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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-42317
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CONSOLIDATION CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7340 52-2054952
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIALCLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)
1747 PENNSYLVANIA AVENUE, N.W., SUITE 900
WASHINGTON, D.C. 20006
202/955-5490
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JONATHAN J. LEDECKY
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CONSOLIDATION CAPITAL CORPORATION
1747 PENNSYLVANIA AVENUE, N.W., SUITE 900
WASHINGTON, D.C. 20006
202/955-5490
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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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.
1747 PENNSYLVANIA AVE. N.W., SUITE 900 WASHINGTON, D.C. 20036
WASHINGTON D.C. 20006 202/467-7000
202/955-5490
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.
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<PAGE>
PROSPECTUS
CONSOLIDATION CAPITAL CORPORATION
24,000,000 SHARES OF COMMON STOCK
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This Prospectus covers 24,000,000 shares of common stock, $.001 par value
(the "Common Stock"), which may be offered and issued 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").
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BUYR." As of February 20, 1998, the Company had 30,292,857 shares of
Common Stock outstanding. On February 20, 1998, the closing price of the
Common Stock was $22.50 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 6 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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 February 27, 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Additional Information................................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Price Range of Common Stock.............................................. 17
Dividend Policy.......................................................... 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 21
Management............................................................... 31
Executive Compensation................................................... 33
Certain Relationships and Related Party Transactions..................... 35
Principal Stockholders................................................... 36
Description of Capital Stock............................................. 37
Plan of Distribution..................................................... 38
Restrictions on Resale................................................... 38
Legal Matters............................................................ 38
Experts.................................................................. 38
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.
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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 intends to consolidate the facilities management industry to become
a national single-source provider of facilities management services. Jonathan
Ledecky is the Chairman and founder and, until November 5, 1997, was the 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 intends to employ a corporate democracy
approach as one of its principal operating strategies.
To date, the Company's operations have consisted of organizational
activities, research and analysis with respect to industry consolidations and
acquisition opportunities, efforts to refine the Company's business strategy,
meetings and negotiations with potential acquisition candidates and the
acquisition of one company. The Company was initially capitalized with $59,000,
has generated immaterial revenues to date other than investment earnings on the
proceeds of its initial public offering (the "IPO"), and earned income of
$7,000 from its founding in February 1997 through December 31, 1997. The
Company completed 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.
In February 1998, the Company acquired one facilities management business
specializing in providing janitorial maintenance management services and
entered into definitive agreements to acquire seven facilities management
businesses specializing in providing electrical installation and maintenance
services (the "Pending Acquisitions"). See "--Recent Developments." 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
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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.
The Company's management team consists of, in addition to Jonathan Ledecky:
Timothy C. Clayton, Executive Vice President, Chief Financial Officer and
Treasurer; F. Traynor Beck, Executive Vice President, General Counsel and
Secretary; and, David Ledecky, Executive Vice President and Chief
Administrative Officer. See "Management."
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 initially 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, expects to rely in part upon 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
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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. Other than the pending
acquisition of Service Management, the Company has no present arrangements or
understandings with respect to the acquisition of any specific business. 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 1747 Pennsylvania
Avenue, N.W., Suite 900, Washington D.C. 20006, and its telephone number is
202-955-5490.
RECENT DEVELOPMENTS
On February 4, 1998, the Company completed the acquisition of Service
Management USA ("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. Some of Service
Management's major clients include the United Parcel Service, K-Mart, Wal-Mart,
Target, Sports Authority, CVS, Kroger, Shaw's and Bi-lo grocery stores. The
total consideration paid by the Company consisted of $9 million in cash and
142,857 shares of Common Stock, with the potential of additional consideration
of $13 million in cash and shares of Common Stock based on the performance of
Service Management and the achievement of certain acquisition goals.
On February 27, 1998, the Company entered into definitive agreements to
acquire the Pending Acquisitions. The Pending Acquisitions include: Garfield
Electric Company ("Garfield"), Indecon, Inc. ("Indecon"), Riviera Electric
Construction Co., Inc. ("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 Pending Acquisitions
specialize in providing electrical installation and maintenance services for
commercial, institutional, industrial and retail customers throughout Ohio,
Colorado, Kansas, Missouri, Wisconsin, Florida and Arizona. Each of the Pending
Acquisitions 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. Bill Love, the founder and
president of SKC, will serve as the president of the Company's electrical
services division upon completion of the Pending Acquisitions.
The combined 1997 revenues of the Pending Acquisitions were approximately
$284.3 million, of which approximately 71.6% was derived from electrical
installation services and approximately 28.4% was derived from electrical
maintenance and specialty services. The combined revenues of the Pending
Acquisitions, 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.
Assuming that the acquisition of Service Management and the Pending
Acquisitions had occurred at the beginning of the Company's 1997 fiscal year,
the Company had pro forma fiscal year 1997 revenues of $310.5 million and pro
forma fiscal year 1997 net income of $11.2 million.
The aggregate consideration to be paid by the Company in the Pending
Acquisitions is approximately $138.1 million, consisting of $66.1 million in
cash and $72.0 million in 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 on the performance of the acquired businesses as a
group. The completion of the Pending Acquisitions is subject to a number of
customary closing conditions and there can be no assurance that such
acquisitions will be completed. In addition, the completion of each of the
Pending Acquisitions is dependent upon the completion of all of the Pending
Acquisitions.
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."
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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. To date, its activities have consisted of organizational activities,
research and analysis with respect to acquisition and consolidation
opportunities, efforts to refine the Company's business strategy, meetings and
negotiations and the execution of letters of intent and agreements with
potential acquisition candidates and one acquisition. The Company intends to
consolidate the facilities management industry to become a single-source
provider of facilities management services. Until its recent acquisition of
Service Management, 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 (if any) will be directly dependent upon the
operating results of such acquired business and any additional acquisitions,
including the Pending Acquisitions, and the successful integration and
consolidation of those businesses.
CONFLICTS OF INTEREST
Jonathan Ledecky serves as both the Chairman and Chief Executive Officer of
the Company and the Chairman and an executive officer of USOP. On January 13,
1998, Jonathan Ledecky entered into a Services Agreement with USOP, effective
upon the completion of USOP's announced restructuring which involves a self-
tender and the incurrence of indebtedness related thereto, the spin-off of
four of USOP's divisions and an equity investment. If the restructuring is
completed, Jonathan Ledecky will resign as the Chairman and as an executive
officer of USOP, but will continue to provide mutually agreed advisory
services to USOP and the companies that are being spun off from USOP, and the
Services Agreement will supersede Jonathan Ledecky's amended and restated
employment agreement with USOP, described below (the "USOP Employment
Agreement"). Jonathan Ledecky also is expected to serve as a director of the
companies that are being spun off from USOP. If USOP's announced restructuring
is not completed, the USOP Employment Agreement will remain in effect. USOP
has announced that the proposed restructuring is not expected to be completed
until the second calendar quarter of 1998.
As long as Jonathan Ledecky serves as a director and an executive officer of
both the Company and USOP, and as a director of each of the companies that are
being spun off from USOP, Jonathan Ledecky 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 or the companies being
spun off from USOP delineating Jonathan Ledecky's duties to each company or
resolving potential conflicts between his conflicting duties and obligations,
although USOP has approved the Company's entry into the facilities management
industry.
Under the USOP Employment Agreement, Jonathan Ledecky is obligated to assist
in, among other things, identifying and pursuing new business and investment
opportunities and acquisitions for USOP, developing and providing strategic
plans and growth analyses for USOP, providing structuring, capitalization,
restructuring, recapitalization and reorganization advice to USOP and
assisting in implementing such advice, and interfacing with the investment and
financial community on an as-needed basis. While Jonathan Ledecky is not
responsible for the day-to-day oversight of USOP, his positions as an
executive officer and Chairman of the Board of USOP
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may nonetheless result in competition between USOP matters and Company matters
for his time and professional attention, and may result in or exacerbate
conflicts as to his obligations to present business opportunities to one
company or another, or to pursue such opportunities for one company or
another. The USOP Employment Agreement and the Services Agreement also contain
covenants not to compete (which USOP has revised to permit the Pending
Acquistions) with USOP 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 to
retain employees and his efforts to employ suitable individuals with the
Company. In addition, the USOP Employment Agreement and the Services Agreement
recite 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 violation. Finally, under
the USOP Employment Agreement and the Services Agreement, 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 USOP Employment Agreement or the Services Agreement,
as applicable.
For as long as the USOP Employment Agreement is in effect, Jonathan Ledecky
owes duties of loyalty and care and has contractual obligations to both the
Company and USOP simultaneously. If and when the Services Agreement supersedes
the USOP Employment Agreement, Jonathan Ledecky will have contractual
obligations and duties of loyalty and care to the Company and the companies
that are being 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 under any of a number of
possible legal theories, including seeking damages from Jonathan Ledecky for
the purported breach or from the other such company for tortiously interfering
with the offended company's contractual relationship with Jonathan Ledecky or
for inducing him to breach his duties to the offended company. The conduct or
response to any such litigation could consume significant management attention
and 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.
