLOSING ADJUSTMENT.
(a) The Base Merger Consideration shall be subject to adjustment after
the Closing Date as specified in this Section 3.1.
(b) Within one hundred twenty (120) days following the Effective Time,
CCC shall cause CCC's Accountant to audit (the "Post-Closing Audit") the
------------------
Surviving Company's books to determine the actual Company net worth as of
Closing without regard to the impact of the award, payment or redemption of
stock appreciation rights granted pursuant to the January 1998 Stock
Appreciation Rights Plan of the Company (the "Actual Closing Net Worth"). The
------------------------
parties acknowledge and agree that Actual Closing Net Worth shall be determined
in accordance with GAAP, provided that no increase in intangible assets
(including without limitation goodwill, franchises and intellectual property)
accounted for after December 31, 1997 shall be taken into account and no write-
offs shall be proposed, other than regular depreciation between December 31,
1997 and March 31, 1998 in accordance with GAAP consistently applied. The
Stockholders shall cooperate and shall use their reasonable efforts to cause the
officers and employees of the Company to cooperate with CCC and CCC's Accountant
after the Closing Date in furnishing information, documents, evidence and other
assistance to CCC's Accountant to facilitate the completion of the Post-Closing
Audit within the aforementioned time period. Without limiting the generality of
the foregoing, within two weeks after the Closing the Stockholders shall provide
CCC's Accountants with the information and/or documents reasonably requested by
them. In the event that CCC's Accountant determines that the Actual Closing Net
Worth was less than the Net Worth Target, CCC shall deliver a written notice
(the "Financial Adjustment Notice") to the Stockholders setting forth (i) the
---------------------------
determination made by CCC's Accountant of the Actual Closing Net Worth, and (ii)
the amount of the Adjustment to the Base Merger Consideration pursuant to the
provisions of Section 2.2(c) (the "Merger Consideration Adjustment").
-------------------------------
(c) The Stockholders shall have thirty (30) days from the receipt of
the Financial Adjustment Notice to notify CCC if they dispute such Financial
Adjustment Notice. If CCC has not received notice of such a dispute within such
30-day period, CCC shall be entitled to receive the Merger Consideration
Adjustment, as provided in Section 2.2(c). If, however, the Stockholders have
delivered notice of such a dispute to CCC within such 30-day period, then CCC's
Accountant shall select a mutually agreeable partner at an independent
accounting firm that has not represented any of the parties hereto within the
preceding two (2) years to review the Surviving Corporation's books and
Financial Adjustment Notice (and related information) to determine the amount,
if any, of the Merger Consideration Adjustment. The independent accounting firm
shall make its determination of the Merger Consideration Adjustment, if any,
within thirty (30) days of its selection. The determination made by the
independent accounting firm shall be final and binding on the parties hereto,
and upon such determination, CCC shall be entitled to receive the Merger
Consideration Adjustment (which shall be from the Pledged Assets as defined in
Section 3.2). The costs of the independent accounting firm shall be borne by
the party (either CCC or the Stockholders) whose determination of the Company's
net worth at Closing was further from the determination of the
8
<PAGE>
independent accounting firm, or equally by CCC and the Stockholders in the event
that the determination by the independent accounting firm is equidistant between
the disputed determinations by CCC and the Stockholders.
3.2 PLEDGED ASSETS.
(a) As collateral security for the payment of any Merger
Consideration Adjustment or any indemnification obligations of the Stockholders
pursuant to (and subject to the limitations of) Article 10, Green shall, at the
Closing, transfer, pledge and assign to CCC, for the benefit of CCC, a security
interest in the following assets (the "Pledged Assets"):
--------------
(i) Green's portion of shares of CCC Common Stock with a
value, based on the Merger Price, equal to ten percent (10%) of the Merger
Consideration, and the certificates and instruments, if any, representing or
evidencing such Pledged Assets;
(ii) all securities hereafter delivered to Green with
respect to or in substitution for the Pledged Assets, all certificates and
instruments representing or evidencing such securities, and all cash and non-
cash dividends and other property at any time received, receivable or otherwise
distributed in respect of or in exchange for any or all thereof; and in the
event Green receives any such property, Green shall hold such property in trust
for CCC and shall immediately deliver such property to CCC to be held hereunder
as Pledged Assets; and
(iii) all cash and non-cash proceeds of all of the foregoing
property and all rights, titles, interests, privileges and preferences
appertaining or incident to the foregoing property.
(b) Each certificate, if any, evidencing the Pledged Assets issued in
Green's name in the Merger shall be delivered to CCC directly by the transfer
agent, such certificate bearing no restrictive or cautionary legend other than
those imprinted by the transfer agent at CCC's request in accordance with the
terms and provisions of this Agreement. Green shall, at the Closing, deliver to
CCC, for each such certificate, a stock power duly signed in blank by him. All
shares of CCC Common Stock comprising the Pledged Assets shall not be commingled
with the assets of CCC or any of its subsidiaries.
(c) The Pledged Assets shall be available to satisfy the Merger
Consideration Adjustment and any indemnification obligations of the Stockholders
pursuant to (and subject to the limitations of) Article 10 until the date which
is one year after the Effective Time (the "Release Date"). Promptly following
------------
the Release Date, CCC shall release such pledge and return or cause to be
returned to Green the Pledged Assets (including dividends and distributions with
respect to shares of CCC Common Stock subject to pledge), less Pledged Assets
having an aggregate value equal to the amount of (i) any finally adjudicated
claim (to the extent not fully satisfied) or any pending claim for
indemnification made by any Indemnified Party (as defined in Article 10) subject
to the limitations of Article 10, and (ii) any indemnification obligations of
any Stockholder pursuant to Article 10 subject to the limitations of Article 10
to the extent previously paid from the Pledged Assets. For purposes of the
preceding sentence and Article 10, the CCC Common Stock held as
9
<PAGE>
Pledged Assets and applied to satisfy the Merger Consideration Adjustment or any
indemnification obligation under Article 10 shall be valued at the average of
the last daily trading price per share on the Nasdaq National Market of CCC
Common Stock for the fifteen trading days prior to the satisfaction of the
Merger Consideration Adjustment or an indemnification obligation pursuant to
Article 10, as the case may be. Notwithstanding the foregoing or anything to
the contrary herein, the Stockholders shall be entitled to satisfy any claims
relating to the Pledged Assets, including but not limited to any indemnification
pursuant to Article 10 hereof, with cash, in lieu of shares of CCC Common Stock
constituting Pledged Assets.
(d) While any shares of CCC Common Stock remain subject to the pledge
set forth herein, and pending the disbursement thereof in accordance with this
Section 3.2, Green shall have all the rights of a stockholder of CCC with
respect to such shares (including without limitation the right to vote such
shares in accordance with his interest therein and the right to receive
dividends and distributions thereon), except (i) the right of possession
thereof, (ii) the right to sell, assign, pledge, hypothecate or otherwise
dispose of such shares or any interest therein and (iii) the right to possession
of any dividends or other distributions received in respect thereof.
4. CLOSING
4.1 LOCATION AND DATE. The consummation of the Merger and the other
transactions contemplated by this Agreement (the "Closing") shall take place at
-------
the offices of [Morgan, Lewis & Bockius LLP, 1800 M Street, NW, Washington, D.C.
20036], on June [__], 1998, providing that all conditions to Closing shall have
been satisfied or waived, or at such other time, place and date as CCC, the
Company and the Stockholders may mutually agree, which date shall be referred to
as the "Closing Date."
------------
4.2 EFFECT. On the Closing Date, a certificate of merger, or other
appropriate documents executed in accordance with the State Corporate Laws (the
"Merger Documents"), together with any required officers' certificates, shall be
----------------
filed in accordance with the provisions of the State Corporate Laws. The Merger
shall become effective upon such filing or at such later time as may be
specified in such filing (the "Effective Time").
--------------
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
To induce CCC and Newco to enter into this Agreement and consummate the
transactions contemplated hereby, each of the Company (with respect to
representations relating to the Company only) and the Stockholders, jointly and
severally, represent and warrant to CCC and Newco, as follows (for purposes of
this Agreement, the phrases "knowledge of the Company" or the "Company's
------------------------ ---------
knowledge," or words of similar import, mean the actual knowledge of Green and
- ---------
Nancy Hanna).
10
<PAGE>
5.1 DUE ORGANIZATION. The Company, and each subsidiary of the Company
listed on Schedule 5.6(a) (each, a "Subsidiary" and together the
----------
"Subsidiaries"), is a corporation duly organized, validly existing and in good
------------
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, operate and lease its properties
and to carry on its business in the places and in the manner as now conducted
except where the failure to be so authorized, qualified or licensed would not
have a material adverse effect on the business, operations, properties, assets
or condition, financial or otherwise, of the Company on a consolidated basis
with its Subsidiaries, taken as a whole, provided that the foregoing shall not
include any material adverse effect attributable to (a) factors affecting the
electrical contracting industry generally, (b) general national, regional or
local economic or financial conditions, (c) changes in governmental or
legislative laws, rules or regulations, or (d) actions taken by CCC or any
affiliate of CCC ("Material Adverse Effect"). SCHEDULE 5.l hereto contains (i) a
-----------------------
list of all jurisdictions in which the Company and its Subsidiaries conduct
business and (ii) a list of all jurisdictions in which the Company and its
Subsidiaries are authorized or qualified to do business as a foreign
corporation. The Company and each Subsidiary is in good standing in all
jurisdictions where the failure to be in good standing would have a Material
Adverse Effect. The Company has delivered to CCC or given CCC access to true,
complete and correct copies of the Certificate of Incorporation and Bylaws of
the Company and each Subsidiary. Such Certificates of Incorporation and Bylaws
are collectively referred to as the "Charter Documents." Neither the Company nor
-----------------
any Subsidiary is in violation of their respective Charter Documents. The minute
books, original stock ledger and corporate seal of the Company and each
Subsidiary have been made available to CCC and are correct and, except as set
forth in SCHEDULE 5.1, complete in all material respects.
5.2 AUTHORIZATION; VALIDITY. The Company has the requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. Each Stockholder has the full legal right and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the performance by the Company of the transactions contemplated herein have
been duly and validly authorized by the Board of Directors of the Company and
will be approved by the Stockholders prior to Closing and, subject to the
foregoing, this Agreement has been duly and validly authorized by all necessary
corporate action. This Agreement is a legal, valid and binding obligation of the
Company and the Stockholders, enforceable in accordance with its terms subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
5.3 NO CONFLICTS. Except as set forth on SCHEDULES 5.3 OR 5.13, the
execution, delivery and performance of this Agreement, the consummation of the
transactions contemplated hereby, and the fulfillment of the terms hereof will
not:
(a) conflict with, or result in a breach or violation of, any of the
Charter Documents;
(b) other than such as would not, individually or in the aggregate,
have a Material Adverse Effect, conflict with, or result in a default (or an
event that would constitute a default but
11
<PAGE>
for the requirement of notice or lapse of time or both) under, any document,
agreement or other instrument to which the Company, any Subsidiary or any
Stockholder is a party or by which the Company, any Subsidiary or any
Stockholder is bound, or result in the creation or imposition of any lien,
charge or encumbrance on any of the Company's or any Subsidiary's properties
pursuant to (i) any law or regulation to which the Company, any Subsidiary or
any Stockholder or any of their respective property is subject, or (ii) any
judgment, order or decree to which the Company, any Subsidiary or any
Stockholder is bound or any of their respective property is subject;
(c) result in termination or any impairment of any material permit,
license, franchise, surety bond, insurance coverage, contractual right or other
authorization of the Company or any Subsidiary;
(d) violate any material law, order, judgment, rule, regulation,
decree or ordinance to which the Company, any Subsidiary or any Stockholder is
subject or by which the Company or any Stockholder is bound; or
(e) require the consent of any third party.
5.4 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company consists of 100,000 shares of Common Stock, par value $0.01 per share,
of which 10,000 shares are voting stock and 90,000 shares are non-voting stock.
There are 1,000 shares of voting stock that are issued and outstanding and 9,000
shares of non-voting stock that are issued and outstanding. No shares are held
as treasury stock. Except as disclosed in SCHEDULE 5.4, all of the issued and
outstanding shares of the capital stock of the Company have been duly authorized
and validly issued, are fully paid and nonassessable and are owned of record and
beneficially by the Stockholders in the respective amounts set forth on SCHEDULE
5.4, free and clear of all Liens (defined below). SCHEDULE 5.4 attached hereto
sets forth the number and class of the authorized capital stock of each
Subsidiary and the number of shares of each Subsidiary which are issued and
outstanding, all of which shares are owned by the Company free and clear of all
Liens. All of the issued and outstanding shares of the capital stock of the
Company were offered, issued, sold and delivered by the Company in compliance
with all applicable state and federal laws concerning the issuance of
securities. Further, none of such shares was issued in violation of any
preemptive rights. There are no voting agreements or voting trusts with respect
to any of the outstanding shares of the capital stock of the Company. For
purposes of this Agreement, "Lien" means any mortgage, security interest,
----
pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien
(statutory or otherwise), charge, preference, priority or other security
agreement, option, warrant, attachment, right of first refusal, preemptive,
conversion, put, call or other claim or right, restriction on transfer (other
than restrictions imposed by federal and state securities laws), or preferential
arrangement of any kind or nature whatsoever (including any restriction on the
transfer of any assets, any conditional sale or other title retention agreement,
any financing lease involving substantially the same economic effect as any of
the foregoing and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction).
12
<PAGE>
5.5 TRANSACTIONS IN CAPITAL STOCK. Except as disclosed in SCHEDULE 5.5, no
option, warrant, call, subscription right, conversion right or other contract or
commitment of any kind exists of any character, written or oral, which may
obligate the Company or any Subsidiary to issue, sell or otherwise cause to
become outstanding any shares of capital stock. Except as disclosed in Schedule
5.5, neither the Company nor any Subsidiary has any obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its equity securities
or any interests therein or to pay any dividend or make any distribution in
respect thereof.
5.6 SUBSIDIARIES, STOCK, AND NOTES.
(a) Except as set forth in SCHEDULE 5.6(A), the Company has no
subsidiaries.
(b) Except as set forth on SCHEDULE 5.6(B), neither the Company nor
any Subsidiary presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity, nor is
the Company or any Subsidiary, directly or indirectly, a participant in any
joint venture, partnership or other noncorporate entity.
(c) Except as set forth on SCHEDULE 5.6(C), there are no promissory
notes that have been issued to, or are held by, the Company or any Subsidiary.
5.7 PREDECESSOR STATUS. SCHEDULE 5.7 sets forth a list of all names of all
predecessor companies of the Company and each Subsidiary, including the names of
any entities from which the Company and each Subsidiary previously acquired
substantially all of the assets. Except as set forth in SCHEDULE 5.7, neither
the Company nor any Subsidiary has ever been a subsidiary or division of another
corporation (other than the Company).
5.8 ABSENCE OF CLAIMS AGAINST THE COMPANY. Except as set forth in SCHEDULE
5.8, no Stockholder has made any claims against the Company or any Subsidiary,
nor, to the knowledge of the Company, has any such claim been threatened.
5.9 FINANCIAL STATEMENTS. SCHEDULE 5.9 includes (a) copies of the
Company's audited consolidated balance sheet as of December 31, 1997 (the
"Balance Sheet Date") (December 31, 1997 being the end of its most recently
------------------
completed fiscal year), and consolidated income statements and statements of
cash flows for the years ended December 31, 1997, 1996 and 1995 (collectively,
the "Audited Financials") and (b) copies of the Company's unaudited consolidated
------------------
balance sheet (the "Interim Balance Sheet") as of March 31, 1998 and
---------------------
consolidated income statement and statement of cash flows, for the three-month
period then ended (collectively, the "Interim Financials," and together with the
------------------
Audited Financials, the "Company Financial Statements"). Except as noted on the
----------------------------
auditors' report accompanying the Audited Financials, the Company Financial
Statements have been prepared in accordance with GAAP consistently applied,
subject to, in the case of the Interim Financials, (i) the exceptions stated on
SCHEDULE 5.9, and (ii) the omission of footnote information and, in the case of
the Interim Financial Statements, normal year end adjustments. Except as set
forth in SCHEDULE 5.9 or as noted on the accompanying auditor's report, each
balance sheet included
13
<PAGE>
in the Company Financial Statements presents fairly the financial condition of
the Company on a consolidated basis as of the date indicated thereon, and each
of the income statements included in the Company Financial Statements presents
fairly the results of its operations for the periods indicated thereon, in each
case in accordance with GAAP.
