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PROSPECTUS SUPPLEMENT Filed Pursuant to Rules 424(b)(3)
To Prospectus dated May 17, 1999 Registration No. 333-60053
[Logo of Building One]
Nasdaq Stock Market Trading Symbol--BOSS
27,893,549 Shares of Common Stock
Building One Services Corporation has prepared this prospectus supplement to
restate the prospectus dated May 17, 1999. This prospectus supplement is
referred to herein as the "prospectus" because it supersedes the prospectus
dated May 17, 1999 and the prospectus supplement dated July 16, 1999.
With this prospectus, we are offering and issuing shares of our common stock
from time to time in connection with the acquisition of other businesses. We
may structure the acquisition of businesses as:
. a merger with Building One or a subsidiary of Building One;
. a purchase of all of the stock of the other business; or
. a purchase of the assets of the other business.
We will negotiate the price and other terms of the acquisition with the
owners of the businesses that are acquired. We will not pay underwriting
discounts or commissions, although fees may be paid to persons who bring
specific acquisitions to our attention. Any person receiving these fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933.
Building One Services Corporation provides services that are necessary for
the operation and maintenance of buildings. The services that we currently
provide include mechanical and electrical installation and maintenance
services and janitorial and maintenance management services. We began our
business in February 1997 and have grown both internally and through the
acquisition of other businesses. Since our formation, we have acquired 46
businesses offering a variety of facilities services. As of November 19, 1999,
26,356,118 shares of Building One Services Corporation common stock were
outstanding.
See "Risk Factors" beginning on page 5 for certain information that you
should consider before accepting stock as part of the purchase price for our
acquisition of your business.
Building One Services Corporation
110 Cheshire Lane
Suite 210
Minnetonka, Minnesota 55305
612/249-4900
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. It is illegal for any person to tell
you otherwise.
The date of this Prospectus is November 24, 1999
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TABLE OF CONTENTS
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Page
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Where You Can Find More Information...................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Introduction to Selected Financial Data.................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 35
Executive Compensation................................................... 38
Certain Relationships and Related Party Transactions..................... 41
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 44
Plan of Distribution..................................................... 47
Restrictions on Resale................................................... 47
Legal Matters............................................................ 47
Experts.................................................................. 47
Index to Financial Statements............................................ i
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and, for a set fee, copy any of the
other information we file at the following SEC public reference facilities:
. 450 Fifth Street, N.W.
Washington, DC 20549
. Seven World Trade Center
Suite 1300
New York, New York 10048
. Citicorp Center
Suite 1400
500 West Madison Avenue
Chicago, Illinois 60661
Please call the SEC at 800/SEC-0330 for further information on these public
reference facilities. Our SEC filings are also available to the public over
the Internet at the SEC's web site (http://www.sec.gov).
The SEC allows us to "incorporate by reference" the information in documents
that we file with them. This means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information in
documents that we file later with the SEC will automatically update and
supersede this information.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, until our next annual meeting of
stockholders:
. Annual Report on Form 10-K for the year ended December 31, 1998;
. Quarterly Reports on Form 10-Q for the interim periods ended March 30,
1999, June 30, 1999 and September 30, 1999; and
. Current Reports on Form 8-K dated February 10, 1999, February 18, 1999,
March 23, 1999, April 9, 1999, August 9, 1999, November 5, 1999 and
November 24, 1999 and the Current Report on Form 8-K/A filed May 13,
1998.
You may request a copy of these filings, at no charge, by writing or
telephoning us at the following address:
Building One Services Corporation
110 Cheshire Lane, Suite 210
Minnetonka, Minnesota 55305
612/249-4900
In making your investment decision, you should rely only on the information
provided in this prospectus or on any information incorporated by reference.
We have not authorized anyone else to provide you with different information.
In addition, you should not assume that the information in this prospectus or
any other document is accurate as of any date other than the date on the front
of those documents.
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PROSPECTUS SUMMARY
The Company
Building One Services Corporation is a leading provider of integrated
facilities services in the United States. We provide many of the services and
related products necessary for the routine maintenance and operation of
commercial and industrial buildings. Our Building One Mechanical and Electrical
Group provides mechanical and electrical systems installation and maintenance
services and our Building One Service Solutions Group provides janitorial and
maintenance management services. Based on pro forma revenues, we believe that
our company is the second largest provider of mechanical and electrical
contracting and maintenance services in the United States and the largest
provider of janitorial and maintenance management services to the retail
industry in the United States. On a pro forma basis for the year ended December
31, 1998, our revenues were $1,604.3 million.
Since our initial public offering in December 1997 and through November 19,
1999, we have grown primarily through acquisitions, having acquired 46
companies that have average revenues of approximately $35 million. We currently
have more than 130 locations that provide facilities services to over 8,800
commercial, industrial and institutional customers in 48 states. The businesses
that we have acquired have demonstrated strong internal growth.
Our goal is to become the preeminent single-source provider of facilities
services in the United States. To achieve this goal, we intend to capitalize on
favorable industry dynamics such as the trend by our customers to outsource
significant portions of facilities services requirements to third-party
providers and the trend of building managers to seek a single-source provider
of facilities services. In addition, we believe that the recent combination of
our mechanical and electrical groups will further enhance our ability to offer
combined services to existing customers and to attract new clients seeking to
reduce the number of vendors with which they do business. We believe our highly
skilled workforce, rigorous hiring and training programs, breadth of service
offerings, geographic coverage and reputation provide us with a competitive
advantage in achieving our goal.
Recent Developments
Merger Agreement. On November 3, 1999 we announced that we had signed an
Agreement and Plan of Merger, dated November 2, 1999, with Group Maintenance
America Corp., a Texas corporation ("GroupMAC"), another leading provider of
facilities services. Under the terms of the merger agreement, Building One will
be merged with and into GroupMAC, with GroupMAC as the surviving legal entity.
If the shareholders of both companies approve the merger, the combined company
will be one of the largest in the industry.
GroupMAC is a leading nationwide provider of mechanical and electrical
services to commercial/industrial and residential customers. GroupMAC provides
its commercial/industrial customers with maintenance, repair and replacement
and new installation services for products such as boilers, chillers and
central plants, process piping and control systems, and data cabling. It
provides its residential customers with maintenance, repair and replacement and
new installation services for products such as central air conditioning systems
and furnaces, plumbing fixtures and pipes and water heaters. Since its
formation in 1996, GroupMAC has grown primarily through a disciplined
acquisition process, having acquired 72 businesses currently providing services
in 64 cities across 28 states. GroupMAC's pro forma revenues for the year ended
December 31, 1998 were $1,441.5.
Under the terms of the merger, which has been unanimously approved by the
boards of directors of both companies, Building One stockholders will have the
right to receive 1.25 shares of GroupMAC common stock for each share of
Building One common stock that they own. GroupMAC shareholders will be given
the right to elect to receive cash for up to 50% of their shares of GroupMAC
common stock at $13.50 per share, subject to
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proration in the event that holders of more than approximately 11 million
shares elect to receive cash. If this cash election is fully subscribed,
approximately 29% of the shares of GroupMAC common stock currently outstanding,
will be cancelled in the merger.
Concurrent with the closing of the merger, affiliates of the private
investment firm of Apollo Management, L.P. will exchange their Building One 7
1/2% convertible junior subordinated debentures and $150 million of cash for
approximately $255 million of GroupMAC convertible preferred stock. The
convertible preferred stock will mature in 2012 and will bear a dividend yield
coupon rate of 7.25% payable quarterly in cash. The combined company can defer
payment of dividends during the first three years without penalty. The
convertible preferred stock will be convertible into shares of combined company
common stock at a conversion price of $14.00 per common share. The cash
proceeds from the Apollo investment will be used to fund the cash election
right for up to 11 million shares of GroupMAC common stock in the merger.
Apollo and its affiliates will have approximately 23% of the voting power of
the combined company if the merger is completed and the cash election right is
fully subscribed. In addition, Apollo and its affiliates will have various
rights in the combined company if the merger is completed, including the right
to designate 30% of the members of the combined company's board of directors.
GroupMAC has received an underwritten commitment letter from Bank of America,
N.A. and Chase Bank of Texas, N.A. (as co-lead arrangers and co-book managers)
to provide a total of $800 million in financing. It is anticipated that this
financing will be used to satisfy all outstanding obligations under our credit
facility and GroupMAC's credit facility. It is also expected that our $200
million of senior subordinated debt will be assumed by GroupMAC and remain
outstanding, and that GroupMAC will refinance its senior subordinated notes.
Although GroupMAC will be the surviving legal entity under the terms of the
merger agreement, for accounting purposes, Building One is deemed to be the
acquiror and accordingly, would account for the merger as a "reverse
acquisition" of GroupMAC under the purchase method of accounting. The
transaction is expected to be tax-free to the shareholders of both companies,
except GroupMAC shareholders to the extent of any cash they elect to receive
and Building One stockholders to the extent they receive cash in lieu of a
fractional share interest in GroupMAC common stock. The merger is subject to
the approval of both companies' shareholders, concurrent completion of the
Apollo investment, regulatory approval and other customary closing conditions
and is expected to close in the first quarter of 2000. The name of the combined
company will be announced on or before closing. For more information on the
proposed merger, you should refer to combined company pro forma financial
statements and the notes thereto contained elsewhere in this prospectus. See
"Risk Factors--Risk Factors Related to the Proposed Merger."
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RISK FACTORS
Before you accept our stock as part of the purchase price for our
acquisition of your company, you should be aware that such an investment is
subject to various risks, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this prospectus before you decide to purchase shares of our common
stock.
This prospectus contains some forward-looking statements. Forward-looking
statements give our current expectations or forecasts of future events. You
can identify these statements by the fact that they do not relate strictly to
historical or current facts. They use words like "believe," "may," "will,"
"expect," "intend," "plan," "anticipate," "estimate" or "continue" and other
words and terms of similar meaning. In particular, these include statements
relating to our merger with GroupMAC and other future actions, our acquisition
program, the integration of acquired businesses, our growth in revenues and
earnings, our achievement of operating efficiencies, the trading of our stock
and our plans with respect to potential new products or services. From time to
time, we also may provide oral or written forward-looking statements in other
materials.
Any or all of our forward-looking statements in this prospectus or in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned below will be important in determining
our future results. Consequently, no forward-looking statement can be
guaranteed. Actual results could differ significantly.
Risk Factors Related to the Proposed Merger
Building One stockholders will not know the market price of the shares of
GroupMAC common stock they will receive in the merger when they vote on the
merger.
As a result of the merger, each share of Building One stock will be
converted into the right to receive 1.25 shares of GroupMAC common stock. The
exchange ratio of 1.25 is fixed. The number of shares of GroupMAC common stock
that Building One stockholders will receive in the merger will not change,
even if the market price of shares of GroupMAC common stock changes. Building
One does not have the right to terminate the merger agreement based upon a
significant decline in the price of GroupMAC common stock. From November 3,
1999 to November 23, 1999, the New York Stock Exchange market price per share
of GroupMAC common stock ranged from $9 1/4 to $11 7/16 and closed at $9 1/4
on November 23, 1999. The merger will not be completed until after the
shareholder meetings. Accordingly, when you vote on the merger, you will not
know what the market price of the shares of GroupMAC common stock will be when
the merger is completed.
None of the stockholders will know their percentage ownership or Apollo's
percentage ownership in the combined company prior to the completion of the
merger.
Under the terms of the merger agreement, holders of GroupMAC common stock
have the right to elect to convert each of their shares of GroupMAC common
stock into $13.50 in cash, subject to proration if the holders of shares of
GroupMAC common stock elect to exchange more than approximately 11 million
shares of GroupMAC common stock in the aggregate. Therefore, until GroupMAC
determines how many shares of GroupMAC common stock will be converted into
cash, none of the holders of GroupMAC common stock or Building One common
stock will be able to determine how many shares of GroupMAC common stock will
be outstanding upon the effectiveness of the merger. Until GroupMAC determines
how many shares of GroupMAC common stock will be converted, the holders of
shares of GroupMAC common stock and Building One common stock will be unable
to determine precisely the percentage of shares of GroupMAC common stock they
will own after the merger or the voting power of Apollo after the merger.
The termination fees required by the merger agreement could make an
alternative transaction more difficult or expensive.
GroupMAC or Building One must pay to the other termination fees ranging from
$15 million to $30 million if the merger agreement terminates under specified
circumstances. For example, GroupMAC or Building One
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must pay the termination fee if its board of directors withdraws, or adversely
modifies, its approval of the merger, or approves an alternative transaction
with another company. In addition, GroupMAC or Building One must pay the
termination fee if an offer, proposal, announcement or any agreement relating
to an alternative transaction occurs, shareholders do not approve the merger
and within 12 months that company enters into an alternative transaction. The
termination fee could deter either company from entering into an alternative
transaction by making it more difficult or expensive.
Upon completion of the merger, Apollo and its affiliates will be able to exert
substantial influence over the election of directors and matters submitted to
the combined company's shareholders, as well as over our business operations.
As the holder of the convertible preferred stock, Apollo will have the right
to vote together with the holders of the combined company's common stock on all
matters submitted to shareholders of the combined company for a vote. The
holders of the convertible preferred stock will be entitled to cast the number
of votes that they would have been entitled to cast if they converted the
convertible preferred stock into shares of the combined company's common stock.
Based upon a conversion price of $14.00 per share and assuming the maximum
number of shares of GroupMAC common stock are exchanged for cash in the merger,
the holders of the convertible preferred stock will have the right to cast
approximately 18.3 million votes, or votes equivalent to approximately 23% of
the total votes of the combined company immediately after the merger. In
addition, Apollo will have the right to elect four of the thirteen directors of
the combined company, or if the board has more than 13 directors, 30% of the
board. Apollo and its affiliates may have economic and business objectives that
make their interests different from what might be in the best interests of the
combined company's shareholders.
Under the investor's rights agreement that GroupMAC will enter into at the
time the merger is completed, Apollo will have various rights. So long as
Apollo beneficially owns at least 25% of the shares of the combined company
common stock underlying the convertible preferred stock that Apollo acquires
upon the completion of the merger, Apollo will have the right to purchase for
cash any shares of common stock or any security that converts into common stock
that the combined company offers in a private placement and the right to
preclude the combined company and its subsidiaries from entering into various
types of transactions or make certain changes in its capital structure or
management without the consent of Apollo. For example, the combined company may
not acquire a business or assets in excess of 2.0% of its total assets, dispose
of a business or assets in excess of 2.5% of its total assets nor may it create
or acquire an interest in a subsidiary other than a wholly owned subsidiary,
subject to certain exceptions, without Apollo's consent. Apollo will also have
the right to approve the incurrence or refinancing of indebtedness that does
not meet a 4 to 1 consolidated leverage ratio and to approve capital
expenditures exceeding $10 million individually or 1.75% of budgeted annual
revenues in the aggregate. Apollo has the right to take control of the combined
company's board of directors if there is a material and intentional breach of
the terms of the convertible preferred stock or the investor's rights or
subscription and exchange agreements, there is a payment default under
outstanding indebtedness, or there are certain bankruptcy events, until the
noncompliance is cured. Some events of noncompliance may not be curable.
Apollo's voting rights upon the completion of the merger may discourage others
from seeking to acquire the combined company.
Immediately, after the merger is completed, Apollo and its affiliates will
beneficially own approximately 23% of the voting power of the combined company.
As a result of this voting power, others may be discouraged from seeking to
acquire the combined company.
Risk Factors Related to Our Financing Arrangements
We have a high level of debt on our balance sheet.
As of November 22, 1999, we had approximately $546.2 million of outstanding
debt, including the convertible junior subordinated debentures. This debt level
has the following consequences:
. a substantial portion of our cash flow is being used to pay interest
expense on our debt, which reduces the funds that would otherwise be
available to us for our operations, capital expenditures and future
business opportunities and requires us to borrow under our new revolving
credit agreement which provides for borrowings of $225.0 million, of
which approximately $87 million is available as of November 22, 1999;
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. a substantial decrease in our net operating cash flows or an increase in
our expenses could make it difficult for us to meet our debt service
requirements and force us to modify our operations;
. we may have more debt than our competitors, which may place us at a
competitive disadvantage; and
. our high level of debt may make us more vulnerable in a downturn in our
business or the economy in general.
We are subject to restrictive debt covenants that may limit our flexibility
in operating our business.
The credit facility and the indentures governing our outstanding senior
subordinated notes and the convertible junior subordinated debentures contain
a number of significant covenants that impose restrictions on us and our
subsidiaries. These covenants include restrictions on:
. indebtedness;
. liens;
. voluntary prepayments of the senior subordinated notes and other
indebtedness;
. amendments of organizational, corporate and other documents;
. mergers, acquisitions and dispositions of assets;
. sale-leaseback transactions, capital lease payments and maintenance of
material properties;
. dividends and other payments in respect of capital stock;
. advances, credit extensions, capital contributions, investments and
capital expenditures;
. transactions with affiliates and formation of subsidiaries and joint
ventures;
. changes in business; and
. entry into a change of control as defined in the indenture relating to
the senior subordinated notes without offering to redeem such notes.
In addition, we are required to comply with financial covenants with respect
to the amount of our debt as compared to our earnings before interest expense,
taxes, depreciation and amortization expense ("EBITDA") and the amount of our
EBITDA as compared to our interest expense. Our indebtedness under the credit
facility and the senior subordinated notes is guaranteed by our subsidiaries
and our indebtedness under the credit facility is secured by a first priority
lien on substantially all of our properties and assets and those of our
subsidiaries, now owned or acquired later. If we should be unable to borrow
under our revolving credit facility due to a default, we would be left without
sufficient liquidity.
We are subject to restrictive debt covenants that may restrict our ability to
make acquisitions.
We have financed, and intend to continue to finance, most of our
acquisitions with a combination of cash and shares of our common stock. We
have approximately $87 million available under our revolving credit facility
to use for acquisitions and general corporate purposes, including working
capital requirements and contingent payments that are required by certain
acquisition agreements with respect to previously completed acquisitions. We
expect to pay approximately $6.6 million in 1999 in connection with contingent
payments. The ability to borrow funds under the revolving credit facility is
subject to various conditions, such as continued compliance with the financial
covenants, maximum individual and aggregate purchase price requirements for
acquisitions, adequate remaining availability under the facility and the
nature of the particular business to be acquired. The restrictive covenants
contained in the indentures relating to the senior subordinated notes and the
convertible junior subordinated debentures may also limit our ability to make
future acquisitions. Depending on the pace of our acquisitions, we may need
additional debt or equity financing in order to continue to acquire
businesses. That financing may not be available if and when additional cash is
needed or it may not be available on terms that we think are acceptable. If we
do not have sufficient cash to pay the cash consideration for acquisitions, or
cannot otherwise finance acquisitions, we will be unable meet our acquisition
objectives.
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Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.,
together with our management, could significantly influence the election of
directors and other matters that require the approval of our stockholders.
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.,
together the "Apollo funds,"affiliates of the private investment firm of
Apollo Management, L.P., beneficially own our convertible junior subordinated
debentures as well as warrants to purchase 1,030,000 shares of our common
stock at a purchase price of $20 per share. As of November 15, 1999, our
directors, executive officers and the Apollo funds owned beneficially
approximately 29.1% of our outstanding shares of common stock. In addition,
many of the officers of our subsidiaries received our shares of common stock
in connection with the sales of their businesses to us.
The terms of the convertible junior subordinated debentures provide certain
voting rights to the holders of the convertible junior subordinated
debentures, including the right to vote together with the holders of our
common stock on all of the matters submitted to our stockholders for a vote
and the right to elect three of our ten directors. The holders of the
convertible junior subordinated debentures are entitled to cast the number of
votes that they would be entitled to cast if they converted the convertible
junior subordinated debentures into shares of our common stock. Apollo
Investment Fund IV, L.P. owns $94.9 million of the convertible junior
subordinated debentures, which are currently convertible into 4,378,754 shares
of our common stock and Apollo Overseas Partners IV, L.P. owns $5.1 million of
the convertible junior subordinated debentures, which are currently
convertible into 234,799 shares of our common stock. As of November 15, 1999,
the Apollo funds beneficially owned approximately 17.6% of our company's
voting power on an as converted basis.
Our directors, executive officers, officers of our subsidiaries and the
Apollo funds, if acting together, may be able to significantly influence the
election of directors and other matters requiring the approval of our
stockholders. See "Principal Stockholders." If we default on any of our
indebtedness or materially breach our agreement with the Apollo funds, they
have the right, among other remedies available to a holder of indebtedness, to
elect a majority of our directors, subject to our prior right to cure any
default or breach.
The Apollo funds have certain rights over our operations.
Under our agreement with the Apollo funds, we are precluded from entering
into various types of transactions or making certain changes in our capital
structure, board size or management without the consent of the Apollo funds.
In addition, the Apollo funds have the right to acquire 50% of the shares of
our common stock or convertible securities that we offer to sell in a private
placement. Finally, the Apollo funds and any other holders of the convertible
junior subordinated debentures have certain rights to require us to register
the shares of common stock that they acquire upon conversion of the
convertible junior subordinated debentures for sale under the Securities Act.
Risks Related to Our Shares
The per share price of our common stock could be adversely affected by sales
of substantial amounts of our common stock or the perception of such likely
sales.
The price of a share of our common stock may be adversely affected by sales
of substantial amounts of our shares of common stock or by the perception that
such sales could occur. Such sales, or the perception of such sales, could
occur as a result of the following factors.
First, a number of our shares will become freely tradable when contractual
restrictions expire. As of November 19, 1999, approximately 9.6 million shares
of our 26,356,118 outstanding shares of common stock were subject to
contractual restrictions on resale primarily under the terms of acquisition
agreements we entered into in connection with our acquisitions of businesses.
These restrictions expire at various times, generally one
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to three years from the date of our acquisition. Sales of a large number of
such shares at the same time, or the possibility that such sales will occur at
the time that the contractual restrictions expire, could adversely affect the
price of our shares of common stock.
The price of our shares may also be adversely affected by certain
registration rights that we have provided to holders of warrants that are
exercisable for our shares at an exercise price of $20.00 per share. Under our
agreement with the Apollo funds, the Apollo funds and any other holders of the
convertible junior subordinated debentures have the right to require us to
register shares of common stock that they acquire upon conversion of those
debentures for resale under the Securities Act. The convertible junior
subordinated debentures are convertible into shares of our common stock at an
initial conversion price of $22.50 per share plus all accrued and unpaid
interest. Apollo Investment Fund IV, L.P. owns $94.9 million of the
convertible junior subordinated debentures, which are currently convertible
into 4,378,754 shares of our common stock and Apollo Overseas Partners IV,
L.P. owns $5.1 million of the convertible junior subordinated debentures,
which are currently convertible into 234,799 shares of our common stock.
Together, the Apollo funds beneficially own approximately 17.6% of the voting
power of the company on an as converted basis as of November 19, 1999. Subject
to certain exceptions, we will adjust the conversion price if, among other
things, we issue shares of our common stock at a price below $22.50 per share
or the then fair market value of the common stock.
Apollo Investment Fund IV, L.P. holds a warrant for 977,573 shares of our
common stock and Apollo Overseas Partners IV, L.P. holds a warrant for 52,427
shares of our common stock. Jonathan J. Ledecky holds a warrant for 1,950,000
shares of our common stock and Friedman, Billings, Ramsey & Co., Inc. holds a
warrant for 100,000 shares of our common stock, which they acquired at the
time of our initial public offering. The Apollo funds and Jonathan J. Ledecky
each have the right to require us to register for sale the shares they acquire
upon the exercise of those warrants. If the Apollo funds and Jonathan J.
Ledecky determine to sell their shares at the same time, that could adversely
affect the price of our shares.
The availability of a significant number of shares for issuance under our
benefit plans could also affect the price of our shares. As of November 22,
1999, we had outstanding options for the purchase of approximately 4,348,102
shares of our common stock and a stock purchase plan that provides for the
issuance of up to 1,000,000 shares of our common stock.
Our stock price could be volatile.
The trading price of our common stock could be subject to significant
fluctuations in response to activities of our competitors, variations in
quarterly operating results, changes in market conditions and other events or
factors. The market price of our common stock could be adversely affected if
the merger with GroupMAC is not completed. The market price of our common
stock could also be adversely affected by confusion or uncertainty as to the
pace of our acquisitions, our ability to integrate effectively different
sectors of the facilities services industry and the difficulty for securities
analysts and investors to analyze our financial and operational performance
when we operate in more than one sector of the facilities services industry.
Moreover, the volatility of the stock market could adversely affect the market
price of our common stock and our ability to raise equity in the public
markets.
We may not be able to make acquisitions if we cannot issue shares of our
common stock as part of the consideration.
The owners of potential target companies may be unwilling to accept shares
of our common stock if our stock price is volatile or trades at lower values.
We may be unwilling to issue shares of our common stock as part of the
consideration to the businesses that we want to acquire if we believe the
market price is unreasonably low.
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We have not paid any dividends.
We have not paid any dividends on our common stock to date and the payment
of dividends in the future is restricted by the terms of our financing
arrangements. See "Dividend Policy."
Our restated certificate of incorporation authorizes series preferred stock,
the issuance of which may adversely affect stockholders in the future.
Our restated certificate of incorporation authorizes the issuance of
11,000,000 shares of series preferred stock. The board of directors has the
authority to issue additional shares of this authorized preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of preferred stock. The
issuance of series of preferred stock may adversely affect the voting and
dividend rights, rights upon liquidation and other rights of the holders of
common stock. In the event it is issued, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of our company. Although we have no present
intention to issue any shares of preferred stock, there can be no assurance
that we will not do so in the future.
Risks Relating to Our Operations
A downturn in commercial and industrial construction could hurt our business.
Approximately 56% of our pro forma revenues in 1998, which include the
revenues of the businesses we acquired in 1998 and 1999, involved the
installation of mechanical and electrical systems in newly-constructed
commercial and industrial buildings. Our ability to maintain or increase our
revenues from new installation services depends on the levels of new
construction starts in the geographic areas where we operate. Because the
construction industry is cyclical, our revenues from year to year may
fluctuate.
The level of new construction starts is affected by local economic
conditions, changes in interest rates and other related factors. A downturn in
levels of new construction would have a material adverse effect on our
business.
Our mechanical and electrical installation services are subject to the
seasonal variations in operations and demands that affect the construction
business. Specifically, the demand for construction services may be lower
during the winter months as a result of inclement weather conditions.
Accordingly, our revenues and operating results may be lower in the first
quarter.
Adverse changes in economic conditions can adversely affect our business.
Our success will depend upon the economic conditions in the geographic areas
in which a substantial number of our operating companies are located. In
addition, our success will depend upon occupancy levels at office buildings
for which we do business. Higher vacancy rates could have a material adverse
effect on, among other sectors of the facilities services industry, janitorial
and maintenance management services.
Fixed price contracts with our customers could expose us to losses if our
estimates of project costs are too low.
A substantial portion of our mechanical and electrical installation
contracts are "fixed price" contracts. The terms of these contracts require us
to guarantee the price of the services we provide and assume the risk that our
costs to perform the services and provide the materials will be greater than
anticipated.
Our profitability in this market is therefore dependent on our ability to
accurately predict the costs associated with our services. These costs may be
affected by a variety of factors, some of which may be beyond our control. If
we 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 our business.
Our short operating history may make it difficult to evaluate our future
prospects.
Since our initial public offering in December 1997 and through November 19,
1999, we have acquired 46 businesses. Therefore, our combined company has a
short history of generating revenues, which may make it difficult to evaluate
our future prospects.
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Our ability to generate revenues and earnings in the future will be
dependent upon, among other factors:
. the operating results of the businesses we have acquired;
. the operating results of any future businesses we acquire; and
. the successful integration and consolidation of those businesses.
The integration of our acquired businesses may result in substantial costs,
delays or other problems.
We may not be able to successfully integrate our acquisitions without
substantial costs, delays or other problems. We will have to continue to
expend substantial managerial, operating, financial and other resources to
integrate our businesses. The costs of such integration could have an adverse
effect on short-term operating results.
The integration of newly-acquired businesses may also lead to diversion of
our management team away from other ongoing business concerns. In addition,
the rapid pace of our acquisitions of other businesses may adversely affect
our efforts to integrate acquisitions and manage those acquisitions
profitably. We may seek to recruit additional managers to supplement the
incumbent management of the acquired businesses, but we may not have the
ability to recruit additional candidates with the necessary skills.
Risks Related to Our Acquisition Strategy
Our growth strategy will be impacted by our ability to acquire additional
businesses.
Our business strategy depends, in part, upon our ability to compete in the
facilities services industry by expanding into new markets and our ability to
broaden the services we provide by identifying and acquiring other businesses.
We may not be able to identify, attract or acquire additional businesses. In
addition, certain acquisitions may require the approval of Apollo. We may also
be unable to make appropriate acquisitions because of competition for the
acquisition. In pursuing acquisitions, we compete against other facilities
services providers, some of which are larger than we are and have greater
financial and other resources than we have. We compete for potential
acquisitions based on a number of factors, including price, terms and
conditions, size and ability to offer cash, stock or other forms of
consideration. In addition, the negotiation of potential acquisitions may
require members of management to divert their time and resources away from our
operations.
Once we acquire a business, we are faced with certain additional risks,
including:
. the possibility that it will be difficult to integrate the operations
into our other operations;
. the possibility that we have acquired substantial undisclosed
liabilities;
. the risks of entering markets or offering services for which we have no
prior experience; and
. the potential loss of customers or employees as a result of changes in
management.
We may not be successful in overcoming these risks.
Investors cannot evaluate the merits of future acquisitions.
Because in most cases we do not seek, and are not required to seek,
stockholder approval of acquisitions, investors will have no basis on which to
evaluate the possible merits or risks of any future acquisitions. Although our
management and our attorneys and accountants evaluate the risks of any
particular business that we may acquire, we may be unable to discover all of
its risks.
The accounting rules relating to acquisitions result in reductions in our net
income.
When we buy businesses and account for them under the purchase method of
accounting, we must account for the amount by which our purchase price exceeds
the fair value of the net assets of the acquired business as
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<PAGE>
an asset identified as goodwill. After the acquisition, we must reduce our net
income each quarter by a portion of that goodwill. We are currently unable to
use the pooling-of-interests method of accounting, which does not result in
goodwill.
The consolidation of our industry may adversely affect our acquisition
program.
Many of our acquisitions are subject to the requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, which could adversely affect the
pace of our acquisitions in one or more sectors of the facilities services
industry. Under the Hart-Scott-Rodino Act, we may be required to divest a
portion of our then-existing operations or those of the acquired business,
which may render a given acquisition disadvantageous. In addition, if we
acquire businesses in regulated industries, we would be subject to regulatory
requirements. Those regulatory requirements could limit our flexibility in
growing and operating our businesses.
We believe that the facilities services industry will continue to undergo
considerable consolidation and changes during the next several years. Such
consolidation could increase the competition we face to acquire facilities
services businesses and increase the prices we must pay for the businesses
that we acquire.
In response to such consolidation, we consider from time to time additional
strategies to enhance stockholder value. One such strategy that we pursued was
our purchase of over 25 million shares of our common stock in a tender offer.
Other strategies include, among others, strategic alliances and joint
ventures, purchase, sale and merger transactions with other large companies,
like our proposed merger with GroupMAC, and other similar transactions. In
considering any of these strategies, we evaluate the consequences of the
strategies, including, among other things, the potential for high levels of
debt that would result from such a transaction, the tax effects of the
transaction and the accounting consequences of the transaction. In addition,
these strategies could have various other significant consequences, including
changes in management, control or operational or acquisition strategies. We
may determine not to pursue any of these strategies, but, if any of these are
pursued, they may not be completed successfully.
There may be potential adverse tax consequences in acquisitions.
As a general rule, federal and state tax laws and regulations have a
significant impact upon the structuring of acquisitions. We will evaluate the
possible tax consequences of any acquisition of a business and will try to
structure the acquisition so as to achieve the most favorable tax treatment to
our business, the acquisition candidate and our respective stockholders.
Nonetheless, the Internal Revenue Service or the appropriate state tax
authorities may not agree with our tax treatment of an acquisition. If the IRS
or state tax authorities recharacterize our tax treatment of an acquisition,
our company, the acquisition candidate and/or our stockholders may suffer
adverse tax consequences.
Risks from Competition
Our business is highly competitive, which could cause us to lower our prices,
resulting in reduced revenues and profit margins.
We face a competitive environment in the market for facilities services. We
compete against both large national and international organizations providing
a wide variety of facilities services to their customers and numerous smaller
companies providing a single service or fewer services in limited geographic
areas.
Other types of companies are also beginning to offer facilities services.
For example, property management companies and real estate investment trusts
(REITS) are beginning to offer facilities services for the properties that
they own or manage. Also, large heating, ventilation and air conditioning
manufacturers (HVAC), such as Carrier Corporation and Honeywell, Inc., and
some public utilities are active in certain sectors of the facilities services
industry.
Barriers to entry to the markets for certain facilities services, such as
janitorial services, are low, and we compete against numerous small service
providers, many of which may have more experience in and knowledge
12
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of the local market for such services. These smaller service providers may
also have lower overhead cost structures and may be able to provide their
services at lower rates than we can.
In these same markets, we face large competitors that offer multiple
services and that are willing to accept lower profit margins in order to
capture market share. In addition, we face competition from both large and
small companies that offer only one of the services that we offer and may face
competition in the future from companies that enter the markets that we are
in.
In some geographic regions, we may not be eligible to compete for certain
contracts if our employees are not subject to collective bargaining
arrangements. As a result of this requirement, we may lose customers or have
difficulty acquiring new customers.
We may have trouble hiring the employees we need and our employment needs may
increase our costs.
Our ability to increase productivity and profitability will depend upon our
ability to recruit, train and retain large numbers of hourly wage and skilled
employees necessary to meet our 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 our operating costs.
In addition, many companies that require skilled employees, such as
mechanical and electrical installation and maintenance and heating,
ventilation and air conditioning companies, are currently experiencing
shortages of qualified employees. We may not be able to maintain an adequate
labor force necessary to efficiently operate our business. Also, our labor
expenses may increase as a result of a shortage in the supply of hourly wage
or skilled employees. As a result, we may have to curtail our planned growth
and margins may decline.
Although fewer than 10% of our employees are members of unions, many sectors
of the facilities services industry involve unionized employees. Union
activity at our companies may be disruptive to our business and may increase
our costs. To the extent any of our union contracts expire or we acquire
businesses that are unionized, we may be required to renegotiate union
contracts in an environment of increasing wage rates. We may not be able to
renegotiate union contracts on terms favorable to us or without experiencing a
work stoppage.
Other Business Risks
We depend on subcontractors to perform a majority of our janitorial services,
which reduces our ability to directly control our workforce and the quality
of services that we provide.
We depend, in part, on subcontractors to provide janitorial services to our
customers. Such reliance reduces our ability to directly control both our
workforce and the quality of services that we provide. We may not be able to
control our subcontractors and the quality of services they provide.
Many of our contracts may be terminated on short notice.
Many of our janitorial services contracts have termination clauses
permitting the customer to cancel the contract on 30 to 90 days notice. While
we maintain long-standing relationships with many of our customers, we may not
be able to keep customers if they exercise their rights to terminate their
contracts prior to expiration.
We may have potential environmental liabilities.
The nature of the facilities services industry often involves the transport,
storage, use and disposal of cleaning solvents, lubricants, chemicals,
gasoline, refrigerants and other hazardous materials by employees. These
activities are subject to stringent and changing federal, state and local
regulation and present the potential for liability for the actions of our
employees in handling such materials. In addition, the exposure of any
employees to these materials may give rise to claims by employees against us.
Compliance with governmental regulations or liability related to hazardous
materials may have a material adverse effect on our business.
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We are subject to government regulation.
Due to the nature of the facilities services industry, our operations are
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. If we fail to
comply with applicable regulations, we may be subject to substantial fines or
revocation of our licenses.
Changes in these laws, regulations and licensing requirements may constrain
our ability to provide services to customers or increase the costs of those
services. In addition, competitive pricing conditions in the industry may
constrain our ability to adjust our billing rates to reflect any such
increased costs.
If we were to lose key members of our management, our business would suffer.
Our success depends principally upon the efforts of our executive officers,
the presidents of our operating companies and certain other members of the
senior management of the businesses we have acquired or will acquire in the
future. The loss of a substantial portion of this management could have a
material adverse effect on the company.
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PRICE RANGE OF COMMON STOCK
The following table shows the high and low sales prices of our common stock,
which has been traded on the Nasdaq Stock Market since November 26, 1997. It
has been traded under the symbol "BOSS" since September 1998.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1997
Fourth Quarter........................................... $21 1/2 $20
Fiscal Year 1998
First Quarter............................................ 25 7/8 18 3/8
Second Quarter........................................... 25 15/16 19 3/4
Third Quarter............................................ 24 1/2 11 1/2
Fourth Quarter........................................... 22 1/2 7 7/8
Fiscal Year 1999
First Quarter............................................ 21 15 1/2
Second Quarter........................................... 20 3/8 12 3/8
Third Quarter............................................ 16 1/8 12 3/16
Fourth Quarter through November 19, 1999................. 12 13/16 8 7/8
</TABLE>
The closing sale price of our common stock on the Nasdaq Stock Market was
$10 1/16 per share on November 19, 1999. As of November 19, 1999, there were
26,356,118 shares of our existing common stock outstanding and 1,956 holders
of record.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future because we would like to keep any earnings to finance the expansion of
our business, including for acquisitions, 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 things, our earnings, financial
condition, capital requirements and debt levels. Furthermore, the terms of the
indebtedness that we have incurred in connection with our issuer tender offer
limit our payment of dividends to you.
15
<PAGE>
INTRODUCTION TO
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the balance sheet data at December 31, 1997 and 1998 have been
derived from our audited financial statements, which are included elsewhere in
this prospectus. The statement of operations data for the years ended December
31, 1994 and 1995 and the balance sheet data at December 31, 1994, 1995 and
1996 have been derived from our unaudited financial statements, which are not
included elsewhere in this prospectus. Our consolidated financial statements
give retroactive effect to the three business combinations accounted for under
the pooling-of-interests method during the year ended December 31, 1998 and
include the results of the businesses acquired in business combinations
accounted for under the purchase method from their respective acquisition
dates. The financial statements for periods prior to the fiscal year ended
December 31, 1998 reflect only the operating results of the three business
combinations accounted for under the pooling-of-interests method of
accounting.
The statement of operations data for the nine months ended September 30,
1999 and 1998 have been derived from our unaudited interim consolidated
financial statements. The unaudited interim consolidated financial statements
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, contain all adjustments, consisting only of
normal adjustments, necessary for a fair presentation of the financial
position and results of operations for the periods presented.
The selected financial data should be read in conjunction with the combined
company unaudited pro forma financial statements and our consolidated
financial statements, included elsewhere in this prospectus.
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<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Nine Months
For the Year Ended December 30, Ended September 30,
------------------------------------------------------ -------------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... $ 45,106 $ 57,287 $ 63,202 $ 70,101 $ 809,601 $ 478,595 $1,265,521
Cost of revenues....... 37,634 48,783 53,664 58,857 636,225 376,318 1,011,305
--------- --------- --------- --------- ---------- ---------- ----------
Gross profit........... 7,472 8,504 9,538 11,244 173,376 102,277 254,216
Selling, general and
administrative........ 6,635 8,468 8,803 11,776 100,539 60,544 145,863
Restructuring and
recapitalization
charges............... -- -- -- -- -- -- 8,020
Goodwill amortization... -- -- -- -- 7,653 4,584 11,511
--------- --------- --------- --------- ---------- ---------- ----------
Operating income
(loss)................. 837 36 735 (532) 65,184 37,139 88,822
Other (income) expense
Interest income........ (41) -- -- (2,056) (19,373) (16,043) (4,674)
Interest expense....... 329 239 224 208 1,054 565 21,279
Other income, net (1).. (43) (8) 83 (221) (80) (134) (128)
--------- --------- --------- --------- ---------- ---------- ----------
Income (loss) before
income taxes........... 592 (195) 428 1,537 83,583 52,751 72,345
Provision (benefit) for
income taxes........... (5) 13 94 36,120 22,460 32,261
--------- --------- --------- --------- ---------- ---------- ----------
Net income (loss)....... $ 592 $ (190) $ 415 $ 1,443 $ 47,463 $ 30,291 $ 40,084
========= ========= ========= ========= ========== ========== ==========
Net income (loss) per
share--Basic........... $ 0.48 $ (0.15) $ 0.32 $ 0.25 $ 1.19 $ 0.79 $ 1.14
========= ========= ========= ========= ========== ========== ==========
Net income (loss) per
share--Diluted......... $ 0.44 $ (0.15) $ 0.30 $ 0.25 $ 1.16 $ 0.77 $ 1.08
========= ========= ========= ========= ========== ========== ==========
Weighted average shares
outstanding--Basic..... 1,238,444 1,238,444 1,290,724 5,683,464 39,908,364 38,298,295 35,311,455
========= ========= ========= ========= ========== ========== ==========
Weighted average shares
outstanding--Diluted... 1,353,560 1,238,444 1,405,840 5,865,550 40,928,452 39,368,321 38,899,637
========= ========= ========= ========= ========== ========== ==========
<CAPTION>
As of December 31, As of
------------------------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
--------- --------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................. $ 300 $ (30) $ 67 $ 528,235 $ 307,390 $ 184,469
Total assets..................... 8,063 8,132 9,629 539,159 1,043,922 1,212,211
Long term debt, net of current
maturities...................... 1,734 1,589 1,890 1,679 3,287 438,887
Convertible junior subordinated
debentures...................... -- -- -- -- -- 101,895
Stockholders' equity............. 1,496 1,299 1,578 529,480 837,537 397,016
</TABLE>
- --------
(1) Other income, net consists primarily of realized gains on the sale of
marketable securities, dividend income on certain investments and gains on
the sale of equipment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with our consolidated
historical financial statements, including the related notes thereto,
appearing elsewhere in this prospectus.
Founded in February 1997, Building One Services Corporation is a leading
provider of facilities services in the United States. We completed our initial
public offering in December 1997, raising net proceeds of approximately $527
million. We have used the proceeds primarily in our acquisition program and to
finance our repurchase of shares of our common stock in our tender offer
further discussed below.
Recapitalization Plan. On May 11, 1999, we completed the repurchase of
24,617,840 shares of our common stock at $22.50 per share for cash and 883,573
shares of common stock underlying stock options at $22.50 per share less the
exercise price of the options. Total funds utilized for the repurchase,
excluding associated fees, totaled $560.1 million, which were obtained from
our available cash, the net proceeds of $195.5 million from the issuance of
$200 million of 10 1/2% senior subordinated notes, $100 million from the
issuance of 7 1/2% convertible junior subordinated debentures to an affiliate
of the private investment firm of Apollo Management, L.P. and borrowings under
a new revolving credit facility.
Proposed Merger with GroupMAC. On November 2, 1999, the board of directors
unanimously approved a merger with GroupMAC. Under the terms of the merger,
each outstanding share of our common stock will be exchanged for 1.25 shares
of GroupMAC common stock. As part of the merger, GroupMAC shareholders may
elect to receive cash for up to 50% of their shares at $13.50 per share (up to
$150 million in the aggregate), subject to proration. If this cash election is
fully subscribed, approximately 11 million GroupMAC shares (or approximately
29% of its shares currently outstanding) will be cancelled in the merger. The
transaction is expected to be tax-free to the shareholders of both companies,
except GroupMAC shareholders to the extent of any cash they elect to receive
and Building One stockholders to the extent they receive cash in lieu of a
fractional share interest in GroupMAC common stock. The merger will be
accounted for as a reverse acquisition under the purchase method of
accounting, with Building One as the accounting acquiror, although Group MAC
will be the surviving legal entity.
Concurrent with the closing of the merger, Apollo will exchange its
convertible junior subordinated debentures and $150 million of cash for
approximately $255 million of GroupMAC convertible preferred stock. The cash
proceeds from the investment will be used to fund the cash election right
described above. The convertible preferred stock will bear a coupon rate of
7.25%, will be payable on a quarterly basis, and will mature in 2012. The
convertible preferred stock will be convertible into GroupMAC common stock at
a conversion price of $14.00 per common share.
GroupMAC has received an underwritten commitment letter from Bank of
America, N.A. and Chase Bank of Texas, N.A. (as co-lead arrangers and co-book
managers) to provide a total of $800 million in financing. It is anticipated
that this financing will be used to satisfy all outstanding obligations under
our credit facility and GroupMAC's credit facility. It is also expected that
our $200 million of senior subordinated debt will be assumed by GroupMAC and
remain outstanding, and that GroupMAC will refinance its senior subordinated
notes.
The merger is subject to the approval of both companies' shareholders,
concurrent completion of the Apollo investment, regulatory approval and other
customary closing conditions, and is expected to close in the first quarter of
2000.
Impact of Acquisitions. As a result of our acquisition program, our
financial condition and results of operations have changed dramatically from
our inception and initial public offering in December 1997 to September 30,
1999. We have completed 46 business combinations since our inception. Forty-
three of these business combinations have been accounted for under the
purchase method of accounting and three of these business combinations
consummated during the second quarter of fiscal 1998 have been accounted for
under the
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pooling-of-interests method of accounting. Our consolidated financial
statements give retroactive effect to the three business combinations
accounted for under the pooling-of-interests method and include the results of
the companies acquired in business combinations accounted for under the
purchase method from their respective acquisition dates. Due to our growth
through acquisitions, comparisons of the historical results of our operations
have been and will continue to be affected by the addition of acquired
businesses. Increases in the various revenues and expense components of our
results are, to a large degree, due to growth from acquisitions. Neither the
magnitude nor the source of these changes is necessarily indicative of changes
that will occur in the future.
Consolidated Results of Operations
Our revenues are recognized as services are performed for maintenance and
service contracts. Additionally, we utilize the percentage-of-completion
method of accounting for installation contracts. Under this method, revenues
are recognized according to the ratio of costs incurred to estimated total
contract costs. Changes in job performance, job conditions, estimated
profitability, anticipated contract losses and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
We believe that we have and will continue to realize savings from the
consolidation of insurance and bonding programs, consolidation of certain back
office functions for some of our operations and volume purchase discounts from
vendors of commodity services and materials and service vehicles. These
savings may be partially offset by costs associated with our corporate
operations and costs of integrating acquired businesses.
Three months ended September 30, 1999 compared to the three months ended
September 30, 1998
Revenues. Consolidated revenues for the three months ended September 30,
1999 increased by $225.6 million, or 89.4%, to $477.9 million from $252.3
million for the three months ended September 30, 1998. Of this increase,
$206.2 million pertains to the mechanical and electrical operations and $19.4
million to the janitorial operations. Approximately $150.3 million of the
increase in mechanical and electrical revenues and $4.4 million of the
increase in janitorial revenues relates to incremental revenue contributed in
the three months ended September 30, 1999 by businesses acquired during or
subsequent to September 30, 1998. The remaining $55.9 million in increased
mechanical and electrical revenues and $15.0 million in janitorial revenues
relates to organic growth.
Gross profit. Gross profit for the three months ended September 30, 1999
increased by $42.7 million, or 77.4%, to $98.0 million from $55.3 million for
the three months ended September 30, 1998. Of this increase, $38.1 million
relates to the mechanical and electrical operations and $4.6 million to the
janitorial operations.
Gross profit as a percentage of revenues, "gross margin," decreased to 20.5%
for the three months ended September 30, 1999 from 21.9% for the three months
ended September 30, 1998 primarily as a result of the mechanical businesses
acquired subsequent to September 30, 1998 which traditionally have lower gross
margins than electrical businesses.
Selling, general and administrative. Selling, general and administrative
expenses for the three months ended September 30, 1999 increased by $23.3
million, or 77.3%, to $53.4 million from $30.1 million for the three months
ended September 30, 1998. Of this increase, $18.6 million relates to an
increase in the mechanical and electrical operations, $3.2 million in the
janitorial operations and $1.5 million to corporate general and administrative
expenses.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.2% for the three months ended September 30, 1999 from 11.9%
for the three months ended September 30, 1998. This decrease is due primarily
to the leverage of corporate expenses and our acquired businesses' selling,
general and administrative expenses over an increase in revenues.
Goodwill amortization. Goodwill amortization for the three months ended
September 30, 1999 increased by $1.6 million, or 62.2%, to $4.2 million from
$2.6 million for the three months ended September 30, 1998. This increase was
a result of the increase in acquired businesses.
19
<PAGE>
Other income/expense, net. Other expense, net for the three months ended
September 30, 1999 changed by $16.8 million, to $12.9 million of other expense
from other income of $3.9 million for the three months ended September 30,
1998. The increase in other expense is primarily attributable to the increase
in net interest expense as a result of the use of our cash funds and the
incurrence of borrowings to provide the necessary funds for the repurchase of
common stock in the tender offer.
Provision for income taxes. The provision for income taxes for the three
months ended September 30, 1999 increased to $12.1 million from $11.2 million
for the three months ended September 30, 1998, reflecting an effective tax
rate of 44.0% and 42.5%, respectively. The increase in the effective rate was
primarily attributable to the increase in non-deductible goodwill amortization
associated with certain acquisitions.
Nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
Revenues. Consolidated revenues for the nine months ended September 30, 1999
increased by $786.9 million, or 164.4%, to $1,265.5 million from $478.6
million for the nine months ended September 30, 1998. Of this increase, $717.1
million pertains to the mechanical and electrical operations and $69.8 million
to the janitorial operations. Approximately $623.7 million of the increase in
mechanical and electrical revenues and $33.7 million of the increase in
janitorial revenues relates to incremental revenue contributed in the nine
months ended September 30, 1999 by businesses acquired during or subsequent to
the nine months ended September 30, 1998. The remaining $93.4 million of the
increase in mechanical and electrical revenues and $36.1 million of the
increase in janitorial revenues relates to organic growth.
Gross profit. Gross profit for the nine months ended September 30, 1999
increased by $151.9 million, or 148.5%, to $254.2 million from $102.3 million
for the nine months ended September 30, 1998. Of this increase, $135.9 million
relates to the mechanical and electrical operations and $16.0 million to the
janitorial operations.
Gross profit as a percentage of revenues, "gross margin, decreased to 20.1%
for the nine months ended September 30, 1999 from 21.4% for the nine months
ended September 30, 1998 primarily as a result of the mechanical businesses
acquired subsequent to September 30, 1998 which traditionally have lower gross
margins than electrical businesses.
Selling, general and administrative. Selling, general and administrative
expenses for the nine months ended September 30, 1999 increased by $85.3
million, or 140.9%, to $145.9 million from $60.6 million for the nine months
ended September 30, 1998. Of this increase, $70.8 million relates to an
increase in the mechanical and electrical operations and $9.7 million to the
janitorial operations. $4.8 million relates to corporate general and
administrative expenses including corporate management and infrastructure
costs to support our operations.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.5% for the nine months ended September 30, 1999 from 12.7% for
the nine months ended September 30, 1998. This decrease is due primarily to
the leverage of corporate's selling, general and administrative expenses and
our acquired businesses' selling, general and administrative expenses over an
increase in revenues.
Goodwill amortization. Goodwill amortization for the nine months ended
September 30, 1999 increased by $6.9 million, or 151% to $11.5 million from
$4.6 million for the nine months ended September 30, 1998. This increase was a
result of the increase in acquired businesses.
Restructuring and recapitalization charges. Restructuring and
recapitalization charges were $8.0 million for the nine months ended September
30, 1999. These charges, as discussed in Note 6 to the financial statements
included elsewhere in this prospectus, included $2.8 million relating to
compensation expense for stock options exercised and the underlying shares of
common stock repurchased in our recapitalization plan, and $5.2 million of
restructuring charges pertaining to the relocation of our corporate
headquarters and integration of the janitorial and maintenance management
operations.
Other income, net. Other expense, net for the nine months ended September
30, 1999 changed by $32.1 million, to $16.5 million of other expense from
other income of $15.6 million for the nine months ended
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September 30, 1998. The increase in other expense is primarily attributable to
the increase in net interest expense as a result of the use of our cash funds
and the incurrence of borrowings to provide the necessary funds for the
repurchase of common stock in the tender offer.
Provision for income taxes. The provision for income taxes for the nine
months ended September 30, 1999 increased to $32.3 million from $22.5 million
for the nine months ended September 30, 1998, reflecting an effective tax rate
of 44.6% and 42.6%, respectively. The increase in the effective rate was
primarily attributable to the increase in income generated from entities which
were subject to C corporation taxes, versus businesses acquired under the
pooling-of-interests method which had elected to be treated as subchapter S
corporations for tax purposes prior to our acquisition of them and an increase
in non-deductible goodwill amortization associated with certain acquisitions.
Year ended December 31, 1998 Compared to the Year ended December 31, 1997
Revenues. Consolidated revenues for the year ended December 31, 1998
increased by $739.5 million, or 1054.9%, to $809.6 million from $70.1 million
for the year ended December 31, 1997. This increase was a result of our
acquisition of the 26 businesses accounted for under the purchase method of
accounting during the year ended December 31, 1998, which have been included
since their respective dates of acquisition. For the year ended December 31,
1998, approximately 66%, 14% and 20% of our revenues were derived from
electrical installation and maintenance services, mechanical installation and
maintenance services and janitorial and maintenance management services,
respectively.
Gross profit. Gross profit for the year ended December 31, 1998 increased by
$162.1 million, or 1441.9%, to $173.4 million from $11.2 million for the year
ended December 31, 1997. This increase was primarily a result of the
acquisition of the companies under the purchase method of accounting and, to a
much lesser extent, the increased gross profit of the businesses accounted for
under the pooling-of-interests method. Gross margin increased to 21.4% for the
year ended December 31, 1998, from 16.0% for the year ended December 31, 1997.
This increase in the gross margin was primarily attributable to the higher
gross margins of the businesses acquired and accounted for under the purchase
method of accounting.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 increased by
$88.0 million, or 747.2%, to $99.8 million from $11.8 million for the year
ended December 31, 1997. This increase was primarily attributable to the
selling, general and administrative expenses of the businesses accounted for
under the purchase method of accounting, and the general and administrative
costs of our corporate activities. Selling, general and administrative
expenses as a percentage of revenues decreased to 12.3% for the year ended
December 31, 1998 from 16.8% for the year ended December 31, 1997.
Goodwill amortization. Goodwill amortization increased by $7.7 million for
the year ended December 31, 1998 as result of the goodwill recorded in
conjunction with the businesses accounted for under the purchase method of
accounting.
Non-recurring acquisition costs. Non-recurring acquisition costs of $0.8
million consists of costs incurred in conjunction with the business
combinations accounted for under the pooling-of-interests method. These costs
include legal and accounting fees, broker fees and other costs directly
attributable to the business combination.