In addition, Jonathan Ledecky is the Non-Executive Chairman of the Board of
U.S.A. Floral Products, Inc. ("USA Floral"), the Non-Executive Chairman of the
Board of UniCapital Corporation, ("UniCapital") and a prospective minority
investor in Unison Partners, Inc. ("Unison Partners"). Each of USA Floral,
UniCapital and Unison Partners is, or is seeking to become, a consolidator of
businesses in one or more industries. Jonathan Ledecky may thus have conflicts
of interest in determining to which of these entities, if any, a particular
relevant business opportunity should be presented.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend principally upon the
experience 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 likely will depend on the senior
management of any significant businesses it acquires in the future. Such
acquired senior management may not be suitable to the Company's business model
or combined operations.
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If the Company loses the services of one or more of its current executives,
the Company's business could be adversely affected. 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
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 USOP Employment Agreement,
Jonathan Ledecky is required to devote a portion of his business time,
attention and efforts to promote and further the business of USOP. Upon the
effectiveness of the Services Agreement, Jonathan Ledecky will be required to
provide mutually agreed advisory services to USOP and the companies that are
being spun off from USOP. In addition, Jonathan Ledecky anticipates devoting
time to his other directorships and professional pursuits. 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 their employment agreements with the
Company, 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 all or any of these individuals may not be sufficient
to meet the Company's management needs.
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. On February 4,
1998, the Company acquired its first business, Service Management, for $9
million in cash and 142,857 shares of Common Stock and will pay $66.1 million
in cash and $72.0 million in shares of Common Stock for 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 are being used to pay corporate overhead and administrative costs, which
the Company estimates will initially be approximately $5.0 million on an
annualized basis, representing the costs of rent, salaries and employee
benefits, insurance, and other miscellaneous expenses.
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 one acquisition and has signed definitive agreements
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."
The Company's management team is utilizing the proceeds of the IPO to
accelerate the research and analysis that has been performed to date to
identify and select prospective acquisition candidates. Management of the
Company has virtually unrestricted flexibility in identifying and selecting
prospective acquisition
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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. The Company may enlist
the assistance of other persons to assess the management of acquisition
candidates (including, without limitation, investment bankers, brokers,
accountants and other advisers who have rendered or may in the future render
services to USOP). 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 future acquisitions without substantial costs,
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 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
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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 February 20, 1998, the Company had cash and cash equivalents of
approximately $520.0 million and has agreed to pay consideration consisting,
in part, of $66.1 million in cash in connection with the Pending Acquisitions.
In addition, BT Alex. Brown Incorporated ("BT") has provided the Company with
a letter, dated October 29, 1997, 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 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 February 20, 1998, the Company had 30,292,857 shares of Common Stock
outstanding. In addition, the Company has securities outstanding that are
convertible into or exercisable for 5,176,000 shares of Common Stock,
consisting of (i) options to purchase 1,536,000 shares of Common Stock granted
under the Consolidation Capital Corporation 1997 Long-Term Incentive Plan (the
"Incentive Plan"), (ii) options to purchase 60,000 shares of Common Stock
granted under the Consolidation Capital Corporation 1997 Non-Employee
Directors' Stock Plan (the "Directors' Plan"), (iii) 500,000 shares of Common
Stock issuable upon the conversion of the 500,000 shares of Convertible Non-
Voting Common Stock currently outstanding, (iv) 1,130,000 shares of Common
Stock issuable upon the exercise of warrants issued to Friedman, Billings,
Ramsey & Co., Inc., the representative of the underwriters in the Company's
IPO (the "Representative"), and (v) 1,950,000 shares of Common Stock issuable
upon the exercise of warrants issued to Jonathan Ledecky in connection with
the IPO. The Company has reserved (i) 1,190,357 shares for issuance pursuant
to awards available to be made under the Incentive Plan, (ii) 240,000 shares
for issuance pursuant to options available to be granted under the Directors'
Plan, and (iii) 1,000,000 shares for issuance pursuant to the Consolidation
Capital Corporation 1997 Employee Stock Purchase Plan (the "Purchase Plan").
Accordingly, as of February 20, 1998, the Company had 212,100,786 authorized
but unissued and unreserved shares of Common Stock (excluding shares of Common
Stock valued at $72.0 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
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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" and "Dilution."
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. 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, in certain
geographic regions, the Company may not be eligible to compete for certain
contracts because 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 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 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.
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EXPOSURE TO DOWNTURNS IN COMMERCIAL AND INDUSTRIAL CONSTRUCTION
Approximately 70% of the Pending Acquisitions' 1997 aggregate revenues
involves the installation of electrical systems in newly constructed
commercial, institutional, industrial and retail buildings and plants. The
extent to which the Pending Acquisitions are 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
Pending Acquisitions operate 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 Pending Acquisitions operate, which fluctuations can be due to local
economic conditions, changes in interest rates and other related factors.
Downturns in levels of commercial, institutional, industrial or retail
buildings and plants construction would have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS OF FIXED PRICE CONTRACTS; BID AND PERFORMANCE BONDS
A substantial portion of the electrical installation contracts of the
Pending Acquisitions are fixed price contracts. The terms of these contracts
require the Pending Acquisitions to guarantee the price of their services and
assume the risk that the costs associated with their performance will be
greater than anticipated. The Pending Acquisitions' profitability in this
market is therefore dependent on their ability to predict accurately the costs
associated with their services. These costs may be affected by a variety of
factors, some of which may be beyond the Pending Acquisitions' control. If the
Pending Acquisitions are 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 Pending Acquisitions' combined
results of operations 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 Pending Acquisitions will be able
to obtain bid and performance bonds in the future and the inability to procure
such bonds could have a material adverse effect on the Pending Acquisitions'
business, operating results and 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 acquires 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 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
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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 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 or
results of operations.
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 expects to 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. 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.
INVESTMENT COMPANY ACT CONSIDERATIONS
The regulatory scope of the Investment Company Act of 1940 ("Investment
Company Act") extends generally to companies engaged primarily in the business
of investing, reinvesting, owning, holding or trading in securities. The
Investment Company Act also may apply to a company which does not intend to be
characterized as an investment company but which, nevertheless, engages in
activities that bring it within the Investment Company Act's definition of an
investment company. The Company believes that its principal activities, which
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will involve acquiring control of operating companies, will not subject the
Company to registration and regulation under the Investment Company Act.
Nonetheless, since the Company currently falls within the Investment Company
Act's definition of an investment company, it will rely on a safe harbor rule
that exempts the Company from the Investment Company Act for a period of one
year from the date of the IPO, provided certain conditions are met.
Thereafter, the Company intends to remain exempt from investment company
regulation either by not engaging in investment company activities or by
qualifying for the exemption from investment company regulation available to
any company that has no more than 45% of its total assets invested in, and no
more than 45% of its income derived from, investment securities, as defined in
the Investment Company Act.
There can be no assurance that the Company will be able to avoid
registration and regulation as an investment company. In the event the Company
is unable to avail itself of an exemption or safe harbor from the Investment
Company Act, the Company may become subject to certain restrictions relating
to the Company's activities, as noted below, and contracts entered into by the
Company at such time that it was an unregistered investment company may be
unenforceable. The Investment Company Act imposes substantive requirements on
registered investment companies including limitations on capital structure,
restrictions on certain investments, prohibitions on transactions with
affiliates and compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations. Registration as an investment
company could have a material adverse effect on the Company.
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 installation
and service sector 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 is 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
second quarters. See also, "--Exposure to Downturns in Commercial and
Industrial Construction."
RISKS RELATING TO INTERNATIONAL EXPANSION
Although it is not currently anticipated, if the Company were to expand into
international markets, it may face additional risks relating to such matters
as currency exchange rate fluctuations, new and different legal and regulatory
requirements, political and economic risks relating to the stability of
foreign governments and their trading relationships with the United States,
difficulties in staffing and managing foreign operations, differences in
financial reporting, differences in the manner in which different cultures do
business, operating difficulties and other factors. The many difficulties and
risks inherent in international operations could result in a material adverse
impact upon the Company's business, financial condition and results of
operations.
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
an industry or its ability to consolidate an industry to the extent the
Company believes appropriate, depending upon the industry being consolidated.
Among the requirements that may be imposed in
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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 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 EXISTING STOCKHOLDER
As of February 20, 1998, Jonathan Ledecky, the Company's founder, Chairman
and Chief Executive Officer, owned beneficially approximately 14.9% of the
outstanding shares of Common Stock. The Company's executive officers and
directors, if acting together, may be able to significantly influence the
election of directors and 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 February 20, 1998, the Company had 30,292,857 shares of Common Stock
outstanding. Of the shares of Common Stock sold in the IPO, 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. Of the remaining
2,692,857 outstanding shares of Common Stock, 2,550,000 shares are owned by
Jonathan Ledecky. Of such 2,550,000 shares, 250,000 shares may not be
transferred until May 26, 1998 and 2,300,000 shares may not be transferred
until November 26, 1998. Any sales of shares owned by Jonathan Ledecky will
also be subject to compliance with Rule 144.