5.10 LIABILITIES AND OBLIGATIONS.
(a) Neither the Company nor any Subsidiary is liable for or subject
to any liabilities except for:
(i) those liabilities reflected on the Interim Balance Sheet
and not previously paid or discharged;
(ii) those liabilities arising in the ordinary course of its
business consistent with past practice under any contract, commitment or
agreement to which the Company or any of its Subsidiaries is a party;
(iii) those liabilities incurred since the Balance Sheet Date
in the ordinary course of business consistent with past practice, which
liabilities are not, individually or in the aggregate, material; and
(iv) those liabilities set forth on SCHEDULE 5.10.
(b) The Company has provided to CCC, in the case of those
liabilities which are not fixed or are contested, its good faith estimate of the
maximum amount which may be payable.
(c) SCHEDULE 5.10 also includes a summary description of all plans
or projects involving the opening of new operations, expansion of any existing
operations or the acquisition of any real property or existing business, to
which management of the Company has made any material expenditure in the two-
year period prior to the date of this Agreement, which if pursued by the
Company, any Subsidiary or the Surviving Corporation would require additional
material expenditures of capital.
(d) For purposes of this Section 5.10, the term "liabilities" shall
-----------
include without limitation any direct or indirect liability, indebtedness,
guaranty, endorsement, claim, loss, damage, deficiency, cost, expense,
obligation or responsibility, either accrued, absolute, contingent, mature,
unmatured or otherwise and whether known or unknown, fixed or unfixed, choate or
inchoate, liquidated or unliquidated, secured or unsecured. SCHEDULE 5.10
contains a complete list of all indebtedness of the Company and its Subsidiaries
for borrowed money as of the Balance Sheet Date.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Attached hereto as SCHEDULE 5.11 is
an accurate list, as of a date not more than five (5) business days prior to the
date hereof, of the accounts and notes receivable of the Company and each
Subsidiary (including without limitation receivables from and advances to
employees, former employees, and the Stockholders), which includes an aging of
14
<PAGE>
all accounts and notes receivable showing amounts due in 30-day aging categories
(collectively, the "Accounts Receivable"). On the Closing Date, the Company will
-------------------
deliver to CCC an accurate list, as of a date not more than five (5) business
days prior to the Closing Date, of the Accounts Receivable. All Accounts
Receivable represent valid obligations arising from sales actually made or
services actually performed in the ordinary course of business or such other
valid obligations arising from receivables from and advances to employees,
former employees or the Stockholders.
5.12 BOOKS AND RECORDS. The Company has made and kept books and records
and accounts, which, in reasonable detail, accurately and fairly reflect the
activities of the Company and each Subsidiary.
5.13 PERMITS. Except as set forth on SCHEDULE 5.13, the Company and its
Subsidiaries own or hold all material licenses, franchises, permits and other
governmental authorizations, including without limitation permits, titles
(including without limitation motor vehicle titles and current registrations),
fuel permits, licenses and franchises necessary for the continued operation of
their businesses as they are currently being conducted (the "Permits"). The
-------
Permits are valid, and neither the Company nor any Subsidiary has received any
notice that any governmental authority intends to modify, cancel, terminate or
fail to renew any Permit. Except as set forth on SCHEDULE 5.13, no present or
former officer, manager, member or employee of the Company, any Subsidiary or
any affiliate thereof, or any other person, firm, corporation or other entity,
owns or has any proprietary, financial or other interest (direct or indirect) in
any Permits. The Company and each Subsidiary has conducted and is conducting its
business in compliance with the requirements, standards, criteria and conditions
set forth in the Permits and other applicable orders, approvals, variances,
rules and regulations and is not in violation of any of the foregoing, except
where such non-compliance or violation would not have a Material Adverse Effect.
Except as set forth on SCHEDULES 5.3 or 5.13, the transactions contemplated by
this Agreement will not result in a default under, or a breach or violation of,
or adversely affect the rights and benefits afforded to the Company or any
Subsidiary by, any Permit.
5.14 REAL PROPERTY.
(a) For purposes of this Agreement, "Real Property" means all of the
-------------
Company's and each Subsidiary's interest in real property, including, without
limitation, fee estates, leaseholds and subleaseholds, purchase options with
respect to real property, easements, licenses with respect to real property,
rights to access, and rights of way, and all buildings and other improvements
thereon, owned or used by the Company, together with any additions thereto or
replacements thereof.
(b) Neither the Company nor any Subsidiary has any fee ownership in
any Real Property.
(c) SCHEDULE 5.14(c) contains an accurate description as of the date
of this Agreement of all Real Property (including street address, legal
description (where known), owner and Company's or its Subsidiaries' use thereof)
and, to the Company's knowledge, any Liens other than for: (A) Liens for current
taxes not yet due and payable or in dispute (to the extent the Company has
established a reasonable reserve therefore in accordance with GAAP), (B)
easements, covenants,
15
<PAGE>
conditions, restrictions, rights of way and title defects reflected in the
public records, and any matters which would be reflected in a current, accurate
survey of the owned Real Property and which will not individually, or in the
aggregate, materially interfere with the right or ability of CCC to use or
operate the owned Real Property as the owned Real Property is currently used by
the Company, (C) Liens securing indebtedness for borrowed money that CCC or one
of its affiliates has agreed to assume at Closing, as set forth on SCHEDULE
5.14(c)(i), (D) landlord's Liens and Liens for property taxes not delinquent,
(E) statutory Liens that were created in the ordinary course of business not
delinquent, (F) restrictions or rights granted to governmental authorities under
applicable law, (G) zoning, building, or similar restrictions relating to or
affecting property, and (H) all matters of record, including leasehold interests
in real property owned by others and operating leases for personal property and
leased interests in property leased to others (collectively, "Permitted
---------
Encumbrances").
- ------------
(d) The Company and each Subsidiary: (i) holds no interest as
landlord in any Real Property; (ii) has a valid leasehold interest as tenant in
all the Real Property listed as leased by the respective Company or Subsidiary
on SCHEDULE 5.14(C) (the "leased Real Property"); (iii) is not in default of any
--------------------
of its obligations under any lease relating to the leased Real Property, nor has
an event occurred which, with the giving of notice or the passage of time, could
become an event of default; (iv) has no knowledge of any default by the landlord
under any lease relating to the leased Real Property; (v) has paid all rent due
under each lease relating to the leased Real Property with respect to the period
through the Closing Date; and (vi) has not exercised any termination or purchase
option under any lease relating to the leased Real Property.
(e) The Company has made available to CCC true and complete copies
of each lease relating to the leased Real Property and all amendments, renewals,
extensions, modifications or supplements thereto, and all correspondence
pursuant to which any party to any of such leases declared a default thereunder
or provided notice of the exercise of any option granted to such party under
such lease.
(f) Except as provided on SCHEDULE 5.3, none of the leases relating
to the leased Real Property requires the consent or approval of any party
thereto in connection with the consummation of the transactions contemplated
hereby.
5.15 PERSONAL PROPERTY.
(a) The Company and each Subsidiary currently owns or leases all
personal property necessary to conduct its business and operations as they are
currently being conducted.
(b) All of the trucks and other material machinery and equipment of
the Company and each Subsidiary are in good working order and condition,
ordinary wear and tear excepted. All leases for the personal property necessary
to conduct the business and operations of the Company and each Subsidiary are in
full force and effect and constitute valid and binding agreements of the Company
and each Subsidiary, as applicable, and neither Company nor any Subsidiary, as
applicable, is in breach of any of their material terms. All fixed assets used
by the Company and
16
<PAGE>
each Subsidiary that are material to the operation of its business are either
owned by the applicable Company or Subsidiary or leased under an agreement.
5.16 INTELLECTUAL PROPERTY. Neither the Company nor any Subsidiary uses
or employs any copyrights, patents, trade names, trade secrets, registered and
unregistered trademarks, service marks, trade dress, franchises, domain names or
similar rights in the business of the Company or its Subsidiaries.
5.17 MATERIAL CONTRACTS AND COMMITMENTS.
(a) The Company has made available each written contract,
commitment, lease, instrument, agreement or contracting license to which the
Company or any Subsidiary is a party or by which any of their respective
properties are bound (including without limitation, joint venture or partnership
agreements, contracts with any labor organizations, employment agreements,
consulting agreements, loan agreements, indemnity or guaranty agreements, bonds,
mortgages, options to purchase land, liens, pledges or other security
agreements) (i) to which the Company or any Subsidiary on the one hand and on
the other hand any affiliate of the Company or any Subsidiary or any officer,
director or shareholder of the Company or any Subsidiary are parties ("Related
-------
Party Agreements"); (ii) that may give rise to obligations or liabilities
- ----------------
exceeding, during the current term thereof, $50,000 individually, or that may
generate revenues or income exceeding, during the current term thereof, $50,000
individually (collectively with the Related Party Agreements, the "Material
--------
Contracts"); or (iii) that provides rights to indemnification to any current or
- ---------
former directors, officers, employees or agents of the Company or any
Subsidiary. Other than as disclosed on SCHEDULE 5.17(A) the Company and each
Subsidiary has complied with all of its material commitments and obligations, is
not in default under any of the Material Contracts, except as arising in the
ordinary course of business, has no contracts under which the work has been
substantially delayed or changed for which proper compensation is not expected,
has no pending or expected claims in excess of $50,000 against a prime
contractor or owner in connection with completed work or work in progress, and
has not received any notice of default with respect to any obligation thereof,
and there are no Material Contracts that were not negotiated at arm's length.
(b) Each Material Contract, except those terminated pursuant to
Section 7.4, is valid and binding on the Company or its Subsidiaries and is in
full force and effect and, to the knowledge of the Company, is not subject to
any default thereunder by any party obligated to the Company or its Subsidiaries
pursuant thereto.
(c) The outstanding balance on all loans or credit agreements either
(i) between the Company and any Person in which any Stockholder owns a material
interest, or (ii) guaranteed by the Company for the benefit of any Person in
which any Stockholder owns a material interest, are set forth in SCHEDULE
5.17(C) as of the date indicated therein.
17
<PAGE>
5.18 GOVERNMENT CONTRACTS.
(a) The Company has made available to CCC any government contracts
to which it or any Subsidiary is a party.
(b) Neither the Company nor any Subsidiary has been suspended or
debarred from bidding on contracts or subcontracts for any agency or
instrumentality of the United States Government or any state or local
government, nor, to the knowledge of the Company, has any such suspension or
debarment action been threatened or commenced.
(c) Except as set forth on SCHEDULE 5.18, to the knowledge of the
Company, neither the Company nor any Subsidiary has been, nor is it now being,
audited, or investigated by any government agency, or the inspector general or
auditor general or similar functionary of any agency or instrumentality, nor, to
the knowledge of the Company has such audit or investigation been threatened in
writing.
(d) Except as set forth on SCHEDULE 5.18, neither the Company nor
any Subsidiary has any material dispute pending before a contracting office of,
nor any current claim (other than the Accounts Receivable) pending against, any
agency or instrumentality of the United States Government or any state or local
government, relating to a contract.
(e) Neither the Company nor any Subsidiary has, with respect to any
government contract, received a cure notice advising the Company or Subsidiary
that it is or was in default or would, if it failed to take remedial action, be
in default under such contract.
(f) Neither the Company nor any Subsidiary has submitted any cost or
pricing data, certification, bid, proposal, report, claim, or any other
information relating to a contract to any agency or instrumentality of the
United States Government or any state or local government which was inaccurate,
untruthful or misleading in any material respect.
(g) No employee of the Company or any Subsidiary is in receipt or
possession of any competitor or government proprietary or procurement sensitive
information related to the Company's or any Subsidiary's business under
circumstances where there is reason to believe that such receipt or possession
is unlawful or unauthorized.
(h) Except as set forth on SCHEDULE 5.18, each of the Company's and
each Subsidiary's government contracts has been issued, awarded or novated to
the Company or any Subsidiary in the Company's or such Subsidiary's name.
(i) Except as set forth on SCHEDULE 5.18, the Company's and each
Subsidiary's cost accounting records can be adjusted in conformance with the
requirements of the Federal Acquisition Regulations to the extent applicable.
18
<PAGE>
5.19 INSURANCE. SCHEDULE 5.19 sets forth, as of the date of this
Agreement, an accurate list of all insurance policies carried by the Company and
its Subsidiaries and the Company has delivered to CCC all insurance loss runs or
workers' compensation claims received for the past two policy years with respect
to the Company and its Subsidiaries. The Company has delivered to CCC complete
correct copies of all current insurance policies, all of which are in full force
and effect other than the omission of additional insured parties. All premiums
payable under all such policies have been paid and the Company and each
Subsidiary is otherwise in compliance with the terms of such policies. The
insurance carried by the Company and each Subsidiary with respect to its
properties, assets and business is, to the Company's knowledge, with financially
sound insurers. To the knowledge of the Company, there have been no threatened
terminations of, or material premium increases with respect to, any of such
policies.
5.20 LABOR AND EMPLOYMENT MATTERS. Except as set forth in SCHEDULE 5.20,
as of the date of this Agreement, with respect to employees of and service
providers to the Company and each Subsidiary:
(a) during the last two years, the Company and each Subsidiary is
and has been in compliance in all material respects with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including without limitation any such laws
respecting minimum wage and overtime payments, employment discrimination,
workers' compensation, family and medical leave, the Immigration Reform and
Control Act, and occupational safety and health requirements, and has not and is
not engaged in any unfair labor practice;
(b) there is not now, nor within the past three years has there
been, any unfair labor practice complaint against the Company or any Subsidiary
pending or, to the Company's knowledge, threatened, before the National Labor
Relations Board or any other comparable authority;
(c) there is not now, nor within the past three years has there
been, any labor strike, slowdown or stoppage actually pending or, to the
Company's knowledge, threatened, against or directly affecting the Company or
any Subsidiary;
(d) no grievance or arbitration proceeding arising out of or under
collective bargaining agreements is pending and, to the Company's knowledge, no
claims therefor exist or have been threatened;
(e) the employees of the Company and each Subsidiary are not and
have never been represented by any labor union, and no collective bargaining
agreement is binding and in force against the Company or any Subsidiary or
currently being negotiated by the Company or any Subsidiary; and
(f) all persons classified by the Company or any Subsidiary as
independent contractors do satisfy and have satisfied the requirements of law to
be so classified, and the
19
<PAGE>
Company and each Subsidiary has fully and accurately reported their compensation
on IRS Forms 1099 when required to do so.
5.21 EMPLOYEE BENEFIT PLANS. Attached hereto as SCHEDULE 5.21 is a list of
all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multiemployer plans and all multiple employer
welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the Company and
-----
each Subsidiary, or to which the Company or any Subsidiary currently contributes
(including, without limitation, any such plan or arrangement created by any
agreements, including any employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements,
----------------
together with copies of any trusts related thereto and a classification of
employees covered thereby (collectively, the "Plans"). To the knowledge of the
-----
Company, SCHEDULE 5.21 sets forth each plan or arrangement that would have been
an employee pension or welfare benefit plan described in the first sentence of
this Section 5.21 but for its termination within the past three years.