Other income, net. Other income, net for the year ended December 31, 1998
increased by $16.3 million from $2.1 million for the year ended December 31,
1997 to income of $18.4 million for the year ended December 31, 1998. This
increase is primarily attributable to the interest income of $19.4 million
generated from the investment of the proceeds raised in our initial public
offering in December 1997.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1998 increased to $36.0 million, reflecting an effective
tax rate of 43.2% from an effective tax rate of 6.1% for the year ended
December 31, 1997. The increase in the effective rate was primarily
attributable to the increase in income
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generated from entities which were subject to C corporation taxes, versus the
businesses accounted for under the pooling-of-interests method, which had
elected to be treated as subchapter S corporations for tax purposes prior to
our acquisition of them. Additionally, the 43.2% effective rate reflects the
non-deductibility of goodwill amortization associated with the majority of our
acquisitions.
Year ended December 31, 1997 Compared to the Year ended December 31, 1996
Revenues. Consolidated revenues for the year ended December 31, 1997
increased by $6.9 million, or 10.9%, to $70.1 million from $63.2 million for
the year ended December 31, 1996. This increase was attributable to an
increase in the janitorial and maintenance management services provided by the
businesses we acquired in transactions accounted for under the pooling-of-
interests method. These businesses had an increase in revenue as a result of
their expansion into new geographic markets and further penetration of their
existing markets.
Gross profit. Gross profit for the year ended December 31, 1997 increased by
$1.7 million, or 17.9%, to $11.2 million from $9.5 million for the year ended
December 31, 1996. Gross profit as a percentage of revenues increased to 16.0%
for the year ended December 31, 1997 from 15.1% for the year ended December
31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 increased by $3.0
million, or 33.8%, to $11.8 million from $8.8 million for the year ended
December 31, 1996 as a result of the increases in the expenses of the
janitorial and maintenance management services businesses we acquired in
transactions accounted for under the pooling-of-interests method as they
increased their staff to support the increase in revenues. Selling, general
and administrative expenses as a percentage of revenues increased to 16.8% for
the year ended December 31, 1997 from 13.9% for the year ended December 31,
1996.
Other income, net. Other income, net for the year ended December 31, 1997
increased by $2.4 million, or 773.9%, to income of $2.1 million from expense
of $0.3 million for the year ended December 31, 1996. This increase is
primarily attributable to the interest income generated from the investment of
the proceeds we raised in our initial public offering in November 1997.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1997 increased to $0.1 million, reflecting an effective tax
rate of 6.1%, as compared to a tax rate of 3.0% for the year ended December
31,1996. The increase in the effective rate is primarily attributable to the
increase in income generated from entities subject to C Corporation income
taxes.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, net cash provided by
operating activities was approximately $6.1 million. Net cash used in
investing activities for the nine months ended September 30, 1999 was $150.4
million, which primarily consisted of $131.0 million used for acquisitions and
$19.7 million used for purchases of property and equipment. Net cash used in
financing activities for the nine months ended September 30, 1999 was $54.3
million, which consisted primarily of $560.1 million used to repurchase our
stock in the tender offer net of proceeds from long-term debt of $506.7
million, including the issuance of the senior subordinated notes, the
convertible junior subordinated debentures and the borrowings under the credit
facility.
We acquired seventeen businesses during the nine months ended September 30,
1999. Aggregate consideration for these acquisitions consisted of 2,959,661
shares of common stock and $96.8 million in cash. In conjunction with the
acquisitions consummated during the nine months ended September 30, 1999 and
during the year ended 1998, we have entered into contingent consideration
agreements which provide for the payment of cash and issuance of shares of
common stock based upon the performance of certain of the businesses acquired.
As of September 30, 1999, $43.7 million of cash and applicable professional
fees was paid and 2,350,501 shares were issued under these agreements. We
expect that approximately $15 million of additional contingent consideration
will become payable in 1999, of which approximately $7.5 million will be
payable in cash.
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As previously discussed, on May 11, 1999, we completed the repurchase for
cash of 24,617,840 shares of our common stock at $22.50 per share and 883,573
shares of common stock underlying stock options at $22.50 per share less the
exercise price per share of the options. Total funds utilized for the
repurchase totaled $560.1 million, which were obtained from our available
cash, the net proceeds of $195.5 million from the issuance of $200 million of
10 1/2% senior subordinated notes, $100 million from the issuance of 7 1/2%
convertible junior subordinated debentures to Apollo and borrowings under the
credit facility.
Interest on the senior subordinated notes is paid semi-annually on May 1 and
November 1 of each year and the notes will mature on May 1, 2009. The senior
subordinated notes are unsecured and guaranteed by our domestic subsidiaries
and rank junior to the credit facility.
We may redeem the senior subordinated notes, in whole or in part, at any
time on or after May 1, 2002 at specified redemption prices, plus accrued
interest. At any time (which may be more than once) before May 1, 2002, we can
redeem up to 35% of the outstanding senior subordinated notes with money
raised in one or more equity offerings under certain circumstances. Upon a
"change of control" of the company (as defined in the indenture for the senior
subordinated notes), the holders of the senior subordinated notes will have
the right to sell the notes to us at 101% of the face amount plus accrued
interest. The proposed merger is not a change of control as that term is
defined in the indenture for the senior subordinated notes.
Additionally, the indenture governing the senior subordinated notes contains
certain covenants relating to, among other things, our ability to incur
indebtedness, pay dividends on, or repurchase capital stock, incur liens, sell
or otherwise dispose of a substantial portion of our assets or merge or
consolidate with another entity.
The convertible junior subordinated debentures will mature on May 1, 2012.
They provide for interest payments at a rate of 7 1/2% to be paid in
additional convertible junior subordinated debentures or cash, at our
election, for the first five years after their issuance, and in cash
thereafter. The holders of a majority of the outstanding principal amount of
the convertible junior subordinated debentures, however, will have the right
to require the payment of interest in cash after the third and through the
fifth anniversary of the issuance of the convertible junior subordinated
debentures. In addition, the provisions of the credit facility and the
indenture for the senior subordinated notes limit our ability to pay cash
interest payments. The convertible junior subordinated debentures are
convertible into shares of our common stock at an initial conversion price of
$22.50 per share plus all accrued and unpaid interest. Assuming conversion of
the principal amount of the convertible junior subordinated debentures and
considering the first and second interest payments were paid in additional
convertible debentures, Apollo will have the right to acquire upon conversion
4,613,556 shares of common stock or 15% of the shares outstanding as of
November 12, 1999. If the convertible junior subordinated debentures are
converted prior to the fifth anniversary of their issuance, the amount
converted into shares will include additional interest that would have accrued
or been paid from the date of conversion through the fifth anniversary of the
issuance of the convertible junior subordinated debentures. However, unless
the conversion is in connection with a change of control, as defined in the
indenture for the convertible junior subordinated debentures, the additional
interest will not exceed a total of 30 months of interest. Subject to certain
exceptions, we will adjust the conversion price under certain circumstances,
including the issuance of shares at a price below the conversion price of the
convertible junior subordinated debentures or below the then fair market value
of a share of our common stock. The indenture for the convertible junior
subordinated debentures limits our ability to, among other things, incur
additional indebtedness, pay dividends, repurchase securities or repay certain
other indebtedness.
The credit facility consists of a $125.0 million term loan and a $225.0
million revolving credit facility, in each case maturing five years after the
date of the borrowing. The credit facility provides for certain mandatory
repayments of the outstanding indebtedness. As of November 12, 1999, we had
$87.0 million of availability under our credit facility. The credit facility
bears interest at the sum of the (i) applicable margin and (ii) at our option,
either the "base rate" or the "eurodollar rate" (as defined in the credit
facility). The base rate will be the higher of (i) the rate that Bankers Trust
Company announces from time to time as its prime lending rate, as in effect
from time to time, and (ii) of 1% in excess of the overnight federal funds
rate. The applicable margin will be a percentage per annum equal to (i) in the
case of term loans maintained as (x) base rate loans, 2.00%,
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and (y) eurodollar rate loans, 3.00%, and (ii) in the case of revolving loans
maintained as (x) base rate loans, 1.50%, and (y) eurodollar rate loans,
2.50%, in each case subject to step-downs to be determined based on certain
levels of financial performance. We must also pay a commitment fee in the
amount of 0.50% per year on the daily average unused portion of the credit
facility, subject to step-downs based upon financial performance. In addition,
the commitment fee percentage will be increased by 0.25% at all times that the
total unutilized commitments under the revolving credit facility exceed 75% of
the sum of (x) the total revolving commitment then in effect plus (y) the
aggregate outstanding principal amount of the term loan. The credit facility
provides for certain mandatory repayments of the outstanding indebtedness.
The credit facility includes a number of significant covenants that impose
restrictions on us and our subsidiaries. These covenants include, among
others, restrictions on our ability to incur additional indebtedness and pay
the interest on Apollo's convertible junior subordinated debentures in cash,
and restrictions on mergers, acquisitions and the disposition of assets, sale
and leaseback transactions and capital lease payments, dividends and other
distributions and voluntary prepayments of indebtedness. In addition, we are
required to comply with financial covenants with respect to minimum interest
coverage and maximum leverage ratios.
We need funds for general corporate purposes, including to pay interest on
the senior subordinated notes, the convertible junior subordinated debentures
and the credit facility, to pay contingent consideration required by the terms
of certain acquisition agreements and to make future acquisitions and capital
expenditures. We anticipate that our cash flow from operations and borrowings
available under the credit facility will be sufficient to meet these liquidity
requirements over the next twelve months.
Year 2000 Issue
The Year 2000 issue refers to a number of date-related problems that may
affect information technology and non-information technology systems,
including codes embedded in chips and other hardware devices. These problems
include systems that identify a year by two digits and not four so that a date
using "00" would be recognized as the year "1900" rather than "2000." This
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions, send invoices or engage in normal business
activities. The Year 2000 issue is a significant issue for most, if not all
companies, with far reaching implications, some of which cannot be anticipated
or predicted with any degree of certainty.
State of Readiness. Since our initial public offering in December 1997, we
have acquired 46 businesses offering mechanical, electrical and janitorial
services. The due diligence relating to the Year 2000 issue that was performed
on these businesses did not reveal any significant internal operating systems
issues. In addition, such due diligence revealed that most of the acquired
businesses have addressed the Year 2000 issue, but are in different phases of
assessment and remediation. During the third quarter we completed a
comprehensive survey of our operating subsidiaries to ensure that our
operating subsidiaries are adequately addressing, or have adequately
addressed, the Year 2000 issue.
The survey mentioned above covered the following areas: (i) our information
technology and operating systems, including job-costing, billing, payroll and
accounting systems; (ii) our non-information technology systems, such as
buildings, plant, equipment and other infrastructure systems that may contain
embedded microcontroller technology; (iii) the systems of our major vendors,
insofar as they relate to our business; and (iv) the systems of our major
customers for which we have performed installation and maintenance services.
These surveys revealed that our subsidiaries have performed an inventory of
hardware and software and conducted research to determine the Year 2000
compliance status of the products. Substantially all of our internal operating
systems have been remediated, upgraded or replaced to date and any additional
upgrading and testing is scheduled to be completed by December 31, 1999.
In addition, during the third quarter, we retained the services of a
consultant to conduct a review of our Year 2000 readiness efforts. This review
focused on our core business applications, computers, phone and voicemail
systems, which are used to conduct daily operations. The primary method used
by the consultant to
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determine Year 2000 readiness was interviews with our employees and inspection
of the surveys mentioned above. The consultant also performed Year 2000
product research and assessment. Overall, the consultant concluded that our
Year 2000 preparedness efforts were adequate.
We continue to evaluate the effect of the Year 2000 problem on our most
significant customers and suppliers, and thus indirectly on us. This
evaluation includes an ongoing process of contacting customers and suppliers
whose systems have, or may have, an effect on the way we conduct business. We
expect to complete the analysis of our customers' and suppliers' systems by
December 1999. We do not have control of these suppliers and customers. While
we will work diligently to coordinate with our suppliers and customers, there
can be no assurance they will complete their efforts prior to January 1, 2000.
There are no individual customers who will have a material impact on our
revenues should they fail to complete their Year 2000 efforts. Additionally,
we have alternative vendors that can be relied on should a current vendor fail
in its Year 2000 preparations.
Costs Related to the Year 2000 Issue. As part of the survey mentioned above,
we requested an estimate from each operating subsidiary of the material
historical and estimated costs of assessment and remediation. These costs,
include, among other things, the costs of assessment, software upgrade fees,
hardware changes and general implementation of a Year 2000 action plan.
Approximately $800,000 has been expended to date and we currently estimate
that up to an additional $500,000 may be incurred to fully comply.
Contingency Plan. We have not implemented a corporate-wide Year 2000
contingency plan. We have been in the process of identifying and resolving
Year 2000 problems and will develop contingency plans as deemed necessary.
Risks Related to the Year 2000 Issue. Although our Year 2000 efforts are
intended to minimize the adverse effects of the Year 2000 issue on our
business and operations, the actual effects of the issue cannot be known until
the Year 2000. Due to the fact that our operations are primarily service
oriented and are not heavily dependent on complex information systems, we
believe that non-information technology systems (i.e. embedded technology such
as microcontrollers) do not represent a significant area of risk relative to
Year 2000 readiness. In addition, our operations do not include capital
intensive equipment with embedded microcontrollers.
However, our failure or the failure of our major vendors and customers to
adequately address their respective Year 2000 issues generally in a timely
manner (insofar as they relate to our business) could result in, among other
things, our inability to obtain equipment that it is obligated to install in a
timely manner, reductions in the quality of materials used in our business,
reductions, delays or cancellations of customer projects, delays in payments
by customers for services performed, or a general inability to record, track
and consummate business transactions. Any or all of these events could have a
material adverse effect on our business, results of operations and financial
condition.
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BUSINESS
The Company
When the company was founded in February 1997, its goal was to identify one
or more fragmented industries that were attractive consolidation
opportunities. In January 1998, we decided to focus our consolidation efforts
exclusively on the facilities services industry. Facilities services companies
provide many of the services and related products necessary for the routine
operation and maintenance of a commercial and industrial building.
Historically, the facilities services industry consisted primarily of
privately-held or family-owned businesses. Most of these privately-held and
family-owned operations operated from day-to-day with no real market or
business plan and did not have access to capital markets to finance expansion
and adequate training and incentive programs. We realized that we could add
value by acquiring many of these companies and marketing their services on a
nationwide basis. In September 1998, we changed our name from Consolidation
Capital Corporation to Building One Services Corporation to better describe
our business.
Within less than two years, we have become a leader in the facilities
services industry. Our Building One Mechanical and Electrical Group provides
mechanical and electrical systems installation and maintenance services and
our Building One Service Solutions Group provides janitorial and maintenance
management services. Since our formation, we have grown primarily through
acquisitions, having acquired 46 companies with average revenues of
approximately $36 million. We have acquired 36 businesses specializing in
providing either mechanical or electrical installation, maintenance and/or
specialty services and ten businesses specializing in providing janitorial and
maintenance management services. We currently have more than 130 locations and
provide facilities services to over 8,800 commercial and industrial customers
in 48 states.
Our goal is to become the preeminent single-source provider of facilities
services in the United States. If our merger with GroupMAC is completed, the
combined company will be one of the largest providers of facilities services
in the United States. See "Prospectus Summary--Recent Developments." We expect
that we, or the combined company if the merger is completed, will continue to
capitalize on favorable industry dynamics such as the trend by our customers
to outsource significant portions of facilities services requirements to
third-party providers and the trend of building managers to seek a single-
source provider of facilities services. In addition, we will continue to offer
combined services to existing customers and to attract new customers seeking
to reduce the number of vendors with which they do business. We believe our
highly skilled workforce, hiring and training programs, breadth of service
offerings, geographic coverage and reputation provide us with a competitive
advantage in achieving our goal.
Industry Background
Facilities services companies provide many products and services needed for
the operation and maintenance of a building including:
.Janitorial and maintenance management .Engineering
.Mechanical installation and maintenance .Parking facility management
.Electrical installation and maintenance .Security systems and management
.Data communications cabling .Grounds keeping and landscaping
.Lighting equipment and maintenance .Pest control
.Building automation and controls .General equipment maintenance
.Energy management
The facilities services industry is highly fragmented with a small number of
firms providing multi-service product offerings on a multi-location basis.
According to industry data, no single source provider holds more than a 2%
market share. Electrical, mechanical and janitorial services represent more
than 75% of the revenues in the facilities services industry. The markets are
substantial and highly fragmented with a small number of multi-location
regional or national operators and a large number of relatively small,
independent, businesses serving discrete local markets with limited service
offerings.
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Since 1990, revenues in the facilities services industry have increased at a
compounded annual growth rate of approximately 5.2%. Industry experts foresee
this growth rate continuing through 2001. Each market segment within the
facilities services industry has its own specific dynamics and competitive
environment and, as a result, has different projected growth rates. In
general, the primary drivers of industry growth include:
.vendor consolidation;
.decreasing metropolitan vacancy rates;
.increased outsourcing of non-core functions by corporations;
.customer interest in relief from labor force issues;
.the need to upgrade and invest in infrastructure; and
.to a lesser extent, revival of construction activity in suburban areas and
smaller cities.
We believe that there has been a significant trend toward outsourcing
business services, including facilities services, over the last several years.
This increase in outsourcing will impact all three of the sectors in which we
do business. According to the Outsourcing Institute, approximately 80% of
United States companies outsource some aspect of their business services.
Spending on outsourcing services increased approximately 100% from 1992
through 1996 and we believe this trend will continue. The Outsourcing
Institute estimates that the demand for outsourcing services will grow at an
estimated compounded annual growth rate of 20% through the year 2000.
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.
The Mechanical and Electrical Services Industry
Mechanical and electrical services are a vital part of new construction,
repairs and remodeling projects. Virtually all domestic construction, repairs
and remodeling projects generate demand for these contracting trades.
According to the 1992 U.S. Census data, these two industries had combined
revenues of $97.2 billion, an increase from $35.3 billion in 1977,
representing a compounded annual growth rate of approximately 7%.
Additionally, the chart below shows historical and projected industry data
(dollars in billions) for the key sectors of the industry.
<TABLE>
<CAPTION>
5
year
Industry Sector 1993 1994 1995 1996 1997 1998E CAGR
--------------- ------ ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Construction Expenditures...... $478.6 $519.5 $538.1 $583.6 $618.2 $646.0 6.2%
Commercial..................... 152.2 160.5 176.8 189.8 205.5 208.4 6.5
Plumbing, HVAC................. 54.7 59.7 61.5 66.9 70.8 74.4 6.3
Electrical..................... 39.7 43.2 44.6 48.5 51.3 53.8 6.3
</TABLE>
- --------
Source: Census of Manufacturers, Dept. of Commerce, Company Data and
Industry Estimates.
Both the mechanical and electrical contracting industries are highly
fragmented and mature. In 1992, the Census of Construction Industries,
Plumbing, Heating, Air Conditioning and Electrical Work reported 54,022
electrical contractors and 75,395 HVAC/plumbing establishments. Of those
companies, 87,167 companies, or 67%, generated annual revenues of $1 million
or less. These industries are highly competitive construction trades and have
low barriers to entry.
Fragmentation within the industry should provide Building One with a
sufficient number of acquisition candidates. Both the mechanical and the
electrical industries are in the early stages of consolidation.
The Janitorial and Maintenance Management Services Industry
According to industry experts, the United States
commercial/industrial/institutional building cleaning and maintenance services
industry comprises more than 56,000 services with over $50 billion in
revenues. Approximately $20 billion of this is outsourced to companies such as
Building One. This market is expected to grow at a projected rate of 6.6%
annually between 1996 and 2000, reaching $65 billion by the turn of the
century.
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Approximately $17 billion of this is in janitorial services, with the
remainder divided up among other services, including hard floor and carpet
care, upholstery, fabric and partition cleaning, elevator and escalator care,
ceiling tile cleaning, light maintenance, and disinfecting and pest control.
We believe that the janitorial and maintenance management services industry
is highly fragmented. In a 1992 study, industry experts estimated that only
eight companies had annual revenues greater than $100 million servicing the
janitorial and maintenance management industry, with the four largest
companies comprising about 10% of industry revenues. More than 21,000 of these
companies had revenues of less than $100,000.
Our Services
We offer a broad range of mechanical and electrical installation,
maintenance and specialty services and janitorial and maintenance management
services.
Mechanical and Electrical Services. Through the Building One Mechanical and
Electrical Group, we offer a broad range of mechanical and electrical design,
installation and maintenance services for industrial, commercial, retail and
institutional customers. We currently offer, among others, the following
mechanical and electrical services:
.lighting and power systems;
.HVAC systems;
.plumbing and industrial process piping systems;
.evaluation and testing of system performance;
.building access, security systems, and fire protection systems;
.fiber optic and data cabling;
.telecommunications equipment and systems;
.fire protection, building access and surveillance systems;
.building automation and temperature systems;
.manufacturing process controls and instrumentation; and
.technical facilities management.
We believe that we are the second largest provider of mechanical and
electrical contracting and maintenance services in the United States based on
pro forma revenues. Our 36 operating companies offering mechanical and
electrical services serve over 30 states. The 1998 pro forma revenues of these
businesses were approximately $1.4 billion.
We believe that the fragmented nature of this industry provides significant
opportunities to consolidate mechanical and electrical installation,
maintenance and specialty service businesses. In addition, we believe that the
majority of owners in this industry have limited access to adequate capital
for modernization, training and expansion and limited opportunities for
liquidity of ownership interests in their business. Many of these businesses
are faced with increased competition from larger entities with greater
financial resources, resulting in part from the deregulation of the United
States gas and electric utility industries. Because of these opportunities,
several publicly traded consolidators, in addition to our company, have
emerged in the mechanical and electrical installation, maintenance and
specialty service industry.
We plan to continue to expand our market presence and grow through strategic
acquisitions, partnerships with other service providers, and internal growth.
We expect to selectively acquire businesses with strong cash flows, strategic
locations and value-added service offerings. For example, because we have
fewer mechanical operating companies, we intend to acquire businesses that
provide mechanical services in areas where we already provide electrical
services to further enhance our cross-selling opportunities.
In addition, we believe that there are growth opportunities in the
electrical maintenance and specialized services portion of the business. We
are increasing the amount and proportion of revenues represented by such
services. Electrical maintenance services generate a recurring revenue stream
that is less susceptible to downswings in the economy than the more cyclical
new installation market. Specialized services require specific skills and
equipment and provide higher margins than general electrical installation and
maintenance services.
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Joint Delivery of Mechanical and Electrical Services. We recently combined
our mechanical and electrical services groups into the Building One Mechanical
and Electrical Group. Under this combination, regional managers are
responsible for both mechanical and electrical operations. Our mechanical and
electrical companies generally serve the same customers and markets, which
provides us with the opportunity to "cross-sell" our mechanical and electrical
services. Cross-selling occurs when one of our companies sells another of our
company's services to existing customers.
In addition, our Building One Mechanical and Electrical Group intends to
continue growing the proportion of work we complete on a "design-build" basis.
Design-build is an approach to installation projects in which the contractor
is given full or partial responsibility for the design specifications of the
installation. Design-build is an alternative to the traditional "plan and
spec" model, in which the contractor is required to build to the exact
specifications of the architect and engineer. We believe that design-build is
the superior model because it allows the contractor to use past experience to
install the project at the least cost to the customer. Our ability to offer
integrated mechanical and electrical services is a strong competitive
advantage when competing for design-build projects.
Janitorial and Maintenance Management Services. Our Building One Service
Solutions Group offers a full range of janitorial and maintenance management
services. A number of these services are often provided for a customer under a
contractual arrangement on a regional or national basis. The customers of this
group are 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 this group include:
.floor and carpet cleaning and maintenance;
.floor stripping and refinishing;
.chemical supply and equipment management;
.window, wall and structural cleaning and maintenance;
.restroom and other area sanitation;
.duct cleaning;
.furniture polishing; and
.exterior window, wall, sidewalk, and parking lot cleaning and maintenance.
We believe that our Building One Service Solutions Group is the largest
provider of janitorial and maintenance management services to the retail
sector in the United States based on revenues. Our ten companies offer these
services in 48 states. The pro forma revenues of these companies in 1998 were
approximately $205 million.
We believe there is significant growth potential for our Building One
Service Solutions Group as a result of the trend toward outsourcing non-core
business functions. We offer programs and systems that free the customer to
focus on its core business activity while the support services are managed in
an efficient, cost-effective manner. We believe that our management expertise,
our menu of services and new technologies will contribute to growth in this
group.
To provide seamless integrated services to our broad customer base, our
Building One Service Solutions Group selects, manages and integrates services
provided by our local companies and third parties to our customers. We often
administer the back office functions for the third party and ensure the
quality of the service performed. We also relieve our customers from the
burden of finding and supervising the contractor or in-house labor to provide
service.
We intend to increase our market presence by increasing the number of
national customers we service, first in the retail market and then in other
markets. Through strategic partnerships and subcontracting relationships, we
will add depth to our broad geographic coverage. We also may add new services
to our menu of janitorial and maintenance management services.
29
<PAGE>
The following chart identifies the businesses we have acquired since our
formation:
<TABLE>
<CAPTION>
Service Date Year
Name Segment Acquired Geographic Coverage Founded
---- ---------- -------- --------------------------------- -------
<S> <C> <C> <C> <C>
Service Management,
USA.................... Janitorial 02/04/98 National 1994
Garfield Electric
Company................ Electrical 03/11/98 Ohio, Indiana, Kentucky 1972
Indecon, Inc............ Electrical 03/11/98 Ohio, Indiana, Kentucky 1989
Riviera Electric
Construction Company,
Inc.................... Electrical 03/11/98 Colorado 1982
SKC Electric Inc........ Electrical 03/11/98 Kansas & Missouri 1980
Town & Country Electric
Inc.................... Electrical 03/11/98 Midwest Region 1972
Tri-City Electrical
Contractors, Inc....... Electrical 03/11/98 Florida 1958
Wilson Electric Company,
Inc.................... Electrical 03/11/98 Arizona 1988
Walker Engineering,
Inc.................... Electrical 03/25/98 Texas 1981
Crest International,
LLC.................... Janitorial 04/01/98 Wisconsin 1995
United Service
Solutions, Inc......... Janitorial 04/27/98 National 1997
Taylor Electric, Inc.... Electrical 05/22/98 Utah & Nevada 1978
G.S. Group, Inc......... Mechanical 05/22/98 National 1986
Perimeter Maintenance
Corporation............ Janitorial 05/31/98 Southeast Region 1985
Spann Building
Maintenance Company.... Janitorial 05/31/98 Midwest Region, Colorado, Oregon, 1959
National Network
Services, Inc.......... Electrical 06/15/98 California, South Dakota 1990
Riviera Electric of
California, Inc........ Electrical 06/17/98 California 1995
Regency Electric
Company, Inc........... Electrical 06/24/98 Southeast & Eastern Regions 1979
The Lewis Companies..... Electrical 06/29/98 Southwest Region 1979
Chambers Electronic
Communications, LLC.... Electrical 07/01/98 Arizona 1969
McIntosh Mechanical,
Inc.................... Mechanical 08/03/98 South Carolina & Georgia 1982
Ivey Mechanical, Inc.... Mechanical 09/02/98 South & Southeast Regions 1947
Tri-M Corporation &
Affiliates............. Electrical 09/03/98 Northeast Region 1964
Robinson Mechanical,
Inc.................... Mechanical 09/14/98 Colorado 1978
Watson Electrical
Construction Co. and
Welcon Management
Company................ Electrical 11/02/98 North Carolina & Virginia 1935
Boxberger, Inc.......... Janitorial 11/06/98 Southeast Region 1989
Flor-Shin, Inc.......... Janitorial 11/06/98 Southeast Region 1982
R.J. Miguel Services,
Inc.................... Janitorial 12/04/98 New England (except for Maine) 1986
Gamewell Mechanical,
LP..................... Mechanical 12/14/98 North, South Carolina, Virginia 1966
Potter Electric
Company................ Electrical 01/01/99 Nevada 1969
Beltline Mechanical
Services, Inc. ........ Mechanical 02/09/99 Texas 1987
Sanders Bros., Inc...... Mechanical 03/24/99 Southeast 1955
DFW Mechanical Services,
Inc.................... Mechanical 03/26/99 Texas 1981
American Air Company,
Inc.................... Mechanical 03/26/99 California 1973
Advent Electric Company,
Inc.................... Electrical 03/29/99 Tennessee 1978
Omni Mechanical
Services............... Mechanical 03/30/99 Oklahoma 1986
Hunt Electric, Inc...... Electrical 03/31/99 Utah 1986
Mountain View Electric,
Inc.................... Electrical 05/25/99 Colorado 1978
Constant Power
Technologies........... Electrical 06/11/99 Southwest Region 1995
D&P Janitorial, Inc..... Janitorial 06/30/99 Rhode Island 1992
Direct Engineered
Maintenance Systems,
Inc.................... Janitorial 06/30/99 Rhode Island 1997
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Service Date Year
Name Segment Acquired Geographic Coverage Founded
---- ---------- -------- ------------------- -------
<S> <C> <C> <C> <C>
Electrical Contracting,
Inc. .................. Electrical 06/30/99 California 1983
Sullivan Electric,
Inc.................... Electrical 07/26/99 Southeast Region 1953
Atlantic Electric,
Inc. .................. Electrical 07/29/99 Southeast Region 1976
K & A Mechanical,
Inc. .................. Mechanical 07/30/99 Texas 1983
B&R Electric, Inc. ..... Electrical 08/11/99 Mid-Atlantic Region 1992
</TABLE>
31
<PAGE>
Competitive Strengths
We believe several factors give us a competitive advantage in the facilities
services industry, including our:
Leading Market Position. With 1998 pro forma revenues of approximately $1.6
billion, we are a leading provider of integrated facilities services in the
United States. We believe that we are the number one or two provider of
facilities services in each of the top 15 cities in which we operate. Our size
gives us the critical mass necessary to compete for larger contracts and to
exercise significant purchasing power. The average revenues of our acquired
businesses are approximately $36 million, which we believe to be the highest
among our competitors. With this size comes enhanced infrastructure, more
experienced management teams, better management information systems and
improved brand recognition.
Premier Operating Capabilities. We believe our operating capabilities are
among the best in the industry. Our superior technical and engineering
expertise, optimal materials management practices and higher human resource
utilization provide us significant competitive advantages. For example, our
technical and engineering expertise allows us to participate in "design-build"
projects where we work with the client to develop optimal specifications and
configurations of systems and then perform the installation, which frequently
leads to recurring maintenance work. As part of an installation, we typically
prefabricate significant portions of the project at an alternative site and
drop ship materials in specific sequences, thereby optimizing materials
management and minimizing the amount of time specialized employees spend on
the job site.
Diversified Business Mix. We believe that our diversified customer base,
broad geographic presence and comprehensive service offerings provide a high
degree of stability to our revenues and cash flow and will enable us to grow
quickly and better meet our customers' needs. Such diversification reduces our
vulnerability to financial weakness of particular customers, industries or
geographic regions. Furthermore, on a pro forma basis for 1998, approximately
44% of our revenue came from higher-margin maintenance and repair business,
which is generally recurring in nature.
National Scale and Service Capability. We have become a leading national
single-source provider of facilities services through our acquisition of 46
businesses with more than 130 locations that provide services in 48 states.
This network enables us to effectively service national and regional customers
who are increasingly purchasing facilities services on a consolidated basis.
Some of our larger customers include Dow Chemical, Wal-Mart, Kmart, MarMaxx,
State Farm Insurance and Federal Express.
Superior Employee Training. We believe that our commitment to the
recruitment, training and retention of a highly skilled workforce results in
higher quality service for our customers and increased productivity and
profitability for our company.
Focused Acquisition Strategy. We have developed significant expertise in
identifying and effecting acquisitions within the facilities services
industry. We will continue to selectively pursue well-managed, profitable
businesses with established market positions, which will allow us to expand
our service offerings in existing markets or penetrate new attractive high-
growth markets.
Experienced Management Team. The presidents of our operating companies have
extensive experience in the facilities services industry. In addition, we have
developed an experienced group of operating managers who have established
strong reputations in their local markets. In addition, our stockholders have
adopted both a new equity-based incentive plan, which authorizes the company
to grant equity-based awards of 1.5 million shares of our common stock to
senior members of management, as well as a stock performance incentive plan,
which authorizes the company to grant to selected members of senior management
of our company and our operating companies awards covering up to a maximum of
1.5 million shares of our common stock depending upon the level of the
company's market price.
32
<PAGE>
Business Strategies
Our objective is to become the premier, national single-source provider of
facilities services in the United States. We expect to achieve our objective
by improving operations and expanding our business through internal growth and
selective acquisitions. If our merger with GroupMAC is completed, the combined
company will be one of the largest providers of facilities services in the
United States.
Operating Strategy
. Implement "Best of Class" Practices. We believe that opportunities exist
to achieve operating efficiencies and cost savings through the adoption
of a "best of class" operating program. We will continue to implement on
a company-wide basis the best business practices used by our operating
companies in areas such as installation and service methods, project cost
estimation, manpower utilization, recruiting and training programs,
safety and risk management programs, marketing strategies and sales
techniques and sales training materials.
. Develop Brand Recognition. We intend to create a brand name for Building
One that suggests superior quality, consistency and reliability. We
believe that developing brand recognition will enhance our ability to
secure regional and national contracts.
. Leverage Purchasing Power. We have begun, and will continue, to use our
growing purchasing power to obtain favorable prices and discounts on
products and services such as insurance, employee benefits, bonding,
service vehicles, commodity materials, legal support, real estate
services and banking and financial services.
Growth Strategy
. Exploit Industry Trends. We intend to further broaden the services we
currently offer by acquiring businesses that provide specialized services
that we want to offer to our customers. This will allow us to become a
single-source provider for all of our customers' mechanical, electrical
and janitorial needs. We believe that becoming a single-source provider
will allow us to take advantage of the recent industry trends of vendor
consolidation and increased outsourcing of facilities services.
. Leverage Customer Relationships. We intend to use our strong customer
relationships to expand the services we provide to those customers. Our
operating companies that provide mechanical and electrical services
generally provide services to the same markets and customers. Therefore,
we believe that significant opportunities exist to cross-sell our
mechanical and electrical services to existing customers. In addition,
relationships with our janitorial customers have enabled us to cross-sell
our mechanical and electrical services.
. Enter New Geographic Markets. We intend to selectively pursue
acquisitions in geographic areas where we do not currently operate to
further enhance our ability to service our clients on a nationwide basis.
. Expand Within Existing Markets. We intend to selectively pursue
additional acquisitions in areas where we already operate to expand
market penetration and the range of services offered. For example, we
have fewer mechanical than electrical businesses and intend to acquire
businesses that provide mechanical services in areas where we already
provide electrical services to further enhance our cross-selling
opportunities.
Customers
We have a diverse customer base, with no single customer accounting for more
than 3% of our pro forma revenues for 1998. We provide superior customer
service and maintain strict quality controls across geographic areas. The
consistency of our service offerings across geographic areas and product lines
helps to build long-term client relationships and provides opportunities to
cross-sell services. Some of our larger customers include Dow Chemical, Wal-
Mart, Kmart, MarMaxx, State Farm Insurance and Federal Express. We intend to
continue to build and maintain relationships with our customers by providing
consistent, high-quality service.
33
<PAGE>
Competition
The facilities services industry is highly competitive. There are large
national and multi-national organizations providing a wide variety of
facilities services to their customers. Large competitors offering multiple
services may be willing to accept lower profit margins in order to capture
market share.
We also compete with numerous smaller service providers, many of whom may
provide fewer services in limited geographic areas. These providers may have
more experience in and knowledge of the local market for such services. Such
smaller service providers may also have lower overhead costs, enabling them to
provide their services at lower rates than we can. As a result of this
competition, we may lose customers or have difficulty acquiring new customers.
Barriers to entry to the markets for certain facilities services, such as
janitorial services, are low. As a result, new competitors, including property
management companies, are beginning to enter the facilities services business.
The existing and new sources of competition place pressures on the pricing of
facilities services, which may cause our revenues or margins to decline.
As the industry undergoes continuing consolidation, we expect to face
significant competition in seeking to buy other facilities services
businesses. Therefore, we may have to pay higher prices for those businesses
we acquire in the future.
Backlog
As of September 30, 1999 we had backlog of orders believed to be firm of
$770 million.
Employees
As of November 22, 1999, we employed more than 15,000 people. Fewer than 10%
of our employees are members of labor unions. We have satisfactory employee
relationships.
Properties
As of November 22, 1999, we operated 137 facilities, including corporate
facilities, in various states. Of these facilities, 125 are leased and 12 are
owned. The facilities are used for warehouse and office purposes, or a
combination of these functions. We are expanding our facilities at four of our
local companies as a result of the expansion of these companies in recent
years. At this time, we believe that our facilities are suitable for our
purposes, and that they have adequate capacity for our present and anticipated
needs.
Legal Proceedings
We are party to litigation that arises from the normal course of business.
Management believes that none of these actions will have a material adverse
effect on our financial condition, results of operations or cash flows.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table lists the individuals who currently are the directors
and executive officers of our company. Under our financing agreement with
Apollo, Messrs. Africk, Gross and Newmark were appointed to the board of
directors on April 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- -----------------------------------------------------------------
<S> <C> <C>
Jonathan J. Ledecky..... 41 Chairman of the Board
Joseph M. Ivey.......... 40 President and Chief Executive Officer; Director
F. Traynor Beck......... 44 Executive Vice President, General Counsel and Secretary
Timothy C. Clayton...... 45 Executive Vice President, Chief Financial Officer and Treasurer
William P. Love, Jr. ... 39 President--Building One Electrical and Mechanical Group; Director
Michael Sullivan........ 51 President--Building One Service Solutions Group
Andrew Africk........... 32 Director
Mary K. Bush............ 49 Director
Vincent W. Eades........ 38 Director
Michael Gross........... 37 Director
Brooks Newmark.......... 41 Director
M. Jude Reyes........... 42 Director
</TABLE>
- --------
Jonathan J. Ledecky founded our company in February 1997 and serves as our
Chairman of the Board. He served as our Chief Executive Officer from November
25, 1997 through February 25, 1999. In October 1994, he founded U.S. Office
Products Company, a company that provides office products, office furniture
and office coffee and beverage services, and served as its Chairman of the
Board until June 10, 1998 and its Chief Executive Officer until November 5,
1997. Jonathan J. Ledecky currently serves as a director of USA Floral
Products, Inc., UniCapital Corporation, Aztec Technology Partners, Inc.,
School Specialty, Inc., the Ledecky Foundation and MicroStrategy Incorporated.
He is also the general partner of Ironbound Partners, LLC, a private
investment management firm, and a director of the United States Chamber of
Commerce. He is a graduate of Harvard College and Harvard Business School.
Joseph M. Ivey has served as our President and Chief Executive Officer since
February 25, 1999 and has been a director of our company since October 8,
1998. From September 2, 1998 to February 25, 1999, Mr. Ivey served as the
President of the Building One Mechanical Group. Mr. Ivey has also served,
since October 1990, as the Chairman and Chief Executive Officer of Ivey
Mechanical Company, Inc., a mechanical services company that we acquired on
September 2, 1998. Mr. Ivey also serves as a director of 1st M&F Corp. Mr.
Ivey is a graduate of, and serves as a trustee of, Freed-Hardeman University.
F. Traynor Beck has served as Executive Vice President, General Counsel and
Secretary of our company since November 25, 1997. Between January 1988 and
November 25, 1997, Mr. Beck was associated with the law firm of 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.
Timothy C. Clayton has served as Executive Vice President, Chief Financial
Officer and Treasurer of our company since November 25, 1997. Between August
1976 and October 1997, Mr. Clayton was associated with Price Waterhouse LLP
(now PricewaterhouseCoopers LLP), most recently as a partner since July 1988.
In his capacity as a 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.
35
<PAGE>
William P. Love, Jr. currently serves as the President of the Building One
Electrical and Mechanical Group and has been a director of our company since
March 11, 1998. From September 1980 to March 11, 1998, Mr. Love served as the
President and Chief Executive Officer of SKC Electric, Inc., an electrical
installation and maintenance services company that Mr. Love founded and that
has been a wholly owned subsidiary of our company since we acquired it on
March 11, 1998. Mr. Love is the director designee of the initial companies in
the electrical group pursuant to the agreements between our company and each
company within the founding group.
Michael Sullivan has served as the President of the Building One Service
Solutions Group since November 1998. From 1980 to 1998, Mr. Sullivan served as
President and Chief Executive Officer of Sullivan Service Company, a contract
management firm that Mr. Sullivan founded and that has been a wholly owned
subsidiary of our company since we acquired it on April 27, 1998 from United
Service Solutions. In 1980, Mr. Sullivan founded SPC Contract Management,
which specializes in outsourcing cleaning services for the specialty retailer,
and was acquired by our company on April 27, 1998 from United Service
Solutions. From 1975 to 1980 he served as the President of Coastal Building
Maintenance, a contract cleaning company.
Andrew Africk has served as a director of the company since April 30, 1999.
Mr. Africk has been a principal of Apollo Advisors, L.P. (which, together with
its affiliates, acts as the managing general partner of several private
securities investment funds) and of Lion Advisors, L.P. (a financial advisor
to, and representative of institutional investors with respect to, securities
investments) for more than five years. Mr. Africk is also a director of
Continental Graphics Holdings, Inc. and Rare Medium Group, Inc. Mr. Africk is
a director designee of Apollo pursuant to an agreement between our company and
Apollo.
Mary K. Bush has been a director of our company since September 15, 1998.
Ms. Bush has served as the President of Bush & Company, an international
financial consulting firm, since 1991. Prior to founding Bush & Company, she
served from 1989 to 1991 as Managing Director of the U.S. Federal Housing
Finance Board. Prior to that, she was Vice President--International Finance at
the Federal National Mortgage Association (Fannie Mae). From 1984 to 1988, she
served as U.S. Alternate Executive Director of the International Monetary
Fund. Ms. Bush serves on a number of boards of directors and advisory boards,
including Texaco, Inc., Mortgage Guaranty Insurance Corporation, a number of
Pioneer mutual funds, Novecon Management Company, Washington Mutual Investors
Fund, March of Dimes, Hoover Institution, Wilberforce University, the Folger
Shakespeare Library, Project 2000, Inc. and the Bretton Woods Committee.
Vincent W. Eades has been a director of our company since November 25, 1997.
Since May 20, 1998, Mr. Eades has served as the Chairman and Chief Executive
Officer of Powerride Motorsports, Inc., a company seeking to consolidate the
motorcycle and leisure sports dealership industry. Between May 1995 and May
20, 1998, he served as the Senior Vice President of Sales and Marketing for
Starbucks Coffee Co., Inc. From November 1985 through May 1995, Mr. Eades was
employed by Hallmark Cards, Inc., most recently as a General Manager.
Additionally, he serves as a director of USA Floral Products, Inc and
UniCapital Corporation.
Michael Gross has served as a director of the company since April 30, 1999.
Mr. Gross is one of the founding principals of Apollo Advisors, L.P. and of
Lion Advisors, L.P. Mr. Gross is also a director of Allied Waste Industries,
Inc., Breuners Home Furnishings, Inc., Converse, Inc., Florsheim Group, Inc.,
United Rentals, Inc., Saks Incorporated and Rare Medium Group, Inc. Mr. Gross
is a director designee of Apollo pursuant to an agreement between our company
and Apollo.
Brooks Newmark has served as a director of the company since April 30, 1999.
Mr. Newmark is a principal of Apollo Advisors, L.P. Mr. Newmark has been
associated with Apollo for more than five years and is Vice President of
Apollo Management (U.K.) L.L.C. Mr. Newmark is a director designee of Apollo
pursuant to an agreement between our company and Apollo.
M. Jude Reyes has been a director of our 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,
he served as President and Chairman of Harbor Distributing Company in Los
Angeles, California. He is also a director and investor in three other
beverage distributors and two wholesale food service distributors.
36
<PAGE>
Committees of the Board of Directors
The board of directors has established an audit committee, a compensation
committee and a nominating 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 our books and records, reviewing the proposed
scope of such audit and approving the audit fees to be paid, reviewing our
accounting and financial controls with the independent public accountants and
our financial and accounting staff and reviewing and approving transactions
between us and our directors, officers and affiliates. Messrs. Eades, Reyes,
Africk and Newmark currently serve as the members of the audit committee. The
audit committee held two meetings (including telephonic meetings) and acted by
unanimous consent on several occasions in fiscal 1998.
The compensation committee reviews our compensation plans to ensure that
they meet corporate objectives. The compensation committee's responsibilities
also include administering the 1997 Long-Term Incentive Plan, the 1998 Long-
Term Incentive Plan and the Section 162(m) Bonus Plan, including selecting the
officers and salaried employees to whom awards will be granted. Messrs. Eades,
Reyes, Africk and Newmark, who are independent directors, currently serve as
the members of the compensation committee. The compensation committee acted
one time by unanimous consent in fiscal 1998.
The nominating committee recommends to the board of directors the slate of
nominees of directors to be elected by the stockholders and any directors to
be elected by the board to fill vacancies and the directors to be selected for
membership to the various board committees. Jonathan J. Ledecky, Joseph M.
Ivey, F. Traynor Beck, Mary K. Bush and M. Jude Reyes currently serve as the
members of the nominating committee.
Director Compensation
Directors who do not receive compensation as officers, employees or
consultants of our company are entitled to receive an annual retainer fee of
$25,000. In addition, pursuant to our 1997 Non-Employee Directors' Stock Plan,
each director who is not an employee automatically receives an initial grant
of an option to purchase 20,000 shares of our common stock on the date that
person is first elected to the board of directors. Such directors also receive
an automatic annual grant of an option to purchase 5,000 shares. The exercise
price of each option is equal to the fair market value on the date of grant of
one share of our common stock. In connection with the negotiation of our
agreement with Apollo in December 1998, Messrs. Eades and Reyes, members of
the special committee to the board of directors, received $19,500 each.
37
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning the cash
and non-cash compensation earned by or awarded to the persons who were our
executive officers during 1998. Our company's predecessor was organized in
February 1997, with David Ledecky as its sole employee. We employed the
remaining executive officers listed in the table as of November 25, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------- Awards
Annual Securities
Compensation Underlying
Name and Principal Fiscal Salary Options/SARS All Other
Position Year ($)(1) Bonus (#)(2) Compensation
- ------------------------ ------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jonathan J. Ledecky..... 1998 $750,000 $42,500 -- --
Chief Executive Officer
and 1997 125,000 -- -- --
Chairman of the
Board(3)
Timothy C. Clayton...... 1998 $300,000 175,000 -- $110,295(4)
Executive Vice
President, 1997 223,000 -- 500,000 25,000
Chief Financial Officer
and Treasurer
F. Traynor Beck......... 1998 $300,000 175,000 -- 4,800(5)
Executive Vice
President, 1997 223,000 -- 500,000 --
General Counsel and
Secretary
David Ledecky........... 1998 $300,000 100,000 -- 4,800(5)
Executive Vice
President and 1997 327,994(7) -- 500,000 --
Chief Administrative
Officer, Director(6)
</TABLE>
(1) The 1997 figures include bonus payments of $200,000 for Timothy C.
Clayton, F. Traynor Beck and David Ledecky, which were guaranteed for the
first year of employment pursuant to their employment agreements, declared
in December 1997 and paid in January 1998.
(2) Represents options granted in 1997 with respect to our common stock, each
option to vest ratably on November 25, 1998, 1999, 2000 and 2001, unless
accelerated under certain conditions. The vesting of the options was
accelerated in connection with our recent tender offer. To the extent that
we did not acquire 50% of the shares underlying an option in the tender
offer, such option is now immediately exercisable with respect to those
shares and will be exercisable with respect to up to 125,000 shares
beginning on November 25, 2000 and with respect to the remaining 125,000
shares beginning on November 25, 2001.
(3) On February 25, 1999, our company appointed Joseph M. Ivey as President
and Chief Executive Officer. Jonathan J. Ledecky currently serves as
Chairman of the Board.
(4) Represents a $4,800 contribution to Timothy C. Clayton's 401(k) plan and
$105,495, the discounted value of the benefit to Mr. Clayton of the
premium paid by the company during 1998 for a split-dollar insurance
policy under which the company is entitled to a refund of the premiums
paid by it to the insurer at the time Mr. Clayton becomes the owner of the
policy at the earlier of the end of 22 years or death.
(5) Represents our company's matching contribution to F. Traynor Beck's 401(k)
plan.
(6) On April 30, 1999, David Ledecky was terminated without cause as Executive
Vice President and Chief Administrative Officer and resigned from the
board of directors.
(7) Includes payments made to David Ledecky by our predecessor.
38
<PAGE>
Employment Agreements
Joseph M. Ivey. Effective February 25, 1999, we entered into an employment
agreement with Joseph M. Ivey, our President and Chief Executive Officer and a
company director. The agreement has a two-year term and is automatically
renewable on the same terms for one-year terms thereafter, unless either we or
Mr. Ivey give notice of non-renewal at least six months prior to the end of
the term. According to the terms of the agreement, Mr. Ivey is obligated to
devote his full business time, attention and efforts to his duties as
President and Chief Executive Officer. The agreement provides for an annual
salary of $400,000 and a discretionary bonus in an amount equal to up to 150%
of his base salary. Pursuant to the agreement, Mr. Ivey received a grant of an
option to purchase 250,000 shares of common stock. The employment agreement
provides that the option vests ratably on the first, second, third and fourth
anniversaries of the date of the grant, unless accelerated upon a "change in
control" (as defined in the 1998 Long-Term Inventive Plan) or upon termination
of Mr. Ivey without "cause" (as defined in the employment agreement). The
vesting of the option was accelerated in connection with our recent tender
offer. Mr. Ivey's option is now exercisable with respect to 125,000 shares and
will be exercisable with respect to 62,500 shares beginning on November 25,
2000 and with respect to an additional 62,500 shares beginning on November 25,
2001. If we terminate the agreement other than for "cause," Mr. Ivey will be
entitled to receive an amount equal to twice his base salary plus the amount
of bonus he received in the prior year and to participate in pension,
insurance and other benefit programs on terms which are identical to those of
our other senior executive officers. Mr. Ivey's employment agreement prohibits
him from competing with us during the term of his employment and, depending on
the nature of his termination, for a period of up to two years thereafter. The
agreement also provides for certain executive perquisites.
F. Traynor Beck, Timothy C. Clayton and David Ledecky. On November 25, 1997,
we entered into employment agreements with F. Traynor Beck, Timothy C. 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 the employee or we give notice of non-renewal
at least six months prior to the end of the term. According to the terms of
the agreements, each is obligated to devote his full business time, attention
and efforts to his duties under the agreement. 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 equal to up to 100% of
his base salary for each year thereafter. On November 25, 1997, 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 our initial public offering price
per share ($20.00). The employment agreements provide that the options vest
ratably on the first, second, third and fourth anniversaries of the date of
grant, unless accelerated upon a "change in control" (as defined in the
employment agreement) or upon the termination of the employee without "cause"
(as defined in the employment agreement). The vesting of the options was
accelerated in connection with our recent tender offer. To the extent that we
do not acquire 50% of the shares underlying each such option in the tender
offer, such option, except as discussed below, is now exercisable with respect
to those shares and will be exercisable with respect to up to 125,000 shares
beginning on November 25, 2000 and with respect to the remaining 125,000
shares beginning on November 25, 2001. If we terminate the agreement other
than for "cause," the executive officer will be entitled to receive an amount
equal to twice his base salary plus the amount of the bonus he received in the
prior year. The agreements generally prohibit the executive officer from
competing with us during the term of his employment and for a period of one
year thereafter. The agreements also provide for certain executive benefits
and perquisites. The salaries for Messrs. Beck and Clayton were increased to
$330,000 in March 1999. We have entered into an agreement with David Ledecky
relating to the termination without cause of his employment as executive vice
president and chief administrative officer of the company and his resignation
as a director of the company effective on April 30, 1999. We paid David
Ledecky an amount in accordance with
the termination without cause provisions of his employment agreement. In
addition, in exchange for his waiver of certain contractual rights, his
agreement to accept certain continuing obligations and the forfeiture and
cancellation of all of David Ledecky's remaining options, we paid David
Ledecky $306,512.50 pursuant to the terms of the termination agreement.
39
<PAGE>
William P. Love, Jr. On July 8, 1999, we entered into an employment
agreement with William P. Love Jr., who is President of our Mechanical and
Electrical Group and a director of our company. The agreement has a two-year
term and is automatically renewable for one-year terms thereafter, unless
either Mr. Love or we give notice of non-renewal at least six months prior to
the end of the term. The agreement provides for an annual salary of $330,000
and a performance-based bonus of up to 100% of his base salary. In connection
with the execution of the employment agreement, we granted Mr. Love an option
to purchase 215,000 shares of our common stock. The option vests ratably on
the first, second, third and fourth anniversaries of the date of grant, unless
accelerated upon a "change of control" (as defined in the employment
agreement). Although the vesting of the options would accelerate if the
proposed merger with GroupMAC were completed, Mr. Love has agreed to waive the
automatic acceleration provisions contained in the employment agreement. If we
terminate the agreement other than for "cause," Mr. Love will be entitled to
receive an amount equal to twice his base salary plus the amount of the bonus
he received in the prior year. The agreement generally prohibits Mr. Love from
competing with us during the term of the agreement and for a period of one
year thereafter.
Jonathan J. Ledecky. On June 25, 1999, the company entered into a letter
agreement with Jonathan J. Ledecky whereby Mr. Ledecky's employment agreement
was terminated. In accordance with the terms of the employment agreement, Mr.
Ledecky was paid $1,376,338. Mr. Ledecky remains as the chairman of the board
of directors.
Year-End Values of Options
The following table sets forth certain information concerning the exercise
and year-end values of options relating to our executive officers for 1998.
Aggregated Option/SARs Exercised in 1998 and Option/SAR Values at end of 1998
<TABLE>
<CAPTION>
Number of
Securities Value of
Shares Underlying Unexercised
Acquired Unexercised In-the-money
on Options/SARs Options/SARs
Exercise Value at End of 1998 at End of 1998
(# of Realized (Exercisable/ (Exercisable/
shares) ($)(1) Unexercisable)(#) Unexercisable)($)(2)
Name -------- -------- ----------------- --------------------
<S> <C> <C> <C> <C>
Jonathan J. Ledecky... -- -- -- --
Timothy C. Clayton.... -- -- 125,000/375,000 $109,375/$328,125
F. Traynor Beck....... -- -- 125,000/375,000 109,375/ 328,125
David Ledecky......... -- -- 125,000/375,000 109,375/ 328,125
</TABLE>
(1) The "value realized" represents the difference between the base (or
exercise) price of the option shares and the market price of the option
shares on the date the option was exercised. The value realized was
determined without considering any taxes which may have been owned.