Further, as of February 20, 1998, 1,950,000 shares were 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, 1,596,000 shares of Common Stock were reserved for issuance
upon the exercise of outstanding stock options, and an aggregate of 2,430,357
shares were 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 Company has filed a registration statement on Form
S-8 with respect to the shares of Common Stock issuable upon exercise of
options. The Registration Statement of which this Prospectus forms a part
registers 24,000,000 shares of Common Stock for issuance in acquisitions, of
which 142,857 shares have been issued in connection with the acquisition of
Service Management. 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 November 25, 1998, the first
anniversary of the effective date of the registration statement (the
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"Effective Date") filed with the Commission in connection with the IPO. In
addition, the Company has agreed to give Jonathan Ledecky the right to request
that the Company include the shares underlying his warrant on a registration
statement filed by the Company during a twelve-year period beginning on the
Effective Date.
Finally, 1,130,000 shares of Common Stock are reserved for issuance upon
exercise of the warrants issued to the Representative (which will have the
right, beginning one year after the Effective Date, to require the Company to
register such shares for sale under the Securities Act) and 500,000 shares
were 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). 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. Each of the Company and its executive officers and
directors as of the Effective Date has generally agreed not to offer, pledge,
sell, contract to sell, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock during the period ending 180 days
after the Effective Date without the prior written consent of the
Representative.
The Company expects to have an aggressive acquisition program under which it
will issue shares of Common Stock. Although some of the shares issued in
acquisitions may be subject to contractual restrictions on the transfer
thereof, shares issued in acquisitions accounted for under the pooling-of-
interests method of accounting cannot be issued subject to contractual
restrictions on transfer. Under the pooling-of-interests method of accounting,
the affiliates of acquired companies, which are expected to 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. 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 after the offering 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
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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 TO NEW INVESTORS
If 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, the Representative'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 ANTITAKEOVER 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."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
since November 26, 1997. On February 20, 1998, the closing price of the Common
Stock was $22.50 per share. As of February 20, 1998, there were 11 holders of
record of the Company's Common Stock. The Common Stock has traded at prices
ranging from $18.75 to $22.50 during the period from November 26, 1997 to
February 20, 1998.
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.
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SELECTED FINANCIAL DATA
(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 unaudited pro
forma combined financial data gives effect to (i) the completion of the
acquisition of Service Management, (ii) the completion of the Pending
Acquisitions, and (iii) certain pro forma adjustments to the historical
financial statements as described below. The selected 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
and the notes thereto, and the historical financial statements of the Company,
Service Management, Garfield, Indecon, Riviera, SKC, Town & Country, Tri-City
and Wilson, and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------
PRO FORMA
ACTUAL COMBINED(1)
----------- ---------------
(UNAUDITED)
<S> <C> <C>
Statement of Operations Data:
Revenues.................................. $ $ 310,523
Cost of Revenues.......................... 250,309
----------- ------------
Gross profit.............................. 60,214
Selling, general and administrative(2).... 1,985 38,640
Goodwill amortization(3).................. 2,594
----------- ------------
Operating income (loss)................... (1,985) 18,980
Other (income) expense
Interest expense........................ 622
Interest income......................... (2,056) (2,026)
Other, net................................ (180)
----------- ------------
Income before income taxes(4)............. 71 20,564
Provision for income taxes................ 64 9,608
----------- ------------
Net income................................ $ 7 $ 10,956
=========== ============
Net income per share--Basic............... $ -- $ 0.90
=========== ============
Net income per share--Diluted............. $ -- $ 0.90
=========== ============
Weighted average number of common shares
outstanding ............................. 4,109,205 12,108,113(5)
=========== ============
Weighted average number of common and
potentially dilutive shares outstanding
......................................... 4,115,107 12,178,935(5)
=========== ============
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------
PRO FORMA
ACTUAL COMBINED(6)
----------- ---------------
(UNAUDITED)
<S> <C> <C>
Balance Sheet Data:
Working capital........................... $ 527,277 $ 477,044(7)
Total assets.............................. 529,065 650,765
Long term debt, net of current
maturities............................... -- 1,795
Stockholders' equity...................... 527,297 591,099
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the
acquisition of Service Management, the Pending Acquisitions, the IPO and
the concurrent offering of 500,000 shares of Convertible Non-Voting Common
Stock were completed on January 1, 1996.
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<PAGE>
(2) The pro forma combined statement of operations data reflect an aggregate
of approximately (i) $2,511 in pro forma reductions/increase in salaries,
bonuses and benefits to the owners of Service Management and the Pending
Acquisitions, which have been agreed to prospectively (the "Compensation
Differential") and a reduction of $3,291 related to anticipated
termination of contributions to employee stock ownership plans at certain
of the Pending Acquisitions.
(3) Consists of amortization of the $103.7 million of goodwill to be recorded
as a result of the combination of Service Management and the Pending
Acquisitions, over a 40 year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Assumes all income is subject to a corporate income tax rate of 40% and
that the majority of the goodwill amortization expense is not tax
deductible.
(5) For calculation of the pro forma weighted average common shares
outstanding and common and potentially dilutive shares outstanding, see
Notes 3 and 4 of Notes to Unaudited Pro Forma Combined Financial
Statements.
(6) The pro forma combined balance sheet data assume that the acquisitions of
Service Management and the Pending Acquisitions were consummated on
December 31, 1997.
(7) Includes $75.1 million of cash consideration for the acquisitions of
Service Management and the Pending Acquisitions.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
balance sheet of the Company and related notes thereto appearing elsewhere in
this Prospectus.
OVERVIEW AND RESULTS OF OPERATIONS
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 has generated
no revenues since inception other than investment earnings on the net proceeds
of the IPO and the earnings of Service Management since its acquisition. As of
December 31, 1997, the Company had incurred expenses of $2.0 million in
connection with the analysis of industry consolidations and acquisition
opportunities, efforts to refine the Company's strategy and meetings and
negotiations with potential acquisition candidates. The net proceeds from the
IPO were approximately $527,000,000. The proceeds will be utilized by the
Company primarily in its acquisition program although some are being used to
fund operations of the Company. While the Company has embarked on an active
acquisition program, until such time as additional acquisitions are
consummated, the Company's income will consist solely of interest on the
investment of the net proceeds of the IPO and the earnings of Service
Management offset by salaries and other operating costs of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of February 20, 1998, the Company had cash and cash equivalents of
approximately $520.0 and has agreed to pay consideration consisting of, in
part, $66.1 million in cash in connection with the Pending Acquisitions. In
addition, BT Alex. Brown Incorporated has provided the Company with a letter,
dated October 29, 1997, 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 the
net proceeds from the IPO, combined with the 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.
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<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. Recently, the Company 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 is the Chairman and founder and, until November 5, 1997,
was 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 intends to employ 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
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.
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 will possess 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 as of February 20, 1998, the Company's ability to acquire
attractive companies is not likely to be constrained initially 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, expects to rely in
part upon management of acquired companies or other individuals experienced in
the facilities management industry.
Since the closing of the IPO in December 1997, the Company has acquired
Service Management and has entered into definite agreements to acquire the
seven Pending Acquisitions. See "Business--Recent Developments."
21
<PAGE>
INDUSTRY BACKGROUND
Facilities management companies generally provide many products and services
needed for the routine 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, 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.
These favorable trends are expected to continue. With the Company's
significant financial resources combined with its aggressive consolidation
strategy, the Company believes that it is well positioned to capitalize on the
trends toward outsourcing.
STRATEGY
The Company's goal is to become the leading consolidator in the facilities
management industry. The Company intends 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 will differentiate it
from other consolidators; and (3) 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.
Identify and 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.
22
<PAGE>
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, 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 will give 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 will continue to manage all functions that "touch the
customer," including sales, marketing, customer service, credit and
collections. The Company will 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 will be
used by the Company include:
. Control by Owner/Operator. The corporate democracy approach to
consolidation is designed to allow 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 plans to provide
strategic oversight and guidance with respect to acquisitions, financing,
marketing and operations. At the same time, managers of acquired
companies will be 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 intends to foster 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 intends
to structure many of 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
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<PAGE>
that this stock ownership plan, in conjunction with the implementation of
incentive compensation programs geared to specific performance goals, will
help to align the objectives of the acquired companies' managers and
employees with those of the Company's stockholders.
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.
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<PAGE>
. 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 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 primarily in the
janitorial maintenance management sector of the facilities management
industry. If the Pending Acquisitions are completed, the Company will also
operate in the electrical installation and maintenance services sector 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 installation and maintenance services, the
Company may in the future seek to offer, among others, lighting equipment and
services, engineering services, mechanical installation and maintenance
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.
Such services are offered under individually negotiated building
maintenance contracts, the majority of which are obtained through
competitive bidding. Most of the Company's janitorial contracts are of one
year duration, contain automatic renewal clauses, and can be subject to
termination by either party upon 30 to 90 written notice.
The focus of this division is to capitalize on the fragmented nature of
the janitorial industry through favorable outsourcing initiatives,
facilities services integration, and aggressive acquisitions.
The janitorial services market consists of in-house cleaning and
outsourced cleaning. 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 with
the confidence that the support services are being managed and performed in
an efficient, cost-effective manner. The Company believes that its depth of
management expertise, breadth of services, and presence of new technologies
will attract this potential business.