All Plans are in substantial compliance with all applicable provisions of
ERISA and the regulations issued thereunder, as well as with all other
applicable laws, and, in all material respects, have been administered, operated
and managed in substantial accordance with the governing documents. All Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
---------------
Internal Revenue Code of 1986, as amended (the "Code") have been determined by
the Internal Revenue Service to be so qualified, and copies of the current plan
determination letters, most recent actuarial valuation reports, if any, most
recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each
such Qualified Plan or employee welfare benefit plan and most recent trustee or
custodian report, as listed on SCHEDULE 5.21. To the extent that any Qualified
Plans have not been amended to comply with applicable law, the remedial
amendment period permitting retroactive amendment of such Qualified Plans has
not expired and will not expire within 120 days after the Closing Date. None of:
(i) any Stockholder; (ii) any Plan; or (iii) the Company or any Subsidiary has
engaged in any non-exempt transaction prohibited under the provisions of Section
4975 of the Code or Section 406 of ERISA. No Plan has incurred an accumulated
funding deficiency, as defined in Section 412(a) of the Code and Section 302(1)
of ERISA; and neither the Company nor any Subsidiary currently has (nor at the
Closing Date will have) any direct or indirect liability whatsoever (including
being subject to any statutory lien to secure payment of any such liability), to
the Pension Benefit Guaranty Corporation ("PBGC") with respect to any such Plan
----
under Title IV of ERISA or to the Internal Revenue Service for any excise tax or
penalty; and neither the Company nor any member of a "controlled group" with the
----------------
Company (as defined in ERISA Section 4001(a)(14)) currently has (or at the
Closing Date will have) any obligation whatsoever to contribute to any
"multiemployer pension plan" (as defined in ERISA Section 4001(a)(14), nor has
--------------------------
any withdrawal liability whatsoever (whether or not yet assessed) arising under
or capable of assertion under Title IV of ERISA (including, but not limited to,
Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred directly or
indirectly by the Company. Further, except as set forth on SCHEDULE 5.21:
20
<PAGE>
(a) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without notice to and
issuance of a favorable determination letter by the Internal Revenue Service;
(b) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
(c) there have been no "reportable events" (as that phrase is
-----------------
defined in Section 4043 of ERISA) with respect to any Plan which were not
properly reported (other than reportable events as to which the PBGC has waived
the notice requirements);
(d) the valuation of assets of any Qualified Plan subject to
Title IV of ERISA, as of the Closing Date, shall exceed the actuarial present
value of all accrued pension benefits under such Qualified Plan in accordance
with the assumptions contained in the Regulations of the PBGC governing the
funding of terminated defined benefit plans;
(e) with respect to Plans which qualify as "group health plans"
------------------
under Section 5000(b)(1) of the Internal Revenue Code and Sections 607(1) and
733(a) of ERISA and related regulations, the Company, each Subsidiary and the
Stockholder have complied (and on the Closing Date will have complied), in all
material respects with all reporting, disclosure, notice, election, coverage and
other benefit requirements imposed under Sections 4980B and 9801-9833 of the
Internal Revenue Code and Sections 601-734 of ERISA as and when applicable to
such plans, and neither the Company nor any Subsidiary has any (nor does the
Company have any reasonable basis to believe that it or its Subsidiaries will
incur any) direct or indirect liability and is not (and will not be) subject to
any material loss, assessment, excise tax, penalty, loss of federal income tax
deduction or other sanction, arising on account of or in respect of any direct
or indirect failure by the Company, any Subsidiary or the Stockholders, at any
time prior to the Closing Date, to comply with any such federal or state
requirement, which is capable of being assessed or asserted before or after the
Closing Date directly or indirectly against the Company, any Subsidiary or the
Stockholders with respect to such group health plans;
(f) neither the Company nor any Subsidiary is now or within
the past five years has been a member of a "controlled group" as defined in
ERISA Section 4001(a)(14) (other than with respect to its Subsidiaries);
(g) except as set forth in SCHEDULE 5.21(G), there is no
pending litigation, arbitration, or disputed claim, settlement or adjudication
proceeding and to the Company's knowledge, there is no threatened (in writing)
litigation, arbitration or disputed claim, settlement or adjudication
proceeding, or any governmental or other proceeding, or investigation with
respect to any Plan, or any disputed claim, settlement or adjudication (other
than routine claims for benefits) with respect to any fiduciary, administrator,
party in interest or sponsor thereof (in their capacities as such);
21
<PAGE>
(h) as required in accordance with GAAP, the Company Financial
Statements as of the Balance Sheet Date reflect the approximate total pension,
medical and other benefit expense for all Plans as of the date thereof, and no
material funding changes or irregularities not reflected thereon would cause
such Company Financial Statements to be inaccurate; and
(i) neither the Company nor any Subsidiary has incurred liability
under Section 4062, 4063 or 4064 of ERISA.
5.22 CONFORMITY WITH LAW; LITIGATION.
(a) Except as set forth on SCHEDULE 5.22(A), neither the
Company nor any Subsidiary is in violation of any law or regulation or under any
order of any court or federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction which would have a Material Adverse Effect on the Company and its
Subsidiaries take as a whole. The Company and each of its Subsidiaries has
conducted and is conducting its business in substantial compliance with the
requirements, standards, criteria and conditions set forth in applicable
federal, state and local statutes, ordinances, permits, licenses, orders,
approvals, variances, rules and regulations and is not in violation of any of
the foregoing which might have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
(b) Except as set forth on SCHEDULE 5.22(B), as of the date of
this Agreement, there are no claims, actions, suits or proceedings, pending or,
to the knowledge of the Company, threatened against or affecting the Company or
any Subsidiary at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over it and no notice of any claim, action,
suit or proceeding, whether pending or threatened, has been received by the
Company or any of its Subsidiaries which might have a Material Adverse Effect on
the Company and its Subsidiaries taken as a whole. As of the date of this
Agreement, there are no judgments, orders, injunctions, decrees, stipulations or
awards (whether rendered by a court or administrative agency or by arbitration)
against the Company or any Subsidiary or against any of their properties or
businesses which might have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
(c) Green has not at any time: (i) committed any criminal act
(expect for minor traffic violations); (ii) engaged in acts of fraud,
dishonesty, gross negligence or moral turpitude; (iii) filed for personal
bankruptcy; of (iv) been an officer, director, manager, trustee or controlling
shareholder of a company that filed for bankruptcy or Chapter 11 protection.
5.23 TAXES.
(a) Except as set forth on SCHEDULE 5.23:
(i) The Company and each Subsidiary has timely filed all
Tax Returns (as defined below) due on or before the Closing Date and all such
Tax Returns are true, correct and complete in all material respects.
22
<PAGE>
(ii) The Company and each Subsidiary has paid in full on a
timely basis all Taxes (as defined below) owed by it.
(iii) The amount of the Company's and its Subsidiaries'
liability for unpaid Taxes as of the Balance Sheet Date did not exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) shown on the Interim Balance Sheet, and the amount of the
Company's and its Subsidiaries' liability for unpaid Taxes for all periods or
portions thereof ending on or before the Closing Date will not exceed the amount
of the current liability accruals for Taxes (excluding reserves for deferred
Taxes) as such accruals are reflected on the books and records of the Company
and its Subsidiaries on the Closing Date.
(iv) There are no ongoing examinations or claims against
the Company or any Subsidiary for Taxes, and no notice of any audit, examination
or claim for Taxes, whether pending or threatened, has been received.
(v) The Company and each Subsidiary has a taxable year
ended on December 31, in each year commencing from the incorporation of the
Company and each Subsidiary.
(vi) The Company and each Subsidiary currently utilizes the
accrual method of accounting for income Tax purposes and such method of
accounting has not changed in the past 10 years. The Company and its
Subsidiaries have not agreed to, and are not and will not be required to, make
any adjustments under Code Section 481(a) as a result of a change in accounting
methods.
(vii) The Company and each Subsidiary has withheld and paid
over to the proper governmental authorities all Taxes required to have been
withheld and paid over, and complied with all information reporting and backup
withholding requirements, including maintenance of required records with respect
thereto, in connection with amounts paid to any employee, independent
contractor, creditor or third party.
(viii) Copies of (A) any Tax examinations, (B) extensions of
statutory limitations for the collection or assessment of Taxes and (C) the Tax
Returns of the Company and each Subsidiary for the last three fiscal years have
been made available to CCC.
(ix) There are (and as of immediately following the Closing
there will be) no Liens on the assets of the Company or any Subsidiary relating
to or attributable to Taxes, except for Permitted Encumbrances.
(x) To the Company's knowledge, except for Permitted
Encumbrances, there is no basis for the assertion of any claim relating to or
attributable to Taxes which, if adversely determined, would result in any Lien
on the assets of the Company or any Subsidiary or otherwise have an adverse
effect on the Company and its Subsidiaries or their businesses.
23
<PAGE>
(xi) There are no contracts, agreements, plans or
arrangements, including but not limited to the provisions of this Agreement,
covering any employee or former employee of the Company or any Subsidiary that,
individually or collectively, could give rise to any payment (or portion
thereof) that would not be deductible pursuant to Sections 280G, 404 or 162 of
the Code.
(xii) The Company and its Subsidiaries are not, and have not
been at any time, a party to a tax sharing, tax indemnity or tax allocation
agreement, and neither the Company nor any Subsidiary has assumed the tax
liability of any other person under contract.
(xiii) To the knowledge of the Company and the Stockholders,
neither the Company, any Subsidiary nor any Stockholder has taken any action or
refrained from taking any action that would cause the Merger not to qualify as a
reorganization as defined under Code Section 368(a)(1)(A) and Section
368(a)(2)(D).
(b) For purposes of this Agreement:
(i) the term "Tax" shall include any tax or similar
---
governmental charge, impost or levy (including without limitation income taxes,
franchise taxes, transfer taxes or fees, sales taxes, use taxes, gross receipt
taxes, value added taxes, employment taxes, excise taxes, ad valorem taxes,
property taxes, withholding taxes, payroll taxes, minimum taxes or windfall
profit taxes) together with any related penalties, fines, additions to tax or
interest imposed by the United States or any state, county, local or foreign
government or subdivision or agency thereof; and
(ii) the term "Tax Return" shall mean any return
----------
(including any information return), report, statement, schedule, notice, form,
estimate or declaration of estimated tax relating to or required to be filed
with any governmental authority in connection with the determination,
assessment, collection or payment of any Tax.
5.24 ABSENCE OF CHANGES. Since the Interim Balance Sheet Date, the
Company and each Subsidiary has conducted its business in the ordinary course
and, between the Interim Balance Sheet Date and the date of this Agreement
except as contemplated herein or as set forth on SCHEDULE 5.24, there has not
been:
(a) any change that by itself or together with other changes has
had a Material Adverse Effect;
(b) any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the properties or business of the
Company and its Subsidiaries taken as a whole;
(c) any change in the authorized capital of the Company or any
Subsidiary or in their outstanding securities or any change in their ownership
interests or any grant of any options, warrants, calls, conversion rights or
commitments;
24
<PAGE>
(d) any increase in the compensation, bonus, sales commissions or
fee arrangements payable or to become payable by the Company or any Subsidiary
to any of their officers, directors, Stockholders, employees, consultants or
agents, except in the ordinary course of business consistent with past practice
or as required by contract or law;
(e) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character, which has had a Material
Adverse Effect;
(f) any sale or transfer, or any agreement to sell or transfer,
any material assets property or rights of the Company or any Subsidiary to any
person other than distributions to Stockholders of assets not used in the
operation of the business;
(g) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company or any Subsidiary, including without
limitation any indebtedness or obligation of any Stockholder and his affiliates
owing to the Company or any Subsidiary, provided that the Company and its
Subsidiaries may negotiate and adjust bills in the course of good faith disputes
with customers in a manner consistent with past practice;
(h) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property or
rights of the Company or any Subsidiary or requiring consent of any party to the
transfer and assignment of any such assets, property or rights;
(i) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside of
the ordinary course of business of the Company or any Subsidiary;
(j) any waiver of any material rights or claims of the Company or
any Subsidiary;
(k) to the knowledge of the Company any breach, amendment or
termination of any material contract, agreement, license, permit or other right
to which the Company or any Subsidiary is a party other than in the ordinary
course of business;
(l) any transaction by the Company or any Subsidiary outside the
ordinary course of business;
(m) any individual capital commitment by the Company or any
Subsidiary exceeding $50,000;
(n) other than as previously disclosed to CCC, any change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by the Company or any Subsidiary or the
revaluation by the Company or any Subsidiary of any of their assets;
25
<PAGE>
(o) any creation or assumption by the Company or any Subsidiary
of any Lien on any asset (other than Permitted Encumbrances, Liens arising under
existing lease financing arrangements which are not material and Liens for Taxes
not yet due and payable);
(p) any entry into, amendment of, relinquishment, termination or
non- renewal by the Company or any Subsidiary of any Material Contract, other
than in the ordinary course of business;
(q) any loan by the Company or any Subsidiary to any person or
entity, incurring by the Company or any Subsidiary, of any indebtedness for
borrowed money, guaranteeing by the Company or any Subsidiary of any
indebtedness, issuance or sale of any debt securities of the Company or any
Subsidiary or guaranteeing of any debt securities of others;
(r) the commencement or notice or, to the knowledge of the
Company and the Stockholders, written threat of commencement, of any lawsuit or
proceeding against, or investigation of, the Company or any Subsidiary or any of
their affairs; or
(s) to the knowledge of the Company, negotiation or agreement by
the Company or any Subsidiary or any officer or employee thereof to do any of
the things described in the preceding clauses (a) through (s) (other than
negotiations with CCC and its representatives regarding the transactions
contemplated by this Agreement).
5.25 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. SCHEDULE 5.25 sets forth a
complete and accurate list as of the date of this Agreement, of:
(a) the name of each financial institution in which the Company
and each Subsidiary has any account or safe deposit box;
(b) the names in which the accounts or boxes are held;
(c) the type of account;
(d) the name of each person authorized to draw thereon or have
access thereto; and
(e) the name of each person, corporation, firm or other entity
holding a general or special power of attorney from the Company and each
Subsidiary and a description of the terms of such power.
5.26 ENVIRONMENTAL MATTERS.
(a) Hazardous Material. To the knowledge of the Company other
------------------
than as set forth on SCHEDULE 5.26, no underground storage tanks and no amount
of any substance that has been regulated by any applicable law as radioactive,
toxic, hazardous or otherwise a danger to health or
26
<PAGE>
the environment, including, without limitation, PCBs, asbestos, petroleum, urea-
formaldehyde and all substances listed as hazardous substances pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws, but excluding office, janitorial, vehicular
and similar supplies properly and safely maintained (a "Hazardous Material"),
------------------
are present in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company and each
Subsidiary has at any time owned, operated, occupied or leased. SCHEDULE 5.26
identifies all underground and aboveground storage tanks, and the capacity, age,
and contents of such tanks are located on Real Property owned or leased by the
Company and each Subsidiary.
(b) Hazardous Materials Activities. Neither the Company nor any
------------------------------
Subsidiary has transported, stored, used, manufactured, disposed of or released,
or exposed its employees or others to, Hazardous Materials in violation of any
law in effect on or before the Closing Date, nor has the Company or any
Subsidiary disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (collectively, "Company Hazardous Materials
---------------------------
Activities") in violation of any rule, regulation, or statute promulgated by any
- ----------
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Company Hazardous Material
Activity.
(c) Permits. The Company and each Subsidiary currently holds all
-------
environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct of the Company's Hazardous
---------------------
Material Activities and other business of the Company and each Subsidiary as
such activities and business are currently being conducted. All Environmental
Permits are in full force and effect. The Company and each Subsidiary (A) is in
compliance in all material respects with all terms and conditions of the
Environmental Permits and (B) is in compliance in all material respects with all
other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the laws of all
Governmental Entities relating to pollution or protection of the environment or
contained in any regulation, code, plan, order, decree, judgment, notice or
demand letter issued, entered, promulgated or approved thereunder. To the
Company's knowledge, there are no circumstances that may prevent or interfere
with such compliance in the future. SCHEDULE 5.26 includes a listing and
description of all Environmental Permits currently held by the Company and each
Subsidiary.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending against
the Company or any Subsidiary, or to the knowledge of the Company, threatened
against the Company or any Subsidiary concerning any Environmental Permit,
Hazardous Material or any Company Hazardous Materials Activity. There are no
present or, to the knowledge of the Company, no past actions, activities,
circumstances, conditions, events, or incidents that could involve the Company
or any Subsidiary (or any person or entity whose liability the Company or any
Subsidiary has retained or assumed, either by contract or operation of law) in
any environmental litigation, or impose upon the Company or any Subsidiary (or
any person or entity whose liability the Company or any Subsidiary has retained
or assumed,
27
<PAGE>
either by contract or operation of law) any environmental liability including,
without limitation, common law tort liability.