(2) "In-the-money" options are options whose base (or exercise) price was less
than the market price of our common stock at December 31, 1998. The value
of such options is calculated assuming a stock price of $207/8, which was
the closing price of our common stock on the Nasdaq Stock Market on
December 31, 1998.
40
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Set forth below is a description of certain transactions and relationships
between us and our officers, directors and principal stockholders.
Jonathan J. Ledecky, our Chairman and founder, is the brother of David
Ledecky, our former Executive Vice President, Chief Administrative Officer and
a former director.
Joseph M. Ivey, our President and Chief Executive Officer and a director, is
an officer and stockholder of two corporations that lease real property and an
airplane to Ivey Mechanical Company, one of our mechanical subsidiaries. The
leases provide for lease payments in the aggregate amount of $8,200 per month,
or $98,400 annually. In addition, our company pays a fee based upon the use of
the airplane. In 1998, our company paid $43,120 in usage fees for the
airplane.
On March 11, 1998, we completed the acquisition of SKC Electric, Inc. SKC
Electric, Inc. leases office, warehouse and storage space from SKC Properties,
L.L.C., a principal member of which is William P. Love, Jr. Mr. Love is one of
the former owners of SKC, Inc., a director, and President of the Building One
Mechanical and Electrical Group. The lease provides for lease payments in the
amount of $8,095 per month, or $97,140 annually.
Effective April 30, 1999, Messrs. Africk, Gross and Newmark were appointed
to the board of directors pursuant to the agreements that our company entered
into with Apollo. Apollo received fees of $2.5 million in connection with its
agreement to acquire an aggregate principal amount of $100 million of our 7
1/2% convertible junior subordinated debentures. In addition, Apollo was
reimbursed for its fees and expenses incurred in connection with its
transaction with our company.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known by Building One
regarding the beneficial ownership of shares of Building One common stock as
of November 15, 1999 by (1) each director of Building One, (2) the chairman
and each of the four other most highly compensated executive officers of
Building One for the fiscal year ended December 31, 1998, (3) each holder of
5% or more of the outstanding Building One common stock and (4) all directors
and executive officers of Building One as a group. Unless otherwise indicated,
each of the following persons may be deemed to have sole voting and
dispositive power with respect to such shares. Information set forth in the
table with respect to beneficial ownership of common stock has been provided
by such holders. Unless otherwise indicated, each holder's address is c/o
Building One at its principal executive offices.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Outstanding
Beneficial Common
Name and Title of Beneficial Owner Ownership Stock
---------------------------------- ---------- -----------
<S> <C> <C>
Directors and Executive Officers:
Andrew Africk, Director............................. 10,000(1) *
F. Traynor Beck, Executive Vice President, General
Counsel and Secretary.............................. 166,729(2) *
Mary K. Bush, Director.............................. 10,605(3) *
Timothy C. Clayton, Executive Vice President, Chief
Financial Officer and Treasurer.................... 258,000(4) *
Vincent W. Eades, Director.......................... 22,527(3) *
Michael Gross, Director............................. 10,000(1) *
Joseph M. Ivey, Director and Chief Executive
Officer............................................ 704,985(5) 2.7%
Jonathan J. Ledecky, Chairman of the Board.......... 2,986,059(6) 11.4%
William P. Love, Jr., Director and President--
Building One Electrical and Mechanical Group....... 212,991(7) *
Brooks Newmark, Director............................ 10,000(1) *
M. Jude Reyes, Director............................. 20,738(8) *
David Ledecky, Former Executive Vice President and
Chief Administrative Officer....................... --(9) --
All current directors and executive officers as a
group (12 persons)............................... 4,412,263(4) 16.9%
Holders of 5% or more of the Common Stock:
Apollo Investment Fund IV, L.P...................... 5,643,553(10) 17.6%
</TABLE>
- --------
* Less than one percent
(1) This figure reflects shares which may be acquired upon the exercise of
options that are exercisable or that will become exercisable within 60
days. Beneficial ownership is disclaimed as to the shares of common stock
beneficially owned by Apollo Investment Fund, IV, L.P. The director is a
principal of Apollo Advisors, L.P., an affiliate of Apollo Investment
Fund IV, L.P. See note (10) below.
(2) This figure reflects shares which may be acquired upon the exercise of
options that are exercisable.
(3) This figure represents shares which may be acquired upon the exercise of
options that are exercisable or that will become exercisable within 60
days.
(4) This figure includes 250,000 shares which may be acquired upon the
exercise of options that are exercisable.
(5) This figure includes 81,598 shares held in the Joseph M. Ivey, Jr.
Annuity Trust, of which Mr. Ivey is the trustee, 125,000 shares which may
be acquired upon the exercise of options that are exercisable and 178,547
shares held by Ivey National Corporation (the principal stockholder of
which is Mr. Ivey's father), of which Mr. Ivey disclaims beneficial
ownership beyond his pecuniary interest.
42
<PAGE>
(6) This figure includes 2,500 shares that may be acquired upon the exercise
of options which are exercisable within 60 days and 1,950,000 shares
underlying a warrant issued to Jonathan J. Ledecky in connection with
Building One's initial public offering. Building One has agreed that, at
Jonathan J. Ledecky's request, it will file a registration statement
under the Securities Act of 1933, as amended, for an offering of the
shares underlying the warrant during a ten-year period beginning on
November 25, 1997. In addition, Building One has agreed to give Jonathan
J. Ledecky the right to request that it include the shares underlying the
warrant on a registration statement filed by Building One during a
twelve-year period beginning on November 25, 1997. Mr. Ledecky's address
is: c/o Building One Services Corporation, 110 Cheshire Lane, Suite 210,
Minnetonka, MN 55305.
(7) This figure includes 72,465 shares owned by Mr. Love's wife and 1,200
shares owned by trusts established for the benefit of his children. Mr.
Love serves as one of four trustees of the SKC Electric, Inc. Profit
Sharing Plan. The number of shares shown as beneficially owned by Mr.
Love excludes shares that may be deemed to be beneficially owned by that
plan.
(8) This figure includes 12,632 shares which may be acquired upon the
exercise of options that are exercisable or that will become exercisable
within 60 days.
(9) On April 30, 1999, David Ledecky was terminated without cause as an
Executive Vice President and Chief Administrative Officer and resigned
from the board of directors.
(10) This figure reflects (1) beneficial ownership by Apollo Investment Fund
IV, L.P. of $94.9 million of 7 1/2% convertible junior subordinated
debentures, which are currently convertible into 4,378,754 shares, and
Apollo Overseas Partners IV, L.P. of $5.1 million of the debentures,
which are currently convertible into 234,799 shares and (2) 977,573
shares underlying a warrant owned by Apollo Investment Fund IV, L.P. and
52,427 shares underlying a warrant owned by Apollo Overseas Partners IV,
L.P. Holders of the warrants have the right to request that Building One
include the shares underlying the warrant on a registration statement
filed by Building One with the SEC during a twelve-year period beginning
on November 25, 1997.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Building One Services Corporation currently has 261,000,000 shares of
authorized capital stock. The following description of our capital stock is
only a summary. As a summary, it is not complete and is subject to the
detailed provisions of, and is qualified in its entirety by reference to, our
restated certificate of incorporation, which was amended on July 8, 1999, our
amended and restated bylaws and the applicable provisions of Delaware General
Corporation Law.
Common Stock
We currently have 250,000,000 shares of authorized common stock. As of
November 19, 1999, there were 26,356,118 shares of common stock outstanding.
Our common stockholders of record are entitled to one vote for each share held
on all matters submitted to a vote of the stockholders. In addition, the
holders of our outstanding convertible junior subordinated debentures have
voting rights. See "--Convertible Junior Subordinated Debentures." Cumulative
voting is not permitted under our amended and restated certificate of
incorporation. Our common stockholders are entitled to receive proportionately
any dividends that the board of directors declares out of legally available
funds.
If we liquidate or dissolve our business, common stockholders will share
proportionately in the assets remaining after we pay our creditors and any
preferred stockholders. Common stockholders are not entitled to preemptive
rights to subscribe for additional shares of capital stock and have no right
to convert their shares into any other securities. In addition, no redemption
or sinking fund provisions are applicable to our common stock. All of the
outstanding shares of our common stock (and shares offered) are fully paid and
nonassessable.
Preferred Stock
We currently have 11,000,000 shares of authorized preferred stock. Article
Four, Section (e) of the amended and restated certificate of incorporation
authorizes the board of directors to create one or more series of preferred
stock, to fix the authorized number of shares of any series and to fix the
terms of any series, including the following:
. designation (naming) of the series;
. the terms upon which shares will be entitled to dividends including the
preference, if any, of such dividends payable on any other class or
classes or any other series of stock;
. the rights of holders of the series in the event of our liquidation,
dissolution or winding up;
. our rights, if any, to buy back (redeem) shares;
. the terms of any of our obligations to purchase, redeem or retire shares
or maintain a fund for such purposes;
. the voting rights, if any, of the shares of the series; and
. the right, if any, to exchange or convert the shares of such series into
shares of another series of preferred stock or any other class of stock.
The issuance of preferred stock may adversely affect the voting and dividend
rights, rights upon liquidation and other rights of the holders of our common
stock. In addition, the issuance of preferred stock could be used in the
future, under certain circumstances, as a method of discouraging, delaying, or
preventing a change in control of the company. The provision authorizing the
board to create a series of preferred shares is expected to have an anti-
takeover effect, including possibly discouraging takeover attempts that might
result in a premium over the market price for the shares of our common stock.
44
<PAGE>
Convertible Junior Subordinated Debentures
On April 30, 1999, Boss Investment LLC, an affiliate of the private
investment firm of Apollo Management, L.P., acquired $100,000,000 in aggregate
principal amount of our 7 1/2% convertible junior subordinated debentures.
Boss Investment LLC has since been dissolved and the Apollo funds have
succeeded to the rights under our agreements with Boss Investment LLC.
Currently, Apollo Investment Fund IV, L.P. beneficially owns $94.9 million of
the convertible junior subordinated debentures and Apollo Overseas Partners,
IV, L.P. beneficially owns $5.1 million of the convertible junior subordinated
debentures. The convertible junior subordinated debentures will mature on
April 30, 2012. Interest is payable quarterly. Through the fifth anniversary
of their issuance, interest is payable in additional convertible junior
subordinated debentures or, at the option of the company, in cash, except that
from and after the third anniversary through the fifth anniversary, interest
will be paid in cash if requested by a majority of the holders of the
convertible junior subordinated debentures. Thereafter, interest is payable
only in cash. The payment of interest in cash may be restricted by the terms
of our other financing arrangements.
The convertible junior subordinated debentures are convertible into shares
of our common stock at an initial conversion price of $22.50 per $1,000
principal amount. The conversion price is subject to customary antidilution
adjustments. Upon conversion of the convertible junior subordinated
debentures, a holder will receive a number of shares of common stock equal to
the principal amount of the convertible junior subordinated debentures being
converted plus accrued interest thereon divided by the conversion price then
in effect. If the convertible junior subordinated debentures are converted
prior to the fifth anniversary of their issuance, the number of shares of
common stock issuable on conversion will also give effect to the amount of
interest that would have been paid on the convertible junior subordinated
debentures through the fifth anniversary subject to a maximum of 30 months of
additional interest unless such conversion is in connection with a change of
control of the company.
Our amended and restated certificate of incorporation entitles the holders
of the convertible junior subordinated debentures to elect as a class three
directors to our board of directors (or if the board has more than ten
directors, no less than 30% of the board) and otherwise to vote on an as
converted basis with the holders of shares of our common stock on all matters
submitted to the holders of common stock.
In the event of (i) a payment default, or any other default giving rise to a
right to accelerate, under any indebtedness of the company and (ii) any
material, intentional breach by the company of the agreements relating to the
investment by Apollo, holders of the convertible junior subordinated
debentures will be entitled to elect a majority of the board of directors
until such time as such event ceases to exist. However, the holders' ability
to exercise this right will be subject to certain notice and cure periods.
So long as the Apollo funds own 50% of the outstanding convertible junior
subordinated debentures, certain significant corporate actions will require
the prior consent of the Apollo funds. The significant corporate actions
requiring such consent are:
. mergers of the company, unless in connection with a "permitted
acquisition;"
. a recapitalization, liquidation or reorganization of the company's
business or a material change in the company's business;
. acquisitions or dispositions having an aggregate value in excess of $100
million;
. dividends;
. acquisitions of capital stock or indebtedness junior to the convertible
junior subordinated debentures;
. the hiring, firing or amendment of the employment terms of our chief
executive officer;
. any increase in the size of the board of directors above ten directors
unless designees of the Apollo funds continue to comprise at least 30% of
the board;
. transactions with affiliates not in the ordinary course of business; and
. any agreement that would restrict our ability to honor the rights of the
holders of the convertible junior subordinated debentures.
45
<PAGE>
In addition, the Apollo funds have the preemptive right to acquire 50% of
the shares of our common stock or convertible securities that we offer to sell
in a private placement.
Delaware Anti-takeover Law and Certain Provisions of our Amended and Restated
Certificate of Incorporation
We are subject, as a Delaware corporation, to Section 203 of the Delaware
General Corporation Law. Section 203 generally prohibits a publicly-held
Delaware corporation from engaging in a "business combination" transaction
with any "interested stockholder" for a period of three years following the
date of the transaction on which the person became an "interested
stockholder." For purposes of Section 203, an "interested stockholder" is a
person who, together with its affiliates and associates, owns 15% or more of a
company's voting stock. A "business combination" includes a merger, asset sale
or other such transaction that results in a financial benefit to the
interested stockholder. Section 203 is subject to certain exceptions, such as
transactions done with persons that became interested stockholders with the
approval of the board of directors, such as Apollo, and transactions approved
by the board and the holders of at least a majority of the outstanding shares
of voting stock that is not owned by the "interested stockholder."
Section 203 is designed to have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium over the market
price for the shares of our common stock.
Our amended and restated certificate of incorporation permits us to
eliminate the personal liability of our directors to us or you, the
stockholders, for monetary damages for a breach of the director's fiduciary
duty. However, we may not eliminate a director's personal liability for the
following:
. for breach of the director's duty of loyalty;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. for certain unlawful dividends and stock repurchases; or
. for any transaction from which the director derived an improper personal
benefit.
The effect of this provision is to eliminate our rights and the rights of
our stockholders (through stockholder derivative suits brought on our behalf)
to recover monetary damages against a director for breach of fiduciary duty
except as described in the four situations above. If the Delaware General
Corporation Law is later amended to authorize the further elimination or
limitation of the liability of a director, then the liability of our directors
shall be eliminated or limited to the fullest extent of the amended Delaware
law.
Unanimous Written Consent
Our amended and restated certificate of incorporation requires unanimous
written consent if stockholder approval of a matter is solicited by written
consent rather than at a meeting of stockholders. The requirement that
stockholder action in writing be given by all of the stockholders makes it
impractical for stockholders to act by written consent. This means that if an
acquiror wanted to attempt to take over the company, action by written consent
would be difficult for the acquiror to achieve and the acquiror would not be
able to avoid a stockholder meeting on the takeover proposal. The need to hold
a meeting provides the board with additional time to consider the takeover
proposal and, as appropriate, negotiate with the would-be acquiror.
Other than the proposed merger with GroupMAC, we are not aware of any
existing or planned effort on the part of any party to accumulate material
amounts of our common stock, or to acquire control of our company by means of
a merger, tender offer, solicitation in opposition to management or otherwise,
or to change our management. We are aware that a number of unsolicited
acquisition proposals in connection with takeover activities have employed, or
have sought to employ, tactics which are designed to force a response by the
target company through threats or attempts to secure action without a meeting
and without affording a reasonable opportunity for the boards of directors of
such companies to consider whether such proposals are in the best interests of
its stockholders.
46
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
PLAN OF DISTRIBUTION
We will offer and issue our common stock from time to time in connection
with our acquisition of other businesses, assets or securities. We expect 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 that we will
acquire. We will not pay underwriting discounts or commission, although we may
pay a finder's fee 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 that we acquire who do not become affiliates of our
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 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 in Rule 144 under the Securities Act. Under Rule
144, sales by such affiliates during any three-month period cannot exceed the
greater of:
. 1% of the shares of our common stock outstanding; or
. 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 our company. Individuals who are
not affiliates of the entity being acquired and do not become affiliates of
our 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 our having satisfied our Exchange Act
reporting requirements for specified periods prior to the time of sale.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Washington, DC has passed upon the validity of
our shares of common stock offered hereby.
EXPERTS
The historical financial statements included in this prospectus, except as
they relate to the unaudited interim periods, 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.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BUILDING ONE SERVICES CORPORATION UNAUDITED PRO FORMA FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Financial Statements............... F-1
Unaudited Pro Forma Balance Sheet...................................... F-2
Unaudited Pro Forma Statement of Operations............................ F-3
Notes to Unaudited Pro Forma Financial Statements...................... F-5
BUILDING ONE SERVICES CORPORATION
Reports of Independent Accountants..................................... F-9
Consolidated Balance Sheet ............................................ F-12
Consolidated Statement of Operations................................... F-13
Consolidated Statement of Stockholders' Equity......................... F-14
Consolidated Statement of Cash Flows................................... F-15
Notes to Consolidated Financial Statements............................. F-17
BUILDING ONE SERVICES CORPORATION UNAUDITED FINANCIAL STATEMENTS FOR THE
INTERIM PERIOD ENDED SEPTEMBER 30, 1999
Consolidated Balance Sheet ............................................ F-34
Consolidated Statement of Operations................................... F-35
Consolidated Statement of Stockholders' Equity and Comprehensive
Income................................................................ F-36
Consolidated Statement of Cash Flows................................... F-37
Notes to Consolidated Financial Statements............................. F-38
GROUP MAINTENANCE AMERICA CORP. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Financial Statements............... F-49
Unaudited Pro Forma Balance Sheet ..................................... F-50
Unaudited Pro Forma Statement of Operations............................ F-51
Notes to Unaudited Pro Forma Financial Statements...................... F-53
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
Report of Independent Accountants...................................... F-56
Consolidated Balance Sheets............................................ F-57
Consolidated Statements of Operations.................................. F-58
Consolidated Statements of Shareholders' Equity........................ F-59
Consolidated Statements of Cash Flows.................................. F-60
Notes to Consolidated Financial Statements............................. F-61
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES UNAUDITED FINANCIAL
STATEMENTS FOR THE INTERIM PERIOD ENDED SEPTEMBER 30, 1999
Consolidated Condensed Balance Sheets.................................. F-77
Consolidated Condensed Statements of Operations........................ F-78
Consolidated Condensed Statements of Cash Flows........................ F-79
Notes to Consolidated Condensed Financial Statements................... F-80
COMBINED COMPANY UNAUDITED PRO FORMA FINANCIAL STATEMENTS REFLECTING THE
MERGER OF BUILDING ONE SERVICES CORPORATION AND GROUP MAINTENANCE
AMERICA CORP.
Introduction to Unaudited Pro Forma Financial Statements............... F-86
Unaudited Pro Forma Balance Sheet ..................................... F-88
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Unaudited Pro Forma Statement of Operations............................. F-90
Notes to Unaudited Pro Forma Financial Statements....................... F-92
SERVICE MANAGEMENT USA, INC.
Report of Independent Accountants....................................... F-101
Combined Balance Sheet.................................................. F-102
Combined Statement of Operations........................................ F-103
Combined Statement of Stockholder's Equity.............................. F-104
Combined Statement of Cash Flows........................................ F-105
Notes to Combined Financial Statements.................................. F-106
TRI-CITY ELECTRICAL CONTRACTORS, INC.
Independent Auditors' Report............................................ F-111
Consolidated Balance Sheets............................................. F-112
Consolidated Statements of Operations................................... F-113
Consolidated Statements of Stockholders' Equity......................... F-114
Consolidated Statements of Cash Flows................................... F-115
Notes to Consolidated Financial Statements.............................. F-117
WILSON ELECTRIC COMPANY, INC.
Report of Independent Accountants....................................... F-125
Balance Sheet........................................................... F-126
Statements of Income and Retained Earnings.............................. F-127
Statements of Cash Flows................................................ F-128
Notes to Financial Statements........................................... F-129
SKC ELECTRIC, INC. AND AFFILIATE
Report of Independent Accountants....................................... F-134
Combined Balance Sheet.................................................. F-135
Statement of Income..................................................... F-136
Statement of Cash Flows................................................. F-137
Notes to Financial Statements........................................... F-139
RIVERA ELECTRIC CONSTRUCTION CO.
Independent Accountants' Report......................................... F-146
Balance Sheets.......................................................... F-147
Statements of Income.................................................... F-148
Statements of Changes in Stockholders' Equity........................... F-149
Statements of Cash Flows................................................ F-150
Notes to Financial Statements........................................... F-151
TOWN & COUNTRY ELECTRIC INC.
Report of Independent Certified Public Accountants...................... F-156
Balance Sheets.......................................................... F-157
Statements of Earnings.................................................. F-159
Statement of Stockholders' Equity....................................... F-160
Statements of Cash Flows................................................ F-161
Notes to Financial Statements........................................... F-162
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
GARFIELD ELECTRIC COMPANY
Report of Independent Certified Public Accountants...................... F-167
Balance Sheet........................................................... F-168
Statements of Earnings.................................................. F-169
Statements of Stockholders' Equity...................................... F-170
Statements of Cash Flows................................................ F-171
Notes to Financial Statements........................................... F-172
INDECON, INC.
Report of Independent Certified Public Accountants...................... F-177
Balance Sheet........................................................... F-178
Statements of Earnings.................................................. F-179
Statements of Stockholders' Equity...................................... F-180
Statements of Cash Flows................................................ F-181
Notes to Financial Statements........................................... F-182
TAYLOR ELECTRIC, INC.
Report of Independent Certified Public Accountants...................... F-187
Balance Sheet........................................................... F-188
Statement of Earnings and Retained Earnings............................. F-189
Statement of Cash Flows................................................. F-190
Notes to Financial Statements........................................... F-191
REGENCY ELECTRIC COMPANY, INC.
Independent Auditor's Report............................................ F-194
Consolidated Balance Sheets............................................. F-195
Consolidated Statements of Income....................................... F-196
Consolidated Statements of Changes in Stockholder's Equity.............. F-197
Consolidated Statements of Cash Flows................................... F-198
Notes to Consolidated Financial Statements.............................. F-199
</TABLE>
iii
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
The following unaudited pro forma financial statements utilize the
historical financial statements of Building One as of September 30, 1999 and
for the nine months ended September 30, 1999, and for the year ended December
31, 1998 and give effect to (i) the tender offer that occurred in February
1999, including the financing of the tender offer, (ii) the pre-acquisition
financial information of 26 companies acquired during 1998 which were
accounted for under the purchase method of accounting (the "1998 Acquisition
Companies"), and (iii) the pre-acquisition financial information of 17
companies acquired during 1999 which were accounted for under the purchase
method of accounting (the "1999 Acquisition Companies").
These unaudited pro forma combined financial statements are based on the
historical financial statements of the acquired companies and estimates and
assumptions set forth below and in the notes to the unaudited pro forma
financial statements.
The unaudited pro forma balance sheet represents the historical consolidated
balance sheet of Building One as adjusted for the refinancing transactions
highlighted in Note 3 below as if such transactions occurred on September 30,
1999. The accompanying unaudited pro forma statements of operations give
effect to the tender offer that occurred in February 1999, including the
refinancing of the tender offer, and combines the historical statements of
operations of Building One and the statements of operations of the acquired
entities as if all such transactions had occurred on January 1, 1998.
Building One has analyzed the savings that it expects to realize from
reductions in salaries and certain benefits to the owners of the acquired
companies. To the extent the owners of the acquired entities have agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in the unaudited pro forma combined statements of
operations.
The pro forma adjustments are based on available information and certain
assumptions that management deems appropriate and may be revised as additional
information becomes available. The pro forma financial data do not purport to
represent what Building One's financial position or results of operations
would actually have been if such transactions had in fact occurred on those
dates and are not necessarily representative of Building One's financial
position or results of operations for any future period. Since the
acquisitions have not historically been under common control or management,
historical pro forma results may not be indicative of or comparable to future
performance. The unaudited pro forma financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in Building One's annual report on Form 10-K for the fiscal
year ended December 31, 1998 and the unaudited consolidated condensed
financial statements and notes thereto included in Building One's quarterly
report on Form 10-Q for the quarter ended September 30, 1999.
F-1
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Building Pro Forma
ASSETS One Adjustments Pro Forma
------ ---------- ----------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 14,522 $(14,522)(a) $ --
Accounts receivable, net of
allowance........................... 362,147 -- 362,147
Inventories.......................... 8,213 -- 8,213
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................... 49,875 -- 49,875
Prepaid expenses and other current
assets.............................. 11,590 -- 11,590
Deferred tax asset................... 4,424 -- 4,424
Refundable income taxes.............. 3,405 -- 3,405
---------- -------- ----------
Total current assets............... 454,176 (14,522) 439,654
---------- -------- ----------
PROPERTY AND EQUIPMENT, net............ 57,358 -- 57,358
GOODWILL, net.......................... 673,238 -- 673,238
DEFERRED DEBT ISSUE COSTS, net......... 21,055 -- 21,055
OTHER LONG-TERM ASSETS................. 6,384 -- 6,384
---------- -------- ----------
Total assets....................... $1,212,211 $(14,522) $1,197,689
========== ======== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt........ $ 3,106 $ (3,106)(b) $ --
Accounts payable..................... 92,036 -- 92,036
Accrued compensation................. 41,669 -- 41,669
Accrued liabilities.................. 46,409 -- 46,409
Due to related parties............... 4,083 (4,083)(c) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... 81,109 -- 81,109
Other current liabilities............ -- -- --
---------- -------- ----------
Total current liabilities.......... 268,412 (7,189) 261,223
REVOLVING CREDIT FACILITY.............. 116,500 (5,001)(a-c) 111,499
TERM CREDIT FACILITY................... 124,375 -- 124,375
SENIOR SUBORDINATED NOTES, net of
unamortized discount.................. 195,680 -- 195,680
CONVERTIBLE JUNIOR SUBORDINATED
DEBENTURES............................ 103,190 -- 103,190
LONG TERM DEBT......................... 2,332 (2,332)(b) --
DEFERRED TAX LIABILITY................. 2,243 -- 2,243
OTHER LONG-TERM LIABILITIES............ 2,463 -- 2,463
STOCKHOLDERS' EQUITY
Common stock......................... 26 -- 26
Additional paid-in capital........... 310,216 -- 310,216
Retained earnings.................... 87,339 -- 87,339
Accumulated other comprehensive
loss................................ (565) -- (565)
---------- -------- ----------
Total stockholders' equity......... 397,016 -- 397,016
---------- -------- ----------
Total liabilities and stockholders'
equity............................ $1,212,211 $(14,522) $1,197,689
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-2
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(in thousands, except per share data )
<TABLE>
<CAPTION>
1998 1999
Building Acquisition Acquisition Pro Forma
One Companies Companies Adjustments Pro Forma
-------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES................ $809,601 $502,663 $292,072 $ -- $1,604,336
COST OF SERVICES........ 636,225 411,042 228,868 -- 1,276,135
-------- -------- -------- -------- ----------
Gross profit.......... 173,376 91,621 63,204 -- 328,201
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 100,539 71,137 50,853 (39,546)(a) 182,983
AMORTIZATION OF GOODWILL
....................... 7,653 234 -- 9,792 (b) 17,679
-------- -------- -------- -------- ----------
Income from
operations........... 65,184 20,250 12,351 29,754 127,539
OTHER INCOME (EXPENSE):
Interest expense...... (1,054) (1,835) (942) (47,231)(c) (51,062)
Interest income....... 19,373 1,852 480 (21,705)(d) --
Other................. 80 1,455 292 1,950 (e) 3,777
-------- -------- -------- -------- ----------
Income before income
tax provision...... 83,583 21,722 12,181 (37,232) 80,254
INCOME TAX PROVISION.... 36,120 6,550 1,547 (5,446)(f) 38,771
-------- -------- -------- -------- ----------
NET INCOME.............. $ 47,463 $ 15,172 $ 10,634 $(31,786) $ 41,483
======== ======== ======== ======== ==========
NET INCOME PER SHARE--
BASIC.................. $ 1.19 $ 1.57 (g)
======== ==========
WEIGHTED AVERAGE
SHARES--BASIC.......... 39,908 26,357 (g)
======== ==========
NET INCOME PER SHARE--
DILUTED................ $ 1.16 $ 1.47 (g)
======== ==========
WEIGHTED AVERAGE
SHARES--DILUTED........ 40,928 31,538 (g)
======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-3
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999
Building Acquisition Pro Forma
One Companies Adjustments Pro Forma
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES ................ $1,265,521 $97,966 $ -- $1,363,487
COST OF SERVICES ........ 1,011,305 73,902 -- 1,085,207
---------- ------- ------- ----------
Gross profit .......... 254,216 24,064 -- 278,280
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................ 145,863 22,147 (10,679)(a) 157,331
RESTRUCTURING &
RECAPITALIZATION
CHARGES................. 8,020 -- -- 8,020
AMORTIZATION OF
GOODWILL................ 11,511 -- 1,748 (b) 13,259
---------- ------- ------- ----------
Income from
operations............ 88,822 1,917 8,931 99,670
OTHER INCOME (EXPENSE):
Interest expense....... (21,279) (183) (16,835)(c) (38,297)
Interest income........ 4,674 213 (4,887)(d) --
Other.................. 128 252 131 (e) 511
---------- ------- ------- ----------
Income before income
tax provision....... 72,345 2,199 (12,660) 61,884
INCOME TAX PROVISION..... 32,261 1,378 (4,895)(f) 28,744
---------- ------- ------- ----------
NET INCOME .............. $ 40,084 $ 821 $(7,765) $ 33,140
========== ======= ======= ==========
NET INCOME PER SHARE--
BASIC................... $ 1.14 $ 1.26 (g)
========== ==========
WEIGHTED AVERAGE SHARES--
BASIC................... 35,311 26,357 (g)
========== ==========
NET INCOME PER SHARE--
DILUTED................. $ 1.08 $ 1.17 (g)
========== ==========
WEIGHTED AVERAGE SHARES--
DILUTED.................. 38,900 31,538 (g)
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-4
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BACKGROUND
The respective results of operations for the 1998 Acquisition Companies from
January 1, 1998 to the dates of the acquisitions were combined with the actual
results of operations of the Company and the 1999 Acquisition Companies for
the twelve months ended December 31, 1998 and the nine months ended
September 30, 1999 to determine the pro forma results of operations for the
twelve months ended December 31, 1998.
The respective results of operations for the 1999 Acquisition Companies from
January 1, 1999 to the dates of acquisition were combined with the actual
results of operations of Building One for the nine months ended September 30,
1999 to determine the pro forma results of operations for the nine months
ended September 30, 1999.
2. ACQUISITIONS
The results of operations of the acquired businesses are included in the
actual results of operations of Building One from the date of acquisition, and
the historical balance sheet at September 30, 1999 includes the acquisitions
completed by Building One to date. With the exception of the 3 companies
acquired during 1998 which were accounted for under the pooling-of-interests
method of accounting (the "1998 Pooled Companies"), all acquisitions are
accounted for as purchases. The cash consideration associated with the
acquisition of the 1999 Acquisition Companies was provided by borrowings under
a revolving credit facility.
Several former owners of the acquired companies have the ability to receive
additional amounts of purchase price, payable in cash and common stock in 1999
through 2001, contingent upon the occurrence of future events. Building One
will record such contingent consideration as additional purchase price when
earned. Building One currently estimates the unearned contingent consideration
under these agreements to approximate $85.0 million in cash and shares of
common stock as of September 30, 1999.
3. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
The following summarizes unaudited pro forma combined balance sheet
adjustments:
a) Records the utilization of cash on hand at September 30, 1999 to
reduce borrowings in connection with acquisitions under the revolving
credit facility.
b) Records the refinancing of debt assumed and outstanding at September
30, 1999 in connection with acquisitions completed prior to that date
through borrowings under the revolving credit facility.
c) Records the funding of amounts due to related parties at September 30,
1999 in connection with acquisitions completed prior to that date through
borrowings under the revolving credit facility.
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The following summarizes unaudited pro forma combined statement of
operations adjustments:
a) Reflects the prospective reduction in salaries, bonuses and benefits
to the owners of the acquired companies to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the
terms of the employment agreements. Such employment agreements are
primarily for three years, contain restrictions related to competition and
provide severance for termination of employment in certain circumstances.
Also reflects the reduction in one-time non-recurring acquisition costs
related to the 1998 Pooled Companies. These costs consist of legal,
accounting and broker fees.
b) Reflects the amortization of goodwill to be recorded as a result of
the acquisitions over a 40-year estimated life.
F-5
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
c) Represents the adjustment necessary to reflect interest expense
related to borrowings under the Revolving and Term Credit Facility, Senior
Subordinated Notes and Convertible Junior Subordinated Debentures to
finance the tender offer and to fund the cash portion of the purchase price
and the assumption of debt related to the 1999 Acquisition Companies. A
summary of the historical and pro forma debt outstanding and a summary of
the pro forma interest expense (including amounts recognized in the
historical financial statements) assuming the acquisitions occurred on
January 1, 1998, follows in Note 5.
d) Reflects the reduction to historical interest income related to
existing and acquired cash, all of which is assumed to be used for the
acquisition of the 1998 and 1999 Acquisition Companies.
e) Reflects the elimination of minority interest associated with the
acquisition of the remaining 50% interest of a company that was originally
50% owned by Building One.
f) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
F-6
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
g) The calculation of the weighted average shares outstanding and the
basic and diluted earnings per share include the following (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Weighted Average Shares Outstanding:
Weighted average shares outstanding--basic.. 26,357 26,357
Incremental effect of conversion of
Convertible Junior Subordinated
Debentures................................. 4,586 4,586
Incremental effect of contingently issuable
shares..................................... 443 443
Incremental effect of options and warrants
on shares outstanding...................... 152 152
-------- --------
Weighted average shares outstanding--
diluted.................................... 31,538 31,538
======== ========
Net of Tax Interest Effect for Convertible
Junior Subordinated Debentures:
Principal of Convertible Junior Subordinated
Debentures................................. $103,190 $103,190
Annual interest at 7.5%..................... 7,739 7,739
Percentage of year.......................... 100% 75%
-------- --------
Interest at coupon rate..................... 7,739 5,804
Amortization of deferred issue costs........ 356 267
-------- --------
Interest on Convertible Junior Subordinated
Debentures................................. 8,095 6,071
One minus tax rate.......................... 61% 61%
-------- --------
Net of tax interest cost.................... $ 4,938 $ 3,703
======== ========
Basic Earnings Per Share:
Net income.................................. $ 41,483 $ 33,140
Basic weighted average shares outstanding... 26,357 26,357
-------- --------
Basic earnings per share.................... $ 1.57 $ 1.26
======== ========
Diluted Earnings Per Share:
Net Income.................................. $ 41,483 $ 33,140
Interest expense on Convertible Junior
Subordinated Debentures, net of tax........ 4,938 3,703
-------- --------
Net income on an if-converted basis......... $ 46,421 $ 36,843
Diluted weighted average shares
outstanding................................ 31,538 31,538
-------- --------
Diluted earnings per share.................. $ 1.47 $ 1.17
======== ========
</TABLE>
F-7
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
5. UNAUDITED PRO FORMA INTEREST EXPENSE (in thousands)
<TABLE>
<CAPTION>
Interest Expense
-------------------------------
September 30, Twelve Months Nine Months
1999 Pro Ended Ended
September 30, Pro Forma Forma Interest December 31, September 30,
1999 Balances Adjustments Balances Rate 1998 1999
------------- ----------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Short -Term Senior Debt:
Historical September
30, 1999 short-term
debt.................. $ 3,106 $ (3,106) $ -- $ -- $ --
-------- -------- -------- ------- -------
Total short-term
senior debt/interest
expense............. $ 3,106 $ (3,106) $ -- $ -- $ --
======== ======== ======== ======= =======
Long-Term Senior Debt:
Historical September
30, 1999 Revolving
Credit Facility....... $116,500 $ (8,107) $108,393 7.73%(i) $ 8,379 $ 6,284
Historical September
30, 1999 Term Credit
Facility.............. 124,375 -- 124,375 7.73%(i) 9,614 7,211
Historical September
30, 1999 other long-
term debt............. 2,332 (2,332) -- -- --
Refinance short-term
debt.................. -- 3,106 3,106 7.73%(i) 240 180
Commitment Fees........ -- -- -- 568 (iv) 426
Amortization of
deferred debt issue
costs................. -- -- -- 1,889 (v) 1,417
-------- -------- -------- ------- -------
Total long-term
senior debt/interest
expense............. $243,207 $ (7,333) $235,874 8.77% $20,690 $15,518
======== ======== ======== ====== ======= =======
Long-Term Senior
Subordinated Debt:
Historical September
30, 1999 Senior
Subordinated Notes.... $200,000 $ -- $200,000 10.50%(ii) $21,000 $15,750
Discount/amortization
on issuance of Senior
Subordinated Notes.... (4,320) -- (4,320) 451 (vi) 338
Amortization of
related deferred debt
issue costs........... -- -- -- 825 (vii) 619
-------- -------- -------- ------- -------
Total long-term
senior subordinated
debt/interest
expense............. $195,680 $ -- $195,680 11.38% $22,276 $16,707
======== ======== ======== ====== ======= =======
Long-Term Convertible
Junior Subordinated
Debt:
Historical September
30, 1999 Convertible
Junior Subordinated
Debentures............ $103,190 $ -- $103,190 7.50%(iii) $ 7,739 $ 5,804
Amortization of
related deferred debt
issue costs........... -- -- -- 357 (viii) 268
-------- -------- -------- ------- -------
Total long-term
convertible junior
subordinated
debt/interest
expense............. $103,190 $ -- $103,190 7.85% $ 8,096 $ 6,072
======== ======== ======== ====== ======= =======
Total debt/interest
expense................ $545,183 $(10,439) $534,744 9.55% $51,062 $38,297
======== ======== ======== ====== ======= =======
</TABLE>
- --------
(i) Represents the current borrowing rates under the BOSC Credit Facility.
(ii) Represents the coupon interest rate for the Senior Subordinated Notes.
(iii) Represents the coupon interest rate for the Convertible Junior
Subordinated Debentures.
(iv) Represents commitment fees on unused capacity on the BOSC Credit Facility
at an annual rate of 0.5%.
(v) Represents amortization of deferred debt issue costs over the remaining
life of the BOSC Credit Facility.
(vi) The Senior Subordinated Notes were issued at 97.746%, or a discount of
$4,508, which is being amortized to interest expense over the ten-year
life of these notes.
(vii) Represents amortization of deferred debt issue costs over the ten-year
life of these Senior Subordinated Notes.
(viii) Represents amortization of deferred debt issue costs over the thirteen-
year life of these Convertible Junior Subordinated Debentures.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Building One Services Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Building One
Services Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain wholly-owned subsidiaries, which
statements reflect total assets of $4.0 million at December 31, 1997 and total
revenues of $28.5 million and $11.1 million for the years ended December 31,
1997 and 1996, respectively. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for those wholly-owned
subsidiaries, is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 1999, except for Note 3, which is as of March 23, 1999
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Perimeter Maintenance Corporation
Atlanta, Georgia
We have audited the balance sheet of Perimeter Maintenance Corporation (an S
Corporation) as of December 31, 1997 (not presented separately herein), and
the related statements of operations, retained earnings, and cash flows for
the year ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Perimeter Maintenance
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Frazier & Deeter, LLC
---------------------
Frazier & Deeter, LLC
Atlanta, Georgia
February 19, 1998
F-10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Crest International, LLC
Green Bay, Wisconsin
We have audited the balance sheet of Crest International, LLC (a Wisconsin
limited liability company) as of December 31, 1997 (not presented separately
herein), and the related statements of income, accumulated deficit and cash
flows for the years ended December 31, 1997 and 1996 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crest International, LLC
as of December 31, 1997, and the results of its operations and cash flows for
the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ Shinners, Hucovski & Company, S.C.
-------------------------------
Shinners, Hucovski & Company, S.C.
Green Bay, Wisconsin
February 17, 1998
F-11
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
-------------------- -----------
1998 1997 1999
---------- -------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................... $ 213,096 $528,972 $ 174,273
Marketable securities....................... 2,697 --
Accounts receivable, less allowance for
doubtful accounts of $1,991, $104 and
$2,079 (unaudited), respectively........... 246,623 5,193 276,981
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... 25,441 -- 39,931
Prepaid expenses and other current assets... 14,411 2,065 19,252
---------- -------- -----------
Total current assets....................... 502,268 536,230 510,437
Property and equipment, net.................. 38,967 2,593 47,541
Intangible assets, net....................... 496,381 152 596,460
Other assets................................. 6,306 184 7,682
---------- -------- -----------
Total assets............................... $1,043,922 $539,159 $ 1,162,120
========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 2,167 $ 1,553 $ 5,068
Accounts payable............................ 75,029 1,800 81,882
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... 58,773 -- 66,672
Accrued compensation........................ 27,737 2,237 11,875
Income taxes payable........................ 6,125 298 32,338
Accrued liabilities--other.................. 25,047 2,107 60,633
---------- -------- -----------
Total current liabilities.................. 194,878 7,995 258,468
Long-term debt............................... 3,287 1,679 4,783
Other liabilities............................ 8,220 5 4,531
---------- -------- -----------
Total liabilities.......................... 206,385 9,679 267,782
---------- -------- -----------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value, 250,000,000
shares authorized, 45,258,946, 31,440,724
and 46,307,373 (unaudited) shares
outstanding, respectively.................. 45 31 46
Convertible Non-Voting Common Stock, $.001
par, 500,000 shares authorized, issued and
outstanding at December 31, 1997........... -- 1
Additional paid-in capital.................. 832,514 529,441 874,299
Treasury stock.............................. (41,832) -- (41,832)
Retained earnings........................... 47,255 7 61,988
Accumulated other comprehensive income
(loss)..................................... (445) -- (163)
---------- -------- -----------
Total stockholders' equity................. 837,537 529,480 894,338
---------- -------- -----------
Total liabilities and stockholders'
equity.................................... $1,043,922 $539,159 $ 1,162,120
========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the
For the Years Ended December Three Months
31, Ended March 31,
-------------------------------- ----------------------
1998 1997 1996 1999 1998
---------- --------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 809,601 $ 70,101 $ 63,202 $ 350,842 $ 54,610
Cost of revenues........ 636,225 58,857 53,664 280,692 44,233
---------- --------- --------- ---------- ----------
Gross profit.......... 173,376 11,244 9,538 70,150 10,377
Selling, general and
administrative
expenses............... 99,771 11,776 8,803 42,714 7,918
Goodwill amortization... 7,653 -- -- 3,469 324
Non-recurring
acquisition costs...... 768 -- --
---------- --------- --------- ---------- ----------
Operating income
(loss)............... 65,184 (532) 735 23,967 2,135
Other (income)
expense:
Interest income....... (19,373) (2,056) -- (2,508) (6,656)
Interest expense...... 1,054 208 224 96 99
Other, net............ (80) (221) 83 (281) (111)
---------- --------- --------- ---------- ----------
Income before taxes..... 83,583 1,537 428 26,660 8,803
Provision for income
taxes.................. 36,120 94 13 11,927 3,722
---------- --------- --------- ---------- ----------
Net income.............. $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
========== ========= ========= ========== ==========
Net income per share--
Basic.................. $ 1.19 $ 0.25 $ 0.32 $ 0.32 $ 0.15
========== ========= ========= ========== ==========
Net income per share--
Diluted................ $ 1.16 $ 0.25 $ 0.30 $ 0.31 $ 0.15
========== ========= ========= ========== ==========
Weighted average shares
outstanding--Basic..... 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
========== ========= ========= ========== ==========
Weighted average shares
outstanding--Diluted... 40,928,452 5,865,550 1,405,840 47,740,958 34,075,876
========== ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-Voting Common
Common Stock Stock
------------------- ------------------
Accumulated
Additional Other Total Total
Shares Shares Paid-in- Treasury Retained Comprehensive Stockholders' Comprehensive
Outstanding Amount Outstanding Amount Capital Stock Earnings Loss Equity Income
----------- ------ ----------- ------ ---------- --------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ 1,238,444 $ 1 $ 1,199 $ $ $ $ 1,200
Transactions of
Pooled
Companies:
Distributions
paid............ (140) (140)
Common stock
issued.......... 52,280 103 103
Net income....... 415 415 $ 415
-------
Total
comprehensive
income.......... $ 415
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1996........ 1,290,724 1 1,577 1,578
Transactions of
Pooled
Companies:
Distributions
paid............ (831) (831)
Capital
contribution.... 2,300,000 2 124 126
Common stock
issued.......... 27,850,000 28 500,000 1 527,135 527,164
Net income....... 1,436 7 1,443 $ 1,443
-------
Total
comprehensive
income.......... $ 1,443
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1997........ 31,440,724 31 500,000 1 529,441 7 529,480
Transactions of
Pooled
Companies:
Distributions
paid............ (628) (628)
Stock issued upon
exercise of
options......... 123,046 216 216
Issuance of
common stock for
acquisitions.... 16,144,711 16 302,855 302,871
Stock issued
under employee
stock purchase
plan............ 40,465 415 415
Purchase of
treasury stock.. (2,990,000) (3) (41,832) (41,835)
Unrealized loss
on marketable
securities --
net of tax...... (445) (445) $ (445)
Conversion of
non-voting
common stock.... 500,000 1 (500,000) (1)
Net income....... 215 47,248 47,463 47,463
-------
Total
comprehensive
income.......... $47,018
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1998 ....... 45,258,946 $45 -- $-- $832,514 $ (41,832) $47,255 $(445) $837,537
Unaudited Data:
Stock issued
upon exercise
of options..... 16,926 83 83
Issuance of
common stock
for
acquisitions... 1,002,507 1 15,166 15,167
Stock issued
under employee
stock purchase
plan........... 28,994 435 435
Contingently
Issuable
Shares......... 26,101 26,101
Unrealized gain
on marketable
securities--net
of tax......... 282 282 $ 282
Net income...... 14,733 14,733 14,733
-------
Total
comprehensive
income......... $15,015
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, March
31, 1999
(unaudited)..... 46,307,373 $46 $874,299 $(41,832) $61,988 $(163) $894,338
========== === ======== ==== ======== ========= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
For the Years Ended December 31, March 31,
--------------------------------------------------------
1998 1997 1996 1999 1998
----------- ----------- ------------------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization....... 13,242 945 926 6,117 802
Gain (loss) on sale
of equipment....... 37 (52) 1 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable....... (38,035) (36) (511) (8,692) (10,601)
Costs and
estimated
earnings in
excess of
billings......... 3,200 -- -- (8,403) 2,405
Prepaid expenses
and other current
assets........... (2,721) (1,319) (27) (1,178) (951)
Billings in excess
of costs and
estimated
earnings......... 2,049 -- -- 1,781 5,552
Accounts payable.. 1,193 (505) 486 152 2,546
Accrued
liabilities...... 7,044 2,254 69 7,825 2,993
Changes in other
assets............. (1,398) 3 39 (659) (523)
----------- ----------- -------- --------- ---------
Net cash
provided by
operating
activities..... 32,074 2,733 1,398 11,676 7,304
----------- ----------- -------- --------- ---------
Cash flows from
investing activities:
Cash paid for
acquisitions, net of
cash acquired........ (231,602) -- -- (45,271) (111,840)
Purchases of property
and equipment........ (11,289) (699) (703) (5,632) (1,206)
Proceeds on sale of
equipment............ 790 387 18 90 617
Other................. (218) (7) (6) (98) 304
----------- ----------- -------- --------- ---------
Net cash used in
investing
activities..... (242,319) (319) (691) (50,911) (112,125)
----------- ----------- -------- --------- ---------
Cash flows from
financing activities:
Proceeds from initial
public offering,
net.................. -- 527,164 -- -- --
Proceeds from issuance
of common stock...... -- -- 103 -- --
Net proceeds
(payments) on short-
term debt............ (38,783) 145 (140) 261 (54)
Payments on long-term
debt................. (28,535) (349) (830) (688) (996)
Proceeds on long-term
debt................. 3,519 -- 398 1,163 1,570
Payment of dividends.. (628) (831) (140) (842) --
Purchase of treasury
stock................ (41,835) -- -- -- --
Proceeds from issuance
of stock options
exercised............ 216 -- -- 83 --
Proceeds from issuance
of stock under
employee stock
purchase plan........ 415 -- -- 435 --
Contributions by
founding
stockholder.......... -- 126 -- -- --
----------- ----------- -------- --------- ---------
Net cash
provided by
(used in)
financing
activities..... (105,631) 526,255 (609) 412 520
----------- ----------- -------- --------- ---------
Net increase in cash and
cash equivalents....... (315,876) 528,669 98 (38,823) (104,301)
Cash and cash
equivalents, beginning
of period.............. 528,972 303 205 213,096 528,972
----------- ----------- -------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 213,096 $ 528,972 $ 303 $ 174,273 $ 424,671
=========== =========== ======== ========= =========
Supplemental cash flow
information:
Cash paid for
interest.............. $ 882 $ 290 $ 357
Cash paid for income
taxes................. 34,395 -- --
</TABLE>
F-15
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(Dollars in thousands)
The Company issued common stock and cash in connection with certain business
combinations during the year ended December 31, 1998. The fair values of the
assets acquired and liabilities assumed at the dates of acquisition are as
follows:
<TABLE>
<CAPTION>
For the
Year Ended Three Months
December 31, Ended March 31,
------------ -----------------
1998 1999 1998
------------ ------- --------
<S> <C> <C> <C>
Accounts receivable............................ $202,515 $21,665 $ 73,351
Inventories.................................... 2,626 541 1,022
Costs and earnings in excess of billings....... 31,085 6,087 10,426
Prepaid expenses and other current assets...... 12,248 343 3,660
Property and equipment......................... 33,080 5,685 11,520
Intangible assets.............................. 502,470 46,714 175,132
Other assets................................... 7,745 2,575 2,526
Short-term debt................................ (29,594) (2,180) (7,113)
Accounts payable............................... (72,805) (6,700) (19,103)
Accrued liabilities............................ (49,020) (7,124) (14,052)
Billings in excess of costs and estimated
earnings...................................... (56,912) (6,119) (22,425)
Long-term debt................................. (41,287) (1,049) (2,909)
Other long-term liabilities.................... (7,678) -- (2,801)
-------- ------- --------
Net assets acquired........................ $534,473 $60,438 $209,234
======== ======= ========
These acquisitions were funded as follows:
Common stock, 16,144,711, 1,002,507 and
5,088,049 shares, respectively ............. $302,871 $15,167 $ 97,394
Cash, net of cash acquired................... 231,602 45,271 111,840
-------- ------- --------
$534,473 $60,438 $209,234
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1--BUSINESS AND ORGANIZATION
Building One Services Corporation ("Building One" or the "Company") is
consolidating the facilities services industry with the intent to become a
national single-source provider of facilities services. Currently the Company
provides electrical installation and maintenance services, mechanical
installation and maintenance services and janitorial and maintenance
management services throughout the United States.
The Company was incorporated in September 1997 under the name of
Consolidation Capital Corporation and completed an initial public offering
("IPO") of its Common Stock 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. During 1998, the Company
changed its name to Building One Services Corporation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of Building One, and
the companies acquired in business combinations accounted for under the
purchase method (the "Purchased Companies") from their respective acquisition
dates and give retroactive effect to the results of the companies acquired in
business combinations accounted for under the pooling-of-interests method (the
"Pooled Companies") for all periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company utilizes the percentage-of-completion method of accounting for
the recognition of revenues and costs of all significant installation
contracts. Revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. 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. Selling and
administrative expenses are expensed as incurred. 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. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Maintenance and other service revenues are recognized as the
services are performed.
Non-Recurring Acquisition Costs
Non-recurring acquisition costs consist of costs incurred in conjunction
with the business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, broker fees and other
costs directly attributable to the business combination.
F-17
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. The Company's temporary cash investments
consist of readily marketable, investment grade financial instruments of a
nature which should reduce risk of loss. Concentration of credit risk with
respect to trade receivables results from these amounts generally not being
collateralized. However, the Company is entitled to payment for work performed
and often has certain lien rights in that work. Additionally, management
continually monitors the financial condition of its customers to reduce risk
of loss.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and debt approximate fair value. The Company's
cash equivalents are comprised of readily marketable, interest-bearing,
investment grade securities.
Marketable Securities
Marketable securities consist of investments in equity securities and are
classified as available for sale. The unrealized gains and losses, net of
applicable income taxes, are reported as an increase or decrease to
stockholders' equity. Realized gains and losses are included in other income.
The cost of securities sold is based on the specific identification method.
Property and Equipment
Property and equipment are stated at cost and depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from three to seven years for equipment, vehicles, and furniture and fixtures
and 30 years for buildings. Leasehold improvements and capital leases are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. No impairment has been recognized
through December 31, 1998.
Intangible Assets
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Goodwill is being amortized on a
straight-line basis over 40 years which is the estimated period benefited. The
recoverability of the unamortized balance of goodwill is assessed on an
ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net book value. If at such time these assessments indicate that
the future undiscounted cash flows from operations are not sufficient to
recover the net book value, the goodwill balance is adjusted to its fair
value. No such adjustments have been recognized through December 31, 1998.
Income Taxes
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted
F-18
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Certain companies acquired in pooling-of-interests transactions
elected to be taxed as subchapter S corporations and, accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by Building One.
Stock-Based Compensation
Building One measures compensation expense for its stock-based employee
compensation plans and warrants granted to employees using the intrinsic value
method and has provided in Note 14 the pro forma disclosures of the effect on
reported net income (loss) and net income (loss) per share as if the fair
value-based method had been applied in measuring compensation expense.
Net Income Per Share
Basic net income per share is determined by dividing net income by the
weighted average number of common shares outstanding during the periods.
Diluted net income per share reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock at the beginning of the period.
Segment Data
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments in annual and interim
financial statements. Operating segments are determined consistent with the
way management organizes and evaluates financial information internally for
making decisions and assessing performance. It also requires related
disclosures about products, geographic areas, and major customers. The Company
adopted SFAS No. 131 for the year ended December 31, 1998.
Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. Building One's
other comprehensive income is attributed to adjustments related to marketable
securities available for sale. The amount included in 1998 other comprehensive
income represents an adjustment for unrealized losses on these marketable
securities totaling $742 ($445 after tax).
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1999 and 1998, as presented in the accompanying unaudited interim
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
NOTE 3--TENDER OFFER PLAN
On February 7, 1999, the Company's Board of Directors approved a plan to
purchase 24,365,891 shares of its outstanding Common Stock at $25.00 per share
for cash. On March 23, 1999, the Company announced that it is modifying the
tender offer to repurchase 25,500,000 shares and reduce the price to $22.50
per share (the "Tender Offer"). The Tender Offer replaces the recapitalization
plan announced by the Company on December 23, 1998 (the "Recapitalization
Plan") under which the Company had intended to, among other things, repurchase
approximately 34.5 million shares of the Company's Common Stock. The Company
plans to finance the Tender Offer through the use of the Company's cash, the
planned issuance of $200,000 of senior
F-19
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
subordinated notes, the investment of $100,000 in exchange for convertible
subordinated debentures by Boss Investment LLC, an affiliate of Apollo
Management, L.P. and borrowings under a new credit facility.
As a result of the announcement of the Recapitalization Plan and as required
by generally accepted accounting principles, the Company has restated its
consolidated financial statements for all periods to account for two
acquisitions originally accounted for under the pooling of interests method of
accounting to the purchase method of accounting. Additionally, the restatement
of these two business combinations as purchase transactions gave rise to
approximately $51,000 of goodwill.
One of the Company's directors is President and a principal stockholder of
Friedman, Billings, Ramsey Group, Inc. ("FBR"). In connection with the
aforementioned transactions, FBR acted as a financial advisor to the Company
and received a fee of $500. Additionally, FBR will receive a fee of up to
$3,000, contingent upon the completion of the Tender Offer.
NOTE 4--BUSINESS COMBINATIONS
Pooling-of-Interests Method
During 1998, the Company issued 1,405,840 shares of Common Stock to acquire
three companies in business combinations accounted for under the pooling-of-
interests method. The Company's consolidated financial statements give
retroactive effect to the acquisitions of the Pooled Companies for all periods
presented.
The following presents the separate results, in each of the periods
presented, of Building One (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the
dates on which they were acquired:
<TABLE>
<CAPTION>
Building Pooled
One Companies Combined
-------- --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1998
Revenues........................................ $782,878 $26,723 $809,601
Net income...................................... $ 47,248 $ 215 $ 47,463
For the year ended December 31, 1997
Revenues........................................ $ -- $70,101 $ 70,101
Net income...................................... $ 7 $ 1,436 $ 1,443
For the year ended December 31, 1996
Revenues........................................ $ -- $63,202 $ 63,202
Net income...................................... $ -- $ 415 $ 415
For the three months ended March 31, 1998
(unaudited)
Revenues........................................ $ 37,497 $17,113 $ 54,610
Net income...................................... $ 5,263 $ (182) $ 5,081
</TABLE>
Purchase Method
During the year ended December 31, 1998, the Company completed 26 business
combinations that were accounted for under the purchase method of accounting.
The consolidated financial statements and related notes to consolidated
financial statements include the results of these acquired entities from their
respective dates of acquisition. The aggregate consideration paid for these
acquisitions consisted of 16,144,711 shares of the Company's Common Stock,
403,389 options assumed at an exercise price below fair market value, $259,021
in cash and the assumption of approximately $33,847 in debt which was paid at
closing. These amounts do not include contingent consideration of up to
approximately $135,945 in cash and in shares of Common Stock of the Company
based upon the performance of the various acquisitions through 2001. The
Company will record such contingent consideration as additional purchase price
when earned.
F-20
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $502,470. Allocation of
purchase price to the assets acquired and liabilities assumed has been
initially assigned and recorded based on preliminary estimates of fair value
and may be revised as additional information becomes available. However, the
Company does not expect any significant adjustments to the purchase price
allocations or amount of goodwill at December 31, 1998. For purposes of
computing the estimated purchase price for accounting purposes the value of
the shares on certain acquisitions was determined in consideration of
restrictions on the sale and transferability of the shares issued. The shares
generally will be subject to the following restrictions on resale: up to one-
third of the shares may be resold twelve months after their date of
acquisition, the first one-third and an additional one-third may be resold
beginning eighteen months after their date of acquisition and the first two-
thirds and the remaining one-third may be resold beginning twenty-four months
after their date of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the years ended December 31, 1998 and 1997, respectively, as if
all of the Purchased Companies had been acquired as of January 1, 1997. The
pro forma results of operations reflect certain pro forma adjustments
primarily related to goodwill amortization and compensation adjustments for
shareholders.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Revenues............................................... $1,312,264 $1,144,457
Net income............................................. $ 64,396 $ 39,185
Net income per share-basic............................. $ 1.34 $ 1.09
Net income per share-diluted........................... $ 1.31 $ 1.08
</TABLE>
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisitions occurred as of January 1, 1997 or the results that may occur
in the future.
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
------------------
1998 1997 1996
------ ---- ----
<S> <C> <C> <C>
Balance at beginning of period............................ $ 104 $136 $120
Allowance amounts of acquired companies................... 1,680 -- --
Additions to costs and expenses........................... 732 5 16
Write-offs................................................ (525) (37) --
------ ---- ----
Balance at end of period.................................. $1,991 $104 $136
====== ==== ====
</TABLE>
F-21
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 6--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 842,203 $ 974,123
Estimated earnings................................. 156,546 176,770
----------- -----------
998,749 1,150,893
Less: Billings to date............................. (1,032,081) (1,177,634)
----------- -----------
$ (33,332) $ (26,741)
=========== ===========
Included in the accompanying balance sheet under the following captions:
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 25,441 $ 39,931
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (58,773) (66,672)
----------- -----------
$ (33,332) $ (26,741)
=========== ===========
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
-------- ------
<S> <C> <C> <C>
Equipment......................................... $ 15,645 $3,160
Office furniture and equipment.................... 10,146 1,029
Autos and trucks.................................. 10,464 593
Buildings and improvements........................ 9,126 1,107
Land.............................................. 1,259 53
-------- ------
46,640 5,942
Less: Accumulated depreciation.................... (7,673) (3,349)
-------- ------
$ 38,967 $2,593
======== ======
Depreciation expense for years 1998, 1997 and 1996 was $5,522, $1,284 and
$1,268, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<CAPTION>
December 31, March
---------------- 31,
1998 1997 1999
-------- ------ --------
<S> <C> <C> <C>
Goodwill.......................................... $502,470 $ 151 $605,993
Non-compete agreements............................ 1,046 835 1,084
Other............................................. 585 64 562
-------- ------ --------
504,101 1,050 607,639
Less: Accumulated amortization.................... (7,720) (898) (11,178)
-------- ------ --------
Net intangible assets........................... $496,381 $ 152 $596,461
======== ====== ========
</TABLE>
F-22
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Amortization expense for years 1998, 1997 and 1996 was $7,720, $141 and $177,
respectively.
NOTE 9--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Credit facilities with banks, interest ranging from prime to
prime plus 1% (average rate of 8% at December 31, 1998)..... $ 61 $1,133
Payable to Pooled Company stockholder........................ -- 151
Current maturities of long-term debt......................... 2,106 269
------ ------
Total short-term debt...................................... $2,167 $1,553
====== ======
Long-Term Debt
Long-term debt consists of the following:
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Notes payable to banks with average interest rates ranging
from 7.0% - 9.5%............................................ $2,549 $1,112
Notes payable, interest rates ranging from 7.0% - 10.0%
secured by certain assets of the Company.................... 2,234 768
Capital lease obligations.................................... 552 46
Other........................................................ 58 22
------ ------
5,393 1,948
Less: Current portion........................................ (2,106) (269)
------ ------
Total long-term debt......................................... $3,287 $1,679
====== ======
</TABLE>
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1999............................................................... $2,106
2000............................................................... 1,800
2001............................................................... 888
2002............................................................... 357
2003............................................................... 131
Thereafter......................................................... 111
------
$5,393
======
</TABLE>
F-23
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 10--INCOME TAXES
The components of income tax expense are comprised as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1998 1997 1996
-------- ------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal................................................ $ 31,388 $ 83 $ 5
State.................................................. 5,144 11 2
-------- ----- ----
$ 36,532 $ 94 $ 7
-------- ----- ----
Deferred income taxes:
Federal................................................ (360) -- 4
State.................................................. (52) -- 2
-------- ----- ----
(412) -- 6
-------- ----- ----
Total tax expense....................................... $ 36,120 $ 94 $ 13
======== ===== ====
</TABLE>
The deferred tax assets and liabilities reflected on the balance sheet
relate primarily to the following:
<TABLE>
<CAPTION>
December
31,
------------
1998 1997
------ ----
<S> <C> <C>
Deferred tax assets (liabilities):
Reserves and accrued liabilities............................... $3,755 $219
Cash to accrual conversion..................................... (675)
Property and equipment......................................... (234)
Other.......................................................... (661)
Deferred gain on marketable securities......................... (945)
------ ----
Net deferred tax asset.......................................... $1,240 $219
====== ====
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate............................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit............ 3.6 0.6 1.0
Nondeductible goodwill amortization....................... 3.4
Subchapter S corporation income not subject to corporate
level taxation........................................... (.1) (30.8) (28.8)
Other..................................................... 1.3 2.3 (3.2)
---- ----- -----
Effective income tax rate................................. 43.2% 6.1% 3.0%
==== ===== =====
</TABLE>
Certain of the Pooled Companies were organized as subchapter S corporations
prior to being acquired by the Company and, as a result, the federal tax on
their income was the responsibility of their individual stockholders.
Accordingly, the Pooled Companies provided no federal income tax expense prior
to these acquisitions by the Company. The following unaudited pro forma income
tax information is presented as if the Pooled Companies had been subject to
applicable federal and state income taxes for 1997 and 1996:
F-24
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Year Ended
December
31,
-----------
1997 1996
------ ----
<S> <C> <C>
Net income as reported............................................. $1,537 $428
Pro forma income tax provision..................................... 615 171
------ ----
Pro forma net income............................................... $ 922 $257
====== ====
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases various office facilities and equipment under
noncancelable lease agreements which expire at various dates. Future minimum
lease payments under noncancelable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999....................................................... $353 $10,733
2000....................................................... 193 9,089
2001....................................................... 42 7,576
2002....................................................... 24 6,077
2003....................................................... 9 4,936
Thereafter................................................. -- 9,789
---- -------
Total minimum lease payments............................... 621 $48,200
==== =======
Less: Amounts representing interest........................ 69
----
Present value of net minimum lease payments................ $552
====
</TABLE>
Rent expense for all operating leases for 1998, 1997 and 1996 was $7,614,
$339 and $514, respectively. Certain of the above leases are for equipment or
facilities which are owned by stockholder-employees. Total rent expense paid
to these affiliates totaled $954 in 1998.
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this
litigation will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
NOTE 12--SEGMENT REPORTING
The Company has three reportable segments: electrical, mechanical and
janitorial. The electrical segment offers a single source for designing,
installing, maintaining and upgrading a facility's electrical systems. The
mechanical segment provides one source for all of a facility's mechanical,
HVAC and plumbing needs. The janitorial segment provides a wide variety of
facility cleaning and maintenance services nationwide.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income and on Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA").
F-25
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The Company's reportable segments are strategic business units that offer
different products and services. Intersegment transactions are accounted for
as if they were to third parties, that is, at current market prices. All of
the Company's revenues are derived from domestic sources. Each of the acquired
companies were acquired as a unit, and the management at the time of the
acquisition was retained.
<TABLE>
<CAPTION>
Consolidating
Electrical Janitorial Mechanical Corporate Entries Consolidated
---------- ---------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 1998 $534,419 $159,912 $115,665 $ -- $(395)(1) $ 809,601
1997 -- 70,101 -- -- -- 70,101
1996 -- 63,202 -- -- -- 63,202
Operating income (loss) 1998 52,197 10,882 10,181 (8,076) -- 65,184
1997 -- (532) -- -- -- (532)
1996 -- 735 -- -- -- 735
EBITDA 1998 60,221 14,660 11,571 (8,026) -- 78,426
1997 -- 413 -- -- -- 413
1996 -- 1,661 -- -- -- 1,661
Total assets 1998 598,852 121,660 162,369 161,041 -- 1,043,922
1997 -- 10,094 -- 529,065 -- 539,159
1996 -- 9,629 -- -- -- 9,629
Working capital 1998 116,569 12,071 21,407 157,343 -- 307,390
1997 -- 958 -- 527,277 -- 528,235
1996 -- 67 -- -- -- 67
</TABLE>
- --------
(1) Elimination of Intersegment Revenues
A reconciliation of consolidated operating income to total consolidated
income before taxes, and of consolidated EBITDA to consolidated income before
taxes for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Operating income (loss):
Total segment operating income....................... $65,184 $ (532) $ 735
Interest income (expense), net....................... 18,399 2,069 (307)
------- ------ ------
Consolidated income before taxes................... $83,583 $1,537 $ 428
======= ====== ======
EBITDA:
Total segment EBITDA................................. $78,426 $ 413 $1,661
Depreciation and amortization........................ (13,242) (945) (926)
Interest income (expense), net....................... 18,399 2,069 (307)
------- ------ ------
Consolidated income before taxes................... $83,583 $1,537 $ 428
======= ====== ======
</TABLE>
F-26
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Effective January 1, 1999, the Company changed the structure of its internal
organization and as a result the Electrical and Mechanical segments have been
combined into one reportable segment.
<TABLE>
<CAPTION>
Mechanical
and Electrical Janitorial Corporate Consolidated
-------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenues
Three months ended:
March 31, 1999............... $296,632 $ 54,210 $ -- $ 350,842
March 31, 1998............... 31,970 22,640 -- 54,610
Operating income (loss)
Three months ended:
March 31, 1999............... 23,849 3,320 (3,202) 23,967
March 31, 1998............... 2,630 145 (640) 2,135
EBITDA
Three months ended:
March 31, 1999............... 28,597 4,661 (3,174) 30,084
March 31, 1998............... 3,156 421 (640) 2,937
Total assets
March 31, 1999............... 857,722 126,301 178,097 1,162,120
March 31, 1998............... 274,362 27,773 418,446 720,581
Working capital
March 31, 1999............... 163,901 12,435 75,633 251,969
March 31, 1998............... 34,281 546 412,020 446,847
</TABLE>
A reconciliation of consolidated EBITDA to consolidated income before taxes
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
EBITDA:
Total segment EBITDA..................................... $ 30,084 $ 2,937
Depreciation and amortization............................ (6,117) (802)
Other income, net........................................ 2,693 6,668
--------- --------
Consolidated income before income taxes................ $ 26,660 $ 8,803
========= ========
</TABLE>
NOTE 13--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.
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") to facilitate the public offering of shares of common stock. The
sole member of LLC received 2,300,000 shares of Common Stock of the Company in
connection with the Merger in exchange for his 100% ownership interest in LLC.
The sole member made contributions to LLC from time to time to fund expenses
in the aggregate amount of $126. These contributions were included in common
stock and additional paid-in capital.
F-27
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The Company completed its IPO in December 1997, selling 27,850,000 shares of
Common Stock and 500,000 shares of Convertible Non-Voting Common Stock at
$20.00 per share and raising net proceeds of approximately $527,000. Proceeds
from the IPO, net of underwriting fees and other stock issuance costs, were
included in common stock and additional paid-in capital.
During 1998, the Company repurchased 2,990,000 shares of its common stock
for $41,835. These shares were repurchased in accordance with a stock
repurchase program covering 3,100,000 shares which was determined based upon
the number of shares issued in connection with acquisitions accounted for
under the purchase method of accounting.
Convertible Non-Voting Common Stock
In connection with the IPO, the Company sold 500,000 shares of Convertible
Non-Voting Common Stock to FBR, the representative of the underwriters in the
Company's IPO, for $20 per share. On November 25, 1998 these 500,000 shares
were converted to 500,000 shares of Common Stock.
Warrants
The Company has 1,130,000 shares of Common Stock reserved for issuance upon
exercise of warrants issued to FBR. The warrants have an exercise price per
share equal to the IPO price. These warrants become exercisable on the first
anniversary and will expire on the fifth anniversary of the IPO. FBR has the
right, as of November 25, 1998, to require the Company to register such shares
for sale.
Additionally, 1,950,000 shares of Common Stock have been reserved for
issuance upon the exercise of warrants issued to Jonathan Ledecky at the time
of the IPO. These warrants are exercisable for a period of ten years at an
exercise price equal to the IPO price. The Company has agreed that, at
Jonathan Ledecky's request, it will register the shares underlying his
warrants for a ten-year period following the IPO. In addition, the Company has
agreed to give Jonathan Ledecky the right to request that the Company include
the shares underlying his warrants on a registration statement filed by the
Company during a twelve-year period following the IPO.
NOTE 14--STOCK PURCHASE AND AWARD PLANS
Long-Term Incentive Plan
The Company's Board of Directors adopted, and the Company's stockholders
approved a 1997 Long-Term Incentive Plan and a 1998 Long-Term Incentive Plan
(collectively, the "Incentive Plans"). The terms of the option awards under
these Incentive Plans are established by the compensation committee of the
Company's Board of Directors. The maximum number of shares that may be issued
under the Incentive Plans is equal to 14% of the number of shares of Common
Stock outstanding from time to time.
Options under the Incentive Plans generally vest 25% each on the first four
anniversaries of the date of grant and 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 adopted, and the Company's stockholders
approved, the 1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"),
which provides for the automatic grant to each non-
F-28
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
employee director of an option to purchase 20,000 shares on 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 granted under the Directors' Plan have an exercise
price per share equal to the fair market value of a share at the date of grant
of the options and expire at the earlier of 10 years from the date of grant or
90 days after termination of service as a director. Options 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 adopted, and the Company's stockholders 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.
Accounting for Stock Based Compensation
A summary of option and warrant transactions follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ---------------------------
Options Options
and Weighted Average and Weighted Average
Warrants Exercise Price Warrants Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996................... -- -- -- --
Granted............... 3,510,000 $20.00 1,950,000 $20.00
--------- ------ --------- ------
Balance at December 31,
1997................... 3,510,000 $20.00 1,950,000 $20.00
Granted............... 2,544,846 17.91 863,389 13.07
Exercised............. (7,930) 4.84 (7,930) 4.84
Canceled.............. (25,613) 22.27 -- --
--------- ------ --------- ------
Balance at December 31,
1998................... 6,021,303 $19.12 2,805,459 $17.91
========= ====== ========= ======
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------------------------------------------------
Weighted Average
Range of Exercise Prices Options Remaining Weighted Average Options Weighted Average
----------------- and Warrants Contractual Life Exercise Price and Warrants Exercise Price
------------ ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$4.84--$4.84 395,459 9.5 years $ 4.84 395,459 $ 4.84
$8.38--$8.38 15,278 9.8 $ 8.38 -- --
$12.75--$18.38 745,438 9.8 $15.22 -- --
$19.25--$25.25 4,865,128 9.1 $21.55 2,410,000 $20.29
-------------- --------- ---- ------ --------- ------
$ 4.84--$25.25 6,021,303 9.2 $19.12 2,805,459 $17.91
============== ========= ==== ====== ========= ======
</TABLE>
F-29
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Had compensation expense for the Company's stock-based compensation plans
and warrants issued to employees been determined based on the fair value at
the grant dates, the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
---------------
1998 1997
------- -------
<S> <C> <C>
Net income (loss):
As reported................................................. $47,463 $ 1,443
Pro forma................................................... $37,381 $(5,782)
Net income (loss) per share--Basic:
As reported................................................. $ 1.19 $ 0.25
Pro forma................................................... $ 0.94 $ (1.02)
Net income (loss) per share--Diluted:
As reported................................................. $ 1.16 $ 0.25
Pro forma................................................... $ 0.91 $ (1.02)
</TABLE>
The weighted average fair value of options and warrants granted in 1998 and
1997 was $13.38 and $7.46, respectively. The fair value of options and
warrants granted (which is amortized to expense over the option vesting period
in determining the pro forma impact) is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
------- -----------------
Options Options Warrants
------- ------- --------
<S> <C> <C> <C>
Expected life of option............................. 5 years 5 years 2 years
Risk-free interest rate............................. 5.3% 5.76% 5.69%
Expected volatility................................. 63.7% 45.0% 45.0%
</TABLE>
Other Employee Benefit Plans
Several of the Company's subsidiaries have defined contribution benefit
plans, such as 401(k) retirement plans, which allow eligible employees to make
contributions. Additionally, several of the subsidiaries also provide company
matching contributions up to specified levels. Company contribution expense to
these plans was $2,880 for the year ended December 31, 1998.
F-30
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data of the
Company:
<TABLE>
<CAPTION>
1998 Quarters
--------------------------------------------
First Second Third Fourth Total
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $54,610 $171,661 $252,324 $331,006 $809,601
Gross profit.................... $10,377 $ 36,662 $ 55,238 $ 71,099 $173,376
Operating income................ $ 2,135 $ 12,485 $ 22,519 $ 28,045 $ 65,184
Net income...................... $ 5,081 $ 10,046 $ 15,164 $ 17,172 $ 47,463
Net income per share--Basic..... $ 0.15 $ 0.26 $ 0.35 $ 0.38 $ 1.19
Net income per share--Diluted
(1)............................. $ 0.15 $ 0.25 $ 0.34 $ 0.38 $ 1.16
<CAPTION>
1997 Quarters
--------------------------------------------
First Second Third Fourth Total
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $17,479 $ 17,393 $ 17,538 $ 17,691 $ 70,101
Gross profit.................... $ 2,807 $ 2,759 $ 2,732 $ 2,946 $ 11,244
Operating income (loss)......... $ 259 $ 426 $ 390 $ (1,607) $ (532)
Net income...................... $ 210 $ 434 $ 299 $ 500 $ 1,443
Net income per share--Basic
(1)............................ $ 0.10 $ 0.12 $ 0.08 $ 0.04 $ 0.25
Net income per share--Diluted
(1)............................ $ 0.09 $ 0.12 $ 0.08 $ 0.04 $ 0.25
</TABLE>
- --------
(1) The arithmetic total of the individual quarterly net income per share
amounts does not reconcile to the annual amount of net income per share
due to the timing of net income in relation to the issuance of common
shares during the course of the year.
F-31
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 16--NET EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share," which became
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 requires presentation of basic and diluted earnings per
share ("EPS") and restatement of EPS data for all prior periods. Basic EPS
includes no dilution and is computed by dividing net income by the Company's
weighted average shares of Common Stock outstanding. Diluted EPS is computed
by dividing net income by the Company's weighted average shares of Common
Stock outstanding and dilutive Common Stock equivalents. The following table
reconciles the numerators and denominators of the basic and diluted EPS
computations for the three years ended December 31, 1998, 1997 and 1996, and
for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
For the
For the Year Ended December 31, Three Months Ended March 31,
--------------------------------- -----------------------------
1998 1997 1996 1999 1998
----------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Basic earnings per
share:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Weighted average
shares outstanding--
Basic................ 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
----------- ---------- ---------- -------------- --------------
Net income per share--
Basic................ $ 1.19 $ 0.25 $ 0.32 $ 0.32 $ 0.15
=========== ========== ========== ============== ==============
Diluted earnings per
share:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Weighted average
shares outstanding--
Basic................ 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
Convertible Non-Voting
Common Stock......... 373,973 49,315 -- -- 500,000
Common Stock
equivalents from
stock options and
warrants............. 342,903 132,771 115,116 277,080 578,207
Contingently issuable
shares............... 303,212 -- -- 1,490,423 10,396
----------- ---------- ---------- -------------- --------------
Total weighted average
shares outstanding--
Diluted.............. 40,928,452 5,865,550 1,405,840 47,740,958 34,075,876
----------- ---------- ---------- -------------- --------------
Net income per share--
Diluted.............. $ 1.16 $ 0.25 $ 0.30 $ 0.31 $ 0.15
=========== ========== ========== ============== ==============
</TABLE>
Outstanding stock options to purchase 1,945,439 and 5,974,775 shares of
Common Stock as of December 31, 1998 and March 31, 1999, respectively, were
not included in the computation of diluted shares per share because the
options' exercise prices were greater than the average market price of the
Common Stock during the period.
NOTE 17--SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1998 and through May 13, 1999, the Company
completed three business combinations in the electrical installation and
maintenance services business and five business combinations in the mechanical
installation and maintenance services business for total consideration of
$47,527 in cash and 1,002,507 shares of Common Stock, excluding professional
fees. Additionally, there is the potential for the payment of up to an
additional $11,600 in cash and shares of Common Stock in connection with
contingent consideration agreements.
As of May 13, 1999, the Company has also entered into letters of intent to
acquire eight companies for total consideration of $52,650 in cash and shares
of Common Stock.
F-32
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
On May 11, 1999 the Company completed its plan to repurchase 25,500,000
shares of common stock for $560,127 (24,618,856 shares at a price of $22.50
per share and 881,144 shares of common stock underlying stock options at
$22.50 per share less the exercise price per share of the options). The
Company financed the repurchase through available cash, the offering of
$200,000 of senior subordinated notes (less discount of $4,508), an investment
by Boss Investment LLC, an affiliate of Apollo Management L.P., of 7 1/2%
$100,000 convertible subordinated debentures and borrowings under a new credit
facility.
The following unaudited pro forma results of operations give effect to the
Tender Offer, including the financing of the Tender Offer, acquisitions
completed during the year ended December 31, 1998 and the three months ended
March 31, 1999 as if they had been consummated on January 1, 1998, and the
effects of certain other pro forma adjustments to the historical financial
statements.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues................................................ $ 373,258 $ 336,111
Cost of revenues........................................ 298,940 275,515
---------- ----------
Gross profit........................................ 74,318 60,596
Selling, general and administrative expenses............ 45,702 39,397
Goodwill amortization................................... 3,654 3,308
---------- ----------
Operating income.................................... 24,962 17,891
Other (income) expense:
Interest income....................................... (17)
Interest expense...................................... 10,829 10,973
Other, net............................................ (497) (2,326)
---------- ----------
Income before taxes..................................... 14,647 9,244
Provision for income taxes.............................. 7,196 4,872
---------- ----------
Net income.............................................. $ 7,451 $ 4,372
========== ==========
Net income per Common Share--Basic...................... $ 0.34 $ 0.20
========== ==========
Net income per Common Share--Diluted.................... 0.31 0.21
========== ==========
Weighted average shares outstanding--Basic.............. 21,910,397 21,578,216
========== ==========
Weighted average shares outstanding--Diluted............ 27,997,422 26,405,533
========== ==========
</TABLE>
Net income per Common Share--Basic is calculated based upon the weighted
average shares outstanding assuming the repurchase of 24,618,856 shares
occured as of January 1, 1998. Net income per Common Share--Diluted is
calculated based upon net income adjusted for a reduction in interest expense
assuming conversion of the convertible subordinated debentures in the amount
of $4,788, and weighted average shares outstanding adjusted for the conversion
of the convertible subordinated debentures into 4,444,444 shares of common
stock plus the dilution attributable to options and warrants and contingently
issuable shares.
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the Tender Offer and the acquisitions occurred as of January 1, 1998 or the
results that may occur in the future.
F-33
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 14,522 $ 213,096
Accounts receivable, net.......................... 362,147 246,623
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 49,875 25,441
Prepaid expenses and other current assets......... 27,632 17,108
---------- ----------
Total current assets............................ 454,176 502,268
Property and equipment, net......................... 57,358 38,967
Intangible assets, net.............................. 694,501 496,381
Other assets........................................ 6,176 6,306
---------- ----------
Total assets.................................... $1,212,211 $1,043,922
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ 4,401 $ 2,167
Accounts payable.................................. 92,036 75,029
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 81,109 58,773
Accrued compensation.............................. 41,669 27,737
Accrued liabilities............................... 50,492 31,172
---------- ----------
Total current liabilities....................... 269,707 194,878
Long-term debt...................................... 438,887 3,287
Convertible junior subordinated debentures.......... 101,895 --
Other liabilities................................... 4,706 8,220
---------- ----------
Total liabilities............................... 815,195 206,385
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 11,000,000 au-
thorized; none issued or
outstanding...................................... -- --
Common stock, $.001 par value; 250,000,000 shares
authorized; 26,080,188 and 45,258,946 shares is-
sued and outstanding, respectively .............. 26 45
Additional paid-in capital........................ 310,216 832,514
Treasury stock.................................... -- (41,832)
Retained earnings................................. 87,339 47,255
Accumulated other comprehensive income (loss)..... (565) (445)
---------- ----------
Total stockholders' equity...................... 397,016 837,537
---------- ----------
Total liabilities and stockholders' equity...... $1,212,211 $1,043,922
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues...................... $ 477,875 $ 252,324 $1,265,521 $ 478,595
Cost of revenues.............. 379,900 197,086 1,011,305 376,318
---------- ---------- ---------- ----------
Gross profit.............. 97,975 55,238 254,216 102,277
Selling, general and adminis-
trative expenses............. 53,375 30,106 145,863 60,554
Goodwill amortization......... 4,238 2,613 11,511 4,584
Restructuring and recapitali-
zation charges (Note 6)...... -- -- 8,020 --
---------- ---------- ---------- ----------
Operating income.......... 40,362 22,519 88,822 37,139
Other (income) expense:
Interest expense............ 13,062 239 21,279 565
Interest income............. (468) (4,280) (4,674) (16,043)
Other, net.................. 270 184 (128) (134)
---------- ---------- ---------- ----------
Income before provision for
income taxes................. 27,498 26,376 72,345 52,751
Provision for income taxes.... 12,110 11,212 32,261 22,460
---------- ---------- ---------- ----------
Net income.................... $ 15,388 $ 15,164 $ 40,084 $ 30,291
========== ========== ========== ==========
Net income per Common Share--
Basic........................ $ 0.60 $ 0.35 $ 1.14 $ 0.79
========== ========== ========== ==========
Net income per Common Share--
Diluted...................... $ 0.54 $ 0.34 $ 1.08 $ 0.77
========== ========== ========== ==========
Weighted average shares out-
standing--Basic.............. 25,631,194 43,122,092 35,311,455 38,298,295
========== ========== ========== ==========
Weighted average shares out-
standing-- Diluted........... 30,853,857 44,255,655 38,899,637 39,368,321
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the nine months ended September 30, 1999
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------
Accumulated
Additional Other Total Total
Shares Paid-in- Treasury Retained Comprehensive Stockholders' Comprehensive
Outstanding Amount Capital Stock Earnings Income (loss) Equity Income
----------- ------ ---------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 45,258,946 $45 $832,514 $(41,832) $47,255 $(445) $837,537
Stock issued upon
exercise of options.... 29,185 142 142
Issuance of common stock
for acquisitions and
contingent
consideration
agreements............. 5,310,162 6 75,155 75,161
Stock issued under
employee stock purchase
plan................... 99,735 1,212 1,212
Contingently issuable
shares................. 3,375 3,375
Repurchase of shares in
Tender Offer (See Note
3)..................... (24,617,840) (25) (562,979) (563,004)
Compensation expense
related to options
exercised in Tender
Offer.................. 2,629 2,629
Cancellation of
treasury stock......... (41,832) 41,832
Unrealized loss on
marketable securities--
net of tax of $80...... (120) (120) $ (120)
Net income.............. 40,084 40,084 40,084
-------
Total comprehensive
income................. $39,964
----------- --- -------- -------- ------- ----- -------- =======
Balance, September 30,
1999................... 26,080,188 $26 $310,216 $ -- $87,339 $(565) $397,016
=========== === ======== ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 40,084 $ 30,291
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 22,436 7,946
Compensation expense related to options exercised....... 2,629 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (70,729) (21,323)
Costs and estimated earnings in excess of billings..... (14,873) 3,190
Prepaid expenses and other current assets.............. (9,928) (2,237)
Billings in excess of costs and estimated earnings..... 12,828 9,787
Accounts payable and accrued liabilities............... 22,668 5,053
Change in other assets.................................. 981 957
--------- --------
Net cash provided by operating activities............. 6,096 33,664
--------- --------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired......... (131,037) (195,155)
Purchases of property and equipment...................... (19,656) (6,677)
Proceeds on sale of equipment............................ 362 740
Other.................................................... (28) 24
--------- --------
Net cash used in investing activities................. (150,359) (201,068)
--------- --------
Cash flows from financing activities:
Net payments on short-term debt.......................... (3,544) (36,355)
Payments on long-term debt............................... (14,416) (28,690)
Proceeds from long-term debt............................. 549,875 2,239
Payment of debt issuance costs........................... (22,219) --
Repurchase of common stock including related expenses.... (564,407) --
Distribution of S-Corp earnings.......................... -- (628)
Proceeds (payments) on related party loans............... (112) 547
Distribution to minority shareholders.................... (842) --
Proceeds from stock options exercised.................... 142 217
Proceeds from issuance of stock under employee stock
purchase plan........................................... 1,212 174
Purchase of treasury stock............................... -- (27,050)
--------- --------
Net cash used in financing activities................. (54,311) (89,546)
--------- --------
Net decrease in cash and cash equivalents................. (198,574) (256,950)
Cash and cash equivalents, beginning of period............ 213,096 528,972
--------- --------
Cash and cash equivalents, end of period.................. $ 14,522 $272,022
========= ========
The Company issued shares of common stock and cash in connection with certain
business combinations during the nine months ended September 30, 1999 and
1998, respectively. The fair values of the assets acquired and liabilities
assumed at the dates of acquisition are as follows:
Accounts receivable....................................... $ 44,674 $178,497
Costs and earnings in excess of billings.................. 9,501 26,045
Prepaid expenses and other current assets................. 2,605 11,225
Property and equipment.................................... 8,843 27,530
Intangible assets......................................... 103,453 459,446
Other assets.............................................. 2,762 6,293
Short-term debt........................................... (4,335) (29,358)
Accounts payable.......................................... (17,954) (57,420)
Accrued liabilities....................................... (12,369) (45,280)
Billings in excess of costs and estimated earnings........ (9,123) (49,776)
Long-term debt............................................ (1,446) (40,848)
Other long-term liabilities............................... (242) (5,812)
--------- --------
Net assets acquired....................................... $ 126,369 $480,542
========= ========
These acquisitions were funded as follows:
Common stock, 2,959,661 and 14,443,040 shares,
respectively............................................. $ 39,076 $285,387
Cash, net of cash acquired................................ 87,293 195,155
--------- --------
$ 126,369 $480,542
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share amounts)
NOTE 1--BUSINESS AND ORGANIZATION
Building One Services Corporation, ("Building One" or the "Company") is a
leading provider of integrated facilities services in the United States.
Currently, the Company provides mechanical and electrical installation and
maintenance services, and janitorial and maintenance management services. The
Company's goal is to become the preeminent single-source provider of
facilities services in the United States.
The interim financial data as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and September 30, 1998 is
unaudited; however, in the opinion of the Company, the interim data includes
all adjustments, consisting only of normal recurring adjustments necessary for
a fair presentation of the results for the interim periods. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the year as a whole. It is suggested that these consolidated
financial statements be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1998.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the interim periods presented. For a description of these policies,
refer to Note 2 of the Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 3--RECAPITALIZATION PLAN
On May 11, 1999, the Company completed its recapitalization plan which
included the repurchase of 24,617,840 shares of its common stock ("Common
Stock") at $22.50 per share for cash and 883,573 shares of the Company's
Common Stock underlying stock options at $22.50 per share less the exercise
price per share of the options in a tender offer (the "Tender Offer"). Funds
utilized for the repurchase totaled $560,084, which were obtained from the
Company's available cash, the net proceeds of $195,492 from the issuance of
$200,000 of 10 1/2% senior subordinated notes, $100,000 from the issuance of 7
1/2% convertible junior subordinated debentures to Boss Investment LLC, an
affiliate of Apollo Management, L.P. ("Apollo") and borrowings under a new
credit facility. See Note 5 for unaudited pro forma statement of operations
data for the three and nine month periods ended September 30, 1999 and
September 30, 1998 which assumes that the recapitalization plan was
consummated on January 1, 1998.
As a result of the Company allowing for the exercise of employee stock
options in the Tender Offer, compensation expense of $2,770 ($1,578 after the
associated tax benefit) was recognized and is included in the restructuring
and recapitalization charges recorded in the nine months ended September 30,
1999. Additionally, $4,323 of expenses were incurred in connection with the
Tender Offer which have been reflected as a reduction of stockholders' equity.
NOTE 4--BUSINESS COMBINATIONS
Purchase Acquisitions
During the nine months ended September 30, 1999, the Company completed
seventeen business combinations that were accounted for under the purchase
method of accounting. The consolidated financial statements include the
results of these acquired businesses from their respective dates of
acquisition. The aggregate consideration paid for these acquisitions consisted
of 2,959,661 shares of the Company's Common Stock and $96,843 in cash,
including $1,593 of debt assumed and applicable professional fees.
F-38
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
The total purchase price was allocated to the fair value of the net assets
acquired, resulting in goodwill of approximately $103,341. Such allocations
are preliminary in nature, pending the outcome of a detailed analysis being
performed by the Company of the assets and liabilities acquired. For purposes
of computing the estimated purchase price for accounting purposes, the value
of the shares on certain acquisitions was determined in consideration of
various restrictions on the sale and transferability of the shares issued.
Contingent Consideration Agreements
In conjunction with acquisitions consummated in 1998 and 1999, the Company
has entered into certain contingent consideration agreements which provide for
the payment of cash and shares of Common Stock based on the performance of
such acquired companies.
During the nine months ended September 30, 1999, $89,812 of consideration
under these agreements had been earned, consisting of 2,644,698 shares of
Common Stock and $45,968 of cash, resulting in additional goodwill in the
amount of $86,178. As of September 30, 1999, $43,744 of this cash and
applicable professional fees was paid and 2,350,501 of these shares were
issued. The remaining cash amount payable of $3,500 has been reflected as a
liability as of September 30, 1999 and the additional paid-in capital
associated with the shares to be issued has been reflected as contingently
issuable shares in the Statement of Stockholders' Equity and Comprehensive
Income. These contingently issuable shares have been included in the weighted
average shares outstanding for purposes of computing basic and diluted
earnings per share for the three and nine month periods ended September 30,
1999. The Company currently estimates the unearned contingent consideration
under these remaining agreements to approximate $84,900 as of September 30,
1999.
F-39
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
NOTE 5--UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
The following unaudited pro forma results of operations give effect to the
Company's recapitalization plan, including the Tender Offer, the financing of
the Tender Offer, acquisitions completed during the year ended December 31,
1998 and the nine months ended September 30, 1999 as if they had been
consummated on January 1, 1998, and the effects of certain other pro forma
adjustments to the historical financial statements. Additionally, net income
per common share is also presented excluding the restructuring and
recapitalization charges discussed in Note 6.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 487,000 $ 414,565 $1,363,487 $1,182,646
Cost of revenues............... 386,551 327,152 1,085,207 945,652
---------- ---------- ---------- ----------
Gross profit............... 100,449 87,413 278,280 236,994
Selling, general and
administrative expenses....... 55,281 47,096 157,331 130,571
Goodwill amortization.......... 4,373 4,335 13,259 13,005
Restructuring and
recapitalization charges...... 8,020
---------- ---------- ---------- ----------
Operating income........... 40,795 35,982 99,670 93,418
Other (income) expense:
Interest expense............. 12,861 12,789 38,297 38,226
Other, net................... 269 (460) (511) (3,438)
---------- ---------- ---------- ----------
Income before taxes............ 27,665 23,653 61,884 58,630
Provision for income taxes..... 12,248 11,025 28,744 28,134
---------- ---------- ---------- ----------
Net income..................... $ 15,417 $ 12,628 $ 33,140 $ 30,496
========== ========== ========== ==========
Net income per common share--
Basic......................... $ 0.59 $ 0.48 $ 1.26 $ 1.16
========== ========== ========== ==========
Net income per common share--
Diluted....................... $ 0.53 $ 0.44 $ 1.17 $ 1.09
========== ========== ========== ==========
Weighted average shares
outstanding--Basic............ 26,357,148 26,233,201 26,357,148 26,233,201
========== ========== ========== ==========
Weighted average shares
outstanding--Diluted.......... 31,470,274 31,346,327 31,538,444 31,414,497
========== ========== ========== ==========
Excluding restructuring and
recapitalization charges:
Net income per common share -
Basic......................... $ 1.44
==========
Net income per common share -
Diluted....................... $ 1.32
==========
</TABLE>
Net income per common share--Basic is calculated based upon the weighted
average shares outstanding assuming the repurchase of 24,617,840 shares in the
Tender Offer occurred as of January 1, 1998. Net income per common share--
Diluted is calculated based upon net income adjusted for a reduction in
interest expense assuming conversion of the convertible junior subordinated
debentures and weighted average shares outstanding adjusted for the conversion
of the convertible junior subordinated debentures into shares of common stock
at $22.50 plus the dilution attributable to options and warrants and
contingently issuable shares.
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the recapitalization plan, the Tender Offer and the acquisitions occurred as
of January 1, 1998 or the results that may occur in the future.
F-40
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
NOTE 6--RESTRUCTURING AND RECAPITALIZATION CHARGES
Recapitalization charges
As discussed in Note 3, during the second quarter of 1999, the Company
completed its recapitalization plan involving the repurchase of 24,617,840
shares of its Common Stock and 883,573 shares of Common Stock underlying stock
options. In conjunction with the recapitalization, compensation expense of
$2,770 was recognized for stock options exercised and the underlying shares of
Common Stock repurchased by the Company.
Restructuring charges
In the second quarter of 1999, the Company's Board of Directors approved and
the Company announced a restructuring plan which included a relocation of the
Company's corporate headquarters and integration of the janitorial and
maintenance management operations. During the second quarter of 1999 and
continuing into the third quarter of 1999, the corporate headquarters was
relocated from Washington, D.C. to Minneapolis, Minnesota. In addition,
certain back office operations of the janitorial and maintenance management
service operations are being consolidated into two locations.
The restructuring costs include costs directly related to the Company's
restructuring in accordance with EITF No. 94-3 which provides specific
requirements as to the appropriate recognition of costs associated with
employee termination benefits and other exit costs.
As a result of these restructuring plans, the Company incurred severance
costs for certain employees, identified certain assets which are no longer of
service and incurred certain lease termination costs.
The following table sets forth a summary of these restructuring costs.
<TABLE>
<CAPTION>
Corporate Janitorial
Headquarters Operations Total
------------ ---------- ------
<S> <C> <C> <C>
Severance........................................ $3,530 $900 $4,430
Impaired assets.................................. 55 520 575
Lease costs...................................... 205 40 245
------ ------ ------
Total............................................ $3,790 $1,460 $5,250
====== ====== ======
</TABLE>
Included in the $5,250 restructuring charge incurred in the second quarter
of 1999 are $4,600 of cash costs and $650 in non-cash related costs. The
Company anticipates annual savings of approximately $2,800 as a result of the
restructuring.
F-41
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
The following table is a detailed reconciliation of the restructuring
reserve balance from June 30, 1999 to September 30, 1999. The reconciliation
reflects the accruals recorded and payments applied during the year.
<TABLE>
<CAPTION>
June 30, September 30,
1999 Payments 1999
Restructuring reserve: -------- -------- -------------
<S> <C> <C> <C>
Severance..................................... $1,396 $(685) $711
Lease costs................................... 268 (88) 180
------ ----- ----
Total........................................... $1,664 $(773) $891
------ ----- ----
</TABLE>
NOTE 7--LONG TERM DEBT
In connection with the repurchase of Common Stock under the recapitalization
plan, the Company issued $200,000 of 10 1/2% senior subordinated notes,
$100,000 of 7 1/2% convertible junior subordinated debentures and entered into
a new credit facility to fund the repurchase. The following is a summary of
these financing sources obtained in connection with the recapitalization plan.
10 1/2% Senior Subordinated Notes
In April 1999, the Company completed a private placement offering of
$200,000 of 10 1/2% senior subordinated notes. The senior subordinated notes
are unsecured, guaranteed by our subsidiaries, require interest to be paid
semi-annually on May 1 and November 1 of each year and mature on May 1, 2009.
The senior subordinated notes were issued at 97.746%, or a discount of $4,508,
which is being amortized over the term of the notes. Additionally, debt
issuance costs of $8,255 incurred in connection with the offering, are
classified as intangible assets and are being amortized over the 10-year term
of the notes.
The Company may redeem the senior subordinated notes, in whole or in part,
at any time on or after May 1, 2002 at specified redemption prices, plus
accrued interest. At any time before May 1, 2002, the Company can redeem up to
35% of the outstanding senior subordinated notes with money raised in one or
more equity offerings under certain circumstances. Upon a change in control of
the Company (as defined in the indenture for the senior subordinated notes),
the holders of the senior subordinated notes will have the right to sell the
notes to the Company at 101% of the face amount plus accrued interest.
The indenture governing the senior subordinated notes contains certain
covenants relating to, among other things, the Company's ability to incur
indebtedness, pay dividends or repurchase capital stock, incur liens, sell or
otherwise dispose of a substantial portion of its assets or merge or
consolidate with another entity.
The senior subordinated notes are guaranteed by all but two of the Company's
wholly owned subsidiaries and a subsidiary that is 93%-owned. The wholly owned
guarantor subsidiaries and the 93%-owned guarantor subsidiary have fully and
unconditionally guaranteed the notes on a joint and several basis. The
aggregate assets, liabilities, earnings and equity of the wholly owned
guarantor subsidiaries and the 93%-owned guarantor subsidiary are
substantially equivalent to the assets, liabilities, earnings and equity of
the Company on a consolidated basis. The Company has not presented separate
financial statements and other disclosures concerning the wholly owned
guarantor subsidiaries and the 93%-owned guarantor subsidiary because
management has determined that such information is not material to investors.
The two non-guarantor subsidiaries, together with the 93%-owned guarantor
subsidiary, are inconsequential on an individual and combined basis (i.e., the
assets and pre-tax income of and the Company's net investment in the non-
guarantor subsidiaries and the 93%-owned subsidiary is less than three percent
on an individual and combined basis).
F-42
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
7 1/2% Convertible Junior Subordinated Debentures
The convertible junior subordinated debentures mature on May 1, 2012 and
provide for interest payments at a rate of 7 1/2% to be paid in additional
convertible junior subordinated debentures or cash, at the Company's election,
for the first five years after their issuance, and in cash thereafter. The
holders of a majority of the outstanding principal amount of the convertible
junior subordinated debentures, however, will have the right to require the
payment of interest in cash after the third and through the fifth anniversary
of the issuance of the convertible junior subordinated debentures. In
addition, the provisions of the credit facility and the indenture for the
senior subordinated notes limit the Company's ability to pay cash interest
payments. Debt issuance costs of $4,634 incurred in connection with the
debentures are classified as intangible assets and are being amortized over
the 13-year term of the debentures.
The convertible junior subordinated debentures will be convertible into
shares of the Company's Common Stock at an initial conversion price of $22.50
per share plus all accrued and unpaid interest. If the convertible junior
subordinated debentures are converted prior to the fifth anniversary of their
issuance, the amount converted into shares will include additional interest
that would have accrued or been paid from the date of conversion through the
fifth anniversary of the issuance of the convertible junior subordinated
debentures. However, unless the conversion is in connection with a change of
control (as defined in the indenture for the convertible junior subordinated
debentures), the additional interest will not exceed a total of 30 months of
interest. The Company will adjust the conversion price under certain
circumstances, including the issuance of shares at a price below the
conversion price of the convertible junior subordinated debentures or below
the then fair market value of a share.
The indenture for the convertible junior subordinated debentures limits the
Company's ability to, among other things, incur additional indebtedness, pay
dividends, repurchase securities or repay certain other indebtedness. The
Company's amended and restated certificate of incorporation authorizes the
holders of the convertible junior subordinated debentures to vote together
with the holders of shares on all of the matters submitted to stockholders for
a vote and to elect as a class three of the Company's directors (or, if the
Board has more than ten directors, no less than 30% of the directors). The
holders of the convertible junior subordinated debentures will be entitled to
cast the number of votes that they would be entitled to cast if they had
converted the convertible junior subordinated debentures into shares of the
Company's Common Stock.
Credit Facility
The Company's credit facility, which is with a syndicate of banks led by
Bankers' Trust Company, consists of a $125,000 term loan and a $225,000
revolving credit facility and matures in April 2004. As of September 30, 1999
the Company had $240,875 of borrowings under this facility. The revolving
credit facility bears interest at various rates which are subject to change
based on certain levels of financial performance. The weighted average
interest rate on the borrowings outstanding under the credit facility was
8.14% as of September 30, 1999. Debt issuance costs of $9,445 incurred in
connection with this new credit facility are being amortized over the 5-year
term of the credit facility. The credit facility includes a number of
significant covenants including, among others, restrictions on the Company's
ability to incur additional indebtedness, restrictions on mergers,
acquisitions and the disposition of assets, sale and leaseback transactions
and capital lease payments, dividends and other distributions and voluntary
prepayments on indebtedness. Additionally, the Company is required to comply
with certain financial covenants with respect to minimum interest coverage and
maximum leverage ratios. As of September 30, 1999, the Company was in
compliance with all covenants.
The fair value of the senior subordinated notes as of September 30, 1999
approximated $189,000. The estimated fair value of the convertible junior
subordinated debentures and the credit facility approximate their carrying
values.
F-43
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
NOTE 8--COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
September 30, 1999
------------------
<S> <C>
Costs incurred on uncompleted contracts...................... $1,242,195
Estimated earnings........................................... 223,416
----------
1,465,611
Less: Billings to date....................................... 1,496,845
----------
$ (31,234)
==========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
September 30, 1999
------------------
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 49,875
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (81,109)
--------
$(31,234)
========
</TABLE>
NOTE 9--SEGMENT DATA
The Company has two reportable segments: mechanical/electrical and
janitorial. The mechanical/electrical segment offers a single source for
designing, installing, maintaining and upgrading a facility's electrical
systems as well as providing a facility's mechanical, HVAC and plumbing needs.
The janitorial segment provides a wide variety of facility cleaning and
maintenance management services nationwide.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on income from operations of the respective business units
prior to unallocated corporate expenses.
The Company's reportable segments offer different products and services.
Intersegment transactions are accounted for as if they were to third parties,
that is, at current market prices. All of the Company's revenues are derived
from domestic sources.
F-44
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
Prior to January 1, 1999, the Company had three reportable segments:
mechanical, electrical and janitorial. Effective January 1, 1999, the Company
changed the structure of its internal organization and as a result the
mechanical and electrical segments have been combined into one reportable
segment.
Segment information for the three and nine month periods ended September 30,
1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Mechanical
and Electrical Janitorial Consolidated
-------------- ----------- ------------
<S> <C> <C> <C>
Three month period ended September
30, 1999:
Revenues............................. $ 412,458 $ 65,417 $ 477,875
Operating costs...................... 369,517 59,830 429,347
----------- ----------- -----------
Subtotal............................. 42,941 5,587 48,528
Goodwill amortization................ 3,648 590 4,238
----------- ----------- -----------
Segment operating income............. $ 39,293 $ 4,997 44,290
=========== =========== ===========
Unallocated corporate expenses....... (3,928)
-----------
Income from operations............... $ 40,362
===========
Three month period ended September
30, 1998:
Revenues............................. $ 206,065 $ 46,259 $ 252,324
Operating costs...................... 182,567 42,186 224,753
----------- ----------- -----------
Subtotal............................. 23,498 4,073 27,571
Goodwill amortization................ 2,115 498 2,613
----------- ----------- -----------
Segment operating income............. $ 21,383 $ 3,575 24,958
=========== =========== ===========
Unallocated corporate expenses....... (2,439)
-----------
Income from operations............... $ 22,519
===========
Nine month period ended September 30,
1999:
Revenues............................. $1,087,830 $177,691 $1,265,521
Operating costs...................... 983,082 165,153 1,148,235
----------- ----------- -----------
Subtotal............................. 104,748 12,538 117,286
Goodwill amortization................ 9,719 1,792 11,511
----------- ----------- -----------
Segment operating income............. $ 95,029 $ 10,746 105,775
=========== =========== ===========
Unallocated corporate expenses....... (16,953)
-----------
Income from operations............... $ 88,822
===========
</TABLE>
F-45
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Mechanical
and Electrical Janitorial Consolidated
-------------- ---------- ------------
<S> <C> <C> <C> <C>
Nine month period ended
September 30, 1999
(before restructuring
and recapitalization
charges):
Revenues................. $1,087,830 $177,691 $1,265,521
Operating costs.......... 983,082 163,693 1,146,775
---------- ---------- -----------
Subtotal................. 104,748 13,998 118,746
Goodwill amortization.... 9,719 1,792 11,511
---------- ---------- -----------
Segment operating
income.................. $ 95,029 $ 12,206 107,235
========== ========== ===========
Unallocated corporate
expenses................ (10,393)
-----------
Income from operations... $ 96,842
===========
Nine month period ended
September 30, 1998:
Revenues................. $ 370,455 $ 108,140 $ 478,595
Operating costs.......... 331,332 100,542 431,874
---------- ---------- -----------
Subtotal................. 39,123 7,598 46,721
Goodwill amortization.... 3,723 861 4,584
---------- ---------- -----------
Segment operating
income.................. $ 35,400 $ 6,737 42,137
========== ========== ===========
Unallocated corporate
expenses................ (4,998)
-----------
Income from operations... $ 37,139
===========
<CAPTION>
Mechanical and
Electrical Janitorial Corporate Consolidated
-------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Total assets
September 30, 1999....... $1,030,433 $ 146,061 $ 35,717 $ 1,212,211
December 31, 1998........ 761,221 121,660 161,041 1,043,922
</TABLE>
F-46
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
NOTE 10 -- EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations for the three and nine month
periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income................... $ 15,388 $ 15,164 $ 40,084 $ 30,291
Weighted average shares
outstanding--Basic.......... 25,631,194 43,122,092 35,311,455 38,298,295
----------- ----------- ----------- -----------
Net income per share--Basic.. $ 0.60 $ 0.35 $ 1.14 $ 0.79
=========== =========== =========== ===========
Diluted earnings per share:
Net income................... $ 15,388 $ 15,164 $ 40,084 $ 30,291
Plus: Interest expense on 7
1/2% convertible junior
subordinated debentures and
related amortization expense
on debt issue costs net of
applicable income taxes..... 1,218 2,003
----------- ----------- ----------- -----------
Net income on an as if
converted basis............. $ 16,606 $ 15,164 $ 42,087 $ 30,291
=========== =========== =========== ===========
Weighted average shares
outstanding--Basic.......... 25,631,194 43,122,092 35,311,455 38,298,295
Convertible non-voting common
stock....................... 500,000 500,000
Common stock equivalents from
stock options and warrants.. 84,295 192,711 152,466 389,347
Contingently issuable
shares...................... 638,081 440,852 942,335 180,679
Convertible junior
subordinated debentures, on
an as if converted basis 4,500,287 2,493,381
----------- ----------- ----------- -----------
Total weighted average shares
outstanding--Diluted........ 30,853,857 44,255,655 38,899,637 39,368,321
----------- ----------- ----------- -----------
Net income per share--
Diluted..................... $ 0.54 $ 0.34 $ 1.08 $ 0.77
=========== =========== =========== ===========
</TABLE>
F-47
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(Dollars in thousands, except per share amounts)
Outstanding stock options and warrants to purchase 3,713,761 shares of
Common Stock as of September 30, 1999 were not included in the computation of
diluted earnings per share because the options' exercise prices were higher
than the average market price of the Common Stock during the period.