The Company seeks to further increase its market presence through
aggressive acquisitions of premier commercial cleaning contractors.
Janitorial maintenance is a $50 billion industry comprised of more than
45,000 companies, most of which are of the "mom and pop" variety 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
large proportion of existing national accounts in diversified areas.
25
<PAGE>
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. The Company believes that the Pending
Acquisitions have the management depth and systems infrastructure to serve
as the platform on which to grow the Company's electrical services
division. The Pending Acquisitions will enable the Company to attract and
acquire smaller companies in their respective geographic regions, serve
national customers that are demanding a higher level of technical
expertise, provide the depth of management necessary to reduce the
vulnerability to management changes and provide the infrastructure that is
necessary for the research, development and training required to install
and maintain specialty electrical services.
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 available U.S. Census data. 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."
26
<PAGE>
RECENT DEVELOPMENTS
Since the Company's IPO in December 1997, the Company acquired Service
Management and has entered into definitive agreements to acquire the Pending
Acquisitions. A description of these acquisitions follows:
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. 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, consisting of 50% in cash and 50% in shares of Common Stock, based
upon a combination of the earnings before interest and taxes of Service
Management during the 12 months subsequent to the Company's completion of the
acquisition of Service Management, and the revenues of Service Management,
including the revenues of certain companies that may be acquired by the
Company or Service Management in the future, during the 24 months subsequent
to the completion of the acquisition of Service Management.
Tri-City. Tri-City was founded in 1958 and operates throughout Florida 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, primarily
from commercial, institutional, industrial and multi-family installation
projects. Tri-City has approximately 1,000 employees. Heimuth L. Eidell, Tri-
City's founder and president, will sign an employment agreement to continue to
serve as president of Tri-City.
Wilson. Wilson was founded in 1988 and operates throughout Arizona, Nevada
and California from its headquarters in Scottsdale, Arizona and from its
offices in Sierra Vista, Prescott, Tucson and Phoenix, Arizona. Wilson had
revenues of approximately $71.0 million for the fiscal year ended December 31,
1997, consisting of 67% commercial, institutional and industrial installation
and 33% electrical maintenance services. Wilson has approximately 700
employees. Stephen J. Gubin, Wilson's founder and president, will sign an
employment contract to continue to serve as Wilson's president.
Town & Country. Town & Country was founded in 1972 and operates throughout
Wisconsin and other midwestern states from its headquarters in Appleton,
Wisconsin and from its offices in Madison, Sheboygan, Wauwatosa, Plover,
Howard, Crivitz, Menasha and Baraboo. Town & Country had revenues of
approximately $8.7 million for the year ended December 31, 1997, consisting of
56% commercial, institutional and industrial installation and 44% electrical
maintenance services. Town & Country has approximately 600 employees. Roland
G. Stephenson, Town & Country's founder and president, will sign an employment
contract to continue to serve as Town & Country's president.
Riviera. Riviera was founded in 1980 and operates throughout the western
United States 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,
consisting of 86% commercial, institutional and industrial installation and
approximately 14% electrical maintenance services. Riviera has approximately
325 employees. Donald G. White, Riviera's founder and president, will sign an
employment contract to continue to serve as Riviera's president.
Garfield and Indecon. Garfield and Indecon were founded in 1972 and 1989,
respectively, and operates under common management throughout Ohio from their
headquarters in Cincinnati and from its office in Dayton, Ohio. Garfield and
Indecon had combined revenues of approximately $24.5 million for the year
ended December 31, 1997, consisting of 63% commercial, institutional and
industrial installation and approximately 37% electrical maintenance services.
Garfield and Indecon have 215 employees on a combined basis. Garfield W.
Hartman, Garfield's and Indecon's founder and Garfield's president, will sign
an employment contract to continue to serve as president of those companies.
27
<PAGE>
SKC. SKC was founded in 1980 and operates throughout Kansas and Missouri
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, consisting of approximately 80% commercial,
institutional and industrial installation and approximately 20% electrical
maintenance services. SKC has approximately 215 employees. William P. Love,
Jr., SKC's founder and president, will sign an employment contract to serve as
the president of the Company's electrical services division and Lawrence J.
Malach will sign an employment contract to serve as the president of SKC.
CONFLICTS OF INTEREST
Jonathan Ledecky serves as both the Chairman and Chief Executive Officer of
the Company and the Chairman and an executive officer of USOP. On January 13,
1998, Jonathan Ledecky entered into a Services Agreement with USOP, effective
upon the completion of USOP's announced restructuring which involves a self-
tender and the incurrence of indebtedness related thereto, the spin-off of
four of USOP's divisions and an equity investment. If the restructuring is
completed, Jonathan Ledecky will resign as the Chairman and as an executive
officer of USOP, but will continue to provide mutually agreed advisory
services to USOP and the companies that are being spun off from USOP, and the
Services Agreement will supersede Jonathan Ledecky's USOP Employment
Agreement. Jonathan Ledecky also is expected to serve as a director of the
companies being spun off from USOP. If USOP's announced restructuring is not
completed, the USOP Employment Agreement will remain in effect. USOP has
announced that the proposed restructuring is not expected to be completed
until the second calendar quarter of 1998.
As long as Jonathan Ledecky serves as a director and an executive officer of
both the Company and USOP or as a director of the companies being spun off
from USOP Jonathan Ledecky 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 or the companies being spun off from USOP
delineating Jonathan Ledecky's duties to each company or resolving potential
conflicts between his conflicting duties and obligations, although USOP has
approved the Company's entry into the facilities management industry.
In addition, Jonathan Ledecky has entered into the USOP Employment
Agreement, which will remain in effect until USOP's proposed restructuring is
completed and is replaced by the Services Agreement, and the CCC Employment
Agreement. Under the USOP Employment Agreement, Jonathan Ledecky is obligated
to assist in, among other things, identifying and pursuing new business and
investment opportunities and acquisitions for USOP, developing and providing
strategic plans and growth analyses for USOP, providing structuring,
capitalization, restructuring, recapitalization and reorganization advice to
USOP and assisting in implementing such advice, and interfacing with the
investment and financial community on an as-needed basis. While Jonathan
Ledecky is not responsible for the day-to-day oversight of USOP, his positions
as an executive officer and Chairman of the Board of USOP may nonetheless
result in competition between USOP matters and Company matters for his time
and professional attention, and may result in or exacerbate conflicts as to
his obligations to present business opportunities to one company or another,
or to pursue such opportunities for one company or another. The USOP
Employment Agreement and the Services Agreement also contain covenants not to
compete (which USOP has revised to permit the Pending Acquisitions) with USOP
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 to retain employees and his efforts
to employ suitable individuals with the Company. In addition, the USOP
Employment Agreement and the Services Agreement recite 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
describes 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
28
<PAGE>
could face liability for inducing or aiding in any such alleged violation.
Finally, under the USOP Employment Agreement and the Services Agreement,
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 USOP Employment Agreement or the
Services Agreement, as applicable.
For as long as the USOP Employment Agreement is in effect, Jonathan Ledecky
owes duties of loyalty and care and has contractual obligations to both the
Company and USOP simultaneously. If and when the Services Agreement supersedes
the USOP Employment Agreement, Jonathan Ledecky will have contractual
obligations and duties of loyalty and care to the Company and the companies
that are being spun off from USOP, and he may be unable in certain
circumstances to fulfill his duties or contractual obligations to one company
and contractual obligations to USOP without allegedly breaching them to the
others. Any alleged breach of such duties of loyalty and care or contractual
obligations could result in litigation by or on behalf of the offended company
under any of a number of possible legal theories, including seeking damages
from Jonathan Ledecky for the purported breach or from the other such company
for tortiously interfering with the offended company's contractual
relationship with Jonathan Ledecky or for inducing him to breach his duties to
the offended company. The conduct or response to any such litigation could
consume significant management attention and 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.
In addition, Jonathan Ledecky is the Non-Executive Chairman of the Board of
USA Floral, the Non-Executive Chairman of the Board of UniCapital, and a
prospective minority investor in Unison Partners. Each of USA Floral,
UniCapital and Unison Partners is, or is seeking to become, a consolidator of
businesses in one or more industries. Jonathan Ledecky may thus have conflicts
of interest in determining to which of these entities, if any, a particular
relevant business opportunity should be presented.
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 expects to face large
competitors 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 and other hazardous materials by employees to, 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
29
<PAGE>
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.