5.27 RELATIONS WITH GOVERNMENTS. Neither the Company nor any
Subsidiary has made, offered or agreed to offer anything of value to any
governmental official, political party or candidate for government office, nor
has it otherwise taken any action that would cause the Company or any Subsidiary
to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or
any law of similar effect.
5.28 DISCLOSURE. The Company has delivered or made available to CCC
and Newco true and complete copies of each agreement, contract, commitment or
other document (or summaries thereof) that is referred to specifically in the
Schedules or that has been requested by CCC. Without limiting any exclusion,
exception or other limitation contained in any of the representations and
warranties made herein, this Agreement and the schedules and all other documents
and information furnished to CCC and its representatives pursuant hereto do not
and will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements herein or therein not misleading.
If Green or Nancy Hanna becomes aware of any fact or circumstance which would
change a representation or warranty of any Stockholder in this Agreement or any
representation made on behalf of the Company, they shall give notice prior to
Closing of such fact or circumstance to CCC. However, such notification shall
not relieve the Company or the Stockholders of their respective obligations
under this Agreement.
5.29 CCC PROSPECTUS; SECURITIES REPRESENTATIONS. Each Stockholder has
received and reviewed a copy of the prospectus dated May 20, 1998 including all
supplements thereto (as supplemented, the "CCC Prospectus") contained in CCC's
--------------
shelf registration statement on Form S-1 (File No. 333-42317). Each Stockholder,
or, to the knowledge of such Stockholder, such Stockholder's purchaser
representative, (a) has such knowledge and experience in business and financial
matters and such knowledge concerning the business, operations and financial
condition of the Company that such Stockholder is capable of evaluating the
merits and risks of an investment in the shares of CCC Common Stock, (b) fully
understands the nature, scope, and duration of the limitations on transfer
contained herein, in the Affiliate Agreement (if applicable), and under
applicable law, and (c) can bear the economic risk of any investment in the
shares of CCC Common Stock and can afford a complete loss of such investment.
Each Stockholder, or such Stockholders' purchaser representative, has had an
adequate opportunity to ask questions and receive answers (and has asked such
questions and received answers to his satisfaction) from the officers of CCC
concerning the business, operations and financial condition of CCC. Except as
required by applicable law, the Stockholders have no contract, undertaking,
agreement or arrangement, written or oral, with any other person to sell,
transfer or grant participation in any shares of CCC Common Stock to be acquired
by such Stockholder in the Merger.
5.30 AFFILIATES. SCHEDULE 5.30 lists each of the persons who is, in
the reasonable judgment of the Company and the Stockholders, an affiliate of the
Company within the meaning of Rule 145 (each such person an "Affiliate" with
---------
respect to the Company) promulgated under the 1933 Act.
28
<PAGE>
5.31 LOCATION OF CHIEF EXECUTIVE OFFICES. SCHEDULE 5.31 sets forth
the location of the Company's chief executive offices.
5.32 LOCATION OF EQUIPMENT AND INVENTORY. Set forth on SCHEDULE 5.32
is a list of all locations where a filing is required under the UCC (as defined
below) with respect to Inventory and Equipment held on the date hereof by the
Company or any Subsidiary. For purposes of this Agreement, (a) the term
"Inventory" shall mean any "inventory" as such term is defined in the Uniform
---------
Commercial Code as in effect on the date hereof in the states listed on SCHEDULE
5.32 (the "UCC") owned by the Company and each Subsidiary as of the date hereof,
---
and, in any event, shall include, but shall not be limited to, all merchandise,
inventory and goods, and all additions, substitutions and replacements thereof,
wherever located, together with all goods, supplies, incidentals, packaging
materials, labels, materials and any other items used or usable in
manufacturing, processing, packaging or shipping same; in all stages of
production, and all proceeds therefrom; and (b) the term "Equipment" shall mean
---------
any "equipment" as such term is defined in the UCC owned by the Company and each
Subsidiary as of the date hereof, and, in any event, shall include, but shall
not be limited to, all machinery, equipment, furnishings, fixtures and vehicles
owned by the Company and each Subsidiary , wherever located, together with all
attachments, components, parts, equipment and accessories installed thereon or
affixed thereto.
5.33 FIRPTA. None of the Company and its Subsidiaries has ever been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code.
5.34 CROSS-INCORPORATION. Any disclosure on any Schedule attached
hereto may be deemed to be incorporated into and disclosed on any other Schedule
if such disclosure is specifically cross-referenced to such other Schedule. No
disclosure of any matter on any Schedule shall constitute a representation or
admission by the Stockholders that such matter is "material" or would have a
Material Adverse Effect as such terms are used in Article 5.
6. REPRESENTATIONS OF CCC AND NEWCO
To induce the Company and each Stockholder to enter into this Agreement
and consummate the transactions contemplated hereby, each of CCC and Newco
jointly and severally represents and warrants to the Company and the
Stockholders as follows (for purposes of this Agreement, the phrases "knowledge
---------
of CCC," "knowledge of Newco," "CCC's knowledge," or "Newco's knowledge" or
- ------ ------------------ --------------- -----------------
words of similar import, mean the actual knowledge of the directors and officers
of each of CCC and Newco.
6.1 DUE ORGANIZATION. Each of CCC and Newco is a corporation duly
organized, validly existing and in good standing under the laws of its state of
organization, and each is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on their respective businesses in the places and in the manner as now
conducted, except where the failure to be so authorized, qualified or licensed
would not have a material adverse effect on the business, operations,
properties, assets or condition, financial or otherwise, of CCC or
29
<PAGE>
Newco. Copies of the Certificate of Incorporation and the Bylaws of each of CCC
and Newco (collectively, the "CCC Charter Documents") have been made available
---------------------
to the Company. Neither CCC nor Newco is in violation of any CCC Charter
Document.
6.2 CCC COMMON STOCK. The shares of CCC Common Stock to be delivered
to the Stockholders pursuant to this Agreement, when delivered in accordance
with the terms of this Agreement, will be validly and legally issued shares of
CCC capital stock, fully paid and nonassessable and have been issued in
compliance with all relevant federal and state securities laws.
6.3 AUTHORIZATION; VALIDITY OF OBLIGATIONS. CCC and Newco have all
requisite corporate power and authority to enter into this Agreement and the
transactions contemplated hereby. Each of CCC and Newco has the full legal right
and authority to enter into this Agreement and the transactions contemplated
hereby. The execution and delivery of this Agreement by CCC and Newco and the
performance by each of CCC and Newco of the transactions contemplated herein
will, prior to Closing, have been duly and validly authorized by the respective
Boards of Directors of CCC and Newco, and this Agreement will, prior to Closing,
have been duly and validly authorized by all necessary corporate action. This
Agreement is a legal, valid and binding obligation of each of CCC and Newco
enforceable against CCC and Newco in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
6.4 NO CONFLICTS. The execution, delivery and performance of this
Agreement, the consummation of the transactions contemplated hereby and the
fulfillment of the terms hereof will not:
(a) conflict with, or result in a breach or violation of the CCC
Charter Documents;
(b) conflict with, or result in a default (or would constitute a
default but for a requirement of notice or lapse of time or both) under any
document, agreement or other instrument to which CCC or Newco is a party, or by
which CCC or Newco is bound, or result in the creation or imposition of any
Lien, charge or encumbrance on any of CCC's or Newco's properties pursuant to
(i) any law or regulation to which either CCC or Newco or any of their
respective property is subject, or (ii) any judgment, order or decree to which
CCC or Newco is bound or any of their respective property is subject;
(c) result in termination or any impairment of any material
permit, license, franchise, contractual right or other authorization of CCC or
Newco;
(d) violate any material law, order, judgment, rule, regulation,
decree or ordinance to which CCC or Newco is subject, or by which CCC or Newco
is bound;
(e) require the consent of any third party; or
30
<PAGE>
(f) violate or conflict with any preemptive or similar rights,
trigger any "anti-dilution adjustment" to any right, warrant, option or
convertible debt or equity security.
6.5 CAPITALIZATION OF CCC AND OWNERSHIP OF CCC STOCK. The authorized
capital stock of CCC consists of 250,000,000 shares of Common Stock, of which
39,007,472 shares are outstanding on June 1, 1998, and 500,000 shares of
Convertible Non-Voting Common Stock, par value $.001 per share, of which 500,000
shares were outstanding on June 1, 1998. The authorized capital stock of Newco
consists of 1,000 shares of Common Stock, of which 100 shares are outstanding.
All of the issued and outstanding shares of Newco are owned beneficially, and of
record by CCC. All of the issued and outstanding shares of CCC Common Stock are
duly authorized and validly issued shares of CCC, fully paid and non-assessable.
All of the issued and outstanding shares of CCC Common Stock have been offered,
issued, sold and delivered by CCC in compliance with all applicable state and
federal laws concerning the issuance of securities and none of such shares was
issued in violation of the preemptive rights of any stockholder of CCC.
6.6 CONFORMITY WITH LAW; LITIGATION.
(a) Neither CCC nor Newco is in violation of any law or regulation or
under any order of any court or federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over either of them which would have a material adverse effect on
the business operations, properties, assets or condition, financial or otherwise
of CCC and its subsidiaries taken as a whole. CCC has conducted and is
conducting its business in substantial compliance with the requirements,
standards, criteria and conditions set forth in applicable federal, state and
local statutes, ordinances, permits, licenses, orders, approvals, variances,
rules and regulations and is not in violation of any of the foregoing which
might have a material adverse effect on the business operations, properties,
assets or conditions, financial or otherwise of CCC and its subsidiaries taken
as a whole.
(b) There are no claims, actions, suits or proceedings, pending or,
to the knowledge of CCC or Newco, threatened against or affecting CCC or Newco
at law or in equity, or before any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
having jurisdiction over either of them that would have a material adverse
effect and no notice of any such claim, action, suit or proceeding, whether
pending or threatened, has been received. There are no judgments, orders,
injunctions, decrees, stipulations or awards (whether rendered by a court or
administrative agency or by arbitration) against CCC or Newco or against any of
the properties of either of them which would have a material adverse effect on
the business operations, properties, assets or conditions, financial or
otherwise of CCC and its subsidiaries taken as a whole.
6.7 DISCLOSURE. Without limiting any exclusion, exception or other
limitation contained in any of the representations and warranties made herein,
this Agreement and the schedules and all other documents and information
furnished to the Company and its representatives pursuant hereto do not and will
not include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements herein or therein not misleading. If CCC
or Newco becomes aware
31
<PAGE>
of any fact or circumstance which would change a representation or warranty of
CCC or Newco in this Agreement, they shall give notice prior to Closing of such
fact or circumstance to the Company. However, such notification shall not
relieve the CCC or Newco of their respective obligations under this Agreement.
6.8 CCC PROSPECTUS. The CCC Prospectus, in the form delivered to the
Stockholders pursuant to Section 5.29 hereof, does not contain, as of the date
hereof, with respect to the sale of shares of CCC Common Stock to the
Stockholders hereunder, any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The balance sheet of CCC (including the related notes)
included in the CCC Prospectus presents fairly, in all material respects, the
financial position of CCC as of the date thereof in conformity with GAAP.
6.9 REGISTRATION STATEMENT. The Shares to be delivered pursuant to this
Agreement will be issued pursuant to a Shelf Registration Statement on Form S-1
filed with the United States Securities and Exchange Commission (the
"Registration Statement") on May 20, 1998 and declared effective on May 20,
----------------------
1998. To the knowledge of CCC, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been instituted or threatened by the SEC. The Shares will be subject
to the contractual restrictions on resale set forth in Section 7.10 below and
will be tradable in accordance with the requirements of Rule 145(d) under the
1933 Act.
6.10 INVESTMENT INTENT. CCC is acquiring the shares of the Company for
its own account and not as a nominee or agent for any other Person, and not with
a view to or for resale in connection with any distribution thereof within the
meaning of the 1933 Act, and can bear the economic risk of an investment in the
shares of the Company and can afford a complete loss of such investment.
7. COVENANTS
7.1 TAX MATTERS.
(a) The following provisions shall govern the allocation of
responsibility as between the Stockholders, on the one hand, and the Surviving
Corporation, on the other, for certain tax matters following the Closing Date:
(i) The Representative shall cause to be prepared and cause
to be filed, within the time and in the manner provided by law, all Tax Returns
of the Company and its Subsidiaries for all periods ending on or before the
Closing Date that are due after the Closing Date. The Stockholders shall pay to
the Surviving Corporation on or before the due date of such Tax Returns the
amount of all Taxes shown as due on such Tax Returns to the extent that such
Taxes are not reflected in the current liability accruals for Taxes shown on the
Company's and its Subsidiaries' books and records as of the Closing Date. Such
Returns shall be prepared and filed in accordance
32
<PAGE>
with applicable law and in a manner consistent with past practices and shall be
subject to review and approval by CCC which shall not be unreasonably withheld
or delayed. To the extent reasonably requested by the Stockholders or required
by law, CCC and the Surviving Corporation shall participate in the filing of any
Tax Returns filed pursuant to this paragraph. The parties acknowledge that under
Code Section 1362(e) a short-year return for the period ending the day before
the Closing Date must be filed by the Company and its Subsidiaries.
(ii) The Surviving Corporation shall prepare or cause to
be prepared and file or cause to be filed any Tax Returns for Tax periods which
begin before the Closing Date and end after the Closing Date other than the
short-year return required to be filed under Code Section 1362(e). The
Stockholders shall pay to the Surviving Corporation within fifteen (15) days
after the date on which Taxes are paid with respect to such periods an amount
equal to the portion of such Taxes which relates to the portion of such taxable
period ending on the Closing Date to the extent such Taxes are not reflected in
the current liability accruals for Taxes (excluding reserves for deferred Taxes)
shown on the Company's and each Subsidiary's books and records as of the Closing
Date. Notwithstanding the preceding sentence, the Stockholders shall not be
responsible for any tax that may arise under Section 4978 of the Code as a
result of the consummation of the Merger. For purposes of this Section 7.1, in
the case of any Taxes that are imposed on a periodic basis and are payable for a
taxable period that includes (but does not end on) the Closing Date, the portion
of such Tax which relates to the portion of such taxable period ending on the
Closing Date shall (A) in the case of any Taxes other than Taxes based upon or
related to income or receipts, be deemed to be the amount of such Tax for the
entire taxable period multiplied by a fraction the numerator of which is the
number of days in the taxable period ending on the Closing Date and the
denominator of which is the number of days in the entire taxable period, and (B)
in the case of any Tax based upon or related to income or receipts be deemed
equal to the amount which would be payable if the relevant taxable period ended
on the Closing Date. Any credits relating to a taxable period that begins before
and ends after the Closing Date shall be taken into account as though the
relevant taxable period ended on the Closing Date. All determinations necessary
to give effect to the foregoing allocations shall be made in a manner consistent
with prior practice of the Company and its Subsidiaries. The Surviving
Corporation will pay over to the Stockholders any Tax refunds attributable to
Tax periods ending on or before the Closing Date; provided that either (i) the
Company paid the Taxes subject to the refund, (ii) such Taxes were reflected in
the current liability accruals for Taxes (excluding reserves for deferred Taxes)
shown on the Company's books and records as of the Closing Date, or (iii) that
the Stockholders paid to the Company or to the applicable taxing authority,
pursuant to this Section 7.1(a), the Taxes subject to the refund(s).