NOTE 11 - SUBSEQUENT EVENTS
On November 2, 1999, the Board of Directors of the Company unanimously
approved a merger with Group Maintenance America Corp. (GroupMAC). Under the
terms of the merger, each outstanding share of the Company's Common Stock will
be exchanged for 1.25 shares of GroupMAC common stock. As part of the merger,
GroupMAC shareholders may elect to receive cash for up to 50% of their shares
at $13.50 per share (up to $150 million in the aggregate), subject to pro-
ration. If this cash election is fully subscribed, approximately 11 million
GroupMAC shares (or approximately 29% of its shares currently outstanding)
will be cancelled in the merger. The transaction is expected to be tax-free to
the shareholders of both companies, except GroupMAC shareholders to the extent
of any cash they elect to receive, and will be accounted for under the
purchase method of accounting.
Concurrent with the closing of the merger, Apollo will exchange its
convertible junior subordinated debentures and $150 million of cash for
approximately $255 million of GroupMAC convertible preferred stock. The cash
proceeds from the investment will be used to fund the cash election option
described above. The preferred stock will bear a coupon rate of 7.25%, will be
payable on a quarterly basis, and will mature in 2012. The preferred stock
will be convertible into GroupMAC common stock at a conversion price of $14.00
per common share.
An underwritten commitment letter from Bank of America, N.A. and Chase Bank
of Texas, N.A. (as Co-Lead Arrangers and Co-Book Managers) to provide a total
of $800 million in financing has been received by GroupMAC. It is anticipated
that this financing will be used to satisfy all outstanding obligations under
the Company's and GroupMAC's credit facilities. It is also expected that the
Company's $200 million of senior subordinated debt will be assumed by GroupMAC
and remain outstanding, and that GroupMAC will refinance its senior
subordinated notes.
The merger is subject to the approval of both companies' shareholders,
concurrent completion of the Apollo investment, regulatory approval and other
customary closing conditions, and is expected to close in the first quarter of
2000.
F-48
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements utilize the
historical financial statements of GroupMAC as of September 30, 1999 and for
the nine months ended September 30, 1999, and for the year ended December 31,
1998 and give effect to (i) the pre-acquisition financial information of 39
companies acquired during 1998 (the "1998 Acquisition Companies") and (ii) the
pre-acquisition financial information of 13 companies acquired during 1999
(the "1999 Acquisition Companies").
All of the acquisitions were accounted for under the purchase method of
accounting. These unaudited pro forma combined financial statements are based
on the historical financial statements of the acquired companies and estimates
and assumptions set forth below and in the notes to the unaudited pro forma
financial statements.
The unaudited pro forma balance sheet represents the historical consolidated
balance sheet of GroupMAC as adjusted for the refinancing transactions
highlighted in Note 3 below as if such transactions occurred on September 30,
1999. The accompanying unaudited pro forma statements of operations of
GroupMAC combine the historical statements of operations of GroupMAC and the
statements of operations of the acquired entities as if such acquisitions had
occurred on January 1, 1998.
GroupMAC has analyzed the savings that it expects to realize from reductions
in salaries and certain benefits to the owners of the acquired companies. To
the extent the owners of the acquired entities have agreed prospectively to
reductions in salary, bonuses and benefits, these reductions have been
reflected in the unaudited pro forma combined statements of operations.
The pro forma adjustments are based on available information and certain
assumptions that management deems appropriate and may be revised as additional
information becomes available. The pro forma financial data do not purport to
represent what GroupMAC's financial position or results of operations would
actually have been if such transactions had in fact occurred on those dates
and are not necessarily representative of GroupMAC's financial position or
results of operations for any future period. Since the acquisitions have not
historically been under common control or management, historical pro forma
results may not be indicative of or comparable to future performance. The
unaudited pro forma financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
GroupMAC's annual report on Form 10-K/A for the fiscal year ended December 31,
1998 and the unaudited consolidated condensed financial statements and notes
thereto included in GroupMAC's quarterly report on Form 10-Q for the quarter
ended September 30, 1999.
F-49
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
GroupMAC Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 6,496 $(6,496)(a) $ --
Accounts receivable, net of allowance.... 317,344 -- 317,344
Inventories.............................. 20,635 -- 20,635
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 50,299 -- 50,299
Prepaid expenses and other current
assets.................................. 8,167 -- 8,167
Deferred tax asset....................... 9,750 -- 9,750
---------- ------- --------
Total current assets.................... 412,691 (6,496) 406,195
PROPERTY AND EQUIPMENT, net............... 55,913 -- 55,913
GOODWILL, net............................. 518,003 -- 518,003
DEFERRED DEBT ISSUE COSTS................. 13,568 -- 13,568
OTHER LONG-TERM ASSETS.................... 1,744 -- 1,744
---------- ------- --------
Total assets............................ $1,001,919 $(6,496) $995,423
========== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt............ $ 1,408 $(1,408)(b) $ --
Accounts payable......................... 92,510 -- 92,510
Accrued compensation..................... 42,981 -- 42,981
Accrued liabilities...................... 27,934 -- 27,934
Due to related parties................... 5,432 (5,432)(c) --
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 47,997 -- 47,997
Deferred service revenue................. 5,022 -- 5,022
Income taxes payable..................... 8,844 -- 8,844
Other current liabilities................ 2,746 -- 2,746
---------- ------- --------
Total current liabilities............... 234,874 (6,840) 228,034
REVOLVING CREDIT FACILITY................. 218,500 344 (a-c) 218,844
SENIOR SUBORDINATED NOTES................. 130,000 -- 130,000
JUNIOR SUBORDINATED NOTES................. 4,150 -- 4,150
DEFERRED TAX LIABILITY.................... 1,486 -- 1,486
OTHER LONG-TERM LIABILITIES............... 3,084 -- 3,084
SHAREHOLDERS' EQUITY
Common stock............................. 38 -- 38
Additional paid-in capital............... 382,949 -- 382,949
Retained earnings........................ 26,838 -- 26,838
---------- ------- --------
Total shareholders' equity.............. 409,825 -- 409,825
---------- ------- --------
Total liabilities and shareholders'
equity................................. $1,001,919 $(6,496) $995,423
========== ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-50
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
Acquisition Acquisition Pro Forma
GroupMAC Companies Companies Adjustments Pro Forma
-------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES................ $761,541 $314,878 $365,054 $ -- $1,441,473
COST OF SERVICES........ 585,396 248,518 292,374 -- 1,126,288
-------- -------- -------- -------- ----------
Gross profit.......... 176,145 66,360 72,680 -- 315,185
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 118,119 43,934 40,155 (11,218)(a) 190,990
AMORTIZATION OF
GOODWILL............... 5,960 -- -- 7,386(b) 13,346
-------- -------- -------- -------- ----------
Income from
operations........... 52,066 22,426 32,525 3,832 110,849
OTHER INCOME (EXPENSE):
Interest expense...... (6,595) (749) (1,583) (22,706)(c) (31,633)
Interest income....... 407 271 299 (977)(d) --
Other................. 377 496 542 -- 1,415
-------- -------- -------- -------- ----------
Income before income
tax provision........ 46,255 22,444 31,783 (19,851) 80,631
INCOME TAX PROVISION.... 20,326 1,124 5,099 8,664(e) 35,213
-------- -------- -------- -------- ----------
NET INCOME.............. $ 25,929 $ 21,320 $ 26,684 $(28,515) $ 45,418
======== ======== ======== ======== ==========
NET INCOME PER SHARE--
BASIC.................. $ 0.94 $ 1.18
======== ==========
WEIGHTED AVERAGE
SHARES--BASIC.......... 27,544 38,412(f)
======== ==========
NET INCOME PER SHARE--
DILUTED................ $ 0.93 $ 1.17
======== ==========
WEIGHTED AVERAGE
SHARES--DILUTED........ 27,948 38,968(f)
======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-51
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999
GroupMAC and Acquisition Pro Forma
Subsidiaries Companies Adjustments Pro Forma
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES................. $1,121,471 $93,072 $ -- $1,214,543
COST OF SERVICES......... 890,287 75,886 -- 966,173
---------- ------- ------- ----------
Gross profit........... 231,184 17,186 -- 248,370
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................ 142,829 10,823 (710)(a) 152,942
AMORTIZATION OF
GOODWILL................ 9,234 -- 775 (b) 10,009
---------- ------- ------- ----------
Income from
operations............ 79,121 6,363 (65) 85,419
OTHER INCOME (EXPENSE):
Interest expense....... (20,777) (152) (2,796)(c) (23,725)
Interest income........ 314 106 (420)(d) --
Other.................. 529 (85) -- 444
---------- ------- ------- ----------
Income before income
tax provision........ 59,187 6,232 (3,281) 62,138
INCOME TAX PROVISION..... 25,767 615 676 (e) 27,058
---------- ------- ------- ----------
NET INCOME............... $ 33,420 $ 5,617 $(3,957) $ 35,080
========== ======= ======= ==========
NET INCOME PER SHARE--
BASIC................... $ 0.91 $ 0.91
========== ==========
WEIGHTED AVERAGE SHARES--
BASIC................... 36,646 38,412 (f)
========== ==========
NET INCOME PER SHARE--
DILUTED................. $ 0.90 $ 0.91
========== ==========
WEIGHTED AVERAGE SHARES--
DILUTED................. 36,980 38,737 (f)
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-52
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BACKGROUND
The respective results of operations for the 1998 Acquisition Companies from
January 1, 1998 to the dates of the acquisitions were combined with the actual
results of operations of the Company and the 1999 Acquisition Companies for
the twelve months ended December 31, 1998 to determine the pro forma results
of operations for the twelve months ended December 31, 1998.
The respective results of operations for the 1999 Acquisition Companies from
January 1, 1999 to the dates of acquisition were combined with the actual
results of operations of the Company for the nine months ended September 30,
1999 to determine the pro forma results of operations for the nine months
ended September 30, 1999.
2. ACQUISITIONS
The results of operations of the acquired businesses are included in the
actual results of operations of GroupMAC from the date of acquisition, and the
historical balance sheet at September 30, 1999 includes all acquisitions
completed by GroupMAC to date. All of the acquisitions are accounted for as
purchases. The cash consideration associated with the acquisition of the 1999
Acquisition Companies was provided by borrowings under an amended and restated
credit agreement (the "Credit Agreement").
Several former owners of the acquired companies have the ability to receive
additional amounts of purchase price, payable in cash and common stock in 1999
through 2001, contingent upon the occurrence of future events. GroupMAC will
record such contingent consideration as additional purchase price when earned.
GroupMAC currently estimates the unearned contingent consideration under these
agreements to approximate $6.0 million in cash and shares of common stock as
of September 30, 1999.
3. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
The following summarizes unaudited pro forma combined balance sheet
adjustments:
a) Records the utilization of cash on hand at September 30, 1999 to reduce
borrowings in connection with acquisitions under the Credit Agreement.
b) Records the refinancing of debt assumed and outstanding at September 30,
1999 in connection with acquisitions completed prior to that date
through borrowings under the Credit Agreement.
c) Records the funding of amounts due to related parties at September 30,
1999 in connection with acquisitions completed prior to that date
through borrowings under the Credit Agreement.
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The following summarizes unaudited pro forma combined statement of
operations adjustments:
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the acquired companies to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the
terms of the employment agreements. Such employment agreements are
primarily for three years, contain restrictions related to competition
and provide severance for termination of employment in certain
circumstances.
b) Reflects the amortization of goodwill to be recorded as a result of the
acquisitions over a 40-year estimated life.
F-53
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
c) Represents the adjustment necessary to reflect interest expense related
to borrowings under the Credit Agreement to fund the cash portion of the
purchase price and the assumption of debt related to the 1998 and 1999
Acquisition Companies, interest related to Senior Subordinated Notes
used to retire amounts outstanding under the Credit Agreement, and
interest related to the junior subordinated debt. A summary of the
historical and pro forma debt outstanding and a summary of the pro forma
interest expense (including amounts recognized in the historical
financial statements) assuming the acquisitions occurred on January 1,
1998, follows in Note 5.
d) Reflects the reduction to historical interest income related to existing
and acquired cash, all of which is assumed to be used for the
acquisition of the 1998 and 1999 Acquisition Companies.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma
adjustments discussed in this Note 4 as well as income taxes on
S Corporation earnings.
f) Weighted average shares outstanding include the following (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Twelve Months Ended
Ended September 30,
December 31, -------------
1998 1999
------------- -------------
<S> <C> <C>
Shares issued and outstanding at September 30,
1999.......................................... 38,344 38,344
Shares to be issued for companies acquired
prior to September 30, 1999................... 68 68
------ ------
Weighted average shares outstanding--basic..... 38,412 38,412
Incremental effect of options and warrants on
shares outstanding............................ 556 325
------ ------
Weighted average shares outstanding--diluted... 38,968 38,737
====== ======
</TABLE>
F-54
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
5. PRO FORMA INTEREST EXPENSE (in thousands)
<TABLE>
<CAPTION>
Interest Expense
------------------------------
September 30, Twelve Months Nine Months
1999 Ended Ended
September 30, Pro Forma Pro Forma Interest December 31, September 30,
1999 Balances Adjustments Balances Rate 1998 1999
------------- ----------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Senior Debt:
Historical September
30, 1999 short-term
debt.................. $ 1,408 $(1,408) $ -- $ -- $ --
-------- ------- -------- ------- -------
Total short-term
senior debt/interest
expense............. $ 1,408 $(1,408) $ --(i) $ -- $ --
======== ======= ======== ======= =======
Long-Term Senior Debt:
Historical September
30, 1999 Credit
Agreement............. $218,500 $(1,064) $217,436 6.88%(iii) $14,959 $11,219
Refinance short-term
debt.................. -- 1,408 1,408 6.88%(iii) 97 73
Letter of Credit Fees
under the Credit
Agreement............. -- -- -- 48 36
Commitment Fees under
the Credit
Agreement............. -- -- -- 762(vi) 572
Amortization of
related deferred debt
issue costs........... -- -- -- 1,704(vii) 1,278
-------- ------- -------- ------- -------
Total long-term
senior debt/interest
expense............. $218,500 $ 344 $218,844(i),(ii) 8.03% $17,570 $13,178
======== ======= ======== ====== ======= =======
Long-Term Senior
Subordinated Debt:
Historical September
30, 1999 Senior
Subordinated Notes.... $130,000 $ -- $130,000 9.75%(iv) $12,675 $ 9,506
Amortization of
related deferred debt
issue costs........... -- -- -- 1,101(viii) 826
-------- ------- -------- ------- -------
Total long-term
senior subordinated
debt/interest
expense............. $130,000 $ -- $130,000 10.60% $13,776 $10,332
======== ======= ======== ====== ======= =======
Long-Term Junior
Subordinated Debt:
Historical September
30, 1999 long-term
debt.................. $ 1,650 $ -- $ 1,650 6.00%(v) $ 99 $ 74
Historical September
30, 1999 long-term
debt.................. 2,500 -- 2,500 7.50%(v) 188 141
-------- ------- -------- ------- -------
Total long-term
junior subordinated
debt/interest
expense............. $ 4,150 $ -- $ 4,150 6.92% $ 287 $ 215
======== ======= ======== ====== ======= =======
Total debt/interest
expense................ $354,058 $(1,064) $352,994 8.96% $31,633 $23,725
======== ======= ======== ====== ======= =======
</TABLE>
- --------
(i) Represents total senior indebtedness.
(ii) Represents total guarantor senior indebtedness.
(iii) Represents the current borrowing rates under the Credit Agreement.
(iv) Represents the coupon interest rate for the Senior Subordinated Notes.
(v) Represents the respective contractual interest rates for these issues of
junior subordinated debt.
(vi) Represents commitment fees on unused capacity on the Credit Agreement at
an annual rate of 0.375%.
(vii) Represents amortization of deferred debt issue costs over the remaining
life of the Credit Agreement.
(viii) Represents amortization of deferred debt issue costs over the ten-year
life of the related Senior Subordinated Notes.
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp.:
We have audited the accompanying consolidated balance sheets of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Group
Maintenance America Corp. and Subsidiaries as of December 31, 1998 and 1997
and the results of their operations and their cash flows for the year ended
December 31, 1998, the ten months ended December 31, 1997 and the year ended
February 28, 1997, in conformity with generally accepted accounting
principles.
KPMG LLP
Houston, Texas
February 23, 1999
F-56
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
ASSETS ------------------
1998 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................ $ 2,371 $ 25,681
Accounts receivable, net of allowance for doubtful
accounts of $5,355 and $1,825, respectively............. 187,251 45,516
Inventories.............................................. 17,843 8,834
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 26,533 3,116
Prepaid expenses and other current assets................ 6,134 1,013
Deferred tax assets...................................... 7,579 1,647
Refundable income taxes.................................. 3,341 --
-------- --------
Total current assets................................... 251,052 85,807
Property and Equipment, net................................ 39,192 11,312
Goodwill, net of accumulated amortization of $6,593 and
$633, respectively........................................ 398,714 84,533
Deferred Tax Assets........................................ -- 4,739
Refundable Income Taxes.................................... -- 4,529
Other Long-Term Assets..................................... 12,123 1,767
-------- --------
Total assets........................................... $701,081 $192,687
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current maturities of long-term
debt.................................................... $ 12,959 $ 2,769
Accounts payable and accrued expenses.................... 99,205 28,519
Due to related parties................................... 14,961 3,358
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 27,830 4,737
Deferred service contract revenue........................ 4,429 3,305
Income taxes payable..................................... 2,028 31
Other current liabilities................................ 3,199 2,610
-------- --------
Total current liabilities.............................. 164,611 45,329
Revolving Credit Facility.................................. 195,000 169
Junior Subordinated Notes.................................. 16,000 --
Deferred Tax Liabilities................................... 733 --
Due to Related Parties..................................... -- 9,745
Other Long-Term Liabilities................................ 8,808 791
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $1.00 par value; 50,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $0.001 par value; 100,000 shares
authorized; 33,154 and 20,629 shares issued and
outstanding, respectively............................... 33 21
Additional paid-in capital............................... 322,478 169,143
Retained deficit......................................... (6,582) (32,511)
-------- --------
Total shareholders' equity............................. 315,929 136,653
-------- --------
Total liabilities and shareholders' equity............. $701,081 $192,687
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Ten months
Year ended ended Year ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................ $761,541 $138,479 $81,880
Cost of Services........................ 585,396 101,762 58,506
-------- -------- -------
Gross Profit.......................... 176,145 36,717 23,374
Selling, General and Administrative
Expenses............................... 117,951 28,643 19,811
Amortization of Goodwill................ 5,960 633 --
Compensation Expense From Reverse
Acquisition and Issuance of Management
Shares and Stock Options............... 168 7,219 --
-------- -------- -------
Income from operations................ 52,066 222 3,563
Other Income (Expense):
Interest expense...................... (6,595) (1,542) (82)
Interest income....................... 407 398 171
Other................................. 377 112 256
-------- -------- -------
Income (loss) before income tax
provision.......................... 46,255 (810) 3,908
Income Tax Provision.................... 20,326 2,832 1,572
-------- -------- -------
Net Income (Loss)....................... $ 25,929 $ (3,642) $ 2,336
======== ======== =======
Basic Earnings (Loss) Per Share:
Earnings (Loss) Per Share............. $ 0.94 $ (0.34) $ 0.45
======== ======== =======
Weighted Average Shares Outstanding... 27,544 10,800 5,172
======== ======== =======
Diluted Earnings (Loss) Per Share:
Earnings (Loss) Per Share............. $ 0.93 $ (0.34) $ 0.45
======== ======== =======
Weighted Average Shares Outstanding... 27,948 10,800 5,172
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
-------------- Paid-In Earnings Treasury Subscriptions Shareholders'
Shares Amount Capital (Deficit) Stock Receivable Equity
------ ------ ---------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 29,
1996................... 5,692 $ 6 $ 2,701 $ 3,667 $ -- $ -- $ 6,374
Purchases of stock..... -- -- -- -- (2,112) -- (2,112)
Repurchase of
warrants.............. -- -- -- (600) -- -- (600)
Cancellation of
treasury stock........ (1,040) (1) (55) (2,056) 2,112 -- --
Distributions to
shareholders.......... -- -- -- (7) -- -- (7)
Net income............. -- -- -- 2,336 -- -- 2,336
------ --- -------- ------- ------ ------ --------
BALANCE, February 28,
1997................... 4,652 5 2,646 3,340 -- -- 5,991
Purchases of acquired
companies............. 5,612 6 58,781 -- -- (6,153) 52,634
Public offering, net of
offering costs........ 8,340 8 103,543 -- -- -- 103,551
Compensation expense
from issuance of
management shares and
stock options......... 5 -- 241 -- -- -- 241
Preferred stock issued
to Airtron
shareholders in
reverse acquisition... -- -- -- (14,873) -- -- (14,873)
Distribution to Airtron
shareholders in
reverse acquisition... -- -- -- (17,336) -- -- (17,336)
Shares issued under
subscription
agreement............. 2,000 2 -- -- -- 6,153 6,155
Exercise of stock
options............... 20 -- 61 -- -- -- 61
Common stock to be
issued in
acquisitions.......... -- -- 3,871 -- -- -- 3,871
Net loss............... -- -- -- (3,642) -- -- (3,642)
------ --- -------- ------- ------ ------ --------
BALANCE, December 31,
1997................... 20,629 21 169,143 (32,511) -- -- 136,653
Purchases of acquired
companies............. 12,455 12 148,762 -- -- -- 148,774
Debenture conversion... 68 -- 820 -- -- -- 820
Compensation expense
from issuance of
management shares and
stock options......... 168 168
Exercise of stock
options............... 2 -- 10 -- -- -- 10
Common stock to be
issued in
acquisitions.......... -- -- 3,575 -- -- -- 3,575
Net income............. -- -- -- 25,929 -- -- 25,929
------ --- -------- ------- ------ ------ --------
BALANCE, December 31,
1998................... 33,154 $33 $322,478 $(6,582) $ -- $ -- $315,929
====== === ======== ======= ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Ten months
Year ended ended Year ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)...................... $ 25,929 $ (3,642) $ 2,336
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.......... 13,863 1,413 208
Gain from sale of property and
equipment............................. (26) (32) (224)
Deferred income taxes.................. 3,499 2,482 2,336
Non-cash compensation expense.......... 168 7,219 --
Changes in operating assets and
liabilities, net of effect of
acquisitions accounted for as
purchases:
(Increase) decrease in --
Accounts receivable.................. (27,316) (2,849) (402)
Inventories.......................... (1,718) (656) 332
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................... (6,950) 503 23
Prepaid expenses and other current
assets.............................. (3,404) 46 (8)
Refundable income taxes.............. 1,319 1,665 (3,235)
Other long-term assets............... (780) (299) --
Increase (decrease) in --
Accounts payable..................... 3,614 (918) (77)
Accrued expenses..................... (2,918) (4,598) 2,534
Due to related parties............... (5,469) (732) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... 3,885 1,572 (86)
Deferred service contract revenue.... (502) 94 6
Income taxes payable................. 519 1,586 (296)
Other current liabilities............ (2,282) 1,442 --
Compensation and benefits payable.... -- (8) 255
Other long-term liabilities.......... (580) 120 --
--------- -------- -------
Net cash provided by operating
activities......................... 851 4,408 3,702
--------- -------- -------
Cash Flows From Investing Activities:
Cash paid for acquisitions, net of cash
acquired of $13,176 and $5,263,
respectively.......................... (178,542) (35,767) --
Deferred acquisition costs............. (1,573) (246) --
Purchases of property and equipment.... (9,292) (2,017) (182)
Proceeds from sale of property and
equipment............................. 199 83 296
Proceeds from note receivable.......... -- -- 156
--------- -------- -------
Net cash provided by (used in)
investing activities............... (189,208) (37,947) 270
--------- -------- -------
Cash Flows From Financing Activities:
Purchase of common stock............... -- -- (787)
Retirement of preferred stock.......... -- (19,277) --
Repurchase of warrants................. -- -- (539)
Proceeds from long-term debt........... 884,515 32,500 --
Payments of long-term debt............. (719,478) (47,742) (35)
Payments of other long-term
obligations........................... -- -- (39)
Issuance of common stock............... -- 109,706 --
Exercise of stock options.............. 10 61 --
Distributions to shareholders prior to
initial public offering............... -- (20,367) (7)
--------- -------- -------
Net cash provided by (used in)
financing activities............... 165,047 54,881 (1,407)
--------- -------- -------
Net Increase (Decrease) In Cash and Cash
Equivalents............................ (23,310) 21,342 2,565
Cash and Cash Equivalents, beginning of
period................................. 25,681 4,339 1,774
--------- -------- -------
Cash and Cash Equivalents, end of
period................................. $ 2,371 $ 25,681 $ 4,339
========= ======== =======
Supplemental Disclosures of Cash Flow
Information:
Interest Paid.......................... $ 5,163 $ 1,470 $ --
Income Taxes Paid...................... $ 16,869 $ -- $ 2,586
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Organization
Group Maintenance America Corp. ("GroupMAC") was incorporated as a Texas
corporation to build a national company providing mechanical and electrical
services in the commercial, industrial and residential markets.
Effective April 30, 1997, GroupMAC entered into an Agreement and Plan of
Exchange (the "Airtron Agreement") with Airtron, Inc. ("Airtron") and certain
of its shareholders, pursuant to which $20.4 million in cash, 14.9 million
shares of GroupMAC preferred stock and 4.7 million shares of GroupMAC common
stock were issued to shareholders of Airtron in exchange for all of the then
outstanding shares of Airtron. Although for legal purposes Airtron was
acquired by GroupMAC, for accounting purposes the transaction was accounted
for as a reverse acquisition, as if Airtron acquired GroupMAC, due to the fact
that the former shareholders of Airtron then owned a majority of GroupMAC
common stock. In connection with the purchase of GroupMAC, the consideration
paid to the shareholders of GroupMAC was recorded as non-recurring
compensation expense of $7.0 million in the accompanying consolidated
statements of operations for the ten months ended December 31, 1997. The
consolidated financial statements presented herein for the periods prior to
the effective date of the acquisition only include the accounts of Airtron.
The consolidated statements of shareholders' equity have been converted from
Airtron's capital structure to GroupMAC's capital structure to reflect the
exchange of shares pursuant to the Airtron Agreement. The cash and redeemable
preferred stock paid to the Airtron shareholders, net of existing liabilities
to former shareholders, have been treated as a distribution to the Airtron
shareholders. The consolidated group of companies are collectively referred to
herein as GroupMAC and Subsidiaries or the "Company." All significant
intercompany balances have been eliminated. Concurrent with the initial public
offering of GroupMAC's common stock (the "IPO"), the Company changed its
fiscal year end from February 28 to December 31.
Airtron was incorporated in 1970 as a Delaware corporation. Airtron installs
and services brand name heating and air conditioning equipment for residential
and commercial customers located in Ohio, Indiana, Kansas, Kentucky, Florida
and Texas.
In June and July 1997, the Company acquired, in separate transactions, 10
additional companies through a combination of cash, preferred stock, common
stock and warrants to purchase shares of common stock. During the fourth
quarter of 1997, the Company acquired, concurrently with the IPO, 13
additional companies through a combination of cash and common stock. During
1998, the Company acquired, in separate transactions, 39 additional businesses
through a combination of cash, notes payable, junior subordinated debt, common
stock, options to purchase common stock and warrants to purchase common stock.
The Company accounted for these acquisitions as purchase business
combinations, with the results of operations included in the Company's
consolidated financial statements from the effective date of acquisition.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated 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
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
from service and maintenance contracts are recognized over the life of
contracts. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on
F-61
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
uncompleted contracts are made in the period in which such losses are
determined. 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out ("FIFO") basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the useful lives of the
assets. Leasehold improvements are amortized over the shorter of the remaining
lease term or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The Company will reassess the recoverability
of goodwill if estimated future operating cash flows are not achieved.
Deferred Financing Costs
Deferred financing costs related to the Company's revolving credit agreement
and senior subordinated note offering completed subsequent to December 31,
1998 (see Note 7) are included in other noncurrent assets and amortized to
interest expense over the scheduled maturity of the debt.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages but does not require companies to record
compensation expense for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation expense for
F-62
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock options is measured as the excess, if any, of the quoted market price of
GroupMAC's common stock at the date of the grant over the amount an employee
must pay to acquire the common stock.
Warranty Costs
The Company generally warrants all of its work for a period of one year from
the date of installation. A provision for estimated warranty costs is made at
the time a product is sold or service is rendered.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
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 and operating loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Weighted average shares outstanding for each of the periods presented were
as follows (in thousands):
<TABLE>
<CAPTION>
Ten months
Year ended ended Year ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shares issued in the acquisition of
Airtron............................ 4,652 4,652 5,172
Shares issued, excluding
acquisitions and the IPO........... 3,637 3,628 --
Shares issued for 1997
acquisitions....................... 4,733 1,259 --
Shares issued for 1998
acquisitions....................... 6,182 -- --
Shares issued in the IPO............ 8,340 1,261 --
------ ------ -----
Weighted average shares
outstanding--Basic .............. 27,544 10,800 5,172
------ ------ -----
Incremental effect of options and
warrants outstanding .............. 404 -- --
------ ------ -----
Weighted average shares
outstanding--Diluted............. 27,948 10,800 5,172
====== ====== =====
</TABLE>
Basic earnings per share have been calculated by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings
per share are computed by dividing net income by the weighted average number
of common shares outstanding plus potentially dilutive common shares.
Because the Company reported a net loss for the ten months ended December
31, 1997, the potentially dilutive common shares (including warrants and stock
options discussed in Note 9) had an anti-dilutive effect on earnings per
share. As of December 31, 1998, options to purchase 0.4 million shares of
common stock and warrants to purchase 1.3 million shares of common stock were
not included in the calculation of diluted earnings per share because the
options' or warrants' exercise price was greater than the average market price
of the common shares.
Reclassifications
Certain amounts recorded in the year ended February 28, 1997 and the ten
months ended December 31, 1997 have been reclassified to conform with the
current year presentation.
F-63
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Business Combinations
During 1997, the Company acquired 23 companies for approximately $44.2
million in cash, 4.5 million shares of common stock, 4.4 million shares of
redeemable preferred stock (which were retired in connection with the IPO),
options to acquire 0.1 million shares of common stock and warrants to purchase
0.5 million shares of common stock. Of the total recorded consideration,
approximately $3.2 million of cash and 0.5 million shares of common stock were
due to former owners at December 31, 1997. During 1998, a reduction of
approximately $1.0 million in cash and 0.1 million shares of common stock was
recorded to reflect final settlements on certain 1997 acquisitions. In
addition, payments of approximately $1.9 million in cash and 0.4 million
shares of common stock were made to former shareholders on certain 1997
acquisitions.
During 1998, the Company completed the acquisition of 39 platform and five
tuck-in companies for approximately $194.8 million in cash, $4.0 million of
notes payable, $16.0 million of junior subordinated debt, 12.1 million shares
of common stock, options to purchase 0.3 million shares of common stock and
warrants to purchase 0.8 million shares of common stock. Of the total
consideration, approximately $7.2 million of cash was due to former owners at
December 31, 1998.
In conjunction with the above mentioned acquisitions, the Company assumed
$26.2 million and $16.1 million of debt for acquisitions completed in 1998 and
1997, respectively.
For the above mentioned acquisitions, the common stock, options and warrants
were valued at estimated fair value at the time of the respective acquisition
and the preferred stock was valued at its redemption value of $1 per share.
For certain 1998 acquisitions, allocation of purchase price to the assets
acquired and liabilities assumed has been initially assigned and recorded
based on preliminary estimates of fair value and may be revised as additional
information becomes available. Such additional information includes appraisals
on property, contingent liabilities of the acquired business, and working
capital settlements related to the acquisition consideration and the net
assets acquired. However, the Company does not expect any significant
adjustments to the purchase price allocations or amount of goodwill at
December 31, 1998.
Several former owners of businesses acquired by the Company have the ability
to receive additional amounts of purchase price, payable in cash and common
stock contingent upon the occurrence of future events. The Company records
such contingent consideration as additional purchase price when earned. During
1997, approximately $0.3 million in cash and 22,500 shares of common stock
were earned and due to former owners related to these contingent payments.
These amounts were paid in 1998. During 1998, approximately $5.2 million of
cash and 0.3 million shares of common stock were earned related to these
contingent payments, of which approximately $3.3 million of cash and 0.3
million shares of common stock were due to former owners as of December 31,
1998. Additional cash and common stock may become payable in 1999 through 2001
contingent upon future events.
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC and its subsidiaries as if the acquisitions were
effective on the first day of the period being reported (in thousands, except
for per share amounts).
<TABLE>
<CAPTION>
Pro forma data
(unaudited)
-------------------
Twelve months ended
December 31,
-------------------
1998 1997
---------- --------
<S> <C> <C>
Revenues.............................................. $1,076,419 $978,480
Net income............................................ $ 33,201 $ 27,372
Net income per share:
Basic............................................... $ 0.99 $ 0.82
Diluted............................................. $ 0.98 $ 0.81
</TABLE>
F-64
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma adjustments reflected in the amounts above include compensation
differentials, adjustment for goodwill amortization over a period of 40 years,
elimination of historical interest income and historical interest expense on
long-term debt which was repaid with the proceeds of the IPO or otherwise
retired, additional interest expense on funds borrowed for certain 1998
acquisitions, and adjustment to the federal and state income tax provisions
based on pro forma operating results. Net income per share assumes all shares
issued for the acquisitions were outstanding for the periods presented.
4. Detail of Accounts Payable and Accrued Expenses (in thousands)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable, trade.................................. $59,067 $13,804
Accrued payroll costs and benefits....................... 29,736 11,167
Warranties............................................... 2,502 1,297
Other accrued expenses................................... 7,900 2,251
------- -------
$99,205 $28,519
======= =======
</TABLE>
5. Costs and Estimated Earnings on Uncompleted Contracts
The summary of the status of uncompleted contracts is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Costs incurred....................................... $618,547 $ 85,101
Estimated earnings recognized........................ 129,912 27,268
-------- --------
748,459 112,369
Less billings on contracts........................... (749,756) (113,990)
-------- --------
$ (1,297) $ (1,621)
======== ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $26,533 $ 3,116
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (27,830) (4,737)
------- -------
$(1,297) $(1,621)
======= =======
</TABLE>
F-65
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Property and Equipment
The principal categories and estimated useful lives of property and
equipment were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
Estimated useful
lives 1998 1997
---------------- ------- -------
<S> <C> <C> <C>
Land.................................... -- $ 1,144 $ 218
Buildings and improvements.............. 20-30 years 6,128 677
Service and other vehicles.............. 4-7 years 17,643 5,385
Machinery and equipment................. 5-10 years 9,491 2,873
Office equipment, furniture and
fixtures............................... 5-10 years 10,842 3,761
Leasehold improvements.................. -- 4,334 1,220
------- -------
49,582 14,134
Less accumulated depreciation........... (10,390) (2,822)
------- -------
$39,192 $11,312
======= =======
</TABLE>
7. Short- and Long-Term Debt
Short- and long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
-------- -----------
<S> <C> <C> <C>
Bank revolving credit agreement (7.1% at December 31,
1998)............................................... $195,000 $ --
Junior subordinated notes payable to former
shareholders of an acquired business at 6%, due
November 2003....................................... 16,000 --
Notes payable to former shareholders of acquired
businesses at 6%, due January 1999 and May 1998,
respectively........................................ 4,399 2,466
Note payable to a bank at 8%, due January 1999....... 8,000 --
Equipment installment loans payable to banks and
other lenders, interest varying from 2.9% to 10%,
secured by certain equipment, due in monthly and
quarterly installments.............................. 495 228
Other notes payable to former shareholders at
interest rates ranging from 4.8% to 8.25%, due in
monthly installments................................ 65 244
-------- ------
Total short- and long-term debt...................... 223,959 2,938
Less short-term borrowings and current maturities.... (12,959) (2,769)
-------- ------
$211,000 $ 169
======== ======
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the "Original
Credit Agreement") with a total commitment of $35 million. The Original Credit
Agreement consisted of three portions: (i) a revolving credit agreement
providing up to $3 million for use as working capital, (ii) a $12 million
advancing acquisition line of credit to finance acquisitions, and (iii) a $20
million term loan to finance the acquisition of Airtron. Borrowings under the
Original Credit Agreement totaled $32.5 million to fund the cash portion of
the purchase prices related to Airtron and the businesses acquired in June and
July 1997. The Original Credit Agreement was repaid from the proceeds of the
IPO and terminated in December 1997.
On December 11, 1997, the Company entered into a three-year revolving credit
agreement with an initial borrowing capacity of $75 million. On June 12, 1998,
the Company amended and restated this facility (the "Credit Agreement") to
increase its borrowing capacity from $75 million to $125 million. On October
15, 1998, the Company amended and restated the Credit Agreement to increase
its borrowing capacity from $125 million to $230 million. Borrowings under the
Credit Agreement are guaranteed by the Company's domestic
F-66
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiaries, including future domestic subsidiaries. The obligations of the
Company under the Credit Agreement and the obligations under the guarantees
are secured by a first priority lien on the accounts receivable and inventory
of the domestic subsidiaries, and by a pledge of stock of its domestic
subsidiaries.
Borrowings under the Credit Agreement bear interest at a rate per annum, at
the Company's option, of either (1) the Alternate Base Rate or (2) the
Eurodollar Rate. The Alternate Base Rate is equal to the greater of the
Federal Funds Effective Rate plus 0.5% or the Prime Rate plus a Margin
depending on the ratio of indebtedness for borrowed money to EBITDA (with all
capitalized terms as defined in the Credit Agreement). The Eurodollar Rate is
the rate defined in the Credit Agreement plus a Margin depending on the ratio
of indebtedness for borrowed money to EBITDA. The Company is subject to
commitment fees payable quarterly in arrears and administration fees payable
annually to the Agent until such time as the Credit Agreement is terminated.
The commitment fees range from 0.25% to 0.375% per annum with respect to the
unused commitments under the Credit Agreement depending on the ratio of
indebtedness for borrowed money to EBITDA. In addition, the Company paid
various underwriting and arrangement fees and closing costs associated with
the origination and syndication of the Credit Agreement. The unamortized
portion of these expenses is included as deferred financing costs in the
accompanying consolidated balance sheets and amounted to approximately $2.4
million and $0.7 million at December 31, 1998 and 1997, respectively.
Under the Credit Agreement, the Company is required to maintain certain
financial covenants and tests, including: (1) a minimum Fixed Charge Coverage
Ratio; (2) a maximum ratio of total indebtedness for borrowed money to
capitalization (as defined in the Credit Agreement); (3) a maximum ratio of
senior debt to pro forma earnings before interest, taxes, depreciation and
amortization; (4) a maximum ratio of total indebtedness to EBITDA; (5) a
minimum amount of Consolidated Net Worth (as defined in the Credit Agreement)
and (6) a maximum amount of Capital Expenditures in relation to Consolidated
Net Worth. The Credit Agreement places limitations upon the amount of letters
of credit which may be drawn, investments which may be permitted, and liens
which may be granted to secure other debt. The Company may not pay any
dividends or redeem, retire or guarantee the value of shares of any class of
stock in the Company without prior approval from the lending banks, other than
the purchase of outstanding shares of the Company's stock within defined
limits. At December 31, 1998, the Company was in compliance with these
covenants. The Credit Agreement matures on October 13, 2001.
In connection with the acquisition of Trinity Contractors, Inc. ("Trinity"),
the Company paid cash and issued $16.0 million of subordinated notes (the
"Trinity Notes"), common stock and warrants to purchase common stock (the
"Trinity Warrants"). Unless prepaid in whole or part at any time by the
Company, the balance of the Trinity Notes was due in November 2003. Holders of
the Trinity Notes have a one-time option to require the Company to repurchase
the Trinity Notes (the "Put Option") in the event the Company issues
$50,000,000 or more in principal amount of debt that is either (1) registered
under the Securities Act and sold to the public or (2) sold to qualified
institutional buyers. Subsequent to December 31, 1998 and in connection with
the private placement offering discussed below, the Put Option was exercised
by substantially all the holders of the Trinity Notes, such notes were repaid
by the Company and the related Trinity Warrants were surrendered.
The aggregate maturities of debt as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999.............. $ 12,959
2000.............. --
2001.............. 195,000
2002.............. --
2003.............. 16,000
--------
$223,959
========
</TABLE>
F-67
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company completed a private placement offering (the
"Offering") of $130 million of unsecured senior subordinated notes (the
"Notes") bearing interest at 9.75% and maturing in January 2009. The net
proceeds of the offering were used to repay indebtedness incurred under the
Credit Agreement.
Under a registration rights agreement executed as part of the Offering, the
Company will file a registration statement within 90 days after the issue date
of the Notes enabling holders of the Notes to exchange the privately placed
Notes for publicly registered notes with identical terms. The Company is
required to use all reasonable efforts to cause the registration statement to
become effective within 150 days after the issue date of the Notes and to
consummate the exchange offer within 180 days after the issue date of the
Notes. If the Company cannot effect an exchange offer within the time periods
listed above and in other certain circumstances, management will use all
reasonable efforts to file a shelf registration statement for the resale of
the Notes. If the Company is unable to comply with these obligations under the
registration rights agreement, the interest rate on the Notes will increase
under certain circumstances.
The Notes are guaranteed by all of the Company's current and future U.S.
subsidiaries other than "Unrestricted Subsidiaries" (as defined in the
indenture governing the Notes). As of the closing of the Offering, there were
no "Unrestricted Subsidiaries." These guarantees are full, unconditional and
joint and several. Accordingly, no separate financial statements of the
guarantor subsidiaries are presented because management believes this
information is not material to users of its financial statements.
The Notes pay interest semi-annually commencing July 15, 1999 and are
redeemable at the option of the Company at any time on or after January 15,
2004. Additionally, the Notes' indenture has restrictive covenants or
limitations on the payment of dividends, the distribution or redemption of
capital stock as well as limitations on the incurrence of debt and on the sale
of assets.
The Company entered into an agreement to lock in the ten year U.S. Treasury
rate used to price the offering of the Notes. The Company locked in $100
million at 5.5212%, which management believes is an attractive long-term base
rate. This agreement expired on January 31, 1999, and was settled on that date
based upon the ten year Treasury yield of 4.648%, resulting in an additional
pre-tax financing cost of approximately $6.9 million. In accordance with SFAS
No. 80, Accounting for Futures Contracts, this agreement qualifies as a hedge
and was recognized as deferred financing costs.
8. Due To Related Parties
Under the Airtron Agreement, part of the cash purchase price payable to
former shareholders of Airtron relates to the tax benefits which have been or
will be received by the Company related to the exercise of previously
outstanding warrants and distributions under deferred compensation
arrangements. The Company recognized liabilities of $9.7 million at the date
of acquisition as an estimate of these amounts. This amount is paid to the
former shareholders of Airtron as the tax benefit is realized by the Company
either through receipt of net operating loss carryback claims or utilization
of current deductions and net operating loss carryforwards to reduce estimated
tax payments. The $9.7 million liability and the related refundable income
taxes and deferred tax assets were reflected as long-term in the December 31,
1997 balance sheet as such tax benefits were not expected to be realized
during 1998. During 1998, the Company was able to realize certain tax benefits
under the Airtron Agreement and correspondingly paid $5.3 million of the
original liability to the former shareholders. As of December 31, 1998, the
$4.4 million remaining liability and the related refundable income taxes and
deferred tax assets are reflected as current assets and liabilities in the
December 31, 1998 consolidated balance sheet as all remaining tax benefits are
expected to be realized during 1999.
F-68
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock-Based Plans
GroupMAC has implemented the following stock-based programs for its
employees and others:
Stock Awards Plan--In August 1997, GroupMAC adopted the Group Maintenance
America Corp. 1997 Stock Awards Plan which provides GroupMAC the latitude to
grant a variety of awards, such as stock options, stock appreciation rights
("SARs"), restricted stock, performance awards and phantom stock awards, to
officers, directors, key employees and other persons working for GroupMAC and
its subsidiaries. The plan requires that options and SARs be granted at not
less than the fair market value of a share of common stock on the grant date.
The plan also requires that no stock option granted shall vest in less than
six months after the grant date. GroupMAC may issue not more than 9% of the
number of total shares outstanding (determined on a quarterly basis) under the
plan, which will terminate on June 30, 2007. At December 31, 1998, options to
purchase 3.0 million shares at an average exercise price of $12.86 were
outstanding under this plan.
Stock Option Plan--In August 1997, GroupMAC adopted the Group Maintenance
America Corp. 1997 Stock Option Plan under which GroupMAC may grant options to
employees who are not eligible for awards under the Stock Awards Plan. The
plan requires that options be granted at not less than fair market value of a
share of common stock on the grant date. The plan also requires that no stock
option granted shall vest in less than six months after the grant date.
GroupMAC may issue not more that 3% of the number of shares outstanding
(determined on a quarterly basis) under this plan, which will terminate on
June 30, 2007. At December 31, 1998, options to purchase 0.7 million shares at
an average exercise price of $13.98 were outstanding under this plan.
Founder Options--Between October 1996 and August 1997, the Company granted
to directors, senior management and other employees options to purchase an
aggregate of 388,800 shares of common stock at an exercise price of $3.08.
These options vest and expire over various periods.
During 1998, the Company issued options to purchase approximately 1.6
million shares of common stock at a weighted average exercise price of $14.32.
These options vest at a rate of 25% per year and expire at various dates
during 2003.
Additionally, the Company issued options to purchase 0.3 million and 0.1
million shares of common stock in connection with acquisitions at a weighted
average exercise price of $4.09 and $11.89 in 1998 and 1997, respectively.
These options were valued at $3.4 million and $1.2 million in 1998 and 1997,
respectively, and are included in the purchase price of the acquired company.
Substantially all of these options are immediately exercisable.
As consideration for a company acquired in November 1998, the Company issued
829,000 warrants to purchase shares of common stock at $19.30 per share. As
indicated in Note 7, substantially all of these warrants were surrendered
subsequent to year end and accordingly no value was included for these
warrants in the purchase price of the acquired company. In connection with the
purchase of one company in July 1997, the Company issued warrants to purchase
514,000 shares of common stock at $17.50 per share. These warrants were valued
at $1.0 million and are included in the purchase price of the acquired
company.
F-69
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option and warrant activity (in
thousands, except for exercise price):
<TABLE>
<CAPTION>
Weighted
average Number of
exercise options and
price warrants
-------- -----------
<S> <C> <C>
Granted............................................ $3.08 292
Balance at December 31, 1996....................... 3.08 292
Granted............................................ 3.08 69
-----
Balance at April 30, 1997, date of Airtron
Agreement......................................... 3.08 361
Granted............................................ 14.33 2,611
Exercised.......................................... 3.08 (20)
Surrendered........................................ 3.08 (25)
-----
Balance at December 31, 1997....................... 13.07 2,927
Granted............................................ 14.56 2,701
Exercised.......................................... 5.77 (2)
Surrendered........................................ 14.54 (165)
-----
Balance at December 31, 1998....................... 13.77 5,461
=====
</TABLE>
A summary of outstanding and exercisable options and warrants as of December
31, 1998 follows:
<TABLE>
<CAPTION>
Weighted
Weighted average
average Number of Weighted exercise Number of
Range of option outstanding average price of exercisable
option and and options and remaining exercisable options and
warrant warrant warrants contractual options and warrants
prices prices (thousands) life (years) warrants (thousands)
---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 3.08 to $
5.00 $ 3.57 713 5.8 $ 3.69 576
$ 5.01 to
$10.00 $ 6.54 38 2.8 $ 6.39 25
$10.01 to
$15.00 $13.60 2,890 4.2 $14.00 456
$15.01 to
$19.30 $18.14 1,820 6.2 $18.61 1,343
----- -----
5,461 2,400
===== =====
</TABLE>
The Company applies Accounting Principle Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its stock options (other than
options issued in connection with acquisitions). Accordingly, compensation
cost has been recognized only for the options that have an exercise price less
than the fair market value of the underlying stock at the date of grant. A
compensation charge of approximately $0.2 million is reflected in the
consolidated statements of operations and shareholders' equity for the fiscal
year ended December 31, 1998 and the ten months ended December 31, 1997
related to the issuance of management shares and stock options at prices below
the fair market value at the date of issue or grant.
F-70
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma data is calculated as if compensation expense for
the Company's stock option plans were determined based on the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Ten months ended
December 31, December 31,
1998 1997
---------------- -----------------
As Pro As Pro
reported Forma reported Forma
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss)..................... $25,929 $23,173 $(3,642) $(3,983)
Net income (loss) per share:
Basic............................... $ 0.94 $ 0.84 $ (0.34) $ (0.37)
Diluted............................. $ 0.93 $ 0.83 $ (0.34) $ (0.37)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Ten months ended
December 31, 1997
-------------------------
Year ended Subsequent to Prior to
December 31, the Airtron the Airtron
1998 Agreement Agreement
------------ ------------- -----------
<S> <C> <C> <C>
Dividend yield.................... -- -- --
Expected volatility............... 48.0% 33.0% 0%
Risk-free interest rate........... 4.70% 5.83% 6.26%
Expected lives 5.0 years 6.6 years 10 years
Fair value of options at grant
date............................. $ 7.445 $ 5.425 $ 1.425
</TABLE>
The Company had outstanding 60,000 warrants to purchase common stock for
$1.00 per share at February 29, 1996. In August 1996, 15,000 of these warrants
were purchased from a former shareholder for $0.5 million, resulting in a
reduction in retained earnings for the original recorded value of the warrants
of $0.6 million with the offset recorded as other income. At February 28,
1997, 45,000 warrants were outstanding. In connection with the Airtron
Agreement these warrants were exchanged for cash and preferred and common
shares of GroupMAC.
Airtron had deferred compensation arrangements for certain members of its
management and its board of directors. The Company reflected the assets and
liabilities associated with these arrangements as distributions in the
accompanying consolidated financial statements.
10. Shareholders' Equity
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual providing for the sale of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. At December 31, 1997, the
Company had sold all of the 2.6 million shares.
During November and December 1997, the Company completed the IPO involving
the sale of 8.3 million shares of common stock at a price to the public of
$14.00 per share. The net proceeds from the IPO (after deducting underwriting
discounts and commissions and offering expenses) were approximately $103.6
million. Of this amount, $29.8 million was used to pay the cash portion of the
closing consideration relating to certain
F-71
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquired businesses, $42.6 million to repay corporate indebtedness and debt
assumed in connection with the acquisition of businesses, $19.3 million to
retire all of the then outstanding preferred stock and $11.9 million for
general corporate purposes including working capital, final consideration
settlements related to acquired businesses and future acquisitions. In March
1998, the Company issued $0.8 million of subordinated convertible debentures
to fund a portion of the consideration of one acquisition. These debentures
were converted to 68,000 shares of common stock during 1998.
11. Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ten months Year
ended ended ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal.......................... $13,553 -- $(1,020)
State............................ 3,274 489 385
------- ------ -------
Deferred: 16,827 489 (635)
Federal and state................ 3,499 2,343 2,207
------- ------ -------
$20,326 $2,832 $ 1,572
======= ====== =======
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. federal statutory income tax rate to income (loss) before income tax
provision as a result of the following (in thousands):
<TABLE>
<CAPTION>
Year Ten months Year
ended ended ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before income tax
provision......................... $46,255 $ (810) $3,908
Applicable U.S. federal statutory
rate.............................. 35.0% 34.0% 34.0%
------- ------ ------
Tax provision (benefit) at
statutory rate.................... 16,189 (275) 1,329
Increase (decrease) resulting from: 2,128 323 254
State income taxes, net of
federal benefit................. 59 2,455 --
Compensation expense from reverse
acquisition and issuance of
management shares and stock
options......................... 1,975 199 --
Non-deductible goodwill
amortization.................... (25) 130 (11)
------- ------ ------
Other............................ $20,326 $2,832 $1,572
======= ====== ======
</TABLE>
F-72
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts........................ $ 2,088 $ 713
Inventories............................................ 300 279
Accrued expenses....................................... 5,101 2,489
Deferred revenue....................................... 1,510 348
Compensation and benefits.............................. 280 3,736
Net operating loss carryforward........................ 497 1,231
Other.................................................. 259 183
------- -------
Total deferred income tax assets..................... 10,035 8,979
------- -------
Deferred income tax liabilities:
Depreciation........................................... (951) (585)
Completed contract accounting for tax purposes......... (1,899) (1,836)
Other.................................................. (339) (172)
------- -------
Total deferred income tax liabilities................ (3,189) (2,593)
------- -------
Net deferred income tax assets........................... $ 6,846 $ 6,386
======= =======
</TABLE>
These deferred income tax assets and liabilities are included in the
accompanying consolidated balance sheets under the following captions (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets--current............................. $7,579 $1,647
Deferred tax assets--long-term........................... -- 4,739
Deferred tax liabilities--long-term...................... (733) --
------ ------
$6,846 $6,386
====== ======
</TABLE>
Management believes it is more likely than not that the Company will realize
the benefits of the net deferred tax assets. Accordingly, no valuation
allowance has been recorded as of December 31, 1998 or December 31, 1997.
12. Leases
Operating leases for certain facilities and transportation equipment expire
at various dates through 2011. Certain leases contain renewal options.
Approximate minimum future rental payments as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................... $11,172
2000........................................... 10,059
2001........................................... 8,901
2002........................................... 7,843
2003........................................... 4,358
Thereafter..................................... 19,685
-------
$62,018
=======
</TABLE>
Total rental expense for the year ended December 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997 was approximately
$13.5 million, $2.3 million and $1.7 million, respectively (including $4.3
million, $1.2 million and $0.6 million, respectively, to related parties).