FACILITIES AND EMPLOYEES
The Company's corporate offices are located in leased space at 1747
Pennsylvania Avenue, N.W., Suite 900, Washington, D.C. 20006. The telephone
number of its principal executive offices is 202/955-5490. To accommodate its
planned growth, the Company intends to seek a larger headquarters facility in
the Washington area, which it intends to lease. As of February 20, 1998, the
Company employed four executive officers and expects to employ a limited
number of other personnel in the near future.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
30
<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 February 20, 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
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 has served as its Chairman
of the Board and, until November 5, 1997, its Chief Executive Officer. Since
its inception, USOP has acquired over 205 companies. Jonathan Ledecky has also
served as the Non-Executive Chairman of the Board of USA Floral since April
1997 and as the Non-Executive Chairman of the Board of UniCapital since
October 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. ("Steelcase"), the nation's
largest manufacturer of office furniture products. While at Legacy Dealer
Capital Fund, Inc., Jonathan Ledecky was responsible for providing corporate
advisory services for Steelcase's network of office products distributors. In
addition, Jonathan Ledecky has served as a director of, or corporate adviser
and consultant to, several office products companies. Prior to his tenure at
The Legacy Fund, Inc., Jonathan Ledecky was a partner at Adler and Company and
a Senior Vice President at publicly traded Allied Capital Corporation, an
investment management company. Jonathan Ledecky also is expected to serve as a
director of the companies being spun off from USOP. 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.
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.
31
<PAGE>
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.
Vincent W. Eades has been a director of the Company since November 25, 1997.
Mr. Eades has served as the Senior Vice President of Sales and Marketing for
Starbucks Coffee Co. Inc. since May 1995. 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 in the IPO, is a wholly owned indirect
subsidiary of FBR Group. FBR was ranked fourth in terms of lead managed U.S.
IPO dollar volume for 1997 year to date as of October 17, 1997, according to
CommScan EquiDesk. FBR has 230 full-time employees and operates offices in the
Washington, D.C. area, Boston, London, and Irvine. During 1989, Mr. Ramsey
served as a Vice President at Johnston, Lemon & Co., Inc., a Washington, D.C.
brokerage firm. 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.
If the Pending Acquisitions are completed, the size of the Company's Board
will be increased by one to include a designee of such Pending Acquisitions,
which designee must be reasonably acceptable to the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee.
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
$25,000. In addition, pursuant to the Consolidation Capital Corporation 1997
Non-Employee Directors' Stock Plan, each non-employee director receives an
automatic initial grant of options to purchase
20,000 shares of Common Stock on the date of their initial election to the
Board of Directors, and an automatic annual grant of options to purchase 5,000
shares. Each such option will have an exercise price equal to the fair market
value of a share of Common Stock on the date of grant. See "--1997 Non-
Employee Directors' Stock Plan."
32
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides for fiscal 1997 certain summary information
concerning the cash and non-cash compensation earned by or awarded to (i) the
Company's Chief Executive Officer and (ii) each of the Company's other
executive officers (collectively, the "named executive officers"). The Company
was organized in February 1997, with David Ledecky as its sole employee. All
other named executive officers were employed by the Company as of November 25,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDER-
LYING
FISCAL SALARY OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) SARS (#)(2) COMPENSATION
--------------------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Jonathan J. Ledecky,
Chief Executive Officer and
Chariman 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 also 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, UniCapital and Unison Partners, a private
company of which he intends to be a minority investor. 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 specified
executive perquisites.
33
<PAGE>
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 $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 under certain
conditions. 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.
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.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
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>
- --------
(1) The options granted are non-qualified 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.
34
<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. 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.
For information with respect to certain conflicts of interest, see
"Business--Conflicts of Interest."
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 20, 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>
Jonathan J. Ledecky..... 4,500,000(1) 0 14.9% 0%
c/o Consolidation
Capital Corporation
1747 Pennsylvania
Avenue, N.W., Suite 900
Washington, DC 20006
David Ledecky........... 0 0 0 0
F. Traynor Beck......... 0 0 0 0
Timothy C. Clayton...... 2,000 0 * 0
Vincent W. Eades........ 0 0 0 0
W. Russell Ramsey(2).... 0 500,000 0 100%
M. Jude Reyes........... 0 0 0 0
All directors and
executive officers as a
group (7 persons)...... 4,502,000 500,000 14.9% 100%
</TABLE>
- --------
* Less than one percent
(1) Includes: (i) 1,950,000 shares underlying the Ledecky Warrant and (ii) the
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) 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.
36
<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 February 20, 1998,
the Company had outstanding 30,292,857 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 the first anniversary of the date
of this Prospectus.
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.
37
<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 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.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATION CAPITAL CORPORATION UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements... F-3
Unaudited Pro Forma Combined Balance Sheet.......................... F-4
Unaudited Pro Forma Combined Statement of Operations................ F-5
Notes to Unaudited Pro Forma Combined Financial Statements.......... F-6
CONSOLIDATION CAPITAL CORPORATION
Report of Independent Accountants................................... F-9
Balance Sheet ...................................................... F-10
Statement of Income................................................. F-11
Statement of Stockholders' Equity................................... F-12
Statement of Cash Flows............................................. F-13
Notes to Financial Statements....................................... F-14
SERVICE MANAGEMENT USA, INC.
Report of Independent Accountants................................... F-19
Combined Balance Sheet.............................................. F-20
Combined Statement of Operations.................................... F-21
Combined Statement of Stockholder's Equity.......................... F-22
Combined Statement of Cash Flows.................................... F-23
Notes to Combined Financial Statements.............................. F-24
TRI-CITY ELECTRICAL CONTRACTORS, INC.
Report of Independent Accountants................................... FINT-1
Consolidated Balance Sheet.......................................... FINT-2
Consolidated Statements of Operations and Retained Earnings......... FINT-3
Consolidated Statements of Stockholders' Equity..................... FINT-4
Consolidated Statements of Cash Flows............................... FINT-5
Notes to Consolidated Financial Statements.......................... FINT-7
WILSON ELECTRIC COMPANY, INC.
Report of Independent Accountants................................... FINW-1
Balance Sheet....................................................... FINW-2
Statement of Income and Retained Earnings........................... FINW-3
Statement of Cash Flows............................................. FINW-4
Notes to Financial Statements....................................... FINW-5
SKC ELECTRIC, INC. AND AFFILIATE
Report of Independent Accountants................................... FINS-1
Balance Sheet....................................................... FINS-2
Statement of Income................................................. FINS-3
Statement of Cash Flows............................................. FINS-4
Notes to Financial Statements....................................... FINS-6
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
RIVIERA ELECTRIC CONSTRUCTION CO.
Report of Independent Accountants..................................... FINR-1
Balance Sheet......................................................... FINR-2
Statement of Income................................................... FINR-3
Statement of Stockholders' Equity..................................... FINR-4
Statement of Cash Flows............................................... FINR-5
Notes to Financial Statements......................................... FINR-6
TOWN & COUNTRY ELECTRIC, INC.
Report of Independent Accountants..................................... FINC-1
Balance Sheet......................................................... FINC-2
Statement of Income................................................... FINC-4
Statement of Stockholders' Equity..................................... FINC-5
Statement of Cash Flows............................................... FINC-6
Notes to Financial Statements......................................... FINC-7
GARFIELD ELECTRIC COMPANY
Report of Independent Accountants..................................... FING-1
Balance Sheet......................................................... FING-2
Statement of Income................................................... FING-3
Statement of Stockholders' Equity..................................... FING-4
Statement of Cash Flows............................................... FING-5
Notes to Financial Statements......................................... FING-6
INDECON, INC.
Report of Independent Accountants..................................... FINI-1
Balance Sheet......................................................... FINI-2
Statement of Income................................................... FINI-3
Statement of Stockholders' Equity..................................... FINI-4
Statement of Cash Flows............................................... FINI-5
Notes to Financial Statements......................................... FINI-6
</TABLE>
F-2
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet gives effect to the
recent acquisition of Service Management and the Pending Acquisitions, as if
they had occurred as of the Company's most recent balance sheet date, December
31, 1997.
The unaudited pro forma combined statements of operations give effect to the
recent acquisition of Service Management and the Pending Acquisitions as if
they had occurred on January 1, 1997.
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 do not purport to represent what the
Company's 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 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-3
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATION SERVICE SKC GARFIELD RIVIERA TRI-CITY TOWN & WILSON
CAPITAL MANAGEMENT ELECTRIC INDECON ELECTRIC ELECTRIC ELECTRICAL COUNTRY ELECTRIC
CORPORATION USA, INC. & AFFILIATE INC. COMPANY CONSTRUCTION CONTRACTORS ELECTRIC CO. CO.
------------- ---------- ----------- ------- -------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents...... $528,392 $ 4 $1,686 $ $ 1 $ 295 $ 1,334 $ 198 $ 1,042
Marketable
securities....... 128
Accounts
receivable,
net.............. 4,132 5,301 2,432 1,829 9,288 16,873 10,605 14,085
Inventories....... 161 39 54 380 295
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts........ 135 56 1,211 190 2,402 1,705 1,302
Prepaid expenses
and other
current assets... 653 303 150 788 58 31 1,491 730 233
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total current
assets......... 529,045 4,567 7,433 3,315 3,153 9,804 22,480 13,533 16,662
Property and
equipment, net.... 20 2,333 554 200 294 1,608 2,513 1,626 704
Other assets....... 27 381 1 161 246 838 99 136
Intangibles........ 202 172 11
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total assets.... $529,065 $7,129 $8,368 $3,516 $3,608 $11,658 $25,831 $15,430 $17,513
======== ====== ====== ====== ====== ======= ======= ======= =======
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Short term debt... $ $1,623 $ 196 $ 728 $ 853 $ 1,524 $ 238 $ 320 $ 183
Current
maturities,
capital leases...