(iii) CCC and the Surviving Corporation on the one hand and
the Stockholders on the other hand shall (A) cooperate fully, as reasonably
requested, in connection with the preparation and filing of Tax Returns pursuant
to this Section 7.1 and any audit, litigation or other proceeding with respect
to Taxes; (B) make available to the other, as reasonably requested, all
information, records or documents with respect to Tax matters pertinent to the
Company and its Subsidiaries for all periods ending prior to or including the
Closing Date; and (C) preserve information, records or documents relating to Tax
matters pertinent to the Company and its
33
<PAGE>
Subsidiaries that is in their possession or under their control until the
expiration of any applicable statute of limitations or extensions thereof.
(iv) The Stockholders shall timely pay all transfer,
documentary, sales, use, stamp, registration and other Taxes and fees arising
from or relating to the transactions contemplated by this Agreement, and the
Stockholders shall, at their own expense, file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales, use,
stamp, registration, and other Taxes and fees. If required by applicable law,
CCC and the Surviving Corporation will join in the execution of any such Tax
Returns and other documentation.
7.2 LONG TERM INCENTIVE PLAN. CCC shall cause the Surviving Corporation
to establish a Long Term Incentive Plan similar to the Long Term Incentive Plan
currently maintained by the Company and to maintain the Long Term Incentive Plan
for at least the term of the Employment Contracts.
7.3 ACCOUNTS RECEIVABLE. In the event that all Accounts Receivable are
not collected in full within 135 days (18 months for the Account Receivable
described on Schedule 7.3) after the Closing then, at the request of the
Surviving Corporation, the Stockholders shall pay (based on their percentage
ownership of the Company immediately prior to the Effective Time) the Surviving
Corporation an amount equal to the Accounts Receivable not so collected, and
upon receipt of such payment the Surviving Corporation shall assign to the
Stockholders making the payment all of their rights with respect to the
uncollected Accounts Receivable giving rise to the payment and shall also
thereafter promptly remit any excess collections received by it with respect to
such assigned Accounts Receivable.
7.4 401(K) PLAN. CCC shall cause the Surviving Corporation to retain
the Company's current 401(k) plan until the Surviving Corporation adopts a
401(k) plan that provides substantially the same or more favorable benefits than
the Company's current 401(k) plan.
7.5 RELATED PARTY AGREEMENTS. All Related Party Agreements, other than
those listed on Schedule 7.5, will be terminated at the Closing by the Company,
its Subsidiaries and/or Stockholder parties thereto. Reasonably promptly
following the Closing and at the expense of CCC, the Stockholders shall, if
requested by CCC direct a third party, which shall be reasonably acceptable to
CCC, to evaluate if the rents with respect to each lease that is a Related Party
Agreement (other than those listed on Schedule 7.5) are greater than those for
comparably situated properties in the same geographic market as of the date the
Related Party Agreement was entered into or as of the date of such evaluation.
To the extent that such third party reasonably determines that the rents payable
with respect to any such lease are 25% or more than for comparably situated
properties both as of the date the Related Party Agreement was entered into and
the date of the evaluation, the parties will negotiate in good faith to adjust
such rents to market rates.
34
<PAGE>
7.6 COOPERATION.
(a) The Company, the Stockholders, CCC and Newco shall each
deliver or cause to be delivered to the other on the Closing Date, and at such
other times and places as shall be reasonably agreed to, such instruments as the
other may reasonably request for the purpose of carrying out this Agreement. In
connection therewith, if required, the president or chief financial officer of
the Company shall execute any documentation reasonably required by CCC's
Accountant (in connection with such accountants' audit or review of the Company)
or the Nasdaq National Market.
(b) The Stockholders and the Company shall cooperate and use
their reasonable efforts to have the present officers, directors and employees
of the Company cooperate with CCC on and after the Closing Date in furnishing
information, evidence, testimony and other assistance in connection with any
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods prior to the Closing Date.
(c) Each party hereto shall cooperate in obtaining all consents and
approvals required under this Agreement to effect the transactions contemplated
hereby
(d) The Company, the Stockholders and CCC shall file any
information and documents that remain to be filed under the HSR Act as promptly
as practicable at such time as such items are required to be filed. The Parties
hereby agree to (a) cooperate with each other in connection with such HSR Act
filings, which cooperation shall include furnishing the other with any
information or documents that may be reasonably required in connection with such
filings; (b) promptly file, after any request by the Federal Trade Commission
("FTC") or Department of Justice ("DOJ") and after appropriate negotiation with
the FTC or DOJ of the scope of such request, any information or documents
requested by the FTC or DOJ; and (c) furnish each other with any correspondence
from or to, and notify each other of any other communications with, the FTC or
DOJ that relates to the transactions contemplated hereunder, and to the extent
practicable, to permit each other to participate in any conferences with the FTC
or DOJ.
7.7 CONDUCT OF BUSINESS PENDING CLOSING. Except as set forth on
Schedule 7.7 or as permitted by Section 7.9A, between the date hereof and the
Effective Time, the Company will and will cause each Subsidiary to (except as
requested or agreed by CCC):
(a) carry on its business in substantially the same manner as it
has heretofore and not introduce any material new method of management,
operation or accounting;
(b) maintain its properties, facilities and equipment and other
assets in as good working order and condition as at present, ordinary wear and
tear excepted;
(c) perform in the ordinary course of business all of its
obligations under debt and lease instruments and other agreements relating to or
affecting its assets, properties, equipment or rights;
35
<PAGE>
(d) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments other than in the ordinary course of
business without the consent of CCC;
(e) keep in full force and effect present insurance policies or
other comparable insurance coverage;
(f) use its best efforts to maintain and preserve its business
organization intact, retain its present key employees and maintain its
relationships and present agreements with suppliers, customers and others having
business relations with the Company and its Subsidiaries;
(g) maintain compliance in all material respects with all permits,
rules, laws and regulations, consent orders and the like; and
(h) maintain present salaries and commission levels for all
officers, directors, employees, agents, representatives and independent
contractors, except in the ordinary course of business consistent with past
practice or as required by contract or law.
7.8 ACCESS TO INFORMATION. Between the date of this Agreement and the
Closing Date, the Company will afford to the officers and authorized
representatives of CCC during normal business hours and with reasonable prior
notice access to (i) all of the sites, properties, books and records of the
Company and (ii) such additional financial and operating data and other
information as to the business and properties of the Company and its
Subsidiaries as CCC may from time to time reasonably request, including without
limitation, access upon reasonable request to the Company's and each
Subsidiary's employees, customers, vendors, suppliers and creditors. No
information or knowledge obtained in any investigation pursuant to this Section
7.8 shall affect or be deemed to modify any representation or warranty contained
in this Agreement or the conditions to the obligations of the parties to
consummate the Merger.
7.9 PROHIBITED ACTIVITIES. Except as provided in Section 7.9A or as set
forth in Schedule 7.9, between the date hereof and the Effective Time, the
Company will not, and will not permit any Subsidiary to, without the prior
written consent of CCC:
(a) make any change in its Certificate of Incorporation or Bylaws,
or authorize or propose the same;
(b) issue, deliver or sell, authorize or propose the issuance,
delivery or sale of any securities, options, warrants, calls, conversion rights
or commitments relating to its securities of any kind, or authorize or propose
any change in its equity capitalization, or issue or authorize the issuance of
any debt securities, except (a) as required under any currently existing
"employee benefit plan" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended), any currently existing employment
agreement or any currently existing buy sell agreements, (b) shares issued upon
exercise of options or other rights outstanding as of the date
36
<PAGE>
hereof, (c) shares, if any, required to be issued under the tax-qualified
employee stock ownership plan or (d) stock appreciation rights;
(c) declare or pay any dividend, or make any distribution
(whether in cash, stock or property) in respect of its stock whether now or
hereafter outstanding, or split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock except as provided
above in subsection (b), or purchase, redeem or otherwise acquire or retire for
value any shares of its stock;
(d) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, or guarantee any
indebtedness, except in the ordinary course of business and consistent with past
practice in an amount in excess of $50,000 individually;
(e) increase the compensation payable or to become payable to
any officer, director, Stockholder, employee, agent, representative or
independent contractor; make any bonus or management fee payment to any such
person (except for accrued and unpaid bonuses); make any loans or advances;
adopt or amend any Plan; or grant any severance or termination pay;
(f) create or assume any Lien (other than Permitted Encumbrances)
upon any assets or properties whether now owned or hereafter acquired;
(g) sell, assign, lease, pledge or otherwise transfer or dispose of
any property or equipment except in the ordinary course of business consistent
with past practice;
(h) acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to the
Company and its Subsidiaries;
(i) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(j) waive any material rights or claims of the Company or any
Subsidiary, provided that the Company and each Subsidiary may negotiate and
adjust bills and accounts receivable in the course of good faith disputes with
customers in a manner consistent with past practice;
(k) commit a breach of or amend or terminate any material
agreement, permit, license or other right;
(l) enter into any other transaction (i) that is not negotiated at
arm's length with a third party not affiliated with the Company or any
Subsidiary or any officer, director or Stockholder of the Company or any
Subsidiary or (ii) outside the ordinary course of business consistent with past
practice or (iii) prohibited hereunder;
37
<PAGE>
(m) commence a lawsuit other than for routine collection of bills
and accounts receivable;
(n) revalue any of its assets, including without limitation,
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business consistent with past practice;
(o) make any tax election other than in the ordinary course of
business and consistent with past practice, change any tax election, adopt any
tax accounting method other than in the ordinary course of business and
consistent with past practice, change any tax accounting method, file any Tax
Return (other than any estimated tax returns, payroll tax returns or sales tax
returns) or any amendment to a Tax Return, enter into any closing agreement,
settle any tax claim or assessment, or consent to any tax claim or assessment,
without the prior written consent of CCC; or
(p) take, or agree (in writing or otherwise) to take, any of the
actions described in Sections 7.9(a) through (o) above.
7.9A PERMITTED DISTRIBUTIONS, ETC.
Notwithstanding Section 7.7, 7.9 or any other provision of this
Agreement, the Company and Stockholders shall, at any time on or before the
Closing, be permitted to:
(a) Distribute the stock of Regency Aviation Company, Inc.
("Regency Aviation") to the Stockholders, or dissolve and liquidate Regency
Aviation and distribute any assets therein (or any portion thereof), to the
Stockholders;
(b) Distribute any cash or cash equivalents (investment securities,
money market instruments, etc.) to the Stockholders;
(c) Distribute any other asset of the Company or any of its
subsidiaries which is not used or useful in the Company's and its Subsidiaries'
electrical contracting business (including, without limitation, the Company's
rights in respect of any split dollar life insurance policy on the life of
Green); or
(d) Pay any transaction costs on behalf of the Company or its
Stockholders incurred in connection with this Agreement and the transaction
contemplated hereby.
None of the foregoing distributions shall cause any representation,
warranty, covenant or agreement herein to be untrue or in violation and such
aforesaid provisions shall be deemed modified to the extent necessary to avoid
such untruth or violation; provided that, nothing in this Section 7.9A shall
change the requirement that a Merger Consideration Adjustment be made to the
extent Actual Net Worth is determined to be less than $4,500,000.
38
<PAGE>
7.10 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the
Company and each Subsidiary shall satisfy any requirement for notice of the
transactions contemplated by this Agreement under applicable collective
bargaining agreements, if requested by CCC, and shall provide CCC with proof
that any required notice has been sent.
7.11 SALES OF CCC COMMON STOCK.
(a) Except with the consent of CCC, no Stockholder will, directly
or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of any
shares of CCC Common Stock received by such Stockholder in the Merger as the
Merger Consideration prior to the first anniversary of the Closing. Thereafter,
up to one-third of the shares of CCC Common Stock received by a Stockholder as
part of the Merger Consideration may be resold at any time after the first
anniversary of the Closing, an additional one-third may be resold beginning
eighteen months after the Closing by each Stockholder and the remaining one-
third may be resold beginning on March 12, 2000. Notwithstanding anything in the
foregoing to the contrary, a Stockholder may transfer shares of CCC Common Stock
to a Related Party for estate planning purposes, provided that such Related
Party transferee (i) acknowledges the contractual restrictions relating to the
transfer of such shares set forth in this Section 7.11 and (ii) agrees to be
bound by the same. For purposes hereof, "Related Party" means, with respect to
any Person that is an individual, any spouse, lineal descendant (including by
adoption), executor, administrator, trustee, legatee or beneficiary of such
Person or any other Person controlled by such Person or as to which such Person
or Persons are beneficiaries. For purposes hereof, "Person" means an individual,
corporation, association, partnership, joint venture, trust, estate, limited
liability company, limited liability partnership or other entity or
organization. Transfers of shares of CCC Common Stock by employees of CCC also
are subject to CCC policies against insider trading and the misuse of material
non-public information and compliance with applicable securities laws and rules.
Persons who become affiliates of CCC may be subject to additional restrictions
on the trading of their CCC Common Shares pursuant to applicable law.
(b) Each Stockholder agrees to sell the shares of CCC Common
Stock to be received by such Stockholder in the Merger only in accordance with
the requirements, if any, of applicable law, including, without limitation, Rule
145(d) promulgated under the 1933 Act or any successor to such rule. CCC
acknowledges that the provisions of this Section 7.10(b) will be satisfied as to
any sale by a Stockholder of the CCC Common Stock that the Stockholder may
acquire pursuant to the Merger by a broker's letter and a letter from the
Stockholder with respect to that sale stating that the applicable requirements
of Rule 145(d)(1) have been met or are inapplicable by virtue of Rule 145(d)(2)
or Rule 145(d)(3).
(c) The certificate or certificates evidencing the shares of CCC
Common Stock to be delivered to the Stockholders in the Merger will bear
restrictive legends substantially in the following forms as long as applicable:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), MAY
--------------
39
<PAGE>
APPLY. IF RULE 145 APPLIES, PRIOR TO [ONE YEAR FROM DATE OF
---------------------
ACQUISITION], THESE SHARES MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH
-----------
THE PROVISIONS OF RULE 145(d)(1) OR ANOTHER APPLICABLE EXEMPTION UNDER
THE SECURITIES ACT. WITHOUT LIMITING THE FOREGOING, IF RULE 145
APPLIES, AFTER [ONE YEAR FROM DATE OF ACQUISITION], THESE SHARES MAY BE
---------------------------------
TRANSFERRED BY NON-AFFILIATES OF THE ISSUER UNDER RULE 145(d)(2) SO
LONG AS THE ISSUER IS CURRENT IN ITS REPORTING OBLIGATIONS UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, OR UNDER ANOTHER
APPLICABLE EXEMPTION UNDER THE SECURITIES ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CONTRACTUAL
RESTRICTIONS ON TRANSFER EXPIRING ON MARCH 12, 2000, PURSUANT TO THAT
CERTAIN AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF JUNE 1, 1998
(THE "AGREEMENT"), BY AND AMONG THE ISSUER, RECI ACQUISITION CORP.,
---------
REGENCY ELECTRIC COMPANY, INC. (THE "COMPANY") AND THE STOCKHOLDERS OF
-------
THE COMPANY. PRIOR TO THE EXPIRATION OF SUCH HOLDING PERIOD, SUCH
SHARES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED AND THE ISSUER SHALL
NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, TRANSFER OR
ASSIGNMENT EXCEPT TO THE EXTENT SUCH SALE, TRANSFER OR ASSIGNMENT IS IN
COMPLIANCE WITH THE AGREEMENT. UPON THE WRITTEN REQUEST OF THE HOLDER
OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE
LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) WHEN THE
HOLDING PERIOD HAS EXPIRED.
(d) Each of the certificates evidencing the Pledged Assets
will, as long as such shares are subject to Section 3.2 hereof, bear restrictive
legends substantially in the following forms:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PLEDGED AS
COLLATERAL PURSUANT TO THAT CERTAIN AGREEMENT AND PLAN OF
REORGANIZATION DATED JUNE 1, 1998 BY AND AMONG CONSOLIDATION CAPITAL
CORPORATION, RECI ACQUISITION CORP., REGENCY ELECTRIC COMPANY, INC.