F-73
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Employee Benefit Plans
Several of GroupMAC's subsidiaries maintain defined contribution employee
retirement plans, which are open to certain employees after various lengths of
service. Employee contributions and employer matching contributions occur at
different rates and the matched portions of the funds vest over a period of
years. Company contributions to these plans totaled approximately $4.8
million, $0.4 million and $0.2 million for the year ended December 31, 1998,
the ten months ended December 31, 1997 and the year ended February 28, 1997,
respectively.
Certain of GroupMAC's subsidiaries make contributions to union-administered
benefit funds that cover the majority of these companies' union employees. For
the year ended December 31, 1998 and the ten months ended December 31, 1997,
the participant costs charged to operations were approximately $8.8 million
and $0.6 million, respectively. Governmental regulations require that, in the
event of plan termination or employer withdrawal, an employer may be liable
for a portion of the plan's unfunded vested benefits, if any. The Company is
not aware of any liabilities resulting from unfunded vested benefits related
to union administered benefit plans. The Company does not anticipate
withdrawal from the plans, nor is the Company aware of any expected plan
terminations.
14. Commitments and Contingencies
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
15. Financial Instruments
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying values of
these instruments on the accompanying consolidated balance sheets approximate
their fair value.
16. Operating Segments
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
The Company has two reportable segments: commercial/industrial and
residential markets. The commercial/industrial segment provides maintenance,
repair and replacement services and new installation services in manufacturing
and processing facilities, power generation facilities, hospitals and other
critical care facilities, colleges and universities, hotels, commercial office
buildings and complexes, retail stores and restaurants, supermarkets and
convenience stores. The residential segment provides maintenance, repair and
replacement services and new installation services in single family and low-
rise multifamily housing units.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on income from operations of the respective business units
prior to unallocated corporate expenses.
Other activities include financial data of two operating subsidiaries that
provide products and services outside of those performed by the Company's two
primary operating segments. Unallocated corporate expenses primarily include
(1) corporate overhead, (2) corporate and operating company management
bonuses, and (3)
F-74
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
savings from national purchase agreements relating to materials and
property/casualty insurance. Assets, capital expenditures and depreciation
expense for the corporate function are included in the "Other" column in the
presentation below.
Segment information for the year ended December 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997 was as follows (in
thousands):
<TABLE>
<CAPTION>
Commercial/
Industrial Residential Other Total
----------- ----------- ------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues............................. $472,451 $286,737 $ 2,353 $761,541
Operating costs...................... 434,431 257,917 2,077 694,425
-------- -------- ------- --------
Subtotal............................. 38,020 28,820 276 67,116
Goodwill amortization................ 4,130 1,652 178 5,960
-------- -------- ------- --------
Segment operating earnings........... $ 33,890 $ 27,168 $ 98 61,156
======== ======== ======= ========
Unallocated corporate expenses....... (9,090)
--------
Income from operations............... $ 52,066
========
Assets............................... $542,998 $123,775 $34,308 $701,081
Capital expenditures................. 6,157 2,376 759 9,292
Depreciation expense................. 4,847 2,745 311 7,903
Ten months ended December 31, 1997:
Revenues............................. $ 23,305 $113,927 $ 1,247 $138,479
Operating costs...................... 22,023 103,017 1,068 126,108
-------- -------- ------- --------
Subtotal............................. 1,282 10,910 179 12,371
Goodwill amortization................ 174 351 108 633
-------- -------- ------- --------
Segment operating earnings........... $ 1,108 $ 10,559 $ 71 11,738
======== ======== ======= ========
Unallocated corporate expenses....... (11,516)
--------
Income from operations............... $ 222
========
Assets............................... $ 65,566 $ 96,237 $30,884 $192,687
Capital expenditures................. 355 1,376 286 2,017
Depreciation expense................. 147 575 58 780
Year ended February 28, 1997:
Revenues............................. $ -- $ 81,880 $ -- $ 81,880
Operating costs...................... -- 78,317 -- 78,317
-------- -------- ------- --------
Subtotal............................. -- 3,563 -- 3,563
Goodwill amortization................ -- -- -- --
-------- -------- ------- --------
Segment operating earnings........... $ -- $ 3,563 $ -- 3,563
======== ======== ======= ========
Unallocated corporate expenses....... --
--------
Income from operations............... $ 3,563
========
Assets............................... $ -- $ 27,153 $ -- $ 27,153
Capital expenditures................. -- 182 -- 182
Depreciation expense................. -- 208 -- 208
</TABLE>
F-75
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maintenance, repair and replacement services represented 53%, 35% and 19%
and new installation services represented 47%, 65% and 81% of total revenues
for the year ended December 31, 1998, the ten months ended December 31, 1997
and the year ended February 28, 1997, respectively. The heavy emphasis on new
installation services in the earlier two fiscal periods is a result of the
operations of Airtron, which represent a significant portion of revenues
during the ten months ended December 31, 1997 and all of the revenues during
the year ended February 28, 1997.
17. Quarterly Financial Summary (unaudited)(in thousands, except per share
data)
<TABLE>
<CAPTION>
Fourth Third Second First
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues.................................. $283,597 $211,667 $159,185 $107,092
Operating income.......................... 19,746 16,297 11,452 4,571
Net income................................ 9,193 8,369 6,095 2,272
Earnings per share:
Basic................................... $ 0.28 $ 0.30 $ 0.24 $ 0.10
Diluted................................. $ 0.28 $ 0.30 $ 0.24 $ 0.10
1997(a)
Revenues.................................. $ 68,011 $ 39,382 $ 25,419 $ 17,425
Operating income.......................... 2,552 2,438 (5,055) (1,060)
Net income................................ 1,158 1,025 (5,998) (484)
Earnings per share(b):
Basic................................... $ 0.08 $ 0.11 $ (0.70) $ (0.10)
Diluted................................. $ 0.07 $ 0.11 $ (0.70) $ (0.10)
</TABLE>
- --------
(a) Concurrent with the IPO, the Company changed its fiscal year end from
February 28 to December 31 (see Note 1). The accompanying consolidated
statements of operations contain results for the ten month period ended
December 31, 1997; however, the quarterly financial summary above contains
four calendar quarters of information for 1997, as reported on Forms 10-Q.
(b) Because the Company reported a net loss in the first two quarters of 1997,
the potentially dilutive common shares (including warrants and stock
options discussed in Note 9) had an anti-dilutive effect on earnings per
share. Accordingly, diluted earnings per share is the same as basic
earnings per share for each of these periods.
18. Subsequent Events (unaudited)
During the first quarter of 1999, the Company completed the acquisition of
three platform companies. The combined annual revenues of the companies were
approximately $165.5 million. Total consideration paid included cash payments
of $35.6 million, $1.6 million of junior subordinated notes, 2.1 million
shares of common stock and total debt assumed of $13.8 million. The Company
will account for these acquisitions using the purchase method of accounting.
F-76
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 6,496 $ 2,371
Accounts receivable, net........................... 317,344 187,251
Inventories........................................ 20,635 17,843
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 50,299 26,533
Prepaid expenses and other current assets.......... 8,167 6,134
Deferred tax assets................................ 9,750 7,579
Refundable income taxes............................ -- 3,341
---------- --------
Total current assets.............................. 412,691 251,052
PROPERTY AND EQUIPMENT, net......................... 55,913 40,795
GOODWILL, net....................................... 518,003 398,714
DEFERRED DEBT ISSUE COSTS........................... 13,568 9,260
OTHER LONG-TERM ASSETS.............................. 1,744 1,260
---------- --------
Total assets...................................... $1,001,919 $701,081
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt.................................... $ 1,408 $ 12,959
Accounts payable and accrued expenses.............. 163,425 99,205
Due to related parties............................. 5,432 14,961
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 47,997 27,830
Deferred service contract revenue.................. 5,022 4,429
Income taxes payable............................... 8,844 2,028
Other current liabilities.......................... 2,746 3,199
---------- --------
Total current liabilities......................... 234,874 164,611
REVOLVING CREDIT FACILITY........................... 218,500 195,000
SENIOR SUBORDINATED NOTES........................... 130,000 --
JUNIOR SUBORDINATED NOTES........................... 4,150 16,000
DEFERRED TAX LIABILITIES............................ 1,486 733
OTHER LONG-TERM LIABILITIES......................... 3,084 8,808
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000 shares
authorized; none issued and outstanding........... -- --
Common stock, $0.001 par value; 100,000 shares
authorized; 38,344 and 33,154 shares issued and
outstanding, respectively......................... 38 33
Additional paid-in capital......................... 382,949 322,478
Retained earnings (deficit)........................ 26,838 (6,582)
---------- --------
Total shareholders' equity........................ 409,825 315,929
---------- --------
Total liabilities and shareholders' equity........ $1,001,919 $701,081
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-77
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months
ended September Nine months ended
30, September 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
REVENUES............................ $436,852 $211,667 $1,121,471 $477,944
COST OF SERVICES.................... 346,456 161,681 890,287 364,225
-------- -------- ---------- --------
Gross profit...................... 90,396 49,986 231,184 113,719
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 53,440 32,107 142,829 77,814
AMORTIZATION OF GOODWILL............ 3,311 1,582 9,234 3,586
-------- -------- ---------- --------
Income from operations............ 33,645 16,297 79,121 32,319
OTHER INCOME (EXPENSE):
Interest expense.................. (8,139) (1,699) (20,777) (3,013)
Interest income................... 140 99 314 328
Other............................. 190 197 529 346
-------- -------- ---------- --------
Income before income tax
provision........................ 25,836 14,894 59,187 29,980
INCOME TAX PROVISION................ 11,016 6,525 25,767 13,243
-------- -------- ---------- --------
NET INCOME.......................... $ 14,820 $ 8,369 $ 33,420 $ 16,737
======== ======== ========== ========
BASIC EARNINGS PER SHARE:
EARNINGS PER SHARE................ $ 0.39 $ 0.30 $ 0.91 $ 0.66
======== ======== ========== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 38,116 27,649 36,646 25,361
======== ======== ========== ========
DILUTED EARNINGS PER SHARE:
EARNINGS PER SHARE................ $ 0.39 $ 0.30 $ 0.90 $ 0.65
======== ======== ========== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 38,435 28,157 36,980 25,781
======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-78
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 33,420 $ 16,737
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 19,837 8,653
Other.................................................... (58) (684)
Changes in operating assets and liabilities, net of
effect of acquisitions accounted for as purchases:
(Increase) decrease in--
Accounts receivable..................................... (54,644) (17,958)
Inventories............................................. (113) (181)
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. (1,835) (10,605)
Prepaid expenses and other current assets............... (1,055) (2,699)
Refundable income taxes................................. 3,341 1,051
Other long-term assets.................................. 2,435 2,072
Increase (decrease) in--
Accounts payable and accrued expenses................... 20,614 2,801
Due to related parties.................................. (214) (5,385)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 7,493 6,332
Deferred service contract revenue....................... (499) 188
Income taxes payable.................................... 7,341 7,771
Other current liabilities............................... (718) 494
Other long-term liabilities............................. (457) (214)
-------- --------
Net cash provided by operating activities.............. 34,888 8,373
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired of $5,417
and $8,610............................................... (98,689) (111,095)
Deferred acquisition costs................................ (2,200) (1,197)
Purchase of property and equipment........................ (13,673) (6,602)
Proceeds from sale of property and equipment.............. 733 200
-------- --------
Net cash used in investing activities.................. (113,829) (118,694)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior subordinated debt offering, net of
offering costs........................................... 118,984 --
Proceeds from other long-term debt........................ 202,590 142,100
Payments of long-term debt................................ (236,898) (55,271)
Deferred financing costs on other long-term debt.......... (1,868) --
Exercise of stock options................................. 258 --
-------- --------
Net cash provided by financing activities.............. 83,066 86,829
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 4,125 (23,492)
CASH AND CASH EQUIVALENTS, beginning of period............. 2,371 25,681
-------- --------
CASH AND CASH EQUIVALENTS, end of period................... $ 6,496 $ 2,189
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 16,981 $ 2,365
Income taxes paid......................................... $ 18,515 $ 5,707
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-79
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of the Company and management's discussion and analysis of financial
condition and results of operations included in the Annual Report on Form 10-
K/A for the year ended December 31, 1998.
Certain amounts recorded in the three and nine month periods ended September
30, 1998 and at December 31, 1998 have been reclassified to conform with the
current period presentation.
2. Earnings Per Share
Basic earnings per share have been calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share have been calculated by dividing net income by the weighted average
number of common shares outstanding plus potentially dilutive common shares.
The following table summarizes weighted average shares outstanding for each
of the historical periods presented (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Shares issued through December 31, 1997
excluding acquisitions................. 16,629 16,629 16,629 16,629
Shares issued for 1997 acquisitions..... 4,733 4,444 4,733 4,439
Shares issued for 1998 acquisitions..... 12,095 6,576 12,089 4,293
Shares issued for 1999 acquisitions..... 4,609 -- 3,163 --
Exercise of stock options............... 50 -- 32 --
--------- --------- -------- --------
Weighted average shares outstanding--
Basic.................................. 38,116 27,649 36,646 25,361
Incremental effect of options and
warrants outstanding................... 319 508 334 420
--------- --------- -------- --------
Weighted average shares outstanding--
Diluted................................ 38,435 28,157 36,980 25,781
========= ========= ======== ========
</TABLE>
As of September 30, 1999, options to purchase 3.4 million and 2.9 million
shares of common stock and warrants to purchase 0.6 million and 0.6 million
shares of common stock were not included in the calculation of diluted
earnings per share for the three and nine month periods ended September 30,
1999, respectively, because the exercise price of such options and warrants
was greater than the average market price of the common shares.
F-80
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
3. Business Combinations
During the nine months ended September 30, 1999, the Company completed the
acquisition of the 1999 Acquisitions for approximately $159.7 million, which
includes cash payments of $95.6 million, $4.1 million in junior subordinated
notes, 4.9 million shares of common stock and warrants to purchase
approximately 80,000 shares of common stock. Of the total consideration,
approximately $5.2 million of cash was due to former owners at September 30,
1999. In connection with these acquisitions, the Company assumed approximately
$30.3 million of debt.
The combined annual 1998 revenues of the 1999 Acquisitions were
approximately $365 million. Certain former owners of businesses acquired as
part of the 1999 Acquisitions have the ability to receive additional amounts
of purchase price, payable in cash and common stock, upon the occurrence of
future events.
Also during the nine months ended September 30, 1999, the Company paid
approximately $13.7 million of cash and 0.3 million shares of common stock
related to previously recorded amounts due to former shareholders of companies
acquired prior to December 31, 1998. Included in these amounts are payments of
contingent consideration related to acquisitions prior to December 31, 1998 of
approximately $3.0 million in cash and 0.3 million shares of common stock. In
addition, the Company reduced amounts due to former shareholders by
approximately $1.1 million related to final purchase price settlements.
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC and its subsidiaries as if all of the 1998
acquisitions and the 1999 Acquisitions were effective on the first day of the
period being reported (in thousands, except for per share amounts).
<TABLE>
<CAPTION>
Pro Forma Data
Three months Pro Forma Data
Ended September Nine months Ended
30, September 30,
----------------- ---------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................ $442,255 $376,425 $1,214,543 $1,060,501
Net income.............................. $ 14,754 $ 12,771 $ 35,080 $ 33,884
Net income per share:
Basic................................. $ 0.38 $ 0.33 $ 0.91 $ 0.88
Diluted............................... $ 0.38 $ 0.33 $ 0.91 $ 0.87
</TABLE>
Pro forma adjustments included in the amounts above consist of (i)
compensation differentials, (ii) adjustment for goodwill amortization over a
period of 40 years, (iii) adjustment for interest expense as if borrowings
outstanding as of September 30, 1999 had been outstanding for both the three
and nine month periods ended September 30, 1999 and 1998 at interest rates in
effect on September 30, 1999, and (iv) adjustment to the federal and state
income tax provisions based on pro forma operating results. Net income per
share assumes all shares issued for the acquisitions were outstanding from the
beginning of the periods presented.
The 1999 Acquisitions included in the accompanying financial statements were
accounted for under the purchase method of accounting. Purchase price
consideration is subject to final adjustment. The allocation of purchase price
to the assets acquired and liabilities assumed has been initially assigned and
recorded based on preliminary estimates of fair values and may be revised as
additional information becomes available. Such additional information may
include appraisals on property, contingent liabilities of the acquired
business, and final settlements related to the acquisition consideration and
the net assets acquired. However, the Company does not expect the receipt of
this additional information to cause any significant adjustments to the
purchase price allocations or amount of goodwill at September 30, 1999.
F-81
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
4. Commitments and Contingencies
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
5. Borrowing Activity
Revolving Credit Facility
The Company has a committed credit facility providing for $425 million of
borrowing capacity (the "Credit Agreement") and, at September 30, 1999, had
outstanding $218.5 million of borrowings under this facility. The Credit
Agreement was expanded from $230 million to $425 million during the second
quarter of 1999. This facility, which is with a syndicate of banks led by
Chase Bank of Texas, National Association, will mature in October 2001. Debt
under the Credit Agreement bears interest at variable rates. Under the Credit
Agreement, the Company is required to maintain: (1) a minimum Fixed Charge
Coverage Ratio; (2) a maximum ratio of total indebtedness for borrowed money
to capitalization (as defined in the Credit Agreement); (3) a maximum ratio of
senior debt to pro forma earnings before interest, taxes, depreciation and
amortization ("EBITDA"); (4) a maximum amount of total indebtedness to EBITDA;
(5) a minimum amount of Consolidated Net Worth (as defined in the Credit
Agreement); and (6) a maximum amount of capital expenditures in relation to
Consolidated Net Worth. At September 30, 1999, the Company was in compliance
with those covenants.
The Company has paid various underwriting and arrangement fees and closing
costs associated with the origination, syndication and expansion of the Credit
Agreement. The unamortized portion of these expenses is included as deferred
debt issue costs in the accompanying consolidated condensed balance sheets and
amounted to approximately $3.3 million and $2.4 million at September 30, 1999
and December 31, 1998, respectively.
Senior Subordinated Notes
In January 1999, the Company completed an offering (the "Offering") of $130
million of unsecured senior subordinated notes (the "Notes") bearing interest
at 9.75% and maturing in January 2009. The net proceeds of the Offering were
used to repay indebtedness incurred under the Credit Agreement. The Notes are
guaranteed by all of the Company's current and future U.S. subsidiaries other
than "Unrestricted Subsidiaries" (as defined in the indenture governing the
Notes). As of November 15, 1999, there were no "Unrestricted Subsidiaries."
These guarantees are full, unconditional and joint and several.
The Notes pay interest semi-annually commencing July 15, 1999 and are
redeemable at the option of the Company at any time on or after January 15,
2004. Additionally, the Notes' indenture has restrictive covenants or
limitations on the payment of dividends, the distribution or redemption of
capital stock, the incurrence of debt and the sale of assets.
The Company entered into an agreement to lock in the ten year U.S. Treasury
rate used to price the Offering of the Notes. The Company locked in $100
million at 5.5212%, which management believes is an attractive long-term base
rate. This agreement expired on January 31, 1999, and was settled on that date
based upon the ten year Treasury yield of 4.648%, resulting in an additional
pre-tax financing cost of approximately $6.9 million. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 80, Accounting for
Futures Contracts, this agreement qualifies as a hedge and was recognized as
deferred debt issue costs.
F-82
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
In addition, the Company paid various arrangement fees and closing costs
associated with the Offering. The unamortized portion of these expenses, along
with the cost of the hedge discussed in the preceding paragraph, is included
as deferred debt issue costs in the accompanying consolidated condensed
balance sheets and amounted to approximately $10.2 million and $6.9 million at
September 30, 1999 and December 31, 1998, respectively.
Junior Subordinated Notes
In February 1999, the Company redeemed approximately $16.0 million of junior
subordinated notes that had been issued in connection with an acquisition
completed in November 1998. The holders of those notes had the right to
require redemption upon the issuance of the Notes. The Company paid the
redemption price with borrowings under the Credit Agreement. During 1999, the
Company issued $4.1 million in junior subordinated notes in connection with
the closing of two of the 1999 Acquisitions.
6. Subsequent Event
On November 3, 1999, the Company and Building One Services Corporation
("BOSC") announced the signing of a definitive agreement to merge the two
companies. Under the terms of the merger, each outstanding share of BOSC
common stock will be exchanged for 1.25 shares of GroupMAC common stock. As
part of the merger, GroupMAC shareholders may elect to receive cash for up to
50% of their shares at $13.50 per share (up to $150 million in the aggregate
less amounts paid to purchase certain options previously issued by the
Company), subject to pro-ration. If this cash election is fully subscribed, up
to approximately 11 million GroupMAC shares (or approximately 29% of its
shares currently outstanding) will be cancelled in the merger. The transaction
is expected to be tax-free to the shareholders of both companies, except
GroupMAC shareholders to the extent of the cash they receive.
Concurrent with the closing of the merger, an affiliate of Apollo Management
IV, L.P. ("Apollo"), a private investment firm, will exchange $105 million of
BOSC convertible debt and $150 million of cash for approximately $255 million
of GroupMAC convertible redeemable preferred stock. The cash proceeds from the
investment will be used to fund the cash election option described above. The
Company can defer payment of dividends during the first three years without
penalty. The preferred stock will bear a coupon rate of 7.25%, payable on a
quarterly basis, and will mature in 2012. The preferred stock will be
convertible into GroupMAC common stock at a conversion price of $14.00 per
common share.
The merger is subject to the approval of both companies' shareholders,
concurrent completion of the Apollo investment, regulatory approval and other
customary closing conditions, and is expected to close in the first quarter of
2000.
An underwritten commitment letter from Bank of America, N.A. and Chase Bank
of Texas, N.A. (as Co-Lead Arrangers and Co-Book Managers) to provide a total
of $800 million in financing has been received by GroupMAC. It is expected
that BOSC's $200 million of senior subordinated debt will be assumed by
GroupMAC and remain outstanding, and that GroupMAC will refinance its senior
subordinated notes.
7. Operating Segments
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
F-83
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
The Company has two reportable segments: commercial/industrial and
residential markets. The commercial/industrial segment provides maintenance,
repair and replacement services and new installation services in manufacturing
and processing facilities, power generation facilities, hospitals and other
critical care facilities, colleges and universities, hotels, commercial office
buildings and complexes, retail stores and restaurants, supermarkets and
convenience stores. The residential segment provides maintenance, repair and
replacement services and new installation services in single family and low-
rise multifamily housing units.
The Company evaluates performance based on income from operations of the
respective business units prior to unallocated corporate expenses.
Other activities include financial data of two operating subsidiaries that
provide products and services outside of those performed by the Company's two
primary operating segments. Unallocated corporate expenses primarily include
(1) corporate overhead, (2) corporate and operating company management
bonuses, (3) employee benefit plan expenses, and (4) savings from national
purchase agreements relating to materials and property/casualty insurance.
Assets for the corporate function are included in the "Other" column in the
presentation below.
Segment information for the three and nine month periods ended September 30,
1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Commercial/Industrial Residential Other Total
--------------------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Three month period ended
September 30, 1999:
Revenues................ $344,185 $ 92,267 $ 400 $ 436,852
Operating costs......... 313,572 82,838 360 396,770
-------- -------- ------- ----------
Subtotal................ 30,613 9,429 40 40,082
Goodwill amortization... 2,795 470 46 3,311
-------- -------- ------- ----------
Segment operating
earnings............... $ 27,818 $ 8,959 $ (6) 36,771
======== ======== =======
Unallocated corporate
expenses............... (3,126)
----------
Income from operations.. $ 33,645
==========
Assets.................. $826,392 $134,516 $41,011 $1,001,919
Three month period ended
September 30, 1998:
Revenues................ $130,279 $ 80,866 $ 522 $ 211,667
Operating costs......... 119,338 71,527 476 191,341
-------- -------- ------- ----------
Subtotal................ 10,941 9,339 46 20,326
Goodwill amortization... 1,108 429 45 1,582
-------- -------- ------- ----------
Segment operating
earnings............... $ 9,833 $ 8,910 $ 1 18,744
======== ======== =======
Unallocated corporate
expenses............... (2,447)
----------
Income from operations.. $ 16,297
==========
</TABLE>
Maintenance, repair and replacement services represented 59% and 52%, and
new installation services represented 41% and 48%, of total revenues for the
three months ended September 30, 1999 and 1998, respectively.
F-84
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)
<TABLE>
<CAPTION>
Commercial/Industrial Residential Other Total
--------------------- ----------- ------ ----------
<S> <C> <C> <C> <C>
Nine month period ended
September 30, 1999:
Revenues................. $870,854 $249,164 $1,453 $1,121,471
Operating costs.......... 799,659 225,508 1,164 1,026,331
-------- -------- ------ ----------
Subtotal................. 71,195 23,656 289 95,140
Goodwill amortization.... 7,662 1,435 137 9,234
-------- -------- ------ ----------
Segment operating
earnings................ $ 63,533 $ 22,221 $ 152 85,906
======== ======== ======
Unallocated corporate
expenses................ (6,785)
----------
Income from operations... $ 79,121
==========
Nine month period ended
September 30, 1998:
Revenues................. $266,641 $209,512 $1,791 $ 477,944
Operating costs.......... 246,324 187,899 1,641 435,864
-------- -------- ------ ----------
Subtotal................. 20,317 21,613 150 42,080
Goodwill amortization.... 2,249 1,203 134 3,586
-------- -------- ------ ----------
Segment operating
earnings................ $ 18,068 $ 20,410 $ 16 38,494
======== ======== ======
Unallocated corporate
expenses................ (6,175)
----------
Income from operations... $ 32,319
==========
</TABLE>
Maintenance, repair and replacement services represented 59% and 49%, and
new installation services represented 41% and 51%, of total revenues for the
nine months ended September 30, 1999 and 1998, respectively.
F-85
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
On November 3, 1999, GroupMAC and Building One announced the signing of a
definitive agreement to merge the two companies. Under the terms of the
merger, each outstanding share of Building One common stock will be converted
into the right to receive 1.25 shares of GroupMAC common stock. As part of the
merger, GroupMAC shareholders may elect to receive cash for up to 50% of their
shares at $13.50 per share, subject to proration in the event that holders of
more than approximately 11 million shares elect to receive cash. If this cash
election is fully subscribed, up to approximately 11 million shares of
GroupMAC common stock, or approximately 29% of the shares currently
outstanding, will be cancelled in the merger.
Concurrent with the closing of the merger, affiliates of Apollo Management,
L.P. ("Apollo") will exchange $105 million of Building One convertible junior
subordinated debentures, the "Building One convertible debt", and $150 million
of cash for approximately $255 million of GroupMAC convertible preferred
stock, the "preferred stock". The cash proceeds from the investment will be
used to fund the cash election right described above.
The preferred stock will mature in 2012 and will bear a dividend yield
coupon rate of 7.25% payable quarterly in cash. The combined company can defer
payment of dividends during the first three years without penalty. The
preferred stock will be convertible into shares of combined company common
stock at a conversion price of $14.00 per common share.
The merger is subject to the approval of both companies' shareholders,
concurrent completion of the Apollo investment, regulatory approval and other
customary closing conditions, and is expected to close in the first quarter of
2000.
GroupMAC received an underwritten commitment letter from Bank of America,
N.A. and Chase Bank of Texas, N.A., as co-lead arrangers and co-book managers,
to provide a total of $800 million in financing. It is expected that Building
One's $200 million of senior subordinated debt will be assumed by GroupMAC and
remain outstanding, and that GroupMAC will refinance its senior subordinated
notes.
The name of the combined company will be announced on or before the closing.
For purposes of the discussions below, the combined entity is referred to as
"combined company".
GroupMAC will be the surviving legal entity in the merger. However, for
accounting purposes, Building One is deemed to be the acquiror and,
accordingly, Building One will account for the merger as a "reverse
acquisition" of GroupMAC under the purchase method of accounting. Under this
method of accounting, the combined company's historical results for periods
prior to the merger will be the same as Building One's historical results. On
the date of the merger, the assets and liabilities of GroupMAC will be
recorded at their estimated fair values.
The following combined company unaudited pro forma financial statements
utilize the unaudited pro forma financial statements of GroupMAC and Building
One as of September 30, 1999 and for the nine months ended September 30, 1999
and for the year ended December 31, 1998, which give effect to the
acquisitions made by each company during 1998 and 1999 including amounts owed
in connection with those acquisitions. The combined company unaudited pro
forma financial statements give effect to the transactions highlighted above
as if the transactions had occurred on September 30, 1999 for purposes of the
combined company unaudited pro forma balance sheet, and on January 1, 1998 for
purposes of the combined company unaudited pro forma statements of operations.
The unaudited pro forma combined financial statements for GroupMAC and
Building One are derived from the separate pro forma financial statements of
each company.
F-86
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA
FINANCIAL STATEMENTS--(Continued)
The pro forma adjustments are based on preliminary estimates and certain
assumptions that GroupMAC and Building One believe are reasonable under the
circumstances. The preliminary allocation of the purchase price to assets and
liabilities of GroupMAC reflects the assumption that assets and liabilities
are carried at historical amounts which approximate fair market value. The
actual allocation of the purchase price may differ from that reflected in the
unaudited pro forma financial statements after a more extensive review of the
fair market values of the assets and liabilities has been completed.
With respect to cost savings and synergies associated with the combined
organization, management cannot fully quantify such items at this time. It is
anticipated that any such savings will be partially offset by the cost of
additional corporate infrastructure to support the combined operation. These
savings and costs cannot be accurately quantified at this time and they have
not been included in the pro forma combined financial information of the
combined company.
The following combined company pro forma financial statements are based on
assumptions and include adjustments as explained in the notes thereto. The
combined company unaudited pro forma financial statements are not necessarily
indicative of the actual financial results that would have occurred if the
transactions described above had been effective on and as of the dates
indicated and may not be indicative of operations in future periods or as of
future dates. The combined company unaudited pro forma financial statements
should be read in conjunction with the notes thereto and the following
documents:
. The historical audited consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of GroupMAC on Form 10-K/A and Building One on
Form 10-K as of December 31, 1998 and for the year then ended;
. The quarterly reports on Form 10-Q of GroupMAC and Building One for the
quarter ended September 30, 1999; and
. The separate company unaudited pro forma financial statements and notes
thereto of GroupMAC and Building One set forth elsewhere in this
prospectus.
F-87
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Merger Transaction
-------------------------------------------------------------------
Apollo Investment Record Goodwill on Merger
---------------------- --------------------------
Preferred Pref Stock/ Cancellation Merger
Building Stock Conv Deb of GroupMAC Costs
GroupMAC One Investment Exchange Common net of tax
Pro Forma Pro Forma (a) (b) Stock (c) (d)
ASSETS --------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents....... $ -- $ -- $146,500 $ -- $ (146,500) $ --
Accounts
receivable, net
of allowance...... 317,344 362,147 -- -- -- --
Inventories....... 20,635 8,213 -- -- -- --
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts......... 50,299 49,875 -- -- -- --
Prepaid expenses
and other current
assets............ 8,167 11,590 -- -- -- --
Deferred tax
asset............. 9,750 4,424 -- -- -- --
Refundable income
taxes............. -- 3,405 -- -- -- --
-------- ---------- ---------- ----------- ------------ ----------
Total current
assets.......... 406,195 439,654 146,500 -- (146,500) --
-------- ---------- ---------- ----------- ------------ ----------
PROPERTY AND
EQUIPMENT, net..... 55,913 57,358 -- -- -- --
GOODWILL AND OTHER
INTANGIBLES, net... 518,003 673,238 -- -- -- 16,328
DEFERRED DEBT ISSUE
COSTS, net......... 13,568 21,055 -- (4,485) -- --
OTHER LONG-TERM
ASSETS............. 1,744 6,384 -- -- -- --
-------- ---------- ---------- ----------- ------------ ----------
Total assets.... $995,423 $1,197,689 $146,500 $ (4,485) $ (146,500) $16,328
======== ========== ========== =========== ============ ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS'
EQUITY
---------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT
LIABILITIES:
Accounts
payable........... $ 92,510 $ 92,036 $ -- $ -- $ -- $ --
Accrued
compensation...... 42,981 41,669 -- -- -- --
Accrued
liabilities....... 27,934 46,409 -- -- -- --
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts......... 47,997 81,109 -- -- -- --
Deferred service
revenue........... 5,022 -- -- -- -- --
Income taxes
payable........... 8,844 -- -- (1,749) -- (3,745)
Other current
liabilities....... 2,746 -- -- -- -- --
-------- ---------- ---------- ----------- ------------ ----------
Total current
liabilities..... 228,034 261,223 -- (1,749) -- (3,745)
REVOLVING CREDIT
FACILITY........... 218,844 111,499 -- -- 3,500 24,800
TERM CREDIT
FACILITY........... -- 124,375 -- -- -- --
SENIOR SUBORDINATED
NOTES, net of
unamortized
discount........... 130,000 195,680 -- -- -- --
JUNIOR SUBORDINATED
NOTES.............. 4,150 -- -- -- -- --
CONVERTIBLE JUNIOR
SUBORDINATED
DEBENTURES......... -- 103,190 -- (103,190) -- --
DEFERRED TAX
LIABILITY.......... 1,486 2,243 -- -- -- --
OTHER LONG-TERM
LIABILITIES........ 3,084 2,463 -- -- -- --
MANDATORILY
REDEEMABLE,
CONVERTIBLE
PREFERRED STOCK.... -- -- 146,500 103,190 -- --
SHAREHOLDERS'
EQUITY
Common stock...... 38 26 -- -- (11) --
Additional paid-
in capital........ 382,949 310,216 -- -- (149,989) --
Retained
earnings.......... 26,838 87,339 -- (2,736) -- (4,727)
Accumulated other
comprehensive
loss.............. -- (565) -- -- -- --
-------- ---------- ---------- ----------- ------------ ----------
Total
shareholders'
equity.......... 409,825 397,016 -- (2,736) (150,000) (4,727)
-------- ---------- ---------- ----------- ------------ ----------
Total
liabilities and
shareholders'
equity.......... $995,423 $1,197,689 $146,500 $ (4,485) $ (146,500) $16,328
======== ========== ========== =========== ============ ==========
<CAPTION>
Merger Transaction
--------------------------------------------------------------------
Record Goodwill on Merger
--------------------------------------------------------------------
Put of Write-off Pro Forma
GroupMAC GroupMAC Eliminate Reverse Combined
Sr Sub Notes, credit line GroupMAC Acquisition Company
net of tax costs, net of tax Equity of GroupMAC Prior to
(e) (f) (g) (h) Refinancing
ASSETS ------------- ----------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents....... $ -- $ -- $ -- $ -- $ --
Accounts
receivable, net
of allowance...... -- -- -- -- 679,491
Inventories....... -- -- -- -- 28,848
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts......... -- -- -- -- 100,174
Prepaid expenses
and other current
assets............ -- -- -- -- 19,757
Deferred tax
asset............. -- -- -- -- 14,174
Refundable income
taxes............. 1,153 1,296 -- -- 5,854
------------- ----------------- ----------- ----------- ------------
Total current
assets.......... 1,153 1,296 -- -- 848,298
------------- ----------------- ----------- ----------- ------------
PROPERTY AND
EQUIPMENT, net..... -- -- -- -- 113,271
GOODWILL AND OTHER
INTANGIBLES, net... 7,043 2,027 (259,825) 274,869 1,231,683
DEFERRED DEBT ISSUE
COSTS, net......... (10,246) (3,323) -- -- 16,569
OTHER LONG-TERM
ASSETS............. -- -- -- -- 8,128
------------- ----------------- ----------- ----------- ------------
Total assets.... $ (2,050) $ -- $ (259,825) $274,869 $2,217,949
============= ================= =========== =========== ============
<CAPTION>
LIABILITIES AND
SHAREHOLDERS'
EQUITY
---------------
<S> <C> <C> <C> <C> <C>
CURRENT
LIABILITIES:
Accounts
payable........... $ -- $ -- $ -- $ -- $ 184,546
Accrued
compensation...... -- -- -- -- 84,650
Accrued
liabilities....... -- -- -- -- 74,343
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts......... -- -- -- -- 129,106
Deferred service
revenue........... -- -- -- -- 5,022
Income taxes
payable........... (3,350) -- -- -- --
Other current
liabilities....... -- -- -- -- 2,746
------------- ----------------- ----------- ----------- ------------
Total current
liabilities..... (3,350) -- -- -- 480,413
REVOLVING CREDIT
FACILITY........... 131,300 -- -- -- 489,943
TERM CREDIT
FACILITY........... -- -- -- -- 124,375
SENIOR SUBORDINATED
NOTES, net of
unamortized
discount........... (130,000) -- -- -- 195,680
JUNIOR SUBORDINATED
NOTES.............. -- -- -- -- 4,150
CONVERTIBLE JUNIOR
SUBORDINATED
DEBENTURES......... -- -- -- -- --
DEFERRED TAX
LIABILITY.......... -- -- -- -- 3,729
OTHER LONG-TERM
LIABILITIES........ -- -- -- -- 5,547
MANDATORILY
REDEEMABLE,
CONVERTIBLE
PREFERRED STOCK.... -- -- -- -- 249,690
SHAREHOLDERS'
EQUITY
Common stock...... -- -- (27) 34 60
Additional paid-
in capital........ -- -- (232,960) 274,835 585,051
Retained
earnings.......... -- -- (26,838) -- 79,876
Accumulated other
comprehensive
loss.............. -- -- -- -- (565)
------------- ----------------- ----------- ----------- ------------
Total
shareholders'
equity.......... -- -- (259,825) 274,869 664,422
------------- ----------------- ----------- ----------- ------------
Total
liabilities and
shareholders'
equity.......... $ (2,050) $-- $ (259,825) $274,869 $2,217,949
============= ================= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-88
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA BALANCE SHEET (Continued)
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Refinancing
-----------------------------------------
Pro Forma Write-off
Combined Company Refinance existing Building One credit Pro Forma
Prior to revolver balances line costs, net of tax Combined
ASSETS Refinancing (i) (j) Company
------ ---------------- ------------------ ---------------------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............ $ -- $ -- $ -- $ --
Accounts receivable,
net of allowance....... 679,491 -- -- 679,491
Inventories............ 28,848 -- -- 28,848
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts.............. 100,174 -- -- 100,174
Prepaid expenses and
other current assets... 19,757 -- -- 19,757
Deferred tax asset..... 14,174 -- -- 14,174
Refundable income
taxes.................. 5,854 -- 3,377 9,231
---------- -------- ------- ----------
Total current
assets............... 848,298 -- 3,377 851,675
---------- -------- ------- ----------
PROPERTY AND EQUIPMENT,
net..................... 113,271 -- -- 113,271
GOODWILL AND OTHER
INTANGIBLES, net........ 1,231,683 -- -- 1,231,683
DEFERRED DEBT ISSUE
COSTS, net.............. 16,569 10,200 (8,658) 18,111
OTHER LONG-TERM ASSETS.. 8,128 -- -- 8,128
---------- -------- ------- ----------
Total assets......... $2,217,949 $ 10,200 $(5,281) $2,222,868
========== ======== ======= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable....... $ 184,546 $ -- $ -- $ 184,546
Accrued compensation... 84,650 -- -- 84,650
Accrued liabilities.... 74,343 -- -- 74,343
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.............. 129,106 -- -- 129,106
Deferred service
revenue................ 5,022 -- -- 5,022
Income taxes payable... -- -- -- --
Other current
liabilities............ 2,746 -- -- 2,746
---------- -------- ------- ----------
Total current
liabilities.......... 480,413 -- -- 480,413
REVOLVING CREDIT
FACILITY................ 489,943 (489,943) -- --
NEW CREDIT FACILITY--
Revolver................ -- 324,518 -- 324,518
NEW CREDIT FACILITY--
Delayed Draw Term A..... -- 130,000 -- 130,000
NEW CREDIT FACILITY--
Term B.................. -- 170,000 -- 170,000
TERM CREDIT FACILITY.... 124,375 (124,375) -- --
SENIOR SUBORDINATED
NOTES, net of
unamortized discount.... 195,680 -- -- 195,680
JUNIOR SUBORDINATED
NOTES................... 4,150 -- -- 4,150
CONVERTIBLE JUNIOR
SUBORDINATED
DEBENTURES.............. -- -- -- --
DEFERRED TAX LIABILITY.. 3,729 -- -- 3,729
OTHER LONG-TERM
LIABILITIES............. 5,547 -- -- 5,547
MANDATORILY REDEEMABLE,
CONVERTIBLE PREFERRED
STOCK................... 249,690 -- -- 249,690
SHAREHOLDERS' EQUITY
Common stock........... 60 -- -- 60
Additional paid-in
capital................ 585,051 -- -- 585,051
Retained earnings...... 79,876 -- (5,281) 74,595
Accumulated other
comprehensive loss..... (565) -- -- (565)
---------- -------- ------- ----------
Total shareholders'
equity............... 664,422 -- (5,281) 659,141
---------- -------- ------- ----------
Total liabilities and
shareholders'
equity............... $2,217,949 $ 10,200 $(5,281) $2,222,868
========== ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-89
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Combined
Building Pro Forma Company Pro Forma Pro Forma
GroupMAC One Merger Prior to Refinancing Combined
Pro Forma Pro Forma Adjustments Refinancing Adjustments Company
---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $1,441,473 $1,604,336 $ -- $3,045,809 $ -- $3,045,809
COST OF SERVICES........ 1,126,288 1,276,135 -- 2,402,423 -- 2,402,423
---------- ---------- -------- ---------- ------- ----------
Gross profit........... 315,185 328,201 -- 643,386 -- 643,386
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 190,990 182,983 -- 373,973 -- 373,973
AMORTIZATION OF
GOODWILL............... 13,346 17,679 552 (a) 31,577 -- 31,577
---------- ---------- -------- ---------- ------- ----------
Income from
operations.......... 110,849 127,539 (552) 237,836 -- 237,836
OTHER INCOME (EXPENSE):
Interest expense....... (31,633) (51,062) 10,770 (b) (71,925) (1,934)(g) (73,859)
Interest income........ -- -- -- -- -- --
Other.................. 1,415 3,777 -- 5,192 -- 5,192
---------- ---------- -------- ---------- ------- ----------
Income before income
tax provision....... 80,631 80,254 10,218 171,103 (1,934) 169,169
INCOME TAX PROVISION.... 35,213 38,771 4,233 (c) 78,217 (760)(h) 77,457
---------- ---------- -------- ---------- ------- ----------
NET INCOME.............. $ 45,418 $ 41,483 $ 5,985 $ 92,886 $(1,174) $ 91,712
Preferred dividends..... -- -- (18,356)(d) (18,356) -- (18,356)
Amortization of deferred
issue costs on
mandatorily redeemable,
convertible preferred
stock.................. -- -- (292)(e) (292) -- (292)
---------- ---------- -------- ---------- ------- ----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS.... $ 45,418 $ 41,483 $(12,663) $ 74,238 $(1,174) $ 73,064
========== ========== ======== ========== ======= ==========
NET INCOME PER SHARE--
BASIC.................. $ 1.18 $ 1.57 $ 1.23 (f) $ 1.21 (i)
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES--BASIC.......... 38,412 26,357 60,247 (f) 60,247 (i)
========== ========== ========== ==========
NET INCOME PER SHARE--
DILUTED................ $ 1.17 $ 1.47 $ 1.17 (f) $ 1.15 (i)
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES--DILUTED........ 38,968 31,538 79,632 (f) 79,632 (i)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-90
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Combined
Building Pro Forma Company Pro Forma Pro Forma
GroupMAC One Merger Prior to Refinancing Combined
Pro Forma Pro Forma Adjustments Refinancing Adjustments Company
---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $1,214,543 $1,363,487 $ -- $2,578,030 $ -- $2,578,030
COST OF SERVICES........ 966,173 1,085,207 -- 2,051,380 -- 2,051,380
---------- ---------- ------- ---------- ------ ----------
Gross profit........... 248,370 278,280 -- 526,650 -- 526,650
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 152,942 157,331 -- 310,273 -- 310,273
RESTRUCTURING AND
RECAPITALIZATION
CHARGES................ -- 8,020 -- 8,020 -- 8,020
AMORTIZATION OF
GOODWILL............... 10,009 13,259 415 (a) 23,683 -- 23,683
---------- ---------- ------- ---------- ------ ----------
Income from
operations.......... 85,419 99,670 (415) 184,674 -- 184,674
OTHER INCOME (EXPENSE):
Interest expense....... (23,725) (38,297) 8,078 (b) (53,944) (1,450)(g) (55,394)
Interest income........ -- -- -- -- -- --
Other.................. 444 511 -- 955 -- 955
---------- ---------- ------- ---------- ------ ----------
Income before income
tax provision....... 62,138 61,884 7,663 131,685 (1,450) 130,235
INCOME TAX PROVISION.... 27,058 28,744 3,119 (c) 58,921 (560)(h) 58,361
---------- ---------- ------- ---------- ------ ----------
NET INCOME.............. $ 35,080 $ 33,140 $ 4,544 $ 72,764 $ (890) $ 71,874
Preferred dividends..... -- -- (13,767)(d) (13,767) -- (13,767)
Amortization of deferred
issue costs on
mandatorily redeemable,
convertible preferred
stock.................. -- -- (219)(e) (219) -- (219)
---------- ---------- ------- ---------- ------ ----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS.... $ 35,080 $ 33,140 $(9,442) $ 58,778 $ (890) $ 57,888
========== ========== ======= ========== ====== ==========
NET INCOME PER SHARE--
BASIC.................. $ 0.91 $ 1.26 $ 0.98 (f) $ 0.96 (i)
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES--BASIC.......... 38,412 26,357 60,247 (f) 60,247 (i)
========== ========== ========== ==========
NET INCOME PER SHARE--
DILUTED................ $ 0.91 $ 1.17 $ 0.92 (f) $ 0.91 (i)
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES--DILUTED........ 38,737 31,538 79,401 (f) 79,401 (i)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-91
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
The following summarizes the unaudited pro forma balance sheet adjustments
(in thousands except per share amounts):
a) Records the shares of preferred stock to be issued to Apollo in exchange
for $150,000 in cash, net of estimated issuance costs of approximately
$3,500.
b) Records the shares of preferred stock to be issued to Apollo in exchange
for the Building One convertible debt in the amount of $103,190
(including in-kind accrued interest of $3,190 through September 30,
1999). It is anticipated that the Building One convertible debt will have
a balance of approximately $105 million as of the closing of the
transactions. Also records the write-off of $4,485 of unamortized
deferred debt issue costs associated with the Building One convertible
debt and the associated tax benefit of $1,749 at a 39% effective tax rate
directly to the combined company's retained earnings. This net of tax
charge of $2,736 will be reflected in the historical statement of
operations of the combined company upon consummation of the transactions.
See Note 3.
c) Records the maximum number of shares of GroupMAC common stock to be
cancelled in the cash election merger with the cash proceeds of the
preferred stock issuance discussed in Note 1a above as follows:
<TABLE>
<S> <C>
Estimated net proceeds from the issuance of shares of preferred
stock........................................................... $146,500
Borrowings under the GroupMAC credit agreement to replenish
issuance costs deducted from the proceeds....................... 3,500
--------
Maximum cash available to cancel shares in the cash election
merger.......................................................... $150,000
Cash election price per share.................................... $ 13.50
--------
Maximum number of shares available for cancellation in the cash
election merger................................................. 11,111
========
</TABLE>
d) Records the estimated cash merger costs of GroupMAC and Building One
along with the related tax benefit as follows:
<TABLE>
<CAPTION>
Building
GroupMAC One
-------- --------
<S> <C> <C>
Estimated nondeductible brokerage, legal, accounting
and other professional fees........................... $ 8,765 $ 6,435
Estimated deductible severance costs................... 1,850 6,000
Estimated deductible office closing costs and other
exit activities costs................................. -- 1,750
------- -------
Total estimated merger costs........................... $10,615 $14,185
======= =======
Tax benefit on deductible costs at 39%................. $ 722 $ 3,023
======= =======
</TABLE>
In connection therewith, the net of tax amount of $4,727 related to
Building One severance and reserves for the closing of duplicate office
space has been recorded directly to combined company retained earnings.
This net of tax charge of $4,727 will be reflected in the historical
statement of operations of combined company upon consummation of the
transactions. See Note 3.
e) Records the anticipated refinancing of GroupMAC's $130,000 Senior
Subordinated Notes at 101% due to change of control provisions in the
associated indenture. Also records the call premium of $1,300, the
elimination of $10,246 in related deferred debt issue costs and the
associated tax benefits of $4,503 at a 39% effective tax rate.
f) Represents the elimination of GroupMAC's unamortized deferred debt issue
costs of $3,323 related to its existing revolving credit facility and the
associated tax benefit of $1,296 at a 39% effective tax rate.
g) Records the elimination of GroupMAC's pro forma shareholders' equity as
of September 30, 1999 after adjusting for the maximum number of shares of
GroupMAC common stock to be cancelled in the cash election merger
discussed in Note 1c above.
F-92
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS--(Continued)
h) Records the effects of the reverse acquisition of GroupMAC by Building
One, including the entries to adjust the par value of common stock of
Building One to reflect the capital structure of GroupMAC, the legal
surviving corporation in the merger, as follows:
<TABLE>
<CAPTION>
Common Options/
Stock Warrants
-------- --------
<S> <C> <C>
GroupMAC number of shares, options and warrants
outstanding at September 30, 1999...................... 38,411 4,916
Maximum shares available for cancellation in the cash
election merger........................................ (11,111) --
-------- --------
GroupMAC number of shares outstanding after the cash
election merger........................................ 27,300 4,916
Reciprocal of the exchange ratio utilized to convert
Building One shares to GroupMAC shares (1.00/1.25)..... 0.80 0.80
-------- --------
Building One equivalent shares.......................... 21,840 3,933
Building One five day share price average with 11/03/99
as the midpoint/Black-Scholes option valuation......... $ 11.325 $ 7.00
-------- --------
Fair value of GroupMAC shares, options and warrants..... $247,338 $ 27,531
======== ========
Total value of shares, options and warrants on the
reverse acquisition.................................... $274,869
Estimated Building One merger costs..................... 6,435
--------
Total purchase consideration............................ $281,304
========
</TABLE>
The preliminary adjustments to revalue the assets and liabilities of
GroupMAC to fair value and allocate the excess purchase consideration
over the fair value of net assets are as follows:
<TABLE>
<S> <C>
Book value of GroupMAC's net assets............................... $240,862
Other intangible assets........................................... 10,000
Goodwill.......................................................... 30,442
--------
$281,304
========
</TABLE>
The book value of GroupMAC's net assets has been adjusted for the
cancellation of shares of GroupMAC common stock in the cash election
right, the elimination of deferred financing costs, and the accrual of
merger costs and severance costs resulting from the merger.
The pro forma financial information includes management's best estimate of
restructuring costs that could result from the merger. In addition, the
total consideration has been allocated to the assets and liabilities of
GroupMAC based on management's best estimates of fair value. The other
intangible assets primarily relate to workforce and customer lists. The
purchase price allocation is subject to change in the fair value of
GroupMAC's net assets on the effective date of the merger. These items
will not be known until the effective date of the merger. Management does
not believe the final purchase price allocation will differ materially
from the preliminary purchase price allocation.
i) Represents the refinancing of the GroupMAC and Building One existing
revolving and term credit facilities with the $800 million of committed
financing from Bank of America, N.A. and Chase Bank of Texas, N.A. (as co-
lead arrangers and co-book managers). Also records estimated deferred debt
issue costs of $10,200 related to this refinancing.
j) Represents the elimination of Building One's unamortized deferred debt
issue costs of $8,658 related to its existing revolving and term credit
facility and the associated tax benefit of $3,377 at a 39% effective tax
rate directly to the combined company's retained earnings. This net of tax
charge of $5,281 will be reflected in the historical statement of
operations of the combined company upon consummation of the transactions.
See Note 3.
F-93
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
2. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
The following summarizes the unaudited pro forma statements of operations
adjustments (in thousands except per share amounts):
a) Reflects the adjustment necessary to reflect the amortization of goodwill
and other intangible assets generated from the balance sheet adjustments
discussed in Note 1 above. The goodwill is amortized over a 40-year
estimated life and the other intangible assets are amortized over a
weighted average estimated life of 15 years.
b) Represents the adjustment necessary to reflect the net decrease in
interest expense related to exchanging Building One convertible debt for
preferred stock discussed in Note 1b, the financing of issuance costs for
the cancellation of shares of GroupMAC common stock discussed in Note 1c,
the financing of each company's merger costs discussed in Note 1d and the
refinancing of GroupMAC's $130,000 Senior Subordinated Notes at 101% due
to change of control provisions in the associated indenture discussed in
Note 1e. A summary of the pro forma debt outstanding of the separate
companies and the combined company and a summary of the pro forma interest
expense (including amounts recognized in the historical financial
statements and the separate company unaudited pro forma financial
statements) are set forth in Note 5.
c) Reflects the incremental provision for federal and state income taxes
related to the reduction in interest expense discussed in Note 2b.
d) Represents the annual and nine-month dividend yield on the $253,190 face
amount of preferred stock issued discussed in Notes 1a and 1b above at a
7.25% coupon rate.
e) Represents the annual and nine-month amortization of the estimated
preferred stock issuance costs of $3,500 discussed in Note 1a over the
twelve-year term of the preferred stock.