Accounts
payable.......... 156 1,738 1,415 527 870 3,590 5,414 2,206 4,589
Accrued
liabilities and
other............ 1,612 556 2,021 611 415 1,554 3,070 3,104 3,879
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ 1,652 134 186 1,088 7,046 1,267 3,402
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total current
liabilities.... 1,768 3,917 5,284 2,000 2,324 7,756 15,768 6,897 12,053
Long-term debt..... 730 982 18 2,798 252 197
ESOP liability..... 1,822
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total
liabilities.... 1,768 4,647 8,088 2,000 2,342 10,554 16,020 7,094 12,053
-------- ------ ------ ------ ------ ------- ------- ------- -------
Stockholders'
equity:
Common Stock...... 30 180 11 3 503 1,351 10 2 10
Convertible Non-
Voting common
stock............ 1
Additional paid-
in capital....... 527,259 110 112 515 266
Retained
earnings......... 7 2,192 269 1,546 958 (247) 9,689 7,819 5,184
Treasury stock.... (33) (195)
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total
stockholders'
equity......... 527,297 2,482 280 1,516 1,266 1,104 9,811 8,336 5,460
-------- ------ ------ ------ ------ ------- ------- ------- -------
Total
liabilities and
stockholders'
equity......... $529,065 $7,129 $8,368 $3,516 $3,608 $11,658 $25,831 $15,430 $17,513
======== ====== ====== ====== ====== ======= ======= ======= =======
<CAPTION>
PRO FORMA
MERGER PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents...... $(75,077) $457,875
Marketable
securities....... 128
Accounts
receivable,
net.............. 64,545
Inventories....... 929
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts........ 7,001
Prepaid expenses
and other
current assets... 4,437
----------- ---------
Total current
assets......... (75,077) 534,915
Property and
equipment, net.... 9,852
Other assets....... 1,889
Intangibles........ 103,724 104,109
----------- ---------
Total assets.... $ 28,647 $650,765
=========== =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current
liabilities:
Short term debt... $ (196) $ 5,469
Current
maturities,
capital leases... --
Accounts
payable.......... 20,505
Accrued
liabilities and
other............ 300 17,122
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ 14,775
----------- ---------
Total current
liabilities.... 104 57,871
Long-term debt..... (3,182) 1,795
ESOP liability..... (1,822) --
----------- ---------
Total
liabilities.... (4,900) 59,666
----------- ---------
Stockholders'
equity:
Common Stock...... (2,066) 34
Convertible Non-
Voting common
stock............ 1
Additional paid-
in capital....... 62,795 591,057
Retained
earnings......... (27,410) 7
Treasury stock.... 228 --
----------- ---------
Total
stockholders'
equity......... 33,547 591,099
----------- ---------
Total
liabilities and
stockholders'
equity......... $ 28,647 $650,765
=========== =========
</TABLE>
F-4
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATION SERVICE SKC GARFIELD RIVIERA TRI-CITY TOWN & WILSON
CAPITAL MANAGEMENT ELECTRIC INDECON ELECTRIC ELECTRIC ELECTRICAL COUNTRY ELECTRIC
CORPORATION USA, INC. & AFFILIATE INC. COMPANY CONSTRUCTION CONTRACTORS ELECTRIC CO. CO.
------------- ---------- ----------- ------- -------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......... $ $26,266 $23,482 $13,672 $10,826 $37,049 $79,493 $48,726 $71,009
Cost of revenues.. 19,856 16,971 11,301 8,286 31,607 63,551 39,701 59,036
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 6,410 6,511 2,371 2,540 5,442 15,942 9,025 11,973
Selling, general &
administrative
expenses......... 1,985 3,832 4,200 1,376 1,605 3,999 9,925 7,006 10,514
Goodwill
amortization.....
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating
income......... (1,985) 2,578 2,311 995 935 1,443 6,017 2,019 1,459
Other (income)
expense:
Interest
expense........ 53 33 69 229 53 75 110
Interest
income......... (2,056) (168) (156)
Other, net...... 6 (40) (41) 24 (119) 26 (113) 77
------ ------- ------- ------- ------- ------- ------- ------- -------
Income before
provision for
income taxes..... 71 2,519 2,351 1,003 842 1,333 6,106 2,057 1,428
Provision for
income taxes..... 64 52 1,150 452 319 462 894 625
------ ------- ------- ------- ------- ------- ------- ------- -------
Net income........ $ 7 $ 2,467 $ 1,201 $ 551 $ 523 $ 1,333 $ 5,644 $ 1,163 $ 803
====== ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share--Basic.....
Net income per
share--Diluted...
Weighted average
number of common
shares
outstanding
(Note 3).........
Weighted average
number of common
and potentially
dilutive shares
outstanding
(Note 4).........
<CAPTION>
COMBINED PRO FORMA PRO FORMA
TOTAL ADJUSTMENTS COMBINED
--------- ----------- -----------
<S> <C> <C> <C>
Revenues.......... $310,523 $ $ 310,523
Cost of revenues.. 250,309 250,309
--------- ----------- -----------
Gross profit.... 60,214 60,214
Selling, general &
administrative
expenses......... 44,442 (5,802) 38,640
Goodwill
amortization..... 2,594 2,594
--------- ----------- -----------
Operating
income......... 15,772 3,208 18,980
Other (income)
expense:
Interest
expense........ 622 622
Interest
income......... (2,380) 354 (2,026)
Other, net...... (180) (180)
--------- ----------- -----------
Income before
provision for
income taxes..... 17,710 2,854 20,564
Provision for
income taxes..... 4,018 5,590 9,608
--------- ----------- -----------
Net income........ $ 13,692 $(2,736) $ 10,956
========= =========== ===========
Net income per
share--Basic..... $ 0.90
===========
Net income per
share--Diluted... $ 0.90
===========
Weighted average
number of common
shares
outstanding
(Note 3)......... 12,108,113
===========
Weighted average
number of common
and potentially
dilutive shares
outstanding
(Note 4)......... 12,178,935
===========
</TABLE>
F-5
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The unaudited pro forma combined balance sheet reflects the following
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) ADJUSTMENTS
-------- ---- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $(75,077) $ $(75,077)
Marketable securities..............................
Accounts receivable, net...........................
Prepaid and other current assets...................
-------- ---- --------
Total current assets............................... (75,077) (75,077)
Property and equipment, net.........................
Other assets........................................
Goodwill, net....................................... 103,424 300 103,724
-------- ---- --------
Total assets....................................... $ 28,347 $300 $ 28,647
======== ==== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities, long-term debt ................ $ (196) $ $ (196)
Current maturities, capital leases ................
Accounts payable ..................................
Accrued liabilities and other ..................... 300 300
-------- ---- --------
Total current liabilities ......................... (196) 300 104
Subordinated debt to stockholders ..................
Long-term debt, less current maturities............. (3,182) (3,182)
Other long-term liabilities.........................
ESOP liability...................................... (1,822) (1,822)
-------- ---- --------
Total liabilities.................................. (5,200) 300 (4,900)
-------- ---- --------
Stockholders' equity................................
Common Stock....................................... (2,066) (2,066)
Non-Voting Common Stock............................
Additional paid-in capital......................... 62,795 62,795
Treasury Stock..................................... 228 228
Retained earnings.................................. (27,410) (27,410)
-------- ---- --------
Total stockholders' equity......................... 33,547 33,547
-------- ---- --------
Total liabilities and stockholders' equity......... $ 28,347 $300 $ 28,647
======== ==== ========
</TABLE>
- --------
(A) Reflects the recent acquisition of Service Management and the Pending
Acquisitions for consideration consisting of $75,077 in cash and 3,745,932
shares of common stock valued at $63,802, for a total estimated purchase price
of $138,879 resulting in excess purchase price over the fair value of net
assets acquired of $103,424. 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 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. Also reflects the
repayment of the employee stock ownership plan (ESOP) debt and the related
elimination of unearned ESOP shares at one of the Pending Acquisitions, and
the forgiveness of a $2,200 note payable to a shareholder of one of the
Pending Acquisitions.
(B) Records the net deferred income tax liability attributable to the
temporary differences between the financial reporting and tax basis of assets
and liabilities of Service Management.
F-6
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2--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) ADJUSTMENTS
------- ------- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ $ $ $ $ $
Cost of revenues........
------- ------- ------- ----- ------- -------
Gross profit..........
Selling, general and
administrative
expenses............... (2,511) (3,291) (5,802)
Goodwill amortization... 2,594 2,594
------- ------- ------- ----- ------- -------
Operating income
(loss)............... 2,511 (2,594) 3,291 3,208
Other (income) expense:
Interest expense......
Interest income....... 354 354
Other, net............
------- ------- ------- ----- ------- -------
Income (loss) before
provision for income
taxes.................. 2,511 (2,594) 3,291 (354) 2,854
Provision for income
taxes.................. 5,590 5,590
------- ------- ------- ----- ------- -------
Net income (loss)....... $ 2,511 $(2,594) $ 3,291 $(354) $(5,590) $(2,736)
======= ======= ======= ===== ======= =======
</TABLE>
- --------
(A) Reflects the modifications in salaries, bonuses and benefits to the owners
of Service Management and the Pending Acquisitions to which they have
agreed prospectively.