(THE "COMPANY") AND THE STOCKHOLDERS OF THE COMPANY. PRIOR TO THE
-------
EXPIRATION OF THE PLEDGE AS SET FORTH IN SUCH AGREEMENT, SUCH SHARES
MAY NOT BE OFFERED, SOLD, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED
OF.
7.12 CCC STOCK OPTIONS. Subject to prior approval by the Compensation
-----------------
Committee of the Board, options to purchase 250,000 shares of CCC Common Stock
shall be available for issuance immediately after the Closing to the key
employees of the Surviving Corporation, as determined by
40
<PAGE>
the current Board of the Company, in accordance with CCC's policies, and
authorized and issued under the terms of CCC's 1997 Long-Term Incentive Plan.
The exercise price of such options shall be equal to the fair market value of
the underlying shares of CCC Common Stock at date of grant and such options
shall have vesting provisions established by the Compensation Committee of the
Board. The value of such options on the Merger Effective Date together with the
Base Merger Consideration, Contingent Merger Consideration and the aggregate
amount of distributions permitted to be made hereunder to the Stockholders after
March 31, 1998 and before the Closing Date is the "Aggregate Merger
----------------
Consideration."
- -------------
7.13 TAX COVENANT. CCC, Newco and the Company shall treat the Merger for
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and any comparable state or local tax statute.
7.14 TAX FREE REORGANIZATION PROTECTION. Prior to the Effective Time, CCC,
Newco, the Stockholders and the Company will each use their best efforts to
cause the Merger to qualify, and prior to the Effective Time and on and after
the Closing Date, will refrain from taking any actions that would result in the
Merger failing to qualify, as a reorganization as defined under Code Section
368(a)(1)(A) and Section 368(a)(2)(D). After the Effective Time, CCC, Newco,
the Stockholders and the Company will refrain from taking any actions that would
cause the stock paid to the Stockholders pursuant to Section 2.3 of this
Agreement to be taxable to the Stockholders upon receipt.
7.15 EXECUTIVE EMPLOYMENT AGREEMENTS. CCC shall cause the Surviving
Company (or its subsidiaries) to enter into employment agreements that include
the executive compensation bonus plan as previously disclosed to CCC by the
Company with Nancy Hanna, Steven L Fowler, Gary A. Moore, Richard A. Wells,
Randy C. Sossamon and Darrell W. Crochet in substantially the same form as set
forth in SCHEDULE 7.15 (the "Employment Agreements") effective as of the Closing
Date.
7.16 DIRECTOR AND OFFICER INDEMNIFICATION. CCC will provide to each
director and officer of the Surviving Corporation, during the term of his
service, directors and officers insurance having coverage at least as
comprehensive as the directors and officers insurance currently maintained by
CCC. In addition, all rights to indemnification for acts or omissions occurring
prior to the Closing now existing in favor of current or former directors,
officers, employees or agents of the Company required by applicable law, the
Company's Charter or bylaws shall survive the Merger and continue in full force
and effect in accordance with their terms for a period of at least six years
from the Closing Date.
7.17 INDEMNIFICATION OF LICENSE HOLDERS. CCC shall cause the Surviving
Corporation to indemnify each of the employees listed on SCHEDULE 5.13 for any
claim arising in connection with the Surviving Corporation's use of the Permits
listed opposite each such employee's name on such Schedule.
41
<PAGE>
8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CCC AND NEWCO
The obligation of CCC and Newco to effect the Merger is subject to the
satisfaction or waiver, at or before the Effective Time, of the following
conditions and deliveries:
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. (a) All
of the representations and warranties of the Stockholders and the Company
contained in this Agreement shall be true, correct and complete on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date except (i) as to representations and
warranties as of a specific date, (ii) as permitted by 7.7, 7.9 and 7.9A, (iii)
which would not have a Material Adverse Effect; and (b) all of the terms,
covenants, agreements and conditions of this Agreement to be complied with,
performed or satisfied by the Company and the Stockholders on or before the
Closing Date shall have been duly complied with, performed or satisfied except
where the failure to do so would not have a Material Adverse Effect; and (c) a
certificate to the foregoing effects dated the Closing Date and signed on behalf
of the Company and by each Stockholder shall have been delivered to CCC.
8.2 NO LITIGATION. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging
CCC's proposed acquisition of the Company, or limiting or restricting CCC's
conduct or operation of the business of the Company (or its own business) which
has a reasonable likelihood of succeeding following the Merger shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending. There shall be no action, suit
claim or proceeding of any nature pending or threatened against CCC, Newco or
the Company, their respective properties or any of their officers or directors,
that could materially and adversely affect the business, assets, liabilities,
financial condition, results of operations or prospects of the Company and its
Subsidiaries taken as a whole.
8.3 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
changes in the business, operations, affairs, prospects, properties, assets or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole, since the Balance Sheet Date; and CCC shall have received a certificate
signed by each Stockholder dated the Closing Date to such effect.
8.4 CONSENTS AND APPROVALS. All necessary consents of, and filings with,
any governmental authority or agency or third party, relating to the
consummation by the Company and the Stockholder of the transactions contemplated
hereby, shall have been obtained and made. Any waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, and no action by the Department of Justice ("DOJ") or Federal Trade
Commission ("FTC") challenging or seeking to enjoin the consummation of the
transactions contemplated hereby shall be pending.
8.5 OPINION OF COUNSEL. CCC shall have received an opinion from counsel
to the Company and the Stockholders, dated the Closing Date, in form and
substance satisfactory to CCC.
42
<PAGE>
8.6 CHARTER DOCUMENTS. CCC shall have received (a) a copy of the
Certificate of Incorporation of the Company certified by an appropriate
authority in the state of its incorporation and (b) a copy of the Bylaws of the
Company certified by the Secretary of the Company.
8.7 QUARTERLY FINANCIAL STATEMENTS. CCC shall have received from the
Company completed quarterly financial statements for any quarter ending after
the date of the Interim Financials in a form reasonably satisfactory to CCC.
8.8 AFFILIATE AGREEMENTS. The Stockholders listed on SCHEDULE 5.30 shall
have entered into an Affiliate Agreement in the form set forth as SCHEDULE 8.8.
8.9 STOCKHOLDERS' RELEASE. The Stockholders shall each have delivered to
CCC an instrument dated the Closing Date in the form of EXHIBIT 8.9.
8.10 BOARD APPROVAL. This Agreement and the Merger shall have been adopted
and approved by the Board of CCC.
8.11 GREEN EMPLOYMENT AGREEMENT. Green shall have entered into an
employment agreement with the Surviving Corporation in the form attached hereto
as SCHEDULE 8.11.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS
The obligation of the Stockholders and the Company to effect the Merger are
subject to the satisfaction or waiver, at or before the Effective Time, of the
following conditions and deliveries:
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. (a) All
of the representations and warranties of CCC and Newco contained in this
Agreement shall be true, correct and complete on and as of the Closing Date with
the same effect as though such representations and warranties had been made as
of such date; (b) all of the terms, covenants, agreements and conditions of this
Agreement to be complied with, performed or satisfied by CCC and Newco on or
before the Closing Date shall have been duly complied with, performed or
satisfied; and (c) a certificate to the foregoing effects dated the Closing Date
and signed by the President or any Vice President of CCC shall have been
delivered to the Company and the Stockholders.
9.2 NO LITIGATION. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging
CCC's proposed acquisition of the Company, limiting or restricting CCC's conduct
or operation of the business of the Company (or its own business) following the
Merger or restraining or prohibiting the Company or the Stockholders from
consummating the transactions contemplated hereby shall be in effect, nor shall
any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
43
<PAGE>
of the foregoing be pending. There shall be no action, suit, claim or proceeding
of any nature having a reasonable likelihood of success pending or threatened,
against CCC, Newco, the Stockholders, or the Company, their respective
properties or any of their officers or directors, that could materially and
adversely affect the business, assets, financial condition, results of
operations or prospects of CCC and its subsidiaries taken as a whole.
9.3 CONSENTS AND APPROVALS. All necessary consents of, and filings with,
any governmental authority or agency or third party relating to the consummation
by CCC and Newco of the transactions contemplated herein, shall have been
obtained and made. Any waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated, and no action by
the DOJ or FTC challenging or seeking to enjoin the consummation of the DOJ
transactions contemplated hereby shall be pending.
9.4 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
changes in the business, operations, properties, assets, or condition (financial
or otherwise) of CCC and its subsidiaries, taken as a whole, since the date of
this Agreement, and the Stockholders shall have received a certificate signed by
CCC and Newco dated the Closing Date to such effect; provided, however, that the
Stockholders and the Company shall be required to effect the Merger (and this
condition shall be deemed satisfied) if the foregoing matters, taken together,
would not, in the reasonable discretion of the Stockholders and the Company,
have a material adverse effect on the business operations, properties, assets or
conditions, financial or otherwise, of CCC and its subsidiaries taken as a
whole.
9.5 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION. The persons set
forth in Section 1.3(d) shall have been appointed, effective at the Effective
Time, to serve as officers and directors of the Surviving Corporation.
9.6 EMPLOYMENT AGREEMENTS. The Surviving Corporation shall have afforded
Green the opportunity to enter into, at Closing, an employment agreement with
the Surviving Corporation in substantially the form of SCHEDULE 8.11 hereto.
The Surviving Corporation (or its subsidiaries) shall have afforded the persons
listed in Section 7.14 the opportunity to enter into, at Closing, an employment
agreement with the Surviving Corporation (or its subsidiaries) in substantially
the form of SCHEDULE 7.14 hereto (the "Employment Agreements").
---------------------
9.7 REGISTRATION STATEMENT. No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceeding for that
purpose shall have been instituted or threatened by the SEC and the shares of
CCC Common Stock to be issued as part of the Base Merger Consideration shall
have been approved for listing on Nasdaq.
10. INDEMNIFICATION
10.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders,
jointly and severally, covenant and agree to indemnify, defend, protect and hold
harmless CCC, Newco and the
44
<PAGE>
Surviving Corporation and their respective officers, directors, employees,
shareholders, assigns, successors and affiliates (individually, an "CCC
---
Indemnified Party" and collectively, "CCC Indemnified Parties") from, against
- ----------------- -----------------------
and in respect of all liabilities, losses, claims, damages, causes of action,
lawsuits, administrative proceedings (including informal proceedings),
investigations, audits, demands, assessments, adjustments, judgments, settlement
payments, deficiencies, penalties, fines, interest (including interest from the
date of such damages) and costs and expenses (including without limitation
reasonable attorneys' fees and disbursements of every kind, nature and
description) (collectively, "Damages") suffered, sustained, incurred or paid by
-------
the Indemnified Parties in connection with, resulting from or arising out of,
directly or indirectly:
(a) any breach of any representation or warranty of the Stockholder or
the Company set forth in this Agreement or any Schedule, certificate or other
document or instrument, delivered by or on behalf of the Stockholder or the
Company in connection herewith; or
(b) any nonfulfillment of any covenant or agreement by the
Stockholders or, prior to the Effective Time, the Company, under this Agreement
or certificate or other document or instrument, delivered by or on behalf of the
Stockholders or the Company in connection herewith.
10.2 GENERAL INDEMNIFICATION BY CCC AND NEWCO. CCC and Newco, jointly and
severally, covenant and agree to indemnify, defend, protect and hold harmless
the Stockholders and their respective officers, directors, employees,
shareholders, assigns, successors and affiliates (individually, a "Shareholder
-----------
Indemnified Party" and collectively, the "Shareholder Indemnified Parties")
- ----------------- -------------------------------
from, against and in respect of all Damages suffered, sustained, incurred or
paid by the Shareholder Indemnified Parties in connection with, resulting from
or arising out of, directly or indirectly:
(a) any breach of any representation or warranty of CCC or Newco set
forth in this Agreement or any Schedule or certificate, delivered by or on
behalf of any CCC or Newco in connection herewith; or
(b) any nonfulfillment of any covenant or agreement by CCC or Newco
under this Agreement.
10.3 LIMITATION AND EXPIRATION. Notwithstanding the above:
(a) there shall be no liability for indemnification under Section 10.1
or 10.2 unless, and solely to the extent that the aggregate amount of Damages
exceeds an amount equal to one percent of the Aggregate Merger Consideration
(the "Indemnification Threshold") at which time the Indemnifying Party (defined
-------------------------
in Section 10.4 below) shall be liable for all Damages from the first dollar;
provided, however, that the Indemnification Threshold shall not apply to (i)
adjustments to the Merger Consideration as set forth in Sections 2.2 and 3.1; or
(ii) Damages arising out of any breaches of the covenants of the Stockholders
set forth in this Agreement which occur to the knowledge of the Company; or
(iii) representations and warranties made in (A) Section 5.23 (taxes), or (B)
Sections 5.22(b) (litigation) and 5.26 (environmental matters), and with respect
to this clause
45
<PAGE>
(B), the Indemnifying Party shall only be liable for Damages to the extent such
Damages exceed $150,000.
(b) the aggregate amount of any liability for Damages of the
Stockholders, CCC and Newco under this Article 10 shall not exceed 50% of the
Base Merger Consideration except with regard to any Damages that occur as a
result of fraudulent misrepresentations or fraudulent acts of the Stockholders,
the Company, its Subsidiaries, CCC or Newco, as applicable;
(c) the indemnification obligations under this Article 10, or under
any certificate or writing furnished in connection herewith, shall terminate at
the date that is the later of clause (i) or (ii) of this Section 10.3(c):
(i)
(1) except as to representations, warranties, and covenants
specified in clause (i)(2) of this Section 10.3(c), the first anniversary of the
Closing Date, or
(2) with respect to representations and warranties contained
in 5.23 (taxes), 5.26 (environmental matters), and the indemnification set forth
in Section 10.1(b) on (A) the date that is six (6) months after the expiration
of the longest applicable federal or state statute of limitation (including
extensions thereof), or (B) if there is no applicable statute of limitation, (x)
five (5) years after the Closing Date if the Claim is related to the cost of
investigating, containing, removing, or remediating a release of Hazardous
Material into the environment, or (y) two (2) years after the Closing Date for
any other Claim covered by clause (i)(2)(B) of this Section 10.3(c); or
(ii) the final resolution of claims or demands pending as of the
relevant dates described in clause (i) of this Section 10.3(c) (such claims
referred to as "Pending Claims").
--------------
(d) the Stockholders shall have no liability under this Article 10 in
respect of any Damages to the extent the amount thereof has been recouped by CCC
in the form of a as a result of any reduction to the Merger Consideration
pursuant to the provisions of Sections 2.2(b)-(d).
(e) to the extent of the amount CCC actually receives pursuant to a
Merger Consideration Adjustment that is directly attributable to a decrease in
the Actual Closing Net Worth that consists of a liability for which CCC would
otherwise be entitled to indemnification under this Article 10;
(f) Damages will be net of:
(i) any amounts recovered from third parties by way of
indemnification;
(ii) insurance proceed and other receipts or other reimbursement
of losses from third parties; and
46
<PAGE>
(iii) amounts attributable to any tax benefit if actually
realized with respect to the loss.
The Indemnified Parties agree to pursue the remedies described under
the foregoing clauses (i) through (iii) in good faith and acknowledge that
such remedies are not the Indemnified Parties' exclusive remedies.
(g) Damages shall not under any circumstances include punitive or
consequential Damages;
(h) the Indemnified Parties shall have no right to be indemnified for
Damages arising out of breaches of a representation or warranty occurring prior
to Closing if disclosed to the Indemnified Party prior to Closing;
(i) upon making a payment of Damages, the Indemnifying Party shall be
subrogated to the extent of such payment, to any rights of the Indemnified Party
in respect of the matter underlying the claim.