F-94
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
2. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS--(Continued)
f) The calculation of the combined weighted average shares outstanding and
basic and diluted earnings per share before refinancing adjustments is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Weighted Average Shares Outstanding:
Basic:
Weighted average shares outstanding--GroupMAC.. 38,412 38,412
Weighted average shares outstanding--Building
One........................................... 26,357 26,357
------- --------
Weighted average shares outstanding--Combined.. 64,769 64,769
Maximum shares available for cancellation in
the cash election merger discussed in Note
1c............................................ (11,111) (11,111)
Incremental shares from conversion of Building
One shares to GroupMAC shares at a 1.25 to
1.00 ratio.................................... 6,589 6,589
------- --------
Weighted average shares outstanding--Basic..... 60,247 60,247
======= ========
Diluted:
Weighted average shares outstanding--GroupMAC.. 38,968 38,737
Weighted average shares outstanding--Building
One........................................... 31,538 31,538
------- --------
Weighted average shares outstanding--Combined.. 70,506 70,275
Maximum shares available for cancellation in
the cash election merger discussed in Note
1c............................................ (11,111) (11,111)
Incremental shares from conversion of Building
One shares to GroupMAC shares at a 1.25 to
1.00 ratio.................................... 6,589 6,589
Elimination of dilutive effect of $103,190 face
amount of Building One convertible debt
exchanged for preferred stock discussed
in Note 1b.................................... (4,586) (4,586)
Dilutive effect of $253,190 face amount of
preferred stock at a $14.00 conversion price
issued discussed in Note 1a and 1b............ 18,085 18,085
Incremental shares from conversion of Building
One contingently issuable shares, options and
warrants to GroupMAC shares at a 1.25 to 1.00
ratio......................................... 149 149
------- --------
Weighted average shares outstanding--Diluted... 79,632 79,401
======= ========
Earnings Per Share:
Basic Before Refinancing:
Net income available to common shareholders.... $74,238 $ 58,778
Basic weighted average shares outstanding...... 60,247 60,247
------- --------
Basic earnings per share....................... $ 1.23 $ 0.98
======= ========
Diluted Before Refinancing:
Net income available to common shareholders.... $74,238 $ 58,778
Plus preferred stock dividends................. 18,356 13,767
Plus amortization of deferred preferred stock
issuance costs................................ 292 219
------- --------
Net income on an if-converted basis............ $92,886 $ 72,764
Diluted weighted average shares outstanding.... 79,632 79,401
------- --------
Diluted earnings per share..................... $ 1.17 $ 0.92
======= ========
</TABLE>
F-95
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
2. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS--(Continued)
g) Represents the adjustment necessary to reflect the net increase in
interest expense related to the refinancing of the GroupMAC and Building
One existing revolving and term credit facilities along with the
financing of the estimated deferred debt issue costs of $10,200 related
to this refinancing. A summary of the pro forma debt outstanding before
and after the refinancing and a summary of the pro forma interest expense
after the refinancing (including amounts recognized in the historical
financial statements and the separate company unaudited pro forma
financial statements) are set forth in Note 5. The impact of a 1/8%
change on the effective interest rate applicable to the debt of the
combined company which is subject to changes in interest rates would be
$781 for the year ended December 31, 1998 and $585 for the nine months
ended September 30, 1999.
h) Represents the reduction of the provision for federal and state income
taxes related to the refinancing activities reflected discussed in Note
2g.
i) The calculation of the combined basic and diluted earnings per share
after refinancing adjustments is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Earnings Per Share:
Basic After Refinancing:
Net income available to common shareholders... $73,064 $57,888
Basic weighted average shares from Note 2f.... 60,247 60,247
------- -------
Basic earnings per share...................... $ 1.21 $ 0.96
======= =======
Diluted After Refinancing:
Net income available to common shareholders... $73,064 $57,888
Plus preferred stock dividends................ 18,356 13,767
Plus amortization of deferred preferred stock
issuance costs............................... 292 219
------- -------
Net income on an if-converted basis........... 91,712 71,874
Diluted weighted average shares from Note 2f.. 79,632 79,401
------- -------
Diluted earnings per share.................... $ 1.15 $ 0.91
======= =======
</TABLE>
3. SUMMARY OF NON RECURRING COSTS ASSOCIATED WITH THE TRANSACTIONS (in
thousands)
The accompanying unaudited pro forma statements of operations do not reflect
the following costs and expenses that the combined company will record at the
time of closing related to: (i) existing Building One financing arrangements
to be extinguished; and (ii) severance and office closing costs and other exit
activities costs, as a part of the transactions highlighted in Note 1.
F-96
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF NON RECURRING COSTS ASSOCIATED WITH THE TRANSACTIONS (in
thousands)--(Continued)
For pro forma financial statement purposes, these costs and expenses, net of
tax effect, have been shown as a direct reduction to the combined company's
retained earnings. However, these costs and expenses will be reflected in the
historical statements of operations of the combined company upon consummation
of the transactions and will be classified as follows:
<TABLE>
<S> <C>
Selling, General and Administrative Expenses:
Severance costs................................................... $6,000
Office closing costs and other exit activities costs.............. 1,750
------
Total charge.................................................... 7,750
Tax benefit at 39%................................................ 3,023
------
Net of tax impact............................................... $4,727
======
Extraordinary Items:
Deferred debt issue costs on Building One convertible debt........ $4,485
Deferred debt issue costs on Building One existing revolving and
term credit facility............................................. 8,658
------
13,143
Tax benefit at 39%................................................ 5,126
------
Net of tax impact................................................. $8,017
======
</TABLE>
4. RANGE OF POTENTIAL RESULTS UNDER CASH ELECTION RIGHT (amounts in thousands,
except per share data)
The accompanying unaudited pro forma financial statements have been prepared
under the assumption that the GroupMAC shareholders will elect to receive the
maximum amount of cash in exchange for their shares. Under this scenario, 100%
of the $150 million of gross proceeds from the preferred stock issuance will
be used for the cash election right, resulting in the cancellation of 11,111
shares of GroupMAC stock as discussed in Note 1c above. However, it is
possible that less than 100% of these proceeds will be required to fund the
cash election right, in which case the remaining funds could be used to either
reduce outstanding borrowings under GroupMAC's credit agreement or repurchase
shares of GroupMAC common stock on the open market. Any repurchase of shares
of GroupMAC common stock on the open market is not expected to have a material
difference on the accompanying pro forma financial information. The following
summarizes the financial impact resulting from only 50%, or $75 million, of
the gross proceeds of the preferred stock issuance required to be used for the
cash election right, with the remaining funds used to reduce outstanding
borrowings under GroupMAC's credit agreement (in each case, after
consideration of the refinancing transactions discussed in Note 1i and 1j):
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Balance Sheet:
Proceeds used to cancel shares in cash election right.......... $ 75,000
Cash election price per share.................................. $ 13.50
----------
Shares to be canceled in cash election right................... 5,556
==========
Goodwill....................................................... $1,207,023
Total assets .................................................. 2,198,208
Long-term debt................................................. 749,348
Total shareholders' equity..................................... 709,481
</TABLE>
F-97
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. RANGE OF POTENTIAL RESULTS UNDER CASH ELECTION RIGHT (amounts in thousands,
except per share data)--(Continued)
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Statements of Operations:
Operating income................................ $238,461 $185,143
Interest expense................................ (68,609) (51,457)
Net income...................................... 95,523 74,760
Net income available to common shareholders..... 76,875 60,774
Net income per share--basic..................... $ 1.17 $ 0.92
Weighted average shares--basic.................. 65,803 65,803
Net income per share--diluted................... $ 1.12 $ 0.88
Weighted average shares--diluted................ 85,188 84,957
</TABLE>
F-98
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
5. PRO FORMA INTEREST EXPENSE--PRO FORMA COMBINED COMPANY PRIOR TO REFINANCING
(in thousands)
<TABLE>
<CAPTION>
Merger Adjustments
-------------------------------------------- Pro Forma
GroupMAC Preferred Put Combined
Pro Building One Stock Conv Pref GroupMAC Company
Forma Pro Forma Issuance Stock/Debenture Merger Sr Sub Prior to Interest
Balances Balances Costs Exchange Costs Notes Refinancing Rate
-------- ------------ --------- --------------- ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Senior
Debt:
Pro Forma
September 30,
1999 Existing
Credit
Agreements--
GroupMAC.......... $218,844 $ -- $3,500 $ -- $10,615 $ 131,300 $364,259 6.88%(i)
Pro Forma
September 30,
1999 Existing
Revolving Credit
Facility--
Building One...... -- 111,499 -- -- 14,185 -- 125,684 7.73%(ii)
Pro Forma
September 30,
1999 Existing
Term Credit
Facility--
Building One...... -- 124,375 -- -- -- -- 124,375 7.73%(ii)
Commitment fees
under Credit
Facility
Agreements........ -- -- -- -- -- -- --
Letter of Credit
fees under Credit
Facility
Agreements........ -- -- -- -- -- -- --
Amortization of
deferred debt
issue costs under
Credit Facility
Agreements........ -- -- -- -- -- -- --
-------- -------- ------ ---------- ------- ---------- --------
Total long-term
senior
debt/interest
expense......... $218,844 $235,874 $3,500 $ -- $24,800 $ 131,300 $614,318 8.04%
======== ======== ====== ========== ======= ========== ======== ======
Long-Term Senior
Subordinated Debt:
Pro Forma
September 30,
1999 senior
subordinated
notes--GroupMAC... $130,000 $ -- $ -- $ -- $ -- $ (130,000) $ --
Pro Forma
September 30,
1999 senior
subordinated
notes--Building
One............... -- 200,000 -- -- -- -- 200,000 10.50%(vi)
Unamortized
balance of
discount on
Building One
senior
subordinated
notes............. -- (4,320) -- -- -- -- (4,320)
Amortization of
deferred debt
issue costs and
discount.......... -- -- -- -- -- -- --
-------- -------- ------ ---------- ------- ---------- --------
Total long-term
senior
subordinated
debt/interest
expense......... $130,000 $195,680 $ -- $ -- $ -- $ (130,000) $195,680 11.38%
======== ======== ====== ========== ======= ========== ======== ======
Long-Term Junior
Subordinated Debt:
Pro Forma
September 30,
1999 long-term
junior
subordinated
note.............. $ 1,650 $ -- $ -- $ -- $ -- $ -- $ 1,650 6.00%(viii)
Pro Forma
September 30,
1999 long-term
junior
subordinated
note.............. $ 2,500 -- -- -- -- 2,500 7.50%(viii)
-------- -------- ------ ---------- ------- ---------- --------
$ 4,150 $ -- $ -- $ -- $ -- $ -- $ 4,150 6.92%
======== ======== ====== ========== ======= ========== ======== ======
Long-Term
Convertible Junior
Subordinated Debt:
Pro Forma
September 30,
1999 long-term
convertible
junior
subordinated
debentures........ $ -- $103,190 $ -- $ (103,190) $ -- $ -- $ --
-------- -------- ------ ---------- ------- ---------- --------
$ -- $103,190 $ -- $ (103,190) $ -- $ -- $ --
======== ======== ====== ========== ======= ========== ========
Total debt/interest
expense............ $352,994 $534,744 $3,500 $ (103,190) $24,800 $ 1,300 $814,148 8.83%
======== ======== ====== ========== ======= ========== ======== ======
<CAPTION>
Pro Forma Combined Company
Prior to Refinancing
-------------------------------
Interest Expense
-------------------------------
Nine
Twelve Months Ended
Months Ended September 30,
December 31, 1998 1999
----------------- -------------
<S> <C> <C> <C>
Long-Term Senior
Debt:
Pro Forma
September 30,
1999 Existing
Credit
Agreements--
GroupMAC.......... $25,059 $18,794
Pro Forma
September 30,
1999 Existing
Revolving Credit
Facility--
Building One...... 9,717 7,288
Pro Forma
September 30,
1999 Existing
Term Credit
Facility--
Building One...... 9,615 7,211
Commitment fees
under Credit
Facility
Agreements........ 1,330(iii) 998
Letter of Credit
fees under Credit
Facility
Agreements........ 48(iv) 36
Amortization of
deferred debt
issue costs under
Credit Facility
Agreements........ 3,593(v) 2,695
----------------- -------------
Total long-term
senior
debt/interest
expense......... $49,362 $37,022
================= =============
Long-Term Senior
Subordinated Debt:
Pro Forma
September 30,
1999 senior
subordinated
notes--GroupMAC... $ -- $ --
Pro Forma
September 30,
1999 senior
subordinated
notes--Building
One............... 21,000 15,750
Unamortized
balance of
discount on
Building One
senior
subordinated
notes.............
Amortization of
deferred debt
issue costs and
discount.......... 1,276(vii) 957
----------------- -------------
Total long-term
senior
subordinated
debt/interest
expense......... $22,276 $16,707
================= =============
Long-Term Junior
Subordinated Debt:
Pro Forma
September 30,
1999 long-term
junior
subordinated
note.............. $ 99 $ 74
Pro Forma
September 30,
1999 long-term
junior
subordinated
note.............. 188 141
----------------- -------------
$ 287 $ 215
================= =============
Long-Term
Convertible Junior
Subordinated Debt:
Pro Forma
September 30,
1999 long-term
convertible
junior
subordinated
debentures........ $ -- $ --
----------------- -------------
$ -- $ --
================= =============
Total debt/interest
expense............ $71,925 $53,944
================= =============
</TABLE>
- ----
(i) Represents the interest rate on the existing GroupMAC credit facility as
reported in Note 5 to the separate company pro forma financial
statements.
(ii) Represents the interest rate on the existing Building One credit facility
as reported in Note 5 to the separate company pro forma financial
statements.
(iii) Represents the combined pro forma amounts of the commitment fees under
both the Building One and GroupMAC credit facilities based on the
borrowing levels of each company as reported in Note 5 of their
respective separate company pro forma financial statements.
(iv) Represents fees related to letter of credit commitments under the
existing GroupMAC credit facility as reported in Note 5 to the separate
company pro forma financial statements.
(v) Represents the combined pro forma amortization of deferred debt issue
costs related to the establishment of the existing credit facilities of
both GroupMAC and Building One over the existing lives of these
facilities as reported in Note 5 of their respective pro forma financial
statements.
(vi) Represents the coupon rate of interest on the Building One senior
subordinated notes as reported in the separate company pro forma interest
calculation.
(vii) Represents the pro forma amortization of the deferred debt issue costs
and the discount recorded at issuance of the existing Building One
senior subordinated notes over the ten-year life of this debt.
(viii) Represents the contractual rates on the existing issuances of junior
subordinated debt of GroupMAC as reported in Note 5 to the separate
company pro forma financial statements.
F-99
<PAGE>
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
5. PRO FORMA INTEREST EXPENSE--PRO FORMA COMBINED COMPANY (in thousands)
<TABLE>
<CAPTION>
Refinancing
Adjustments Pro Forma Combined Company
------------------- --------------------------------
Interest Expense
--------------------------------
Pro Forma
Combined Refinance New Nine
Company Existing Facility Pro Forma Twelve Months Months Ended
Prior to Revolver Fees & Combined Interest Ended September 30,
Refinancing Balances Costs Company Rate December 31, 1998 1999
----------- --------- -------- --------- -------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-Term Senior Debt:
Pro Forma September
30, 1999 Existing
Credit Agreements--
GroupMAC............... $364,259 $(364,259) $ -- $ -- $ -- $ --
Pro Forma September
30, 1999 Existing
Revolving Credit
Facility--Building
One.................... 125,684 (125,684) -- -- -- --
Pro Forma September
30, 1999 Existing Term
Credit Facility--
Building One........... 124,375 (124,375) -- -- -- --
Refinance with New
Facility--Revolver..... -- 314,318 10,200 324,518 7.50%(i) 24,339 18,254
Refinance with New
Facility--Delayed Draw
Term Loan A............ -- 130,000 -- 130,000 8.00%(ii) 10,400 7,800
Refinance with New
Facility--Term Loan
B...................... -- 170,000 -- 170,000 8.00%(iii) 13,600 10,200
Commitment fees under
Credit Facility
Agreements............. -- -- -- -- 877(iv) 658
Letter of Credit fees
under Credit Facility
Agreements............. -- -- -- -- 64(v) 48
Amortization of
deferred debt issue
costs under Credit
Facility Agreements.... -- -- -- -- 2,016(vi) 1,512
-------- --------- ------- -------- ------- -------
Total long-term
senior debt/interest
expense.............. $614,318 $ -- $10,200 $624,518 8.21% $51,296 $38,472
======== ========= ======= ======== ====== ======= =======
Long-Term Senior
Subordinated Debt:
Pro Forma September
30, 1999 senior
subordinated notes--
Building One........... $200,000 $ -- $ -- $200,000 10.50%(vii) $21,000 $15,750
Unamortized balance of
discount on Building
One senior
subordinated notes..... (4,320) -- -- (4,320)
Amortization of
deferred debt issue
costs and discount..... -- -- -- -- 1,276(viii) 957
-------- --------- ------- -------- ------- -------
Total long-term
senior subordinated
debt/interest
expense.............. $195,680 $ -- $ -- $195,680 11.38% $22,276 $16,707
======== ========= ======= ======== ====== ======= =======
Long-Term Junior
Subordinated Debt:
Pro Forma September
30, 1999 long-term
junior subordinated
note................... $ 1,650 $ -- $ -- $ 1,650 6.00%(ix) $ 99 $ 74
Pro Forma September
30, 1999 long-term
junior subordinated
note................... 2,500 -- 2,500 7.50%(ix) 188 141
-------- --------- ------- -------- ------- -------
$ 4,150 $ -- $ -- $ 4,150 6.92% $ 287 $ 215
======== ========= ======= ======== ====== ======= =======
Total debt/interest
expense................. $814,148 $ -- $10,200 $824,348 8.96% $73,859 $55,394
======== ========= ======= ======== ====== ======= =======
</TABLE>
- ----
(i) Represents interest rate on the new revolving credit facility calculated
as base rate of 5.5% plus applicable margin of 2.0%.
(ii) Represents interest rate on the new delayed draw term loan A credit
facility calculated as base rate of 5.5% plus applicable margin of 2.5%.
(iii) Represents interest rate on the new term loan B credit facility
calculated as base rate of 5.5% plus applicable margin of 2.5%.
(iv) Represents commitment fees under the new credit facilities based on a
rate of 0.5% on the amount available under the new credit facilities
after reflecting pro forma borrowings.
(v) Represents letter of credit fees on pro forma borrowings of $3,190 under
letter of credit agreements at an annual rate of 2.0%.
(vi) Represents amortization over the terms of the respective credit
facilities of deferred debt issuance costs relating to establish of these
new credit facilities.
(vii) Represents the coupon rate of interest on the Building One senior
subordinated notes as reported in Note 5 to the separate company pro
forma financial statements.
(viii) Represents the pro forma amortization of the deferred debt issue costs
and the discount recorded at issuance of the existing Building One
senior subordinated notes over the ten-year life of this debt.
(ix) Represents the contractual rates on the existing issuances of junior
subordinated debt of GroupMAC as reported in Note 5 to the separate
company pro forma financial statements.
F-100
<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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 19, 1998
F-101
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 425 $ 4
Marketable securities............................................ 36 128
Accounts receivable, net of an allowance for doubtful accounts of
$295 and $333, respectively..................................... 1,614 4,044
Other receivable................................................. 46 88
Related party receivable......................................... 169
Employee receivables............................................. 5 75
Prepaid expenses................................................. 92 59
------ ------
Total current assets......................................... 2,218 4,567
Property and equipment, net...................................... 1,159 2,333
Deposits......................................................... 26 27
Intangibles...................................................... 167 202
------ ------
Total assets................................................. $3,570 $7,129
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Bank line of credit.............................................. $ $1,250
Current maturities, long-term debt............................... 165 373
Current obligations, capital leases.............................. 43
Accounts payable................................................. 954 1,738
Accrued liabilities.............................................. 452 503
Federal payroll tax payable...................................... 341
Income taxes payable............................................. 19 53
------ ------
Total current liabilities.................................... 1,974 3,917
Long-term debt................................................... 94 730
Capital lease obligations........................................ 100
------ ------
Total liabilities............................................ 2,168 4,647
Commitments
Stockholder's equity:
Common stock, Service Management USA, Inc., $1 par value, 1,000
shares authorized, issued and outstanding..................... 1 1
Common stock, Diversified Management Services USA, Inc., no par
value, 200 shares authorized, issued and outstanding.......... 152 152
Interstate Building Services, LLC.............................. 27
Additional paid-in capital..................................... 110 110
Retained earnings.............................................. 1,139 2,192
------ ------
Total stockholder's equity................................... 1,402 2,482
------ ------
Total liabilities and stockholder's equity................... $3,570 $7,129
====== ======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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.
/s/ KPMG LLP
KPMG LLP
Orlando, Florida
February 16, 1998
F-111
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 2,734,000 $ 1,333,571
Certificates of deposit............................ 46,101 --
Accounts receivable (note 2)....................... 13,423,658 16,873,473
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3)................. 1,116,186 2,401,919
Inventories........................................ 287,136 379,543
Prepaid expenses................................... 588,310 831,859
Deferred income taxes (note 6)..................... 443,972 --
Refundable income taxes............................ 1,276 658,698
------------ -----------
Total current assets............................... 18,640,639 22,479,063
------------ -----------
Property, plant and equipment, at cost (note 5):
Leasehold improvements............................. 1,012,292 1,098,838
Autos, trucks and trailers......................... 1,681,540 1,618,478
Office furniture and equipment..................... 1,932,148 2,543,219
Shop tools and equipment........................... 1,065,898 860,513
Capitalized equipment leases (notes 5 and 13)...... 712,596 705,758
------------ -----------
6,404,474 6,826,806
Less accumulated depreciation and amortization..... (3,841,367) (4,313,431)
------------ -----------
Net property, plant and equipment.................. 2,563,107 2,513,375
------------ -----------
Other assets:
Advances to stockholders (note 9).................. 550,768 607,168
Other ............................................. 66,141 230,553
Advances to joint venture partner (note 12)........ 60,000 --
------------ -----------
676,909 837,721
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable (note 4)............................. $ 2,530 $ 30
Current maturities of long-term debt and
capitalized lease obligations (note 5)............ 490,374 237,544
Accounts payable................................... 3,630,900 5,414,432
Accrued salaries and wages......................... 1,332,014 1,527,555
Accrued expenses................................... 1,708,451 1,406,199
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 3)................. 4,375,530 7,045,641
Due to stockholders................................ 155,253 --
------------ -----------
Total current liabilities.......................... 11,695,052 15,631,401
Long-term debt and capitalized lease obligations,
less current maturities (note 5)................... 556,139 252,238
Deferred income taxes (note 6)...................... 45,025 --
------------ -----------
Total liabilities.................................. 12,296,216 15,883,639
------------ -----------
Minority interest in joint ventures (note 12)....... 184,072 135,832
------------ -----------
Stockholders' equity:
Common stock, 10,000 shares authorized, issued and
outstanding, at $1 par value...................... 10,000 10,000
Additional paid-in capital......................... 111,827 111,827
Retained earnings.................................. 9,278,540 9,688,861
------------ -----------
Total stockholders' equity......................... 9,400,367 9,810,688
Commitments and contingencies (notes 7 and 9).......
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-112
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned............... $71,977,018 $63,852,151 $79,492,578
Cost of revenues earned................ 63,321,626 51,904,661 63,550,836
----------- ----------- -----------
Gross profit......................... 8,655,392 11,947,490 15,941,742
Selling, general and administrative
expenses.............................. 6,994,448 9,017,708 8,986,018
Depreciation expense................... 949,800 944,325 939,103
----------- ----------- -----------
Income from operations............... 711,144 1,985,457 6,016,621
----------- ----------- -----------
Other income (expense):
Interest income....................... 66,979 67,318 168,039
Interest expense...................... (223,389) (196,604) (52,983)
Other income (expense), net........... 477,561 (50,455) (25,576)
----------- ----------- -----------
Other income (expense), net.......... 321,151 (179,741) 89,480
----------- ----------- -----------
Income before income taxes........... 1,032,295 1,805,716 6,106,101
Income tax expense (note 6)............ 487,252 679,856 461,879
----------- ----------- -----------
Net income before minority interest.. 545,043 1,125,860 5,644,222
Minority interest in joint venture
income (note 12)...................... (71,419) (104,584) (134,535)
----------- ----------- -----------
Net income .......................... $ 473,624 $ 1,021,276 $ 5,509,687
=========== =========== ===========
Unaudited pro forma information (Note
1):
Income before income taxes............. $ 6,106,101
Pro forma provision for income taxes... 2,442,440
-----------
Pro forma net income (unaudited)....... $ 3,663,661
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-113
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained stockholders'
Stock capital earnings equity
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995...... $10,000 $111,827 $ 7,783,640 $ 7,905,467
Net income....................... -- -- 473,624 473,624
------- -------- ----------- -----------
Balances at December 31, 1995.... 10,000 111,827 8,257,264 8,379,091
Net income....................... -- -- 1,021,276 1,021,276
------- -------- ----------- -----------
Balances at December 31, 1996.... 10,000 111,827 9,278,540 9,400,367
Net income....................... -- -- 5,509,687 5,509,687
Distributions to stockholders.... -- -- (5,099,366) (5,099,366)
------- -------- ----------- -----------
Balances at December 31, 1997.... $10,000 $111,827 $ 9,688,861 $ 9,810,688
======= ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-114
<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
activities........................... (1,181,007) (258,641) (996,026)
---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-115
<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
assets.................................. -- 734,013 --
Proceeds from (repayment of)
notes payable........................... 249,180 (1,081,500) (2,500)
Distributions to shareholders............ -- -- (5,099,366)
---------- ----------- ----------
Net cash provided by (used in)
financing activities.................. 756,351 (1,501,487) (5,658,597)
---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents...................... 530,919 1,432,291 (1,400,429)
Cash and cash equivalents at beginning of
year..................................... 770,790 1,301,709 2,734,000
---------- ----------- ----------
Cash and cash equivalents at end of year.. $1,301,709 $ 2,734,000 $1,333,571
========== =========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest............................... $ 223,389 $ 196,604 $ 52,983
========== =========== ==========
Income taxes........................... $ 225,274 $ 1,984,369 $ 720,355
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-116
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Tri-City Electrical Contractors, Inc. (the Company) is an electrical
contractor engaged in designing and installing electrical systems in the
commercial, industrial and residential construction markets. The Company is
headquartered in Altamonte Springs, Florida and operates branch locations in
Pompano Beach, Tampa and Fort Myers, Florida. The Company conducts all of its
business within the state of Florida.
As further described in Note 14, the Company entered into a Letter of Intent
with Consolidation Capital Corporation for the potential sale of the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
B&S Diversified, Inc. and B&S Diversified, Inc. #2. B&S Diversified, Inc. and
B&S Diversified, Inc. #2 are joint ventures in which the Company has a 75%
interest as to profits and losses. All significant intercompany transactions
between the entities have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both
readily convertible into known amounts of cash and are so near their maturity
that they present insignificant risk of changes in value because of changes in
interest rates. For purposes of the statement of cash flows, the Company
considers such investments with a maturity of three months or less to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
(e) Income Taxes
Until December 31, 1996, the Company followed the asset and liability method
in which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Effective January 1, 1997, the Company's stockholders elected to be taxed
under the provisions of sub-chapter S of the Internal Revenue Code. Under
these provisions, the stockholders will include in their individual income tax
returns their pro rata shares of the Company's revenue and expenses.
The unaudited pro forma federal and state income tax information included in
the Statements of Operations is presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", as if
the Company had been subject to federal and state income taxes as a C
corporation rather than under the provisions of a sub-chapter S corporation
for 1997.
(f) Contract Revenue Recognition and Contract Costs
Contract revenues are recognized on the percentage-of-completion method.
Under this method, the percentage of completion of each job is the portion of
the costs incurred to date compared to current estimates of total cost. This
percentage is applied to the total contract price to determine the amounts of
revenue earned on fixed price contracts. Revenues from cost plus contracts are
recognized on the basis of costs incurred during the period plus the fee
earned. At the time a loss on a contract becomes known, the entire amount of
the estimated loss is recorded. The Company does not recognize any gross
profit amounts related to change order work performed until such time as those
change orders have been approved by the customer.
F-117
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Organization and Summary of Significant Accounting Policies--(Continued)
Contract costs include all direct and indirect costs related to job
performance. Selling, general and administrative costs are charged to expense
as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents contract billings in excess of revenues
recognized.
(g) Depreciation and Amortization
Depreciation and amortization is provided in amounts sufficient to allocate
the cost of depreciable or amortizable assets to operations over their
estimated service lives using the straight-line method for financial statement
reporting purposes. The straight-line, declining balance, Accelerated Cost
Recovery System and Modified Accelerated Cost Recovery System methods are used
for income tax reporting.
The estimated service lives for financial reporting purposes are generally
as follows:
<TABLE>
<S> <C>
Leasehold improvements......................................... 3-15 years
Autos, trucks and trailers..................................... 5 years
Office furniture and equipment................................. 3-10 years
Shop tools and equipment....................................... 5 years
</TABLE>
(h) Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform with the 1997 presentation.
(i) Significant Group Concentration of Credit Risk
As of December 31, 1997 and 1996, substantially all of the Company's
receivables are obligations of companies in the construction business. The
Company does not require collateral or other security on most of these
accounts. The credit risk on these accounts is controlled through credit
approvals, lien rights and payment bonds issued on behalf of general
contractors, limits and monitoring procedures.
(j) Use of Estimates
In conformity with generally accepted accounting principles, management of
the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of these consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates (see note 3).
(k) Financial Instruments
Balance Sheet Financial Instruments--The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, certificates of
deposit, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for the Company's
notes payable and long-term debt approximate fair value because the
instruments are variable rate notes which reprice frequently.
F-118
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Organization and Summary of Significant Accounting Policies--(Continued)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(2) Accounts Receivable
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts including retentions........... $ 1,329,411 $ 1,356,146
Contracts in progress:
Current billings................................. 8,325,388 10,649,975
Retentions....................................... 3,681,338 5,069,366
Other.............................................. 97,621 162,399
----------- -----------
13,433,758 17,237,886
Less allowance for doubtful accounts............... (10,100) (364,413)
----------- -----------
$13,423,658 $16,873,473
=========== ===========
</TABLE>
The provisions for doubtful accounts of $113,100, $10,000 and $354,313 have
been included in selling, general and administrative expenses in the
accompanying consolidated 1995, 1996 and 1997 statements of operations,
respectively.
(3) Contracts in Progress
Contracts in progress are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $71,670,443 $73,320,138
Estimated earnings................................. 9,327,198 11,651,629
----------- -----------
80,997,641 84,971,767
Less billings to date.............................. 84,256,985 89,615,489
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
F-119
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Contracts in Progress--(Continued)
Included in the consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 1,116,186 $ 2,401,919
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (4,375,530) (7,045,641)
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
As of December 31, 1995, 1996 and 1997, the Company had unapproved change
orders of approximately $3,284,000, $3,162,000 and $3,163,000, respectively,
which are recorded without profit recognition as a component of contract
revenue in the accompanying consolidated statements of operations.
(4) Notes Payable
The Company has lines of credit arrangements with two banks under which it
may borrow, on an unsecured basis, up to an aggregate of $3,000,000 as of
December 31, 1997, with interest that approximates the banks' prime rate (8
1/2% at December 31, 1997). As of December 31, 1997, the Company also has a
line of credit arrangement with one bank under which it can borrow up to an
additional $1,000,000 with interest that approximates the bank's prime rate
plus 1% (8 1/2% at December 31, 1997, the total balances outstanding under
these lines of credit were $2,530 and $30 at December 31, 1996 and 1997,
respectively.
These note agreements each contain a provision restricting the payment of
dividends and transfer of ownership of the Company without the prior written
consent of the lenders. Written consent of the lenders was obtained by the
Company subsequent to December 31, 1997.
(5) Long-term Debt and Capitalized Lease Obligations
Long-term debt and capitalized lease obligations are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
---------- --------
<S> <C> <C>
Capitalized equipment lease obligations, related to
certain vehicles and equipment, payable in 26 to 51
equal monthly principal installments plus interest at
the commercial paper rate plus .9% maturing on
various dates through February, 2001................. $ 734,013 $489,782
Installment note payable to a bank with original
balance of $500,000 payable in 24 equal monthly
installments of $20,833 with interest at bank's prime
rate plus 1/2% (8 1/4% at December 31, 1996). The
balance of the note payable was repaid during 1997... 312,500 --
---------- --------
1,046,513 489,782
Less current maturities.............................. 490,374 237,544
---------- --------
$ 556,139 $252,238
========== ========
</TABLE>
F-120
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Long-term Debt and Capitalized Lease Obligations--(Continued)
Maturities of and capitalized lease obligations for years ending after
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $237,932
1999................................................................ 198,097
2000................................................................ 51,910
2001................................................................ 1,843
--------
$489,782
========
</TABLE>
(6) Income Taxes
The provision for income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1996 1997
----------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 1,310,717 $575,502 $ --
State...................................... 223,826 98,222 --
----------- -------- --------
1,534,543 673,724 --
----------- -------- --------
Deferred:
Federal.................................... (891,740) 5,235 415,690
State...................................... (155,551) 897 46,189
----------- -------- --------
(1,047,291) 6,132 461,879
----------- -------- --------
Total income tax expense..................... $ 487,252 $679,856 $461,879
=========== ======== ========
</TABLE>
The tax effect of temporary differences between the income tax basis of
assets and liabilities and the financial statement reporting amounts which
result in the recognition of deferred tax assets and liabilities as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Deferred tax assets:
Bad debts................................................ $ 3,434
Accrued losses on long-term construction contracts....... 503
Workers' compensation self insurance reserves............ 380,387
Deferred compensation.................................... 128,727
Reserve for loss contracts............................... 84,520
Tax reported asset sale-gains............................ 8,059
---------
Total deferred tax assets.............................. 605,630
---------
Deferred tax liabilities:
Deferred profit on contracts............................. (153,599)
Depreciation............................................. (19,362)
Other.................................................... (33,722)
---------
Total deferred tax liabilities......................... (206,683)
---------
Net deferred tax assets................................ $ 398,947
=========
</TABLE>
F-121
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Income Taxes--(Continued)
Presented in the accompanying consolidated balance sheet as of December 31,
1996:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Current assets............................................ $443,972
Noncurrent liabilities.................................... (45,025)
--------
$398,947
========
</TABLE>
No valuation allowance has been recognized in the accompanying consolidated
financial statements for the deferred tax assets as of December 31, 1996 or
1995 because the Company has sufficient taxable income within the statutory
carryback periods.
Effective January 1, 1997, the Company elected, by consent of its
stockholders, to be taxed under the provisions of subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal or
state corporate income taxes on its taxable income. Instead, the stockholders
include in their individual income tax return the Company's taxable income or
loss.
The Company incurred an income tax liability associated with built-in gains
at the time of the conversion to "S" corporation status. Built-in gains
represent the excess of the fair market value of the S corporation's assets at
the effective date of the S corporation election over the aggregate adjusted
tax basis of those assets at that date. Taxes associated with the built-in
gains were charged to operations during the year ended December 31, 1997.
The balances of deferred tax assets and liabilities as of December 31, 1996,
net of the tax associated with the built-in gains referred to above, were also
charged to operations during the year ended December 31, 1997 resulting in the
1997 provision for income taxes.
The actual expense for 1995 and 1996 differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
income before income taxes) as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Computer "expected" tax expense........................ $350,980 $613,978
Nondeductible expenses................................. 17,309 39,867
State income taxes, net of federal tax effect.......... 45,062 63,291
Settlement of investment in partnerships at amounts
different than accrued................................ 86,220 --
Computed taxes attributable to minority interest
portion of income before taxes........................ (24,282) (35,559)
Other, net............................................. 11,963 (1,721)
-------- --------
$487,252 $679,856
======== ========
</TABLE>
(7) Leases
The Company leases their Pompano Beach and Fort Myers facilities from third
parties. The remainder of the facilities are leased from a related party, as
more fully described in note 9. These leases have been classified as operating
leases.
F-122
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Leases--(Continued)
The Company also leases a portion of their fleet vehicles for a period of
five years from acquisition of the vehicles. These leases are cancelable after
one year and, accordingly, are classified as operating leases.
The following is a schedule of future minimum lease payments required under
operating leases, including those with related parties as more fully described
in note 9, that have initial or remaining noncancelable lease terms in excess
of one year at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $863,214
1999.............................................................. 523,419
2000.............................................................. 410,068
2001.............................................................. 269,205
2002 and thereafter............................................... 83,487
----------
$2,149,393
==========
</TABLE>
Rental expense for operating leases was $474,668, $683,594 and $902,239 for
the years ended December 31, 1995, 1996 and 1997, respectively.
(8) 401(K) Employees' Profit Sharing Plan
The Company has a 401(K) profit sharing plan under which voluntary employee
contributions are permissible from eligible employees who elect to participate
in the plan. The Company's contribution is determined annually by the Board of
Directors. Contributions made by the Company were $23,263, $104,888 and
$116,768 for the years ended December 31, 1995, 1996, and 1997, respectively.
(9) Related Party Transactions
The Company leases its Altamonte Springs and Tampa facilities from its
principal shareholder. The Altamonte Springs lease agreement requires base
monthly payments of $30,509. For each year after the first year, the lease
payment will be upwardly adjusted by the greater of the increase in the
Consumer Price Index or three percent. The lease requires the Company to
provide insurance, repairs and maintenance, and taxes on the leased property.
The lease expires in 1998. The Tampa lease agreement requires monthly payments
of $3,000 and expires in 1999.
The Company is guarantor of two loans in the name of the principal
stockholder to finance the Company's Altamonte Springs and Tampa facilities.
The total amount borrowed under the two loan agreements was $1,274,000. The
principal amounts of the loans outstanding at December 31, 1996 and 1997 were
$823,600 and $732,150, respectively.
Amounts due from a trust in the name of its principal stockholder at
December 31, 1996 and 1997, were $550,768 and $607,168, respectively. These
amounts are included in advances from stockholders on the accompanying
consolidated balance sheets and arise from the Company paying expenses on
behalf of the trust.
F-123
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Backlog
The following is a reconciliation of backlog work to be performed under
signed contracts in existence at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
(millions)
----------
<S> <C>
Balance, December 31, 1996........................................ $ 37.0
Contract adjustments and new contracts............................ 117.1
Less: Contract revenue earned, 1997............................... 79.5
------
Balance, December 31, 1997........................................ $ 74.6
======
</TABLE>
In addition, between January 1 and January 31, 1998, the Company entered
into additional contracts totaling approximately $8.3 million.
(11) Environmental Remediation
During 1993, the Company incurred costs for remediation in connection with
efforts to clean up a petroleum product contamination at its Altamonte
Springs, Florida facilities. The Company applied for and received approval for
reimbursement of $302,890 under the Florida Petroleum Liability Insurance and
Restoration program. As of December 31, 1996 and 1997, $222,299 of the total
approved reimbursement has been collected and $80,591 remains outstanding and
is included in accounts receivable in the accompanying consolidated balance
sheet.
(12) Minority Interest
The Company is party to two joint ventures with B&S Diversified, Inc., in
connection with two specified contracts. The venture agreements provide for
sharing of profits at 75% to the Company and 25% to the joint venture partner.
All transactions related to the ventures have been consolidated in the
accompanying consolidated financial statements and all significant
intercompany balances have been eliminated.
(13) Sale-Leaseback Transactions
On December 31, 1996 the Company completed a transaction wherein seventy-
five of the vehicles the Company had owned with a net book value of $712,596
at the date of the transaction, were sold to a leasing company for the sum of
$734,013 resulting in a gain of $21,417.
The Company immediately entered into individual lease agreements for each of
the vehicles with terms ranging from twenty-six to fifty-one months and with
interest accruing at .9% over the commercial paper rate (5.8% at December 31,
1997) payable monthly on the outstanding unamortized cost of the leased asset.
The gain realized on the transaction is to be amortized over the respective
lease terms for each of the individual vehicles.
(14) Subsequent Event
Subsequent to December 31, 1997, the stockholders of the Company entered
into an agreement to sell their shares of the Company to Consolidation Capital
Corporation ("CCC"), a public company, for cash and shares of CCC common
stock. Simultaneous with the transaction, the Company will become a C-
corporation and its income will be taxed at the corporate level (as it was in
1996 and prior years) rather than be included in the income tax returns of the
stockholders.
F-124
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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.
/s/ Barry and Moore, P.C.
Barry and Moore, P.C.
Phoenix, Arizona
January 30, 1998
F-125
<PAGE>
WILSON ELECTRIC COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
November 30,
------------------------------------- February
1995 1996 1997 28, 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................... $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 20,193
Contracts receivable
(Notes 3 and 5)......... 8,542,419 11,308,641 14,085,329 11,665,106
Costs and estimated earn-
ings in excess of bill-
ings on uncompleted con-
tracts (Note 4)......... 565,702 1,225,288 1,301,651 2,916,870
Notes receivable......... 37,975 -- 59,824 57,410
Deferred income taxes
(Note 11)............... -- -- 115,760 115,760
Prepaid expenses and
other current assets.... 13,579 105,835 57,866 242,137
----------- ----------- ----------- -----------
Total current assets... 10,917,627 16,025,230 16,662,215 15,017,476
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
(Note 5)
Equipment................ 161,328 223,263 340,632 376,251
Automobiles & trucks..... 474,589 521,007 564,579 566,054
Office equipment......... 60,834 97,093 126,525 154,512
Furniture................ 7,904 16,318 23,630 23,630
Computer equipment &
software................ 130,015 138,923 415,226 445,590
Leasehold Improvements... -- -- 15,090 --
----------- ----------- ----------- -----------
834,670 996,604 1,485,682 1,566,037
Less accumulated depre-
ciation............... (430,028) (562,403) (781,312) (851,119)
----------- ----------- ----------- -----------
Property and equipment,
net................... 404,642 434,201 704,370 714,918
SHW JOINT VENTURE, (Note
10)....................... 468,408 422,641 -- --
OTHER ASSETS............... 19,651 23,227 136,160 977,346
GOODWILL, (net of $13,500,
$10,500 and $7,500 of am-
ortization) (Note 9)...... 16,500 13,500 10,500 9,750
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......... $ 2,242,295 $ 4,875,340 $ 4,588,823 $ 3,936,028
Billings in excess of
costs and estimated
earnings on
uncompleted contracts
(Note 4)................ 2,312,092 3,211,141 3,401,706 2,320,983
Accrued liabilities...... 292,637 468,575 428,838 463,965
Accrued payroll and re-
lated taxes............. 2,785,396 2,348,590 2,914,098 1,868,262
Accrued contribution to
Employee Stock Ownership
Plan (Note 6)........... 665,410 1,358,147 536,299 1,558,757
Note Payable ((Notes 5
and 6).................. -- -- 183,333 1,100,000
Employee Stock Ownership
Plan note payable
(Note 6)................ 149,625 2,000,000 -- --
Less--Accrued
contribution included
above................. (149,625) (1,358,147) -- --
----------- ----------- ----------- -----------
Total current
liabilities......... 8,297,830 12,903,646 12,053,097 11,247,995
----------- ----------- ----------- -----------
COMMITMENTS (Notes 5
and 7).................... -- -- --
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par
value; authorized
1,000,000 shares, issued
and outstanding 10,000.. 10,000 10,000 10,000 10,000
Additional paid-in capi-
tal..................... 265,950 265,950 265,950 265,950
Retained earnings........ 3,253,048 4,381,056 5,184,198 5,195,545
Employee Stock Ownership
Plan note payable (Note
6)...................... (149,625) (2,000,000) -- --
Accrued contribution in-
cluded in current lia-
bilities................ 149,625 1,358,147 -- --
----------- ----------- ----------- -----------
Total stockholders'
equity.............. 3,528,998 4,015,153 5,460,148 5,471,495
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-126
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the three months
For the years ended November 30, ended February 28,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES....... $ 40,279,206 $ 49,790,214 $ 71,008,958 $ 15,436,341 $ 17,243,732
COST OF CONTRACT
REVENUES............... (29,935,382) (37,729,341) (59,036,426) (12,719,276) (14,568,353)
------------ ------------ ------------ ------------ ------------
GROSS PROFIT............ 10,343,824 12,060,873 11,972,532 2,717,065 2,675,379
------------ ------------ ------------ ------------ ------------
EXPENSES:
General and
administrative
expenses ............ 6,317,716 7,281,252 8,093,230 1,385,359 1,654,772
ESOP contribution
(Note 6)............. 1,981,828 2,957,797 2,421,164 656,114 1,014,546
------------ ------------ ------------ ------------ ------------
Total expenses...... 8,299,544 10,239,049 10,514,394 2,041,473 2,669,318
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS.. 2,044,280 1,821,824 1,458,138 675,592 6,061
OTHER INCOME (EXPENSE):
Interest income....... 20,919 89,593 157,634 96,703 90,040
Interest expense...... (4,439) (82,404) (109,581) (38,952) (13,122)
Other income
(expense)............ 6,235 101,820 (78,548) 36,558 17,143
------------ ------------ ------------ ------------ ------------
Net other income
(expense).......... 22,715 109,009 (30,495) 94,309 94,061
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES.................. 2,066,995 1,930,833 1,427,643 769,901 100,122
PROVISION FOR INCOME
TAXES (Note 11)........ (811,730) (802,825) (624,501) (212,500) (88,775)
------------ ------------ ------------ ------------ ------------
NET INCOME.............. 1,255,265 1,128,008 803,142 557,401 11,347
RETAINED EARNINGS,
Beginning of year...... 1,997,783 3,253,048 4,381,056 4,381,056 5,184,198
------------ ------------ ------------ ------------ ------------
RETAINED EARNINGS, End
of year................ $ 3,253,048 $ 4,381,056 $ 5,184,198 4,938,457 5,195,545
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-127
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months
For the years ended November 30, ended February 28,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........... $ 1,255,265 $ 1,128,008 $ 803,142 $ 557,401 $ 11,347
----------- ----------- ----------- ----------- -----------
Adjustments to
reconcile net income
to net cash provided
by (used for)
operations--
Depreciation and
amortization...... 104,364 154,621 232,324 42,944 71,307
(Gain) Loss on sale
of assets......... 12,780 (1,447) 2,255 -- --
SHW Joint Venture
(income) loss..... -- (96,733) 80,641 -- --
(Increase) decrease
in:
Contracts
receivable........ (1,108,920) (2,766,221) (2,776,688) 65,155 2,420,223
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts......... 64,168 (659,586) (76,363) (289,265) (1,615,219)
Notes receivable... 14,275 37,975 (59,824) (50,000) 2,414
Prepaid expenses... 20,695 (92,256) 47,969 93,449 (184,271)
Other assets....... (5,325) (3,651) (113,008) (496,352) (841,186)
Deferred Income
Taxes............. -- -- (115,760) -- --
Increase (decrease)
in:
Accounts payable... (933,811) 2,633,045 (286,517) (122,397) (652,795)
Billings in excess
of costs and
estimated earnings
on uncompleted
contracts......... 1,403,358 899,049 190,565 336,567 (1,080,723)
Accrued
liabilities....... (180,580) 175,938 (39,737) 14,076 35,127
Accrued payroll and
related taxes..... 1,149,901 (436,806) 565,508 (205,815) (1,045,836)
Accrued pension
contribution...... (1,101,364) 692,737 (821,848) (1,663,021) 1,022,458
----------- ----------- ----------- ----------- -----------
Net adjustments to
reconcile net income
to net cash (used
for) provided by
operations.......... (560,459) 536,665 (3,170,483) (2,274,659) (1,868,501)
----------- ----------- ----------- ----------- -----------
Net cash (used
for) provided by
operating
activities...... 694,806 1,664,673 (2,367,341) (1,717,258) (1,857,154)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of
equipment........... (243,149) (181,509) (502,423) (80,201) (81,105)
Distribution from SHW
Joint Venture....... -- 142,500 342,000 -- --
Proceeds on sale of
equipment........... 8,093 1,850 750 -- --
Loan to ESOP......... -- -- (2,000,000) (2,000,000) --
Repayments of loan to
ESOP................ -- -- 2,000,000 2,000,000 --
----------- ----------- ----------- ----------- -----------
Net cash flows
used for
investing
activities...... (235,056) (37,159) (159,673) (80,201) (81,105)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings........... -- -- 2,000,000 2,000,000 1,100,000
Repayment of
borrowings.......... -- -- (1,816,667) (333,333) (183,333)
----------- ----------- ----------- ----------- -----------
Net cash flows
provided by
financing
activities........ -- -- 183,333 1,666,667 916,667
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH............... 459,750 1,627,514 (2,343,681) (130,792) (1,021,592)
CASH AND CASH
EQUIVALENTS, Beginning
of year............... 1,298,202 1,757,952 3,385,466 3,385,466 1,041,785
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, End of
year.................. $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 3,254,674 $ 20,193
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-128
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1995, 1996 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Wilson Electric Company, Inc. (the "Company") was incorporated on May 24,
1988 and performs electrical contracting services throughout Arizona. The
significant accounting policies of the Company are as follows:
Cash and Cash Equivalents--
Cash equivalents consist of investments in highly liquid investments with
maturities of three months or less, and at November 30, 1996 and 1997,
included restricted cash of $184,330 and $770,297, respectively.
Revenue and Cost Recognition--
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the actual costs incurred to date compared to
estimated total cost for each contract. Revenue recognition commences only
after contract progress reaches a state where experience is sufficient to
estimate a profit on the contract. At the time a loss on a contract becomes
known, the entire amount of the estimated loss is recognized.
Contract costs include all direct material, labor and employee benefit costs
and indirect costs related to contract performance, such as indirect labor,
equipment rentals, insurance and tools. Selling and most general and
administrative costs are charged to expense as incurred. Changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and revenues, and are recognized in the period in which the
revisions are determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
Depreciation--
Property and equipment are carried at cost. Depreciation of property and
equipment is determined using straight-line and accelerated methods of
depreciation for financial statement purposes at rates based on the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures......................................... 5-10 years
Computer equipment and software................................ 3- 5 years
Shop equipment................................................. 3- 5 years
Automotive equipment........................................... 3- 5 years
</TABLE>
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repair are charged to expense as incurred.
Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-129
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(Continued)
Advertising Expense--
The Company expenses advertising costs as incurred. Advertising expenses
were $61,438, $96,441 and $127,303 in 1995, 1996 and 1997, respectively.
Unaudited Interim Financial Statements--
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustment, necessary for a fair
presentation of the financial position of the Company at February 28, 1998,
and the results of its operations and its cash flows for the three months
ended February 28, 1997 and February 28, 1998, as presented in the
accompanying unaudited interim financial statements.
(2) SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes paid................ $ 921,180 $ 876,819 $ 752,833
Interest paid.................... $ 4,439 $ 82,404 $ 84,581
(3) CONTRACTS RECEIVABLE:
Contracts receivable consist of the following:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Completed contracts.............. $ 1,873,011 $ 897,193 $ 779,037
Contracts in progress............ 5,065,980 8,632,012 10,698,107
Unbilled completed contracts..... 56,668 152,600 143,000
Retainages....................... 1,556,760 1,636,836 2,475,185
Less: Allowance for doubtful
accounts........................ (10,000) (10,000) (10,000)
------------ ------------ ------------
$ 8,542,419 $11,308,641 $14,085,329
============ ============ ============
(4) CONTRACTS IN PROCESS:
Information with respect to contracts in process follows:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expenditures on uncompleted
contracts....................... $18,300,419 $22,081,105 $50,660,947
Estimated earnings thereon....... 4,095,848 3,920,520 6,378,912
------------ ------------ ------------
22,396,267 26,001,625 57,039,859
Less billings applicable
thereto......................... 24,142,657 27,987,478 59,139,914
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
Included in the accompanying balance sheet under the following captions:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... $ 565,702 $ 1,225,288 $ 1,301,651
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... (2,312,092) (3,211,141) (3,401,706)
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
</TABLE>
F-130
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(5) NOTE PAYABLE AND LINE OF CREDIT:
As of November 30, 1995, 1996 and 1997, the Company had a line of credit
with Norwest Bank in the amount of $2,500,000, $3,000,000 and $4,000,000,
respectively. Interest was 9.75%, 9.25% and 8.50% at November 30, 1995, 1996
and 1997, respectively. The collateral for the line of credit is a first lien
position on all accounts and contracts receivable, inventory, equipment,
vehicles, furniture and fixtures. There were no borrowings against this line
at November 30, 1995, 1996 and 1997, respectively.
The agreement requires the Company to maintain certain ratios and minimums.
In January, 1997, the Company borrowed $2,000,000 and then loaned the
proceeds to the Employee Stock Ownership Plan. The loan is payable in minimum
monthly payments of $83,333, together with interest at the prime rate.
(6) EMPLOYEE STOCK OWNERSHIP PLAN:
Effective December 1, 1992 the Company established an employee stock
ownership Plan (ESOP) covering substantially all of its employees. Company
contributions to the Plan are determined annually by management.
During fiscal year 1994, the ESOP used the proceeds of a loan guaranteed by
the Company to purchase 1,900 shares of the Company's common stock for
$2,280,000. The loan was paid in full during the fiscal year 1995.
During fiscal year 1996, the ESOP purchased 2,500 shares of the Company's
common stock for $3,500,000. The ESOP made cash payments totaling $1,500,000
and issued $2,000,000 of notes due November 1, 1997.
In January, 1997, the Company borrowed $2,000,000 and loaned the funds to
the ESOP for the repayment of its $2,000,000 of notes. During the year ended
November 30, 1997, the Company accrued contributions to the ESOP sufficient to
allocate the remaining shares, and accordingly reduced the loan to the ESOP to
zero.
Generally accepted accounting principles require the following:
1) For loans made to the ESOP by someone other than the Company (a direct
loan), the loan balance is reported as a liability and a deduction in the
stockholders' equity section of the Company. At November 30, 1996, the loan
to the ESOP was a direct loan, as the loan was payable to the selling
shareholders.
2) For loans made to the ESOP by the Company, the Company does not report a
loan receivable from the ESOP. Instead, the loan receivable is reported as
a deduction in the stockholder's equity section and is reduced to the
extent accrued Company contributions to the ESOP releases shares.
Information with respect to the allocation of common shares is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Allocated........................................... 4,900.0 5,971.4 7,400.0
Committed to be released............................ -- 1,428.6 0.0
------- ------- -------
Total............................................. 4,900.0 7,400.0 7,400.0
======= ======= =======
</TABLE>
F-131
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(6) EMPLOYEE STOCK OWNERSHIP PLAN:--(Continued)
The fair values for shares allocated and committed to be released is based
upon the latest appraisal available.
During the years ended November 30, 1995, 1996 and 1997, contributions
charged to expense amounted to $1,981,828, $2,957,797 and $2,421,164,
respectively. In addition, in 1995 and 1996, the Company paid interest of
$81,734 and $65,338, respectively, on the ESOP's notes payable.
(7) COMMITMENTS:
The Company leases its offices, warehouse facilities and vehicles under
operating leases.
Minimum annual rental commitments are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
1996.............................................. $250,907 $ -- $ --
1997.............................................. 191,618 307,994 --
1998.............................................. 109,734 138,318 309,421
1999.............................................. -- 61,857 143,360
2000.............................................. -- 45,356 131,081
2001.............................................. -- 25,256 116,934
Thereafter........................................ -- -- 38,915
-------- -------- --------
$552,259 $578,781 $739,711
======== ======== ========
</TABLE>
(8) RELATED PARTY TRANSACTIONS:
The Company leased office space from one of its shareholders for $6,249 per
month. This lease expired on December 31, 1996, and is on a month-to-month
basis.
The Company performs contracting activities with a company which is owned by
an employee. Total revenue for the years ended November 30, 1995, 1996 and
1997 were $291,806, $137,027 and $0, respectively. Amounts included in
Accounts Receivable from such activities at November 30, 1996 and 1995, were
$131,528 and $42,654, respectively. There were no amounts included in Accounts
Receivable at November 30, 1997.