(B) Reflects the amortization of goodwill to be recorded as a result of the
acquisition of Service Management and the Pending Acquisitions over a 40
year estimated life.
(C) Adjustment to eliminate expense recorded in connection with certain of the
Pending Acquisition ESOPs. These plans will be converted to profit sharing
plans as part of the acquisitions, and no future contributions will be
made.
(D) Adjustment to eliminate interest income relating to the cash consideration
of $75,077 used in the acquisition of Service Management and the Pending
Acquisitions.
(E) Reflects the incremental provision for federal and state income taxes
assuming (i) the Pending Acquisition was subject to federal and state
income tax; (ii) the other statements of operations' adjustments; and
(iii) the amortization of goodwill is not tax deductible, with the
exception of the goodwill associated with the acquisition of Service
Management.
NOTE 3--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(CONTINUED)
Includes (i) 2,026,165 shares representing the weighted average shares
outstanding for the Company, (ii) 2,300,000 shares issued to founding
stockholder of the Company, (iii) 3,745,932 shares issued to the owners of
Service Management and the Pending Acquisitions, and (iv) 4,036,015 shares of
the 27,850,000 shares issued in the Company's initial public offering
completed in December 1997 to fund the cash portion of the consideration
payable to the owners of Service Management and the Pending Acquisitions.
F-7
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(CONTINUED)
Includes (i) 2,026,165 shares representing the weighted average shares
outstanding for the Company, (ii) 2,300,000 shares issued to the founding
stockholder of the Company, (iii) 3,745,932 shares issued to the owners of
Service Management and the Pending Acquisitions, (iv) 4,036,015 shares of the
27,850,000 shares issued in the Company's initial public offering completed in
December 1997 to fund the cash portion of the consideration payable to the
owners of Service Management and the Pending Acquisitions, and (v) 70,822
weighted average shares, calculated using the treasury stock method, to
reflect the potential dilutive effects of the assumed exercise as of the
beginning of the period of certain warrants issued to Jonathan Ledeck and the
representatives of the underwriters in the Company's initial public offering
and all outstanding options.
F-8
<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.
Price Waterhouse LLP
Minneapolis, Minnesota
February 27, 1998
F-9
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $528,392
Prepaid expenses........................................... 434
Deferred tax asset......................................... 219
--------
Total current assets..................................... 529,045
Property and equipment, net.................................. 20
--------
Total assets............................................. $529,065
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 156
Income taxes payable....................................... 283
Accrued compensation....................................... 1,042
Accrued professional fees.................................. 194
Other...................................................... 93
--------
Total current liabilities................................ 1,768
--------
Stockholders' equity:
Common Stock, $.001 par, 250,000,000 shares authorized,
30,150,000 shares issued and outstanding.................. 30
Convertible Non-Voting Common Stock, $.001 par, 500,000
shares authorized, issued and outstanding................. 1
Additional paid-in capital................................. 527,259
Retained earnings.......................................... 7
--------
Total stockholders' equity............................... 527,297
--------
Total liabilities and stockholders' equity............... $529,065
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
STATEMENT OF INCOME
FOR A PERIOD FROM INCEPTION (FEBRUARY 27, 1997) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Interest income..................................................... $ 2,056
Selling, general, and administrative expenses....................... 1,985
---------
Income before taxes................................................. 71
Provision for income taxes.......................................... 64
---------
Net income.......................................................... $ 7
=========
Net income per Common Share--Basic.................................. $ --
=========
Net income per Common Share--Assuming dilution...................... $ --
=========
Weighted average number of Common Shares outstanding ............... 4,109,205
=========
Weighted average number of Common and Potentially Dilutive Shares
outstanding ....................................................... 4,115,107
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 27, 1997) TO DECEMBER 31, 1997
(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.... -- $ -- -- $ -- $ -- $ -- $ --
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
========== ===== ============ ========== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 27, 1997) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income............................................................ $ 7
Changes in assets and liabilities:
Prepaid expenses.................................................. (434)
Other current assets.............................................. (219)
Income taxes payable.............................................. 283
Accounts payable.................................................. 156
Accrued liabilities............................................... 1,329
--------
Net cash provided by operating activities............................. 1,122
--------
Cash flows from investing activities:
Purchases of property and equipment................................. (20)
--------
Net cash used in investing activities................................. (20)
--------
Cash flows from financing activities:
Proceeds from initial public offering, net.......................... 527,164
Contributions by founding stockholder............................... 126
--------
Net cash provided by financing activities............................. 527,290
--------
Net increase in cash and cash equivalents............................. 528,392
Cash and cash equivalents, beginning of period........................ --
--------
Cash and cash equivalents, end of period.............................. $528,392
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments.
The Company has invested in financial instruments of a nature which should
reduce the 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.
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.
F-14
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share
Basic net income per share is determined by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. 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.
NOTE 3--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 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.
F-15
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--STOCKHOLDERS' EQUITY (CONTINUED)
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 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.
F-16
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--STOCK PURCHASE AND AWARDS PLAN
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.
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>
F-17
<PAGE>
CONSOLIDATION CAPITAL CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
NOTE 5--NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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. Accordingly, the Company will adopt this new standard
during 1998.
NOTE 6--SUBSEQUENT EVENTS
On February 4, 1998, the Company completed the acquisition of Service
Management USA ("Service Management"). Service Management is a Sterling,
Virginia-based provider of facilities management services specializing in
providing janitorial maintenance management services to retailers and
industrial and commercial clients in 39 states. The total consideration paid
by the Company consisted of $9 million in cash and 142,857 shares of Common
Stock, with the potential for the payment of up to an additional $13 million
in cash and shares of Common Stock based on the performance of Service
Management and the achievement of certain acquisition goals.
On February 27, 1998, the Company entered into definitive agreements to
acquire seven facilities management businesses specializing in providing
electrical installation and maintenance services (the "Pending Acquisitions").
The Pending Acquisitions include: Garfield Electric Company, Indecon, Inc.,
Riviera Electric, Inc., SKC Electric and affiliate, Town & Country Electric,
Inc., Tri-City Electrical Contractors, Inc., and Wilson Electric, Inc. The
aggregate consideration to be paid by the Company in the Pending Acquisitions
consists of $71.7 million in cash and 3.6 million in shares of Common Stock.
In addition, there is the potential for the payment of up to an additional $37
million in cash and shares of Common Stock based on the performance of the
acquired businesses as a group. The completion of the Pending Acquisitions is
subject to a number of customary closing conditions and there can be no
assurance that such acquisitions will be completed. In addition, the
completion of each of the Pending Acquisitions is dependent upon the
completion of all of the Pending Acquisitions.
F-18
<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.
Price Waterhouse LLP
Minneapolis, Minnesota
February 19, 1998
F-19
<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
------ ------
Commitments
Total liabilities............................................ 2,168 4,647
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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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
FINT-1
<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.
FINT-2
<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.
FINT-3
<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.
FINT-4
<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.
FINT-5
<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.
FINT-6
<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.
FINT-7
<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.
FINT-8
<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>
FINT-9
<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>
FINT-10
<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>
FINT-11
<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.
FINT-12
<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.
FINT-13
<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.
FINT-14
<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
FINW-1
<PAGE>
WILSON ELECTRIC COMPANY, INC.