10.4 INDEMNIFICATION PROCEDURES. All claims or demands for indemnification
under this Article 10 ("Claims") shall be asserted and resolved as follows:
------
(a) In the event that any CCC Indemnified Party or Stockholder
Indemnified Party (in either case, an "Indemnified Party") has a Claim against
-----------------
any party obligated to provide indemnification pursuant to this Article 10 (the
"Indemnifying Party") which does not involve a Claim being asserted against or
------------------
sought to be collected by a third party, the Indemnified Party shall with
reasonable promptness notify the Indemnifying Party of such Claim, specifying
the nature of such Claim and the amount or the estimated amount thereof to the
extent then feasible (the "Claim Notice"). If the Indemnifying Party does not
------------
notify the Indemnified Party within thirty days after the date of delivery of
the Claim Notice that the Indemnifying Party disputes such Claim, with a
detailed statement of the basis of such position, the amount of such Claim shall
be conclusively deemed a liability of the Indemnifying Party hereunder. In case
an objection is made in writing in accordance with this Section 10.4(a), the
Indemnified Party shall respond in a written statement to the objection within
thirty days and, for sixty days thereafter, attempt in good faith to agree upon
the rights of the respective parties with respect to each of such Claims (and,
if the parties should so agree, a memorandum setting forth such agreement shall
be prepared and signed by both parties).
(b)
(i) In the event that any Claim for which the Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party (a "Third Party Claim"), the Indemnified
-----------------
Party shall deliver a Claim Notice to the Indemnifying Party. The Indemnifying
Party shall have thirty days from the date of delivery of the Claim Notice to
notify the Indemnified Party (A) whether the Indemnifying Party disputes
liability to the Indemnified Party hereunder with respect to the Third Party
Claim, and, if so, the basis for such a dispute, and (B) if such party does not
dispute liability, whether or not the Indemnifying Party
47
<PAGE>
desires, at the sole cost and expense of the Indemnifying Party, to defend
against the Third Party Claim, provided that the Indemnified Party is hereby
authorized (but not obligated) to file any motion, answer or other pleading and
to take any other action which the Indemnified Party shall deem necessary or
appropriate to protect the Indemnified Party's interests.
(ii) In the event that the Indemnifying Party timely notifies
the Indemnified Party that the Indemnifying Party does not dispute the
Indemnifying Party's obligation to indemnify with respect to the Third Party
Claim, the Indemnifying Party shall defend the Indemnified Party against such
Third Party Claim by appropriate proceedings, provided that, unless the
Indemnified Party otherwise agrees in writing, the Indemnifying Party may not
settle any Third Party Claim (in whole or in part) if such settlement does not
include a complete and unconditional release of the Indemnified Party. If the
Indemnified Party desires to participate in, but not control, any such defense
or settlement the Indemnified Party may do so at its sole cost and expense. If
the Indemnifying Party elects not to defend the Indemnified Party against a
Third Party Claim, whether by failure of such party to give the Indemnified
Party timely notice as provided herein or otherwise, then the Indemnified Party,
without waiving any rights against such party, may settle or defend against such
Third Party Claim in the Indemnified Party's sole discretion and the Indemnified
Party shall be entitled to recover from the Indemnifying Party the amount of any
settlement or judgment and, on an ongoing basis, all indemnifiable costs and
expenses of the Indemnified Party with respect thereto, including interest from
the date such costs and expenses were incurred.
(iii) If at any time, in the reasonable opinion of the
Indemnified Party, notice of which shall be given in writing to the Indemnifying
Party, any Third Party Claim seeks material prospective relief which could have
an adverse effect on any Indemnified Party or the Surviving Corporation or any
subsidiary, the Indemnified Party shall have the right to control or assume (as
the case may be) the defense of any such Third Party Claim, provided that the
Indemnified Party shall not settle any such claim without the consent of the
Indemnifying Party (which consent shall not be unreasonably withheld). If the
Indemnified Party elects to exercise such right, the Indemnifying Party shall
have the right to participate in, but not control, the defense of such Third
Party Claim at the sole cost and expense of the Indemnifying Party.
(c) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent Damages provided the Claim Notice sets forth the
specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such Claim may be made.
(d) Subject to the provisions of Section 10.3, the Indemnified
Party's failure to give timely notice as required by this Section 10.4 of any
actual, threatened or possible claim or demand which may give rise to a right of
indemnification hereunder shall not relieve the Indemnifying Party of any
liability which the Indemnifying Party may have to the Indemnified Party except
to the extent that the failure to give such notice materially and adversely
prejudiced the Indemnifying Party.
48
<PAGE>
10.5 SURVIVAL OF REPRESENTATIONS WARRANTIES AND COVENANTS. All
representations, warranties and covenants made by the Company, the Stockholders,
CCC and Newco in or pursuant to this Agreement or in any document delivered
pursuant hereto shall be deemed to have been made on the date of this Agreement
(except as otherwise provided herein) and, if a Closing occurs, as of the
Closing Date. The representations of the Company, the Stockholders, CCC and
Newco will survive the Closing and will remain in effect until, and will expire
upon, the termination of the indemnification obligations as provided in Section
10.3.
10.6 EXCLUSIVE REMEDIES. The remedies set forth in this Article 10 shall
be the exclusive remedies available for any breach of this Agreement except with
regard to any Damages that occur as a result of fraudulent misrepresentations or
fraudulent acts of the Stockholders, the Company, its Subsidiaries, CCC or
Newco, as applicable.
10.7 RIGHT TO SET OFF. Subject to the Stockholders' right to satisfy
claims relating to Pledged Assets in cash as provided in Section 3.2(c), CCC
shall have the right, but not the obligation, to set off, in whole or in part,
against the Pledged Assets, amounts finally determined under Section 10.4 to be
owed to CCC by the Stockholders under Section 10.1 hereof.
11. NONCOMPETITION
11.1 PROHIBITED ACTIVITIES. Except as described on SCHEDULE 11.1 hereto or
as otherwise provided in an employment agreement with CCC or a subsidiary of
CCC, the Surviving Corporation or any other subsidiary of CCC, Green agrees, for
a period of two years following the Closing Date, not to:
(a) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
selling any electrical contracting products or services (the "Business") in
--------
direct competition with the Surviving Corporation or CCC's other electrical
contracting subsidiaries within 100 miles of any office of CCC or any office of
its subsidiaries engaged in the Business (the "Territory");
---------
(b) call upon any person who is, at that time, or who was at any time
within one year prior to that time, an employee of the Company (including its
subsidiaries) in a managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of CCC (including its
subsidiaries);
(c) call upon any person or entity which is, at that time, or which
has been, within one year prior to that time, a customer the Company or CCC
(including their respective subsidiaries engaged in the Business) within the
Territory for the purpose of soliciting or selling products or services within
the Territory which are in direct competition with the Surviving Corporation or
CCC's other subsidiaries engaged in the Business;
49
<PAGE>
(d) call upon any prospective acquisition candidate, on the
Stockholder's own behalf or on behalf of any competitor, which candidate either
was called upon by the Company or CCC (including their respective subsidiaries)
or was the subject of an acquisition analysis conducted by the Company or CCC
(including their respective subsidiaries); or
(e) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any reason
or purpose whatsoever.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Green from acquiring as an investment not more than 2.5 percent of the
outstanding voting capital stock of a competing business, whose stock is traded
on a national securities exchange or through the auto mated quotation system of
a registered securities association.
11.2 DAMAGES. Because of the difficulty of measuring economic losses to
CCC and the Surviving Corporation as a result of the breach of the foregoing
covenant, and because of the immediate and irreparable damage that would be
caused to CCC and the Surviving Corporation for which they would have no other
adequate remedy, each Stockholder subject to this Article 11 agrees that, in the
event of a breach by them of the foregoing covenant, the covenant may be
enforced by CCC or the Surviving Corporation by, without limitation, injunctions
and restraining orders.
11.3 REASONABLE RESTRAINT. It is agreed by the parties that the foregoing
covenants in this Article 11 impose a reasonable restraint on Green subject to
this Article 11 in light of the activities and business of CCC on the date of
the execution of this Agreement and the current and future plans of CCC and the
Surviving Corporation (as successors to the businesses of the Company).
11.4 SEVERABILITY; REFORMATION. The covenants in this Article 11 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
11.5 INDEPENDENT COVENANT. All of the covenants in this Article 11 shall
be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of the Stockholders
against the Company, the Surviving Corporation or CCC, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
of such covenants.
11.6 MATERIALITY. The Company and the Stockholders hereby agree that the
covenants set forth in this Article 11 are a material and substantial part of
the transactions contemplated by this Agreement, supported by adequate
consideration.
50
<PAGE>
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
12.1 STOCKHOLDERS. Green recognizes and acknowledge that he has in the
past, currently has, and in the future may possibly have, access to certain
confidential information of the Company, such as lists of customers, operational
policies, and pricing and cost policies that are valuable, special and unique
assets of the Company and the Company's business. Green agrees that he will not
disclose any confidential information to any person, firm, corporation,
association or other entity for any purpose or reason whatsoever, except to
authorized representatives of CCC, unless Green can show that such information
has become known to the public generally through no fault of Green. In the event
of a breach or threatened breach by Green of the provisions of this Article 12,
CCC and the Surviving Corporation shall be entitled to an injunction restraining
Green from disclosing, in whole or in part, such confidential information.
Nothing herein shall be construed as prohibiting CCC and the Surviving
Corporation from pursuing any other available remedy for such breach or
threatened breach, including the recovery of damages.
12.2 CCC. CCC recognizes and acknowledges that it has in the past,
currently has, and prior to the Closing Date will have, access to certain
confidential information of the Company, such as lists of customers, operational
policies, pricing and cost policies that are valuable, special and unique assets
of the Company and the Company's business. CCC agrees that it will not disclose
any confidential information to any person, firm, corporation, association, or
other entity for any purpose or reason whatsoever, prior to the Closing Date
without prior written consent of the Stockholders. In the event of a breach or
threatened breach by CCC of the provisions of this Article 12, the Stockholders
shall be entitled to an injunction restraining CCC from disclosing, in whole or
in part, such confidential information. Nothing contained herein shall be
construed as prohibiting the Stockholders from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
12.3 DAMAGES. Because of the difficulty of measuring economic losses as
a result of the breach of the foregoing covenants, and because of the immediate
and irreparable damage that would be caused for which they would have no other
adequate remedy, CCC, the Surviving Corporation and the Stockholders agree that,
in the event of a breach by any of them of the foregoing covenant, the covenant
may be enforced against them by injunctions and restraining orders.
13. GENERAL
13.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date solely:
(a) by mutual consent of the boards of directors of CCC and the
Company; or
(b) by the Stockholders and the Company as a group, on the one
hand, or by CCC, on the other hand, if the Closing shall not have occurred on or
before July 31, 1998, provided that the right to terminate this Agreement under
this Section 13.1(b) shall not be available to either
51
<PAGE>
party (with the Stockholders and the Company deemed to be a single party for
this purpose and CCC and Newco deemed to be a single party for this purpose)
whose material misrepresentation, breach of warranty or failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Closing to occur on or before such date; or
(c) by the Stockholders and the Company as a group, on the one
hand, or by CCC, on the other hand, if there is or has been a material breach,
failure to fulfill or default on the part of the other party (with the
Stockholders and the Company deemed to be a single party for this purpose and
CCC and Newco deemed to be a single party for this purpose) of any of the
representations and warranties contained herein or in the due and timely
performance and satisfaction of any of the covenants, agreements or conditions
contained herein, and the curing of such default shall not have been made or
shall not reasonably be expected to occur before the Closing Date; or
(d) by the Stockholders and the Company as a group, on the one
hand, or by CCC, on the other hand, if there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; or there shall be any action taken, or any statute, rule or regulation
or order enacted, promulgated or issued or deemed applicable to the Merger by
any governmental entity which would make the consummation of the Merger illegal.
13.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 13.1, this Agreement shall forthwith become
ineffective, and there shall be no liability or obligation on the part of any
party hereto or its officers, directors or shareholders. Notwithstanding the
foregoing sentence, (i) the provisions of this Article 13 shall remain in full
force and effect and survive any termination of this Agreement; (ii) each party
shall remain liable for any breach of this Agreement prior to its termination;
and (iii) in the event of termination of this Agreement pursuant to Section
13.1(c) above, then notwithstanding the provisions of Section 13.7 below, the
breaching party (with the Stockholders and the Company deemed to be a single
party for purposes of this Article 13), shall be liable to the other party to
the extent of the expenses incurred by such other party in connection with this
Agreement and the transactions contemplated hereby, as well as any damages in
accordance with applicable law.
13.3 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of CCC, and the heirs and legal representatives of the Stockholders.
13.4 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement sets forth
the entire understanding of the parties hereto with respect to the transactions
contemplated hereby. Each of the Schedules to this Agreement is incorporated
herein by this reference and expressly made a part hereof. Any and all previous
agreements and understandings between or among the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement except
the Confidentiality Agreement dated as of May 21, 1998, between the Company,
Mid-Atlantic Companies Ltd. and CCC. This Agreement shall not be amended or
modified except by a written instrument duly executed by each of the parties
hereto, or in accordance with Section 11.4. Any
52
<PAGE>
extension or waiver by any party of any provision hereto shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
13.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original, and all of
which counterparts taken together shall constitute but one and the same
instrument.
13.6 BROKERS AND AGENTS. CCC and Newco (as a group) and the Company and
each Stockholder (as a group) each represents and warrants to the other that it
has not employed any broker or agent in connection with the transactions
contemplated by this Agreement other than the Company's engagement of
Mid-Atlantic and agrees to indemnify the other against all losses, damages or
expenses relating to or arising out of claims for fees or commission of any
broker or agent employed or alleged to have been employed by such party.
13.7 EXPENSES. CCC has and will pay the fees, expenses and
disbursements of CCC and Newco and their agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
The Company has and will pay the fees, expenses and disbursements of the
Stockholders, the Company, and their agents, representatives, financial
advisers, accountants and counsel incurred in connection with the subject matter
of this Agreement; provided that any such fees due after the Closing (which
shall promptly be paid by the Surviving Corporation) shall be deemed accrued as
of the Closing Date for purposes of determining the Actual Closing Net Worth.
13.8 SPECIFIC PERFORMANCE; REMEDIES. Each party hereto acknowledges
that the other parties will be irreparably harmed and that there will be no
adequate remedy at law for any violation by any of them of any of the covenants
or agreements contained in this Agreement, including without limitation, the
noncompetition provisions set forth in Article 11 and the confidentiality
obligations set forth in Article 12. It is accordingly agreed that, in addition
to any other remedies which may be available upon the breach of any such
covenants or agreements, each party hereto shall have the right to obtain
injunctive relief to restrain a breach or threatened breach of, or otherwise to
obtain specific performance of, the other parties, covenants and agreements
contained in this Agreement.
13.9 NOTICES. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or sent by
telefax (with confirmation of receipt), by registered or certified mail, postage
prepaid, or by recognized courier service, as follows:
53
<PAGE>
If to CCC, Newco or the Surviving Corporation to:
Consolidation Capital Corporation
800 Connecticut Avenue, N.W.
Suite 1111
Washington DC 20006
Attn: F. Traynor Beck
Executive Vice President, General Counsel and Secretary
(Telefax: (202) 261-6020)
with a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Telefax: (215) 963-5299
Attention: N. Jeffrey Klauder
If to any Stockholder to:
Regency Electric Company, Inc.
The Regency Electric Building
6601 Southpoint Drive North, Suite 300
Jacksonville, FL 32216
Attention: Alan Green
(Telefax: (904) 281-9740)
with a required copy to:
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154-0037
Attn: Christopher Aidun
(Telefax: (212) 407-4990)
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed, mailed or
dispatched and, if given by any other means, shall be deemed given only when
actually received by the addressees.
13.10 GOVERNING LAW. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of Delaware,
without giving effect to any of
54
<PAGE>
the conflicts of laws provisions thereof that would require the application of
the substantive laws of any other jurisdiction.
13.11 SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstances is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstances in any other jurisdiction, shall
not be affected thereby, and to this end the provisions of this Agreement shall
be severable. The preceding sentence is in addition to and not in place of the
severability provisions in Section 11.4.
13.12 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provision of this
Agreement is intended, nor will any provision be interpreted, to provide or to
create any third party beneficiary rights or any other rights of any kind in any
client, customer, affiliate, shareholder, employee or partner of any party
hereto or any other person or entity.
13.13 FURTHER REPRESENTATIONS. Each party to this Agreement
acknowledges and represents that it has been represented by its own legal
counsel in connection with the transactions contemplated by this Agreement, with
the opportunity to seek advice as to its legal rights from such counsel. Each
party further represents that it is being independently advised as to the tax
consequences of the transactions contemplated by this Agreement and is not
relying on any representation or statements made by the other party as to such
tax consequences.
13.14 ACCOUNTING TERMS. Except as otherwise expressly provided herein
or in the Schedules, all accounting terms used in this Agreement shall be
interpreted, and all financial statements, Schedules, certificates and reports
as to financial matters required to be delivered hereunder shall be prepared, in
accordance with GAAP consistently applied.
13.15 REPRESENTATIVE. Each of the Stockholders hereby appoints Green as
his exclusive agent and attorney-in-fact to act on his behalf with respect to
any and all matters, claims, controversies, or disputes arising out of the terms
of this Agreement (the "Representative"). Each Stockholder further agrees that
--------------
upon the vote of the Stockholders holding a majority of the stock of the Company
immediately preceding the Closing (the "Stockholder Approval") the
--------------------
Representative shall have the power to take any and all actions which the
Representative believes are necessary or appropriate or in the best interests of
the Stockholders, as fully as if the Stockholders were acting on their own
behalf, including without limitation, consenting to, and settling any and all
claims, disputes or controversies arising hereunder (including without
limitation the calculation and payment of the Merger Consideration), conducting
all negotiations with and otherwise dealing with CCC and the Surviving
Corporation and engaging counsel, accountants and other representatives in
connection with the foregoing matters. CCC and the Surviving Corporation shall
have the right to rely on any actions taken or omitted to be taken by the
Representative as being the act or omission of the Stockholders, without the
need for any inquiry, and any such actions or omissions shall be binding upon
the Stockholders. The Stockholders shall have the right to change the identity
of the Representative upon Stockholder Approval and shall deliver to CCC and the
Surviving Corporation prompt written notice of any such change of identity,
which upon receipt by CCC and the Surviving Corporation will effect said change.
The Stockholders agree to hold the Representative free and
55
<PAGE>
harmless from and indemnify the Representative against any and all loss, damage
or liability which he may sustain as a result of any action taken in good faith
hereunder, including, without limitation, any legal fees and expenses.
13.16 UNANIMOUS WRITTEN CONSENT OF STOCKHOLDERS. The execution of this
Agreement by all of the Stockholders shall constitute unanimous written consent
of all of the stockholders of the Company approving the this Agreement as a plan
of merger within the meaning of the State Corporate Laws.
[Execution Page Following]
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CONSOLIDATION CAPITAL
CORPORATION
By: /s/ F. Traynor Beck
--------------------------------------
F. Traynor Beck
Executive Vice President
RECI ACQUISITION CORP.
By: /s/ F. Traynor Beck
--------------------------------------
F. Traynor Beck
Executive Vice President & Secretary
REGENCY ELECTRIC COMPANY, INC.
By: /s/ Alan J. Green
--------------------------------------
Alan J. Green
President
STOCKHOLDERS:
/s/ Alan J. Green
------------------------------------------
Alan J. Green
ALAN J. GREEN, GRANTOR RETAINED
ANNUITY TRUST
/s/ Nancy L. Hanna
------------------------------------------
Nancy L. Hanna, Trustee
<PAGE>
MATTHEW GREEN IRREVOCABLE TRUST
/s/ Nancy L. Hanna
-----------------------------------
Nancy L. Hanna, Trustee
KEVIN GREEN IRREVOCABLE TRUST
/s/ Nancy L. Hanna
-----------------------------------
Nancy L. Hanna, Trustee
PAMELA L. GREEN GRANTOR RETAINED
ANNUITY TRUST
/s/ Nancy J. Green
-----------------------------------
Nancy L. Hanna, Trustee
<PAGE>
Index of Certain Defined Terms
------------------------------
<TABLE>
<S> <C>
1933 Act .................................................................................................... 4
Accounts Receivable ......................................................................................... 15
Actual Closing Net Worth .................................................................................... 8
Actual Earn Out EBIT ........................................................................................ 4
Affiliate ................................................................................................... 28
Affiliates .................................................................................................. 62
Agreement ................................................................................................... 1, 40
Audited Financials .......................................................................................... 13
Balance Sheet Date .......................................................................................... 13
Base Merger Consideration ................................................................................... 3
CCC ......................................................................................................... 1
CCC Charter Documents ....................................................................................... 30
CCC Common Stock ............................................................................................ 3
CCC Prospectus .............................................................................................. 28
CCC's Accountant ............................................................................................ 5, 8
CCC's knowledge ............................................................................................. 29
Certificates ................................................................................................ 7
Charter Documents ........................................................................................... 11
Claim Notice ................................................................................................ 47
Claims ...................................................................................................... 47
Closing ..................................................................................................... 10
Closing Date ................................................................................................ 10
Code ........................................................................................................ 1
Company ..................................................................................................... 1, 40
Company Common Stock ........................................................................................ 1
Company Financial Statements ................................................................................ 13
Company Hazardous Materials Activities ...................................................................... 27
Company's knowledge ......................................................................................... 10
Constituent Corporations .................................................................................... 1
Contingent Merger Consideration ............................................................................. 4
Contingent Merger Consideration Payment Date ................................................................ 6
controlled group ............................................................................................20, 21
Damages ..................................................................................................... 45
DOJ ......................................................................................................... 35
Earn Out EBIT Notice ........................................................................................ 5
Earn Out Period Average Price ............................................................................... 6
Effective Time .............................................................................................. 10
employee benefit plan ....................................................................................... 36
Environmental Permits ....................................................................................... 27
Equipment ................................................................................................... 29
ERISA ....................................................................................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Financial Adjustment Notice ................................................................................ 8
FTC ........................................................................................................ 35
GAAP ....................................................................................................... 4
GCL ........................................................................................................ 1
golden parachute ........................................................................................... 20
group health plans ......................................................................................... 21
Hazardous Material ......................................................................................... 27
Indemnification Threshold .................................................................................. 45
Indemnified Parties ........................................................................................ 45
Indemnified Party .......................................................................................... 45
Indemnifying Party ......................................................................................... 47
Interim Balance Sheet ...................................................................................... 13
Interim Financials ......................................................................................... 13
Interim Period Average ..................................................................................... 4
Inventory .................................................................................................. 29
knowledge of CCC ........................................................................................... 29
knowledge of Newco ......................................................................................... 29
knowledge of the Company ................................................................................... 10
leased Real Property ....................................................................................... 16
liabilities ................................................................................................ 14
Lien ....................................................................................................... 12
Material Adverse Effect .................................................................................... 11
Material Contracts ......................................................................................... 17
Merger ..................................................................................................... 1
Merger Consideration ....................................................................................... 6
Merger Consideration Adjustment ............................................................................ 8
Merger Documents ........................................................................................... 10
Merger Price ............................................................................................... 3
multiemployer pension plan ................................................................................. 20
Net Worth Target ........................................................................................... 4
New Accounting Firm ........................................................................................ 5
Newco ...................................................................................................... 1
Newco's knowledge .......................................................................................... 29
PBGC ....................................................................................................... 20
Pending Claims ............................................................................................. 46
Permits .................................................................................................... 15
Permitted Encumbrances ..................................................................................... 16
Person ..................................................................................................... 39
Plans ...................................................................................................... 20
Pledged Assets ............................................................................................. 9
Post-Closing Audit ......................................................................................... 8
Prime Rate ................................................................................................. 5
Qualified Plans ............................................................................................ 20
Real Property .............................................................................................. 15
</TABLE>
60
<PAGE>
<TABLE>
<S> <C>
Registration Statement ................................................................................... 32
Related Party ............................................................................................ 39
Related Party Agreements ................................................................................. 17
Release Date ............................................................................................. 9
reportable events ........................................................................................ 21
Representative ........................................................................................... 55
Revised Earn Out EBIT .................................................................................... 5
Securities Act ........................................................................................... 39
Shareholder Approval ..................................................................................... 55
Shareholder Indemnified Parties .......................................................................... 45
Stockholder .............................................................................................. 1
Surviving Corporation .................................................................................... 1
Tax ...................................................................................................... 24
Tax Return ............................................................................................... 24
tax-free reorganization .................................................................................. 1
Territory ................................................................................................ 49
Third Party Claim ........................................................................................ 47
UCC ...................................................................................................... 29
</TABLE>
61
<PAGE>
SCHEDULES
5.1 Due Organization
5.3 No Conflicts
5.4 Capital Stock of the Company
5.5 Transactions in Capital Stock
5.6(a) Subsidiaries
5.6(b) Other Holdings of Company
5.6(c) Promissory Notes
5.7 Predecessor Status
5.8 Stockholder Claims
5.9(b) EBIT add-backs
5.9 Financial Statements
5.10 Liabilities and Obligations; Capital Expenditures; Indebtedness as
of the Balance Sheet Date
5.11 Accounts and Notes Receivable
5.13 Permits
5.14(c) Real Property Leased; Permitted Encumbrances
5.14(c)(i) Liens securing indebtedness for borrowed money that CCC or one of
its affiliates has agreed to assume at Closing.
5.14(d) Landlord Interests
5.17(a) Material Contracts
5.17(c) Outstanding balances on all loans or credit agreements
5.17(d) Breaches/defaults/terminations/liens on Material Contracts caused
by transaction
5.18 Government Contracts
5.19 Insurance
5.20 Labor and Employment Matters
5.21 Employment Benefit Plans
5.22(a) Conformity with Law
5.22(b) Litigation
5.23 Taxes
5.24 Absence of Changes
5.25 Deposit Accounts; Powers of Attorney
5.26 Environmental Matters
5.30 "Affiliates" under the 1933 Act
5.31 Location of chief executive offices
5.32 Location of Equipment and Inventory
7.3 Title Insurance and Surveys
7.4 Related Party Agreements
7.6 Conduct of Business Pending Closing
7.8 Prohibited Activities
8.5 Opinion of Counsel
62
<PAGE>
8.9 Stockholders' Releases
8.11 Employment Agreement
11.1 Prohibited Activities
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1, as amended, of our reports dated (i)
February 27, 1998, relating to the financial statements of Consolidation
Capital Corporation; (ii) February 19, 1998, relating to the combined
financial statements of Service Management USA, Inc. and its affiliates; and
(iii) February 27, 1998 (except as to Note 1, which is as of June 26, 1998,
relating to the supplemental consolidated financial statements of
Consolidation Capital Corporation, which appear in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 6, 1998
<PAGE>
EXHIBIT 23.01
(CONTINUED)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 17, 1998
relating to the financial statements of SKC Electric, Inc. and Affiliate and
Lovecor, Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
July 2, 1998
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated February 6, 1998, accompanying the financial
statements of Town & Country Electric Inc. contained in the Post-Effective
Amendment No. 4 to the Registration Statement on Form S-1 for Consolidation
Capital Corporation. We .consent to the use in the aforementioned reports in
the Post-Effective Amendment No. 4 to the Registration Statement on Form S-1,
and to the use of our name as its appears under the caption "Experts."
/s/ Grant Thornton LLP
Appleton, Wisconsin
July 2, 1998
<PAGE>
EXHIBIT 23.02
(CONTINUED)
We have issued our report dated February 12, 1998, accompanying the financial
statements of Garfield Electric Company contained in the Post-Effective
Amendment No. 4 to the Registration Statement on Form S-1 for Consolidation
Capital Corporation. We consent to the use of the aforementioned report in the
Post-Effective Amendment No. 4 to the Registration Statement on Form S-1, and
to the use of our name as it appears under the caption "Experts".
/s/ Grant Thornton LLP
Cincinnati, Ohio
July 2, 1998
<PAGE>
EXHIBIT 23.02
(CONTINUED)
We have issued our report dated February 12, 1998, accompanying the financial
statements of Indecon, Inc. contained in the Post-Effective Amendment No. 4 to
the Registration Statement on Form S-1 for Consolidation Capital Corporation.
We consent to the use of the aforementioned report in the Post-Effective
Amendment No. 4 to the Registration Statement on Form S-1, and to the use of
our name as it appears under the caption "Experts".
/s/ Grant Thornton LLP
Cincinnati, Ohio
July 2, 1998
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Riviera Electric Construction Co.
We consent to the use in the post-effective amendment No. 4 to the
registration statement of Consolidation Capital Corporation on Form S-1 of our
report dated February 18, 1998, with respect to the balance sheets of RIVIERA
ELECTRIC CONSTRUCTION CO. as of December 31, 1997 and 1996, and the related
statements of income, stockholders' equity and cash flows for the three years
in the period ended December 31, 1997. We also consent to the reference to us
under the heading "Experts" in such registration statement.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
July 2, 1998
<PAGE>
EXHIBIT 23.04
[Letterhead]
The Board of Directors
Tri-City Electrical Contractors,Inc.:
We consent to the inclusion of our report dated February 16, 1998 included
herein, with respect to the consolidated balance sheets of Tri-City Electrical
Contractors, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997 and to the
reference to our firm under the heading "Experts" including herein.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
July 2, 1998
<PAGE>
EXHIBIT 23.05
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 30, 1998,
relating to the financial statements of Wilson Electric Company, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Barry & Moore, P.C.
July 2, 1998
<PAGE>
Arthur Andersen LLP
EXHIBIT 23.06
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado
July 2, 1998
<PAGE>
EXHIBIT 23.07
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 20, 1998
relating to the financial statements of Taylor Electric, Inc. which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Leverich, Phillips, Rasmuson & Company
Salt Lake City, Utah
July 2, 1998
<PAGE>
EXHIBIT 23.08
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 8, 1998 relating to
the financial statements of G.S. Group Inc. and Subsidiaries which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Wallingford, McDonald, Fox & Co.,
P.C.
Houston, Texas
July 2, 1998
<PAGE>
EXHIBIT 23.09
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 27, 1998,
relating to the financial statements of Walker Engineering, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Hutton, Patterson & Company, P.C.
Hutton, Patterson & Company, P.C.
Dallas, Texas
July 2, 1998
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 20, 1998, relating
to the financial statements of National Network Services, Inc., which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Bradley, Allen & Associates, P.C.
Bradley, Allen & Associates , P.C.
Lakewood, Colorado
July 2, 1998
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 18, 1998,
relating to the financial statements of Regency Electric Company, Inc. and
subsidiaries which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Harbeson, Beckerleg & Fletcher
Harbeson, Beckerleg & Fletcher
Jacksonville, Florida
July 2, 1998
<PAGE>
EXHIBIT 23.12
INDEPENDENT AUDITORS' CONSENT
We consent to the use, in this Post-Effective Amendment No. 4 to Registration
Statement No. 333-42317 of Consolidation Capital Corporation, of our report
dated November 17, 1997 on the financial statements of Chambers Electronic
Communications, LLC for the years ended September 30, 1997 and 1996 appearing
in the Prospectus, which is a part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
July 2, 1998
<PAGE>
EXHIBIT 23.13
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 19, 1998,
relating to the financial statements of Perimeter Maintenance Corporation
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Frazier & Deeter, LLC
Frazier & Deeter, LLC
Atlanta, Georgia
July 2, 1998
<PAGE>
EXHIBIT 23.14
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 17, 1998,
relating to the financial statements of Crest International, LLC which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Shinners, Hucovski & Company
Green Bay, Wisconsin
July 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-27-1997
<PERIOD-END> DEC-31-1997
<CASH> 528,392
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 653
<PP&E> 20
<DEPRECIATION> 0
<TOTAL-ASSETS> 529,065
<CURRENT-LIABILITIES> 1,768
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 527,266
<TOTAL-LIABILITY-AND-EQUITY> 529,065
<SALES> 0
<TOTAL-REVENUES> 2,056
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 71
<INCOME-TAX> 64
<INCOME-CONTINUING> 7
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