BALANCE SHEET
NOVEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 1,757,952 $ 3,385,466 $ 1,041,785
Contracts receivable (Notes 3 and 5).. 8,542,419 11,308,641 14,085,329
Costs and estimated earnings in excess
of billings on
uncompleted contracts (Note 4)....... 565,702 1,225,288 1,301,651
Notes receivable...................... 37,975 -- 59,824
Deferred income taxes (Note 11)....... -- -- 115,760
Prepaid expenses and other current as-
sets................................. 13,579 105,835 57,866
----------- ----------- -----------
Total current assets................ 10,917,627 16,025,230 16,662,215
----------- ----------- -----------
PROPERTY AND EQUIPMENT: (Note 5)
Equipment............................. 161,328 223,263 340,632
Automobiles & trucks.................. 474,589 521,007 564,579
Office equipment...................... 60,834 97,093 126,525
Furniture............................. 7,904 16,318 23,630
Computer equipment & software......... 130,015 138,923 415,226
Leasehold Improvements................ -- -- 15,090
----------- ----------- -----------
834,670 996,604 1,485,682
Less accumulated depreciation....... (430,028) (562,403) (781,312)
----------- ----------- -----------
Property and equipment, net......... 404,642 434,201 704,370
SHW JOINT VENTURE, (Note 10)............ 468,408 422,641 --
OTHER ASSETS............................ 19,651 23,227 136,160
GOODWILL, (net of $13,500, $10,500 and
$7,500 of amortization) (Note 9)....... 16,500 13,500 10,500
----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 2,242,295 $ 4,875,340 $ 4,588,823
Billings in excess of costs and esti-
mated earnings on
uncompleted contracts (Note 4)....... 2,312,092 3,211,141 3,401,706
Accrued liabilities................... 292,637 468,575 428,838
Accrued payroll and related taxes..... 2,785,396 2,348,590 2,914,098
Accrued contribution to Employee Stock
Ownership Plan (Note 6).............. 665,410 1,358,147 536,299
Note Payable ((Notes 5 and 6)......... -- -- 183,333
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
----------- ----------- -----------
COMMITMENTS (Notes 5 and 7)............. -- -- --
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; autho-
rized 1,000,000 shares, issued and
outstanding 10,000................... 10,000 10,000 10,000
Additional paid-in capital............ 265,950 265,950 265,950
Retained earnings..................... 3,253,048 4,381,056 5,184,198
Employee Stock Ownership Plan note
payable (Note 6)..................... (149,625) (2,000,000) --
Accrued contribution included in cur-
rent liabilities..................... 149,625 1,358,147 --
----------- ----------- -----------
Total stockholders' equity........ 3,528,998 4,015,153 5,460,148
----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
FINW-2
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CONTRACT REVENUES.................... $ 40,279,206 $ 49,790,214 $ 71,008,958
COST OF CONTRACT REVENUES............ (29,935,382) (37,729,341) (59,036,426)
------------ ------------ ------------
GROSS PROFIT......................... 10,343,824 12,060,873 11,972,532
------------ ------------ ------------
EXPENSES:
General and administrative expenses
.................................. 6,317,716 7,281,252 8,093,230
ESOP contribution (Note 6)......... 1,981,828 2,957,797 2,421,164
------------ ------------ ------------
Total expenses................... 8,299,544 10,239,049 10,514,394
------------ ------------ ------------
INCOME FROM OPERATIONS............... 2,044,280 1,821,824 1,458,138
OTHER INCOME (EXPENSE):
Interest income.................... 20,919 89,593 157,634
Interest expense................... (4,439) (82,404) (109,581)
Other income (expense)............. 6,235 101,820 (78,548)
------------ ------------ ------------
Net other income (expense)....... 22,715 109,009 (30,495)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 2,066,995 1,930,833 1,427,643
PROVISION FOR INCOME TAXES (Note
11)................................. (811,730) (802,825) (624,501)
------------ ------------ ------------
NET INCOME........................... 1,255,265 1,128,008 803,142
RETAINED EARNINGS, Beginning of
year................................ 1,997,783 3,253,048 4,381,056
------------ ------------ ------------
RETAINED EARNINGS, End of year....... $ 3,253,048 $ 4,381,056 $ 5,184,198
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
FINW-3
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,255,265 $ 1,128,008 $ 803,142
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by (used for)
operations--
Depreciation and amortization....... 104,364 154,621 232,324
(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)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 64,168 (659,586) (76,363)
Notes receivable.................... 14,275 37,975 (59,824)
Prepaid expenses.................... 20,695 (92,256) 47,969
Other assets........................ (5,325) (3,651) (113,008)
Deferred Income Taxes............... -- -- (115,760)
Increase (decrease) in:
Accounts payable.................... (933,811) 2,633,045 (286,517)
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 1,403,358 899,049 190,565
Accrued liabilities................. (180,580) 175,938 (39,737)
Accrued payroll and related taxes... 1,149,901 (436,806) 565,508
Accrued pension contribution........ (1,101,364) 692,737 (821,848)
----------- ----------- -----------
Net adjustments to reconcile net
income to net cash (used for)
provided by operations............... (560,459) 536,665 (3,170,483)
----------- ----------- -----------
Net cash (used for) provided by
operating activities............. 694,806 1,664,673 (2,367,341)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment................. (243,149) (181,509) (502,423)
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)
Repayments of loan to ESOP............ -- -- 2,000,000
----------- ----------- -----------
Net cash flows used for investing
activities....................... (235,056) (37,159) (159,673)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................ -- -- 2,000,000
Repayment of borrowings............... -- -- (1,816,667)
----------- ----------- -----------
Net cash flows provided by financing
activities......................... -- -- 183,333
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH......... 459,750 1,627,514 (2,343,681)
CASH AND CASH EQUIVALENTS, Beginning of
year................................... 1,298,202 1,757,952 3,385,466
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, End of year.. $ 1,757,952 $ 3,385,466 $ 1,041,785
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
FINW-4
<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.
FINW-5
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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 $27,303 in 1995, 1996 and 1997, respectively.
(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>
FINW-6
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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>
FINW-7
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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.
FINW-8
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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.
FINW-9
<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.
Price Waterhouse LLP
Kansas City, Missouri
February 17, 1998
FINS-1
<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.
FINS-2
<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.
FINS-3
<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.
FINS-4
<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.
FINS-5
<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.
FINS-6
<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.
FINS-7
<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>
FINS-8
<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>
FINS-9
<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,
FINS-10
<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, $111,482, $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.
FINS-11
<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.
FINS-12
<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
FINR-1
<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
FINR-2
<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
FINR-3
<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
FINR-4
<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
FINR-5
<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.
FINR-6
<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.
FINR-7
<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.
FINR-8
<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.
FINR-9
<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.
FINR-10
<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
FINC-1
<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.
FINC-2
<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.
FINC-3
<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.
FINC-4
<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.
FINC-5
<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.
FINC-6
<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.
FINC-7
<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>
FINC-8
<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>
FINC-9
<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>
FINC-10
<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.
FINC-11
<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
FING-1
<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.
FING-2
<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.
FING-3
<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.
FING-4
<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.
FING-5
<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
FING-6
<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.
FING-7
<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.
FING-8
<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.
FING-9
<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.
FING-10
<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
FINI-1
<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.
FINI-2
<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.
FINI-3
<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.
FINI-4
<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.
FINI-5
<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.
FINI-6
<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.
FINI-7
<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
FINI-8
<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.
FINI-9
<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.
FINI-10
<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 estimated expenses expected to be incurred in connection
with issuance and distribution of securities being registered. All such fees
and expenses shall be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $145,582
Nasdaq National Market Listing Fee................................. 17,500
Printing Expenses.................................................. 75,000*
Accounting Fees and Expenses....................................... 25,000*
Legal Fees and Expenses............................................ 50,000*
Miscellaneous...................................................... 86,918*
--------
Total............................................................ $400,000
========
</TABLE>
- --------
* Estimate
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).
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 Registration Statement on Form S-
1 (File No. 333-36193) is hereby incorporated 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).
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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.
24.01 Power of Attorney (included on signature page of this registration
statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** 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.
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
II-4
<PAGE>
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 FEBRUARY 24, 1998.
Consolidation Capital Corporation
/s/ Jonathan J. Ledecky
By: _________________________________
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jonathan J. Ledecky Chairman and Chief February 24, 1998
- ------------------------------------- Executive Officer
JONATHAN J. LEDECKY (Principal Executive
Officer)
* Executive Vice February 24, 1998
- ------------------------------------- President, Chief
TIMOTHY C. CLAYTON Financial Officer and
Treasurer (Principal
Financial and
Accounting Officer
* Executive Vice February 24, 1998
- ------------------------------------- President, Chief
DAVID LEDECKY Administrative
Officer and Director
* Director February 24, 1998
- -------------------------------------
VINCENT E. EADES
* Director February 24, 1998
- -------------------------------------
W. RUSSELL RAMSEY
* Director February 24, 1998
- -------------------------------------
M. JUDE REYES
</TABLE>
/s/ Jonathan J. Ledecky
By: _________________________________
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, CCC 8 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).
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 Registration Statement on Form
S-1 (File No.333-36193) is hereby incorporated 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).
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
23.01 Consents of Price Waterhouse LLP.
23.02 Consents of Grant Thornton LLP.
23.03 Consent of Baird, Kurtz & Dobson.
23.04 Consent of KPMG Peat Marwick LLP.
23.05 Consent of Barry & Moore P.C.
24.01 Power of Attorney (included on signature page of this registration
statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
2
<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 of our reports dated (i) February 25, 1998
relating to the financial statements of Consolidation Capital Corporation; and
(ii) February 19, 1998, relating to the combined financial statements of Service
Management USA, Inc. and its affiliates which appear in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 25, 1998
<PAGE>
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.
PRICE WATERHOUSE LLP
Kansas City, Missouri
February 25, 1998
Price Waterhouse LLP
<PAGE>
Exhibit 23.02
We have issued our reports dated February 12, 1998, accompanying the financial
statements of Garfield Electric Company and Indecon Inc. contained in the Post-
Effective Amendment No. 2 to the Registration Statement on Form S-1 for
Consolidation Capital Corporation. We consent to the use of the aforementioned
reports in the Post-Effective Amendment No. 2 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
February 25, 1998
<PAGE>
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. 2 to the Registration Statement on Form S-1 for Consolidation
Capital Corporation. We consent to the use of the aforementioned reports in the
Post-Effective Amendment No. 2 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
Appleton, Wisconsin
February 25, 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. 2 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.
Baird, Kurtz & Dobson
Denver, Colorado
February 25, 1998
<PAGE>
Exhibit 23.04
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" included herein.
KPMG Peat Marwick LLP
Orlando, Florida
February 25, 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.
Barry & Moore, P.C.
Phoenix, Arizona
February 25, 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>