(9) GOODWILL:
During 1993, the Company acquired assets and assumed leases and contracts-
in-process of Adkins Cabling Systems (Adkins). The amount assigned to goodwill
represents the excess of the amount paid over the fair value of assets
received, and is being amortized over eight years which is the term of related
employment and non-competition agreements with the sole Adkins shareholder.
(10) SHW JOINT VENTURE:
The Company had a minority interest in a general partnership joint venture
formed to construct a freeway management system. Related costs included in the
Company's contract revenue earned and cost of revenues earned were $80,000,
$7,000 and $0 for the years ended November 30, 1995, 1996 and 1997. The
investment was accounted on the equity method of accounting wherein the
Company recognized it's share of the joint ventures net assets.
The joint venture was completed in 1997.
F-132
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(11) INCOME TAXES:
Deferred income taxes arise because of timing differences between financial
and income tax reporting.
At November 30, 1997, the only significant timing difference relates to
accrued vacation pay, that is not tax deductible unless paid within 2 1/2
months after year-end. The provision for income taxes for 1997 differed from
the amount computed by applying the statutory income tax rates because of non-
deductible expenses.
F-133
<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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 17, 1998
F-134
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 719,316 $1,686,037
Accounts receivable:
Contracts........................................... 4,688,121 5,161,512
Other............................................... 75,761 138,708
Costs and estimated earnings in excess of billings.... 125,597 134,759
Materials............................................. 85,438 161,338
Deferred income taxes................................. -- 150,000
---------- ----------
Total current assets.............................. 5,694,233 7,432,354
Property and equipment................................ 251,363 553,957
Receivable--related party............................. 250,000 250,000
Other assets.......................................... 131,375 131,790
---------- ----------
$6,326,971 $8,368,101
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 3,495 $ 196,490
Accounts payable...................................... 963,534 1,414,869
Due to stockholders................................... 3,101 --
Billings in excess of costs and estimated earnings.... 1,555,592 1,652,288
Accrued expenses...................................... 545,450 825,818
Accrued ESOP liability................................ 350,000 --
Accrued income taxes.................................. 105,000 1,195,900
---------- ----------
Total current liabilities......................... 3,526,172 5,285,365
---------- ----------
Long-term debt, less current portion.................... -- 982,449
ESOP common stock purchase obligation (Note 8).......... -- 3,000,000
Unearned ESOP common stock (Note 8)..................... -- (1,178,939)
Commitments and contingencies (Notes 7 and 10)..........
STOCKHOLDERS' EQUITY (Note 9)
Common stock:
SKC Electric, Inc., $.01 par value, 100,000 shares
authorized, 63,491 issued and outstanding at December
31, 1997; no par value, 1,000 shares authorized,
100 shares issued and outstanding at December 31,
1996................................................. 10,000 635
SKCE, Inc., $10 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding...... 10,000 10,000
Additional paid-in capital............................ 15,000 --
Retained earnings..................................... 2,765,799 268,591
---------- ----------
Total stockholders' equity........................ 2,800,799 279,226
---------- ----------
$6,326,971 $8,368,101
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliate--
Consolidated Combined
------------- ---------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
construction and
service contracts...... $11,261,874 $3,012,185 $16,811,224 $23,482,722
Costs from construction
and service contracts.. 8,556,644 2,205,404 12,565,452 16,970,948
----------- ---------- ----------- -----------
Gross profit............ 2,705,230 806,781 4,245,772 6,511,774
Selling, general and
administrative
expenses............... 1,900,327 426,680 2,906,523 4,199,645
----------- ---------- ----------- -----------
Operating income........ 804,903 380,101 1,339,249 2,312,129
Other income............ 25,853 6,459 60,322 38,381
----------- ---------- ----------- -----------
Income before income
taxes.................. 830,756 386,560 1,399,571 2,350,510
Provision for income
tax.................... 277,984 -- -- 1,150,000
----------- ---------- ----------- -----------
Net income.............. $ 552,772 $ 386,560 $ 1,399,571 $ 1,200,510
=========== ========== =========== ===========
Unaudited pro forma
information:
Income before provision
for income taxes...... $ 386,560 $ 1,399,571 $ 2,350,510
Provision for income
taxes................. 150,758 545,833 916,582
---------- ----------- -----------
Pro forma net income... $ 235,802 $ 853,738 $ 1,433,928
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliated--
Consolidated Combined
------------- ----------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income............... $ 552,772 $ 386,560 $ 1,399,571 $1,200,510
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation............ 70,750 18,165 75,534 124,339
Provision for doubtful
accounts............... -- -- -- 161,127
Gain on sale of fixed
assets................. -- -- (540) 3,502
Deferred income taxes... (305,000) -- -- (150,000)
ESOP compensation
expense................ -- -- -- 270,648
(Increase) decrease in
assets:
Accounts receivable--
contracts.............. (637,735) (169,078) (1,900,371) (634,518)
Accounts receivable--
other.................. 4,064 4,904 (50,820) (62,947)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts.............. 31,226 (3,322) (63,236) (9,162)
Materials............... 49,572 (18,751) (47,260) (75,900)
Other assets............ (251,135) 362 (77,810) (415)
Increase (decrease) in
liabilities:
Accounts payable........ 238,944 654,921 658,374 451,335
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. (370,863) (238,685) 394,852 96,696
Accrued expenses and
ESOP liability......... 239,104 (320,693) 721,457 (69,632)
Accrued income taxes.... 106,724 (254,087) (68,397) 1,090,900
--------- --------- ----------- ----------
Net cash provided (used)
by operating
activities.............. (271,577) 60,296 1,041,354 2,396,483
Cash flows used by
investing activities
Capital expenditures.... (102,108) (18,416) (97,711) (431,610)
Proceeds from
disposition of fixed
assets................. -- -- 540 1,175
--------- --------- ----------- ----------
Net cash used by
investing activities.... (102,108) (18,416) (97,171) (430,435)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliate--
Consolidated Combined
------------- ---------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows used by
financing activities
Distributions to
stockholders.......... (3,633) -- (654,172) (799,342)
Principal payments on
long-term debt........ (30,288) (5,063) (29,453) (199,985)
Borrowings to finance
ESOP.................. -- -- -- 1,375,429
Loan to ESOP........... -- -- -- (1,375,429)
--------- -------- --------- -----------
Net cash used by
financing activities... (33,921) (5,063) (683,625) (999,327)
Net increase (decrease)
in cash and cash
equivalents............ (407,606) 36,817 260,558 966,721
Cash and cash
equivalents--beginning
of period.............. 829,547 421,941 458,758 719,316
--------- -------- --------- -----------
Cash and cash
equivalents--end of
period................. $ 421,941 $458,758 $ 719,316 $ 1,686,037
========= ======== ========= ===========
Income taxes paid....... $ 469,994 $ -- $ 68,397 $ 210,400
========= ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Company's activities and operating cycle
SKC Electric, Inc., its subsidiary, Cramar Electric, Inc., and its
affiliate, SKCE, Inc. (the Company) are electrical specialty contractors and
electrical service companies operating primarily in the commercial markets in
Kansas and Missouri. The Company is headquartered in Lenexa, Kansas, and
operates branch offices in Branson and Columbia, Missouri. During 1996, the
Company acquired an exclusive franchise for TEGG services which provides
preventive maintenance contracts for end user facilities located throughout
the same geographic areas. The stock of Cramar Electric, Inc. was acquired in
September 1997 for approximately $35,000 and will allow the Company to enter
the residential and multifamily construction market.
The length of the Company's construction contracts varies but is typically
less than one year. Therefore, the contract-related assets and liabilities are
classified as current. Other items in the balance sheet are classified as
current or noncurrent depending on whether their realization and liquidation
period extend beyond one year.
The Company grants credit, generally without collateral, but is usually
eligible for filing a contractor's lien against the property on which work was
performed. Most of the Company's contracts are in the Kansas and Missouri
regions. Consequently, the Company's ability to collect the amounts due from
customers is affected by the economic fluctuations in these geographic areas.
During 1997, approximately 17% of the Company's revenues were from one
customer.
Principles of combination and consolidation
The combined financial statements include the consolidated accounts of SKC
Electric, Inc. and its subsidiary, Cramar Electric, Inc., combined with its
affiliate, SKCE, Inc. all of which are under common control and management and
stock ownership effective October 1, 1995. Prior to October 1, 1995, SKC
Electric, Inc. and its affiliate were owned by a separate corporation,
Lovecor, Inc., which had the same stock ownership as SKC Electric, Inc. and
its affiliate. Immediately following the close of business on September 30,
1995, the consolidated group was terminated as a result of the tax-free spin
off of SKC Communications, Inc. (now SKCE, Inc.) and the subsequent tax-free
merger of Lovecor, Inc. into SKC Electric, Inc.
The fiscal year of the Company was September 30 prior to October 1, 1995, at
which time a December 31 year end was adopted. All significant intercompany
transactions and balances have been eliminated from the combined and
consolidated financial statements.
Revenue and cost recognition
The Company utilizes the percentage-of-completion method of accounting for
the recognition of revenues and costs of all significant construction
contracts. Revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions
are determined.
Balances billed but not paid pursuant to retainage provisions under
provisions under construction contracts generally become due upon completion
of the contracts and acceptance by the customers.
Revenue earned on specific contracts in excess of billings and billings in
excess of revenue earned are shown as current assets and liabilities,
respectively, in the accompanying balance sheet. Revenues from service
contracts and maintenance work are recognized when earned.
F-139
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Summary of significant accounting policies--(Continued)
Direct costs on construction contracts include all direct material,
equipment, subcontractor, and labor costs. Where costs such as tools, travel,
licenses and fees, and utilities can be charged to a specific job, the Company
also considers these direct costs. Certain indirect costs for both
construction and service contracts are allocated to jobs based on an overhead
burden rate developed by the Company. This rate is based on the relationship
between these indirect costs and labor expense incurred on the contracts.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
Property and equipment and depreciation
Property and equipment is stated at cost. Expenditures for renewals and
betterments are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Upon sale or retirement, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss is included in or charged against income.
Income taxes
During the period October 1, 1994 through September 30, 1995, Lovecor, Inc.
was a C corporation and used the liability method of accounting for income
taxes. Deferred income taxes are recorded to reflect the tax consequences of
future years of differences between the basis of assets and liabilities for
income tax and financial reporting purposes.
For the period October 1, 1995 to December 31, 1996, the companies'
stockholders elected S corporation status under the Internal Revenue Code,
thereby consenting to include the income or losses in their individual tax
returns. At the time of the election, the Company was subject to a potential
built-in gains tax based on the gross profit recognized on uncompleted
contracts determined on a percentage-of-completion method. This tax totaling
$105,000 was accrued at September 30, 1995 and subsequently paid. There is no
provision for income taxes reflected in the financial statements during the
period the companies elected S Corporation status.
Subsequent to December 31, 1996, SKC Electric, Inc. terminated its S
Corporation status and began using the liability method of accounting for
income taxes. At this time, SKC Electric, Inc. was required to change its
method of accounting for tax purposes from the completed contract method to
the percentage-of-completion method.
The unaudited pro forma information included in the Statement of Income is
presented as if the Company had been subject to federal and state income taxes
for all periods presented.
Materials
Materials consist of electrical supplies used on the contracts or for
service work. The materials are valued at the lower of original cost or net
realizable value. A residual value remains for materials used but not consumed
on the jobs.
Use of estimates
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from these estimates.
F-140
<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
=========== ============
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
<CAPTION>
December 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 4,901,213 $ 9,916,098
Estimated earnings................................. 798,890 4,033,573
----------- ------------
5,700,103 13,949,671
Less--Billings to date............................. (7,130,098) (15,467,200)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 125,597 $ 134,759
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (1,555,592) (1,652,288)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
</TABLE>
F-141
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and equipment
The property and equipment balance consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Office furniture......................................... $ 51,123 $ 53,452
Computers................................................ 304,600 384,772
Communication equipment.................................. 22,650 35,515
Construction equipment................................... 235,954 358,264
Trucks and vehicles...................................... 378,061 384,398
Leasehold improvements................................... -- 151,226
--------- ----------
992,388 1,367,627
Less--Accumulated depreciation........................... (741,025) (813,670)
--------- ----------
$ 251,363 $ 553,957
========= ==========
</TABLE>
5. Notes payable and long-term debt
The Company has a line of credit agreement with a bank with a borrowing
limit of $500,000 which matures April 30, 1998. The interest rate is prime and
is payable monthly. This line of credit is collateralized by the Company's
contract receivables, materials, fixed assets and personal guaranties of the
stockholders. There were no outstanding borrowings under this agreement as of
December 31, 1996 or 1997.
In 1997, the Company entered into an agreement with a bank for a $1,375,429
term loan which was used to finance the purchase by the SKC Electric, Inc.
Employee Stock Ownership Plan of 30% of the shares of the Company's common
stock from the majority shareholder. The term loan provides for interest
payable quarterly at the prime rate, which was 8.5% at December 31, 1997, and
annual payments of $196,490 due each December 31 with the balance due December
31, 2001. The term loan is secured by unallocated ESOP stock pledged as
collateral. The balance outstanding at December 31, 1997 was $1,178,939, of
which $196,490 was the current portion of the term loan.
The Company had other long-term debt comprised of obligations under notes
payable on vehicles and other assets due to various financial institutions
with interest rates ranging from 6% to 10% outstanding at December 31, 1996.
These obligations were repaid in 1997.
6. Income taxes
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
September 30, December 31,
1995 1997
------------- -------------
<S> <C> <C>
Current
Federal........................................ $ 472,984 $1,085,000
State.......................................... 110,000 215,000
--------- ----------
582,984 1,300,000
Deferred
Federal........................................ (252,700) (125,000)
State.......................................... (52,300) (25,000)
--------- ----------
(305,000) (150,000)
--------- ----------
Total........................................ $ 277,984 $1,150,000
========= ==========
</TABLE>
F-142
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income taxes--(Continued)
The difference between the effective tax rate and the federal statutory
income tax rate (34%) is:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
September 30, December 31,
1995 1997
------------- ------------
<S> <C> <C>
Statutory federal income tax provision............ $ 282,457 $ 799,173
State taxes net of federal benefit................ 38,082 125,400
Contract accounting method change................. -- 202,675
Other, net........................................ (42,555) 22,752
--------- ----------
$ 277,984 $1,150,000
========= ==========
</TABLE>
The Company's deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Allowance for doubtful accounts................................. $ 54,600
Employee compensation........................................... 54,686
Other expenses.................................................. 40,714
--------
$150,000
========
</TABLE>
7. Commitments and related party transactions
The Company was a guarantor on a personal loan of the stockholders in the
amount of $109,000 at December 31, 1996 and had given a security interest in
its accounts receivables and materials as collateral on that debt. Such
guarantee no longer exists at December 31, 1997.
The Company received advances from a stockholder totaling $3,101 at December
31, 1996.
During 1995, SKC Electric, Inc. loaned $250,000 to an unrelated corporation.
The loan is secured by a second mortgage on a commercial building. During
1996, the majority shareholder of SKC Electric, Inc. acquired the stock of the
corporation which owned the building collateralizing the loan. SKC Electric,
Inc.'s security position remains the same following the acquisition. The loan
is non-interest bearing and has no stated maturity date.
In December 1996, the Company entered into an operating lease agreement with
a company that is owned by the shareholders for the lease of new office and
warehouse space. The lease is for five years and expires December 2001. The
agreement calls for monthly payments of $8,095. No expense was incurred on
this lease during the year ended December 31, 1996, and $97,140 was expensed
during the year ended December 31, 1997. Future minimum lease payments total
$97,140 for each of the next 5 years. Management believes that the rental
expense under this lease is equivalent to that which could have been
experienced in an unrelated arms-length transaction.
The Company is party to an operating lease agreement for its former office
and warehouse space with an unrelated third party. The lease is for five
years, expiring March 1998. Lease expense under this agreement was $46,150,
$11,544, $42,355 and $46,177 for the periods ended September 30, 1995,
December 31, 1995, December 31, 1996, and December 31, 1997, respectively. The
facility in Branson, Missouri is leased under an operating lease agreement
with an unrelated third party. The lease is for two years, expiring in August
1996,
F-143
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
with an additional two year option which the Company exercised. Lease expense
under this agreement was $13,750, $2,850, $14,452 and $15,365 for the periods
ended September 30, 1995, December 31, 1995, December 31, 1996, and December
31, 1997, respectively. In June 1997, the Company entered into a two year
operating lease with an unrelated third party for a new facility. Future
minimum lease payments under these leases will be $22,944 and $7,750 for the
years ending December 31, 1998 and 1999.
8. Employee benefit plans
The Company has a defined contribution employee benefit plan which includes
a qualified profit sharing plan funded through a trust. As a part of the
profit sharing plan, the Company offers a salary deferral program under
Section 401 of the Internal Revenue Code. Under this plan, the Company matches
certain contributions of the eligible participants. In addition, the Company's
annual discretionary contribution, if any, is determined by the Board of
Directors and may be any amount not in excess of 15% of the total
participant's compensation and not to exceed $30,000 for any individual
participant. The Company's expense under this plan totaled $217,051, $3,506,
$30,613 and $31,019, for the periods ended September 30, 1995, December 31,
1995, December 31, 1996, and December 31, 1997, respectively.
The Company also contributes to a Voluntary Employee Beneficiary Association
(VEBA) established under 501(c)(9) of the Internal Revenue Code. The VEBA,
which is a trust, provides various health and welfare benefits to the members,
which are the employees of the Company. Contributions are determined as a
percentage of payroll. The Company contributed $401,153, $111,432, $555,114
and $1,043,211 to the VEBA for the periods ended September 30, 1995, December
31, 1995, December 31, 1996 and December 31, 1997, respectively.
On December 24, 1996, the Company formed the SKC Electric, Inc. Employee
Stock Ownership Plan (ESOP). Management prefunded the ESOP with the maximum
allowable contribution, which for 1996 totaled approximately $350,000. This
amount was accrued by the Company in December of 1996 when it was authorized
by the Company's Board of Directors. During 1996, the ESOP did not acquire any
common stock of the Company.
On September 30, 1997, the Company borrowed $1,375,429 and loaned this
amount to the ESOP (see Note 5). The ESOP used this amount together with the
Company's $350,000 cash contribution to purchase 30% of the SKC Electric,
Inc.'s common stock from the majority stockholder at appraised value. Of the
19,047 shares of common stock purchased, 3,727 were allocated to participant
accounts representing the contribution for 1996. For 1997, management
contributed $196,496 representing 2,189 shares. For the year ended December
31, 1997, the Company recognized $270,648 of expense representing compensation
expense for the year based on the estimated average fair value of the 2,189
shares.
The Company has recorded a $3,000,000 ESOP common stock purchase obligation
on the combined balance sheet at December 31, 1997 representing the estimated
fair value of the 19,047 shares held by the ESOP which are puttable to SKC
Electric, Inc. by the participants upon distribution. Unearned ESOP common
stock represents the historical cost of shares for which compensation expense
has not been accrued at December 31, 1997.
On January 30, 1998, The Company announced a business combination in which
all of the common stock of the Company would be acquired. If consummated, this
transaction could result in a termination of the ESOP and all remaining
unallocated shares held by the ESOP could be allocated to participant
accounts. The Company would repay the outstanding balance on the term loan and
recognize compensation expense in 1998 representing the transaction value of
remaining common shares allocated at that time.
F-144
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' equity
Subsequent to December 31, 1996, SKC Electric Inc.'s Board of Directors
increased the number of authorized shares to 100,000 with a par value of $.01.
In addition, the Company split the 100 shares outstanding into 63,491 shares
which remain issued and outstanding at December 31, 1997.
The changes in the capital stock, additional paid-in capital and retained
earnings balances are summarized as follows:
<TABLE>
<CAPTION>
Common Additional
stock paid-in Retained
combined capital earnings
--------- ---------- -----------
<S> <C> <C> <C>
Balance, September 30, 1994............. $ 634,913 $ -- $ 481,155
Net income.............................. -- -- 552,772
--------- -------- -----------
Balance, September 30, 1995............. 634,913 -- 1,033,927
Lovecor, Inc. merger into SKC Electric,
Inc.................................... (614,913) 15,000 599,913
Net income.............................. -- -- 386,560
--------- -------- -----------
Balance, December 31, 1995.............. 20,000 15,000 2,020,400
Net income.............................. -- -- 1,399,571
Stockholder distributions............... -- -- (654,172)
--------- -------- -----------
Balance, December 31, 1996.............. 20,000 15,000 2,765,799
Net income.............................. -- -- 1,200,510
SKC Electric, Inc. stock split.......... (9,365) 9,365 --
Other--ESOP compensation................ -- 74,158 --
ESOP common stock purchase obligation... -- (98,523) (2,901,477)
Stockholder distributions............... -- -- (796,241)
--------- -------- -----------
Balance, December 31, 1997.............. $ 10,635 $ -- $ 268,591
========= ======== ===========
</TABLE>
10. Contingencies
During the year ended December 31, 1996, the National Labor Relations Board
and International Brotherhood of Electrical Workers Local Union, Local No.
124, brought suit against the Company alleging unfair hiring practices and
threatening or terminating employees due to their union affiliation. In March
1997, an out-of-court settlement was reached. The settlement calls for the
Company to pay to the union $155,000, which was accrued in the fourth quarter
of calendar 1996, and paid in 1997.
The Company has legal matters pending which arose in the ordinary course of
business. It is management's opinion that these legal matters will not result
in liabilities that would have a material adverse effect on the Company's
financial position or results of operations.
F-145
<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.
/s/ Baird, Kurtz & Dobson
Baird, Kurtz & Dobson
Denver, Colorado
February 18, 1998
F-146
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31,
ASSETS -----------------------
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash............................................. $ 103,182 $ 295,184
----------- -----------
Receivables:
Contracts........................................ 6,910,281 7,093,367
Retainage........................................ 1,711,153 1,611,347
Unbilled on completed contracts.................. 284,859 495,611
Related parties.................................. 102,006 40,170
Other............................................ 14,280 112,998
----------- -----------
9,022,579 9,353,493
Less allowance for uncollectible accounts........ 8,000 65,000
----------- -----------
9,014,579 9,288,493
----------- -----------
Prepaid expenses................................. 5,774 30,026
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 457,293 189,818
----------- -----------
Total current assets............................ 9,580,828 9,803,521
----------- -----------
PROPERTY AND EQUIPMENT, At Cost
Land............................................. 106,500 106,500
Buildings and improvements....................... 1,217,928 1,217,928
Leasehold improvements........................... 124,356 163,646
Automobiles and trucks........................... 401,528 423,729
Office furniture and equipment................... 466,038 592,419
Tools and equipment.............................. 277,386 290,480
----------- -----------
2,593,736 2,794,702
Less accumulated depreciation and amortization... 974,532 1,186,294
----------- -----------
1,619,204 1,608,408
----------- -----------
DEPOSITS AND OTHER ASSETS......................... 116,598 246,294
----------- -----------
$11,316,630 $11,658,223
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, stockholder....................... $ 790,000 $ 415,000
Notes payable.................................... 1,000,000 990,000
Current maturities of long-term debt............. 118,665 119,230
Accounts payable................................. 2,546,410 3,589,392
Accrued expenses................................. 1,073,852 1,554,276
Billings in excess of costs and estimated
earnings on uncompleted contracts............... 2,289,817 1,088,368
----------- -----------
Total current liabilities....................... 7,818,744 7,756,266
----------- -----------
LONG-TERM DEBT.................................... 638,216 522,577
----------- -----------
NOTES PAYABLE--STOCKHOLDERS....................... -- 2,275,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares
authorized, issued and outstanding,
1997--320,200 shares, 1996--310,200 shares...... 1,233,764 1,350,988
Retained earnings (deficit)...................... 1,625,906 (246,608)
----------- -----------
2,859,670 1,104,380
----------- -----------
$11,316,630 $11,658,223
=========== ===========
</TABLE>
See Notes to Financial Statements
F-147
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Contract revenues..................... $29,464,580 $30,879,445 $31,845,921
Service revenues...................... 3,005,879 4,955,771 5,203,331
----------- ----------- -----------
32,470,459 35,835,216 37,049,252
----------- ----------- -----------
DIRECT COSTS OF REVENUES EARNED
Contract costs........................ 26,164,454 27,462,760 27,051,842
Service costs......................... 2,682,071 4,226,942 4,555,202
----------- ----------- -----------
28,846,525 31,689,702 31,607,044
----------- ----------- -----------
GROSS PROFIT........................... 3,623,934 4,145,514 5,442,208
INDIRECT SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES............... 2,666,836 2,883,829 3,999,543
----------- ----------- -----------
INCOME FROM OPERATIONS................. 957,098 1,261,685 1,442,665
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense...................... (170,552) (257,402) (228,751)
Interest income....................... 269 8,161 283
Other, net............................ 55,561 24,195 119,218
----------- ----------- -----------
(114,722) (225,046) (109,250)
----------- ----------- -----------
NET INCOME............................. $ 842,376 $ 1,036,639 $1,333,415
=========== =========== ===========
UNAUDITED PRO FORMA INFORMATION (SEE
NOTE 1)
Income before provision for income
taxes................................ $ 842,376 $ 1,036,639 $1,333,415
Provision for income taxes............ 314,206 386,666 497,364
----------- ----------- -----------
PRO FORMA NET INCOME (unaudited)....... $ 528,170 $ 649,973 $ 836,051
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-148
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
-------------------
Retained
Earnings
Shares Dollars (Deficit) Total
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994......... 377,800 $1,485,880 $2,045,212 $3,531,092
Net income........................ -- -- 842,376 842,376
Stockholders' distributions....... -- -- (1,734,539) (1,734,539)
Issuance of common stock.......... 3,000 18,750 -- 18,750
Redemption of common stock........ (73,600) (289,616) (173,825) (463,441)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995......... 307,200 1,215,014 979,224 2,194,238
Net income........................ -- -- 1,036,639 1,036,639
Stockholders' distributions....... -- -- (389,957) (389,957)
Issuance of common stock.......... 3,000 18,750 -- 18,750
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996......... 310,200 1,233,764 1,625,906 2,859,670
Net income........................ -- -- 1,333,415 1,333,415
Stockholders' distributions....... -- -- (3,164,999) (3,164,999)
Issuance of common stock ......... 25,200 212,224 -- 212,224
Redemption of common stock........ (15,200) (95,000) (40,930) (135,930)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997......... 320,200 $1,350,988 $ (246,608) $1,104,380
======= ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-149
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 842,376 $ 1,036,639 $1,333,415
Items not requiring (providing) cash:
Depreciation and amortization.......... 119,040 169,157 212,632
Loss from partnership.................. 21,222 -- --
Income from joint venture.............. (9,722) -- --
Loss from sale of property and
equipment............................. 4,925 17,701 380
Changes in:
Receivables............................ 245,664 (3,580,164) (348,834)
Related party receivables.............. (324,128) 327,461 74,920
Other current assets................... (2,679) 14,609 (24,252)
Costs and estimated earnings in excess
of billings on uncompleted contracts.. (25,442) (196,050) 267,475
Other assets........................... 62,246 -- --
Accounts payable....................... (1,552,104) 1,192,347 1,042,982
Accrued expenses....................... (164,219) (9,565) 480,424
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 423,796 1,562,081 (1,201,449)
Related party payables................. 255,118 (255,118) --
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. (103,907) 279,098 1,837,693
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.... (720,411) (385,106) (202,316)
Proceeds from sales of property and
equipment............................. 8,101 1,700 100
Investments in joint ventures and other
assets................................ (12,500) (46,523) (129,696)
Cash provided for note receivable...... (100,000) -- --
Payments received on note receivable... 30,000 -- --
----------- ----------- ----------
Net cash used in investing
activities........................... (794,810) (429,929) (331,912)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of
credit................................ 1,480,000 (250,000) (10,000)
Payments on long-term debt............. (69,806) (457,066) (115,074)
Proceeds from notes payable--
stockholders.......................... 462,000 435,000 --
Repayments on notes payable--
stockholders.......................... -- -- (375,000)
Proceeds from long-term borrowings..... -- 680,983 --
Issuance of common stock for cash...... 18,750 18,750 212,224
Distributions to stockholders.......... (1,734,539) (389,957) (889,999)
Distribution of cash for spinoff....... (51,620) -- --
Redemption of Common Stock............. -- -- (135,930)
----------- ----------- ----------
Net cash (used in) provided by
financing activities................. 104,785 37,710 (1,313,779)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH............. (793,932) (113,121) 192,002
CASH, BEGINNING OF PERIOD............... 1,010,235 216,303 103,182
----------- ----------- ----------
CASH, END OF PERIOD..................... $ 216,303 $ 103,182 $ 295,184
=========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-150
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is engaged in the construction of electrical systems for
industrial and commercial buildings. The Companies' operations are
predominately in Colorado. The Company grants credit to its customers which
are primarily commercial general contractors in Colorado.
The Company derives most of its revenues from guaranteed maximum price
contracts. The remainder of the contracts are fixed price contracts. The
length of the Company's contracts varies, but contracts are typically
completed in one year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues are recognized on the percentage of completion method, measured by
the percentage of costs incurred to date to estimated total costs for each
contract, commonly referred to as the cost-to-cost method.
Contract costs include all direct material and labor costs and certain
indirect costs related to contract performance such as supplies, tools,
supervisory salaries, and repairs. Selling, general, and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to costs and income which
are recognized in the period in which the revisions are determined. An amount
equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenue recognized.
Property and Equipment
Property and equipment are depreciated over the estimated useful lives of
each asset. Leasehold improvements are depreciated over the shorter of the
lease term or the estimated useful lives of the improvements. Annual
depreciation is primarily computed using declining balance methods.
Income Taxes
The Company, with its stockholders' consent, has elected to be taxed as an S
Corporation under the Internal Revenue Code. In lieu of corporate income
taxes, the stockholders of an S Corporation are taxed on their proportionate
share of the corporation's taxable income. Therefore, no provision for income
taxes has been included in these financial statements.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities primarily related to property
and equipment, and contracts in progress. At December 31, 1997, the Company's
net assets for financial reporting purposes exceeds the tax basis by
approximately $70,000.
F-151
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The unaudited pro forma income tax information included in the Statement of
Income is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the years presented.
NOTE 2: REORGANIZATION AND CORPORATE SEPARATION
As of April 1, 1995, the Company entered into an agreement with Riviera
Electric of California, Inc., a California corporation, to separate the
California division from the Colorado division of the Company. The Company
transferred the assets identified as related to California; and Riviera
Electric of California, Inc. agreed to assume all liabilities, debts,
contracts and obligations of the California division and to issue 460 shares
of common stock to the Company. The Company then exchanged the stock of
Riviera Electric of California, Inc. in exchange for 368 shares of its own
common stock of the Company. The Company's majority stockholder maintains a
controlling interest in Riviera Electric of California, Inc. This transaction
was reported as a transaction between entities under common control using the
historical cost basis of assets and liabilities. The assets net of liabilities
transferred to Riviera Electric of California, Inc. as of April 1, 1995 were
$463,441. The statements of income and cash flows for the year ended December
31, 1995, are reflected as if the transaction occurred January 1, 1995.
NOTE 3: COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts......... $ 16,086,014 $ 13,741,951
Estimated earnings.............................. 2,149,180 2,046,994
------------ ------------
18,235,194 15,788,945
Less billings to date........................... 20,067,718 16,687,495
------------ ------------
$ (1,832,524) $ (898,550)
============ ============
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............. $ 457,293 $ 189,818
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (2,289,817) (1,088,368)
------------ -----------
$ (1,832,524) $ (898,550)
============ ===========
</TABLE>
NOTE 4: JOINT VENTURE
Included in other assets at December 31, 1997, is an investment of $125,000
in a joint venture. The joint venture was formed to acquire land and to
develop condominium units on the property. As of December 31, 1997, the
venture had little activity.
F-152
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5: NOTES PAYABLE
An agreement with a bank provides for borrowing up to $1,800,000, due May 1,
1998, unsecured, with an assignment up to $500,000 of a life insurance policy
on the majority stockholder. The agreement bears interest at prime, 8.5
percent, at December 31, 1997. The average interest rate for the years ended
December 31, 1997, 1996 and 1995 was approximately 8.25, 8.5 and 9.0 percent
respectively. The loan requires a $50,000 compensating balance. The agreement
also contains working capital and debt restrictions. The loan is guaranteed by
the president and majority stockholder.
NOTE 6: LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Bank note payable (A)................................... $ 143,390 $ 103,430
Bank note payable (B)................................... 520,783 483,804
Bank note payable (C)................................... 72,913 40,826
Bank note payable (D)................................... 19,795 13,747
--------- ---------
756,881 641,807
Less current maturities................................. 118,665 119,230
--------- ---------
$ 638,216 $ 522,577
========= =========
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1997 are:
<TABLE>
<S> <C>
1998............................................................... $ 119,230
1999............................................................... 89,220
2000............................................................... 57,438
2001............................................................... 375,919
---------
$ 641,807
=========
</TABLE>
(A) Due July 15, 2000; payable $3,330 monthly plus accrued interest at prime
plus 1%, secured by a deed of trust on certain property.
(B) Due January 15, 2001; payable $3,082 monthly plus monthly interest at
prime plus 1%; remaining principal and interest due at maturity; secured by a
deed of trust on certain property and guaranteed by the majority stockholder
of the Company.
(C) Due February 1, 1999; payable $2,917 monthly plus accrued interest at
9.5%; secured by vehicles.
(D) Due October 1, 1999; payable in monthly installments of $678 including
interest at prime plus .5%; payment subject to change if the prime rate
changes; secured by a vehicle.
NOTE 7: COMMON STOCK
During 1997, the Company increased its common stock shares authorized from
50,000 to 1,000,000 and issued 199 shares of Common Stock to its stockholders
for each share then held by the stockholders. These actions are reflected in
the financial statements as if they happened at the earliest period presented.
F-153
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8: OPERATING LEASES
The Company has entered into noncancellable operating leases for facilities
and equipment expiring in various years through March, 2003. The Company also
leases several vehicles under operating leases which expire through October,
2000.
Future minimum lease payments at December 31, 1997, were:
<TABLE>
<S> <C>
1998............................................................... $440,565
1999............................................................... 252,056
2000............................................................... 159,080
2001............................................................... 61,982
2002............................................................... 59,220
Thereafter......................................................... 4,935
--------
Future minimum lease payments...................................... $977,838
========
</TABLE>
Rental expenses for all operating leases was $617,000, $517,800, and
$360,284, during 1997, 1996, and 1995, respectively.
NOTE 9: PROFIT SHARING PLANS
The Company has a 401(k) savings and retirement plan which covers all
eligible employees. The plan provides benefits based on earnings of each
participant. The plan allows the Company to make an additional discretionary
contribution. Participants' interests are 100% vested when they enter the
plan. For the years ended December 31, 1997, 1996, and 1995, the Company made
no additional discretionary contributions to the plan.
In December, 1996, the Company established a new profit sharing plan. In
September, 1997, the Company decided to make a $300,000 contribution to the
new plan for 1996. The Company has also approved a $300,000 contribution for
1997. During the year ended December 31, 1997, $600,000 has been recorded as
profit sharing expense.
NOTE 10: RELATED PARTY TRANSACTIONS
The Company performs various administrative functions, shares certain costs,
and pays certain bills, for a company related through common ownership (see
Note 2). During the years ended December 31, 1997 and 1996, this related
entity reimbursed the Company $241,727, and $193,559, respectively for
expenses the Company paid on behalf of this related entity. During the year
ended December 31, 1995, substantially all of the entity's operating expenses
were paid by the Company. As of December 31, 1997 and 1996 $10,302 and
$48,637, respectively, was owed to the Company by this related entity.
During 1995, the Company sold a partnership interest to the Company's
majority stockholder for $78,412. The Partnership billed the Company
$1,600,190 for services rendered during the year ended December 31, 1995. The
Company provided and was reimbursed for health insurance, miscellaneous tools
and other services to the partnership during 1995 in the amount of $74,156.
At December 31, 1997 and 1996, the Company had a note payable to its
majority stockholder of $265,000 and $643,000, and notes payable of $150,000
and $150,000 to other stockholders, respectively. The notes are unsecured, due
on demand, and bear interest at a bank's prime rate plus one percent. The
average interest rates for the years ended December 31, 1997, 1996 and 1995
were approximately 9.25, 9.5 and 10.0 percent respectively.
F-154
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10: RELATED PARTY TRANSACTIONS (continued)
In December 1997, distributions totaling $2,275,000 were made to
stockholders in the form of notes payable. The notes are unsecured, bear
interest at a bank's prime rate plus one percent, and are subordinated to the
Company's bank debt. Principal is due April 1, 1999. Interest expense for all
notes payable to stockholders was $54,548, $51,012 and $55,309, for the years
ended December 31, 1997, 1996, and 1995, respectively.
The Company maintains a $1 million life insurance policy on its president
and majority stockholder.
The Company rents various office equipment and employee lodging facilities
under operating leases with a director of the Company. The leases expire in
1998. Total lease expense paid for 1997, 1996, and 1995, was $74,952, $113,177
and $89,896, respectively.
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Those matters include the following:
Contracts in Process
The Company recognizes revenue on contracts under the percentage-of-
completion method, which involves estimates of total contract costs and the
percentage of a contract's completion. The methodology used is described as
part of Note 1.
Bonding and Regulations
The Company currently is involved in long-term construction contracts. As
part of these contracts, the Company must meet certain requirements and obtain
an appropriate level of bonding.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities
During 1995, the Company redeemed 368 shares of common stock in exchange for
460 shares of its affiliate with a fair value of $463,441. The transaction is
detailed at Note 2.
During 1997, the Company issued notes payable of $2,275,000 to stockholders
as distributions.
Additional Cash Payment Information
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest paid (net of amount capitalized)....... $222,686 $253,191 $170,728
</TABLE>
NOTE 13: SUBSEQUENT EVENT
In February 1998, the Company and its stockholders signed a letter of intent
to sell the Company. The Company's outstanding stock will be acquired by, and
the Company will be simultaneously merged into a wholly-owned subsidiary of
Consolidated Capital Corporation. If the transaction is completed, the
existing stockholders intend to purchase land and a building from the Company
and to contribute the $2,275,000 notes payable discussed in Note 10, to the
Company as additional paid-in capital.
F-155
<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
Grant Thornton LLP
Appleton, Wisconsin
February 6, 1998
F-156
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 253,462 $ 198,051
Contract receivables .............................. 9,331,072 10,604,699
Other receivables ................................. 23,302 267,662
----------- -----------
9,354,374 10,872,361
Inventories........................................ 260,872 294,829
Prepaid expenses................................... 98,298 112,656
Costs and estimated earnings in excess of billings
on contracts in progress.......................... 1,465,108 1,705,125
Deferred income tax................................ 378,800 349,400
----------- -----------
Total current assets............................. 11,810,914 13,532,422
PROPERTY AND EQUIPMENT--AT COST
Equipment.......................................... 1,261,582 1,431,590
Furniture and fixtures............................. 552,206 561,394
Computer equipment................................. 543,073 587,283
Vehicles........................................... 1,351,576 1,643,078
Leasehold improvements............................. 161,493 194,174
Building........................................... 161,124 162,357
----------- -----------
4,031,054 4,579,876
Less accumulated depreciation..................... 2,380,179 2,969,891
----------- -----------
1,650,875 1,609,985
Land............................................... 16,216 16,216
----------- -----------
1,667,091 1,626,201
OTHER ASSETS
Cash surrender value of life insurance............. 83,482 98,898
Goodwill........................................... 203,586 203,586
Less accumulated amortization..................... (18,098) (31,669)
----------- -----------
185,488 171,917
Investments........................................ 338 338
----------- -----------
269,308 271,153
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-157
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt................. $ 156,269 $ 320,644
Accounts payable..................................... 1,650,744 2,206,393
Accrued liabilities
Salaries, wages and vacation........................ 1,729,140 1,792,164
Property, payroll and other taxes................... 314,323 396,442
Profit sharing...................................... 340,049 407,824
Health and disability insurance..................... 67,605 58,597
Other............................................... 296,241 207,547
Income taxes........................................ 345,000 241,000
----------- -----------
3,092,358 3,103,574
Billings in excess of costs and estimated earnings on
contracts in progress............................... 579,683 1,265,955
----------- -----------
Total current liabilities.......................... 5,479,054 6,896,566
LONG-TERM DEBT, less current maturities................ 1,149,468 197,014
COMMITMENTS............................................ -- --
STOCKHOLDER'S EQUITY
Common stock
Class A--authorized 200,000 shares of $.005 par
value, issued and 47,307 and 48,461 shares at
December 31, 1996 and September 30, 1997,
respectively...................................... 236 242
Class B--authorized 400,000 shares of no par value,
issued 263,900 and 264,710 shares at December 31,
1996 and September 30, 1997, respectively......... 1,320 1,324
Additional paid-in capital........................... 461,396 515,944
----------- -----------
462,952 517,510
Retained earnings...................................... 6,655,839 7,818,686
----------- -----------
7,118,791 8,336,196
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned................ $43,306,306 $51,219,799 $48,725,990
Cost of revenues earned................. 34,569,800 41,156,211 39,701,121
----------- ----------- -----------
Gross profit.......................... 8,736,506 10,063,588 9,024,869
General and administrative expenses..... 5,638,605 6,547,518 7,006,235
----------- ----------- -----------
Operating profit...................... 3,097,901 3,516,070 2,018,634
Other income (expense)
Interest expense...................... (206,474) (153,433) (74,988)
Miscellaneous income, net............. 58,303 106,915 113,446
----------- ----------- -----------
(148,171) (46,518) 38,458
----------- ----------- -----------
Earnings before income taxes........ 2,949,730 3,469,552 2,057,092
Provision for income taxes.............. 1,155,024 1,413,716 894,245
----------- ----------- -----------
NET EARNINGS............................ $ 1,794,706 $ 2,055,836 $ 1,162,847
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-159
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock issued
-------------------------------
Class A Class B
(Nonvoting) (Voting) Additional Total
--------------- --------------- paid-in Retained stockholders'
Shares Amount Shares Amount capital earnings equity
------- ------ ------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 54,880 $274 287,000 $1,466 $239,516 $3,464,716 $3,705,972
Retirement and
redemption of stock.... (14,140) (70) (29,020) (145) -- (656,964) (657,179)
Issuance of stock....... 2,000 10 4,000 (10) 97,360 -- 97,360
Net earnings............ -- -- -- -- -- 1,794,706 1,794,706
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1995................... 42,740 214 261,980 1,311 336,876 4,602,458 4,940,859
Retirement and
redemption of stock.... (134) (1) -- -- -- (2,455) (2,456)
Issuance of stock....... 4,701 23 1,920 9 124,520 -- 124,552
Net earnings............ -- -- -- -- -- 2,055,836 2,055,836
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1996................... 47,307 236 263,900 1,320 461,396 6,655,839 7,118,791
Retirement and
redemption of stock.... (48) -- -- -- (1,370) -- (1,370)
Issuance of stock....... 1,154 6 810 4 55,918 -- 55,928
Net earnings for the
year ended December 31,
1997................... -- -- -- -- -- 1,162,847 1,162,847
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1997................... 48,413 $242 264,710 $1,324 $515,944 $7,818,686 $8,336,196
======= ==== ======= ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-160
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings........................... $ 1,794,706 $ 2,055,836 $ 1,162,847
Adjustments to reconcile net earnings
to net cash provided by operating
activities............................
Depreciation expense................... 517,363 647,192 690,665
Loss on sale of property and
equipment............................. 5,218 16,442 34
Amortization of goodwill............... -- 13,573 13,571
Decrease (increase) in accounts
receivable............................ 376,430 (1,992,514) (1,517,987)
Decrease (increase) in inventories..... (43,847) 8,118 (33,957)
Increase in prepaid expenses........... (47,717) (25,354) (14,358)
(Increase) decrease in costs and
estimated earnings in excess of
billings on contracts in progress..... 300,173 (304,357) (240,017)
Increase in deferred income taxes...... (96,000) (15,800) 29,400
Increase (decrease) in accounts
payable............................... (74,592) 127,869 555,649
Increase (decrease) in accrued
liabilities........................... 206,510 683,036 11,216
Decrease (increase) in billings in
excess of costs and estimated
earnings on contracts in progress..... (175,362) (123,360) 686,272
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,762,882 1,090,681 1,343,335
Cash flows from investing activities
Purchase of property and equipment..... (812,013) (971,003) (660,656)
Proceeds from sale of property and
equipment............................. 35,219 36,792 10,847
Increase in cash surrender value of
life insurance........................ (11,122) (13,371) (15,416)
Acquisition of assets of electrical
contractor............................ (203,586) -- --
----------- ----------- -----------
Net cash used in investing
activities.......................... (991,502) (947,582) (665,225)
Cash flows from financing activities
Proceeds from borrowings............... 2,420,770 199,253 2,486,646
Issuance of common stock............... 97,360 124,552 55,928
Payments on borrowings................. (2,702,418) (1,233,676) (3,274,725)
Retirement and redemption of stock..... (657,179) (2,456) (1,370)
----------- ----------- -----------
Net cash used in financing
activities.......................... (841,467) (912,327) (733,521)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ 929,913 (769,228) (55,411)
Cash and cash equivalents at beginning
of period.............................. 92,777 1,022,690 253,462
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 1,022,690 $ 253,462 $ 198,051
----------- ----------- -----------
Supplemental disclosures of cash flow
information
Cash paid during period for:
Interest............................... $ 204,017 $ 158,191 $ 72,207
Income taxes........................... 1,226,603 1,063,726 1,288,604
</TABLE>
The accompanying notes are an integral part of these statements.
F-161
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Town & Country Electric Inc. ("Company") is engaged in electrical
contracting for industrial, commercial, residential and institutional
customers. The majority of the contracts are in the midwestern United States.
On January 30, 1998, the Company entered into a Letter of Intent with
Consolidation Capital Corporation ("CCC") for the potential sale of the
Company to CCC.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies used in the
preparation of the financial statements follows.
1. Revenue and Cost Recognition
Revenues from fixed-price contracts are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. This method is used because
management believes costs to be the best available measure of progress on
these contracts. Contracts are considered completed when the work is
substantially complete and accepted. Revenues from time and material contracts
are recognized on the basis of costs incurred during the period plus fees
earned.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts, if material, are made in the period in which such
losses are determined. It is reasonably possible that changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and income, and are recognized in the period in which the
revisions are determined.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
3. Inventories
Inventories, consisting of electrical materials and supplies, are stated at
the lower of cost, determined on the first-in, first-out method, or market.
4. Property and Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized while replacements, maintenance and repairs which
do not improve or extend the lives of the respective assets are expensed
currently as incurred. Properties sold, or otherwise disposed of, are removed
from the property accounts, with gains or losses on disposal credited or
charged to the results of operations.
F-162
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
Depreciation is provided over the estimated useful lives of the respective
assets, using straight-line and accelerated methods, as follows:
<TABLE>
<S> <C>
Equipment....................................................... 7 years
Furniture and fixtures.......................................... 7 years
Computer equipment.............................................. 5 years
Vehicles........................................................ 5 years
Leasehold improvements.......................................... 15 years
Building........................................................ 19-39 years
</TABLE>
5. Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. The deferred taxes relate primarily to differences between the
financial and tax basis of accounts receivable, inventories, accrued vacation,
and other accrued liabilities. The deferred taxes represent the future tax
return consequences of those differences.
6. Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired
and is being amortized by the straight-line method over 15 years.
7. Financial Instruments
The carrying amount of financial instruments at December 31, 1997
approximates fair value.
NOTE B--CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at two financial institutions.
Accounts at each institution are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate to $98,051 at
December 31, 1997. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
NOTE C--CONTRACT RECEIVABLES
Contract receivables consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Contract receivables currently due............... $8,805,476 $ 9,732,792
Retention........................................ 649,302 997,407
---------- -----------
9,454,778 10,730,199
Less: Allowance for doubtful accounts............ (123,706) (125,500)
---------- -----------
$9,331,072 $10,604,699
========== ===========
</TABLE>
F-163
<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
installments of $1,024, including interest, to December
1998................................................... $ 94,543 $ 89,949
Note payable to bank, 8.18% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $6,275, including interest, to January 1999......... 142,422 76,460
Note payable to bank, 8.45% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $8,424, including interest, to January 2000......... -- 192,251
Note payable to bank, 8.15% interest, with a vehicle
pledged as collateral. Payable in monthly installments
of $1,765, including interest, to October 1998......... 38,370 19,656
Note payable to former shareholder for redemption of
stock, 6.46% interest, quarterly payments of $7,329
including interest, last payment due February 1998..... 35,472 7,324
Note payable to Dory Electric, Inc., 7.5% interest for
purchase of Dory Electric, Inc. Payable in one
installment of $80,000 made January 1996 and monthly
installments of $4,008, including interest, to January
2001................................................... 165,747 132,018
1996 Notes payable, paid off in 1997.................... 829,183 --
---------- --------
1,305,737 517,658
Less current maturities............................. 156,269 320,644
---------- --------
$1,149,468 $197,014
========== ========
</TABLE>
The aggregate maturities on long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................... $320,644
1999............................................................... 138,316
2000............................................................... 58,697
--------
$517,657
========
</TABLE>
F-164
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE E--INDEBTEDNESS--Continued
Revolving Line of Credit
The Company has available a $3,667,000 revolving line of credit with M&I
Bank Fox Valley of Appleton which runs through March 31, 2000. Under the terms
of the agreement the Company is required to make monthly interest payments at
prime less .25% (effectively 8.25% (effectively 8.25% at December 31, 1997).
The terms of the agreement contain various restrictive covenants including the
maintenance of certain levels of working capital and net worth, redemption of
stock and issuance of stock. The Company is in compliance with these covenants
as of December 31, 1997. At December 31, 1997, there was no outstanding
balance on the revolver note.
NOTE F--INCOME TAXES
The provision (credit) for income taxes for the years ended December 31,
1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current
Federal................................. $ 990,507 $1,112,556 $ 751,935
State................................... 260,517 316,960 171,710
Deferred.................................. (96,000) (15,800) (29,400)
---------- ---------- ---------
$1,155,024 $1,413,716 $ 894,245
========== ========== =========
</TABLE>
The reconciliation of statutory to actual tax provision is as follows for
the year ended December 31:
<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
---------- ---- ---------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory
rate.................... $1,002,908 34.0% $1,179,648 34.0% $699,411 34.0%
State income taxes, net
of federal benefit...... 171,941 5.8 209,194 6.0 113,329 6.0
Other.................... (19,825) (0.6) 24,874 0.7 81,505 3.0
---------- ---- ---------- ---- -------- ----
Tax provision
recorded.............. $1,155,024 39.2% $1,413,716 40.7% $894,245 43.0%
========== ==== ========== ==== ======== ====
</TABLE>
The tax effect of items that comprise a significant portion of deferred tax
assets at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Vacation pay............................................... $198,966 $202,945
Accrued continued employment............................... 61,386 60,195
Allowance for bad debts.................................... 48,245 48,945
Other...................................................... 70,202 37,315
-------- --------
Total current deferred tax asset......................... 378,799 $349,400
======== ========
</TABLE>
F-165
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company leases its home office building under an operating lease in
effect through July, 2004. During the term of the lease, the Company has the
option to purchase the building. The Company also leases other office space
and a vehicle under operating leases. Future minimum rental payments under
these leases consist of the following at December 31, 1996:
<TABLE>
<S> <C>
1998............................................................ $ 237,655
1999............................................................ 216,184
2000............................................................ 161,277
2001............................................................ 141,960
2002............................................................ 141,960
Thereafter........................................................ 223,720
----------
Total......................................................... $1,122,756
==========
</TABLE>
Total rent expense for all operating leases was $234,180, $197,202, and
$116,818 for the years ended December 31, 1997, 1996 and 1995, respectively.
In addition, the Company rents equipment as needed. The Company treats these
rents as contract costs.
NOTE H--PROFIT SHARING AND 401(K) PLAN
The Company has a profit sharing and 401(k) plan covering substantially all
employees, which includes the provisions of Section 401(k) of the Internal
Revenue Code. The Plan allows for tax deferred employee contributions.
Participants may make voluntary contributions of between 1% and 15% of their
annual compensation to the Plan. This contribution may be 100% matched by the
Company, up to a maximum of $950 per employee for the years ended December 31,
1997, 1996, and 1995. Matching and any additional Company contributions to the
Plan are determined annually by the Board of Directors. Company contributions
to the Plan for the years ended December 31, 1997, 1996 and 1995 amounted to
$380,488, $315,874, and $277,720, respectively.
Beginning in 1995, participants were allowed to elect that up to 33% of
their matching contribution could be allocated to purchase Company stock.
These amounts have been deposited with the asset custodian.
NOTE I--STOCK REDEMPTION AGREEMENT
The Company's Articles of Incorporation include provisions concerning the
purchase of a stockholder's stock by the Company when such stockholder is no
longer an employee or director of the Company. Under the terms of this
agreement, the price paid for the stock is to be the Company's appraised value
as of the end of the fiscal year immediately preceding the date of the
termination of the stockholder as an employee or director.
F-166
<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.
/s/ Grant Thornton LLP
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-167
<PAGE>
GARFIELD ELECTRIC COMPANY
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31
--------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash........................................................... $ 3 $ 1
Accounts receivable:
Trade (including retainages of $55 and $67 in 1996 and
1997)....................................................... 971 1,664
Affiliates................................................... 297 158
Officer...................................................... 28 37
Allowance.................................................... (30) (30)
------ ------
1,266 1,829
Inventory...................................................... 42 54
Cost and estimated earnings in excess of billings on uncom-
pleted contracts.............................................. 615 1,211
Prepaid expenses............................................... 20 21
Deferred Federal income tax.................................... 6 37
------ ------
Total current assets....................................... 1,952 3,153
Equipment--net................................................. 328 294
Investment in affiliate........................................ -- 75
Deposits....................................................... 2 3
Cash surrender value of life insurance......................... 70 83
------ ------
Total assets............................................... $2,352 $3,608
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable--bank............................................ $ 474 $ 838
Current maturities of long-term debt........................... 5 15
Bank overdraft................................................. 141 218
Accounts payable:
Trade........................................................ 405 624
Affiliate.................................................... 20 21
Other........................................................ 7 7
------ ------
432 652
Billings in excess of costs and estimated earnings on uncom-
pleted contracts.............................................. 113 186
Accrued income taxes........................................... 156 228
Accrued expenses
Payroll and payroll taxes.................................... 118 181
Workers compensation......................................... 65 6
Dividends.................................................... 42 --
------ ------
Total accrued expenses..................................... 225 187
------ ------
Total current liabilities.................................. 1,546 2,324
Long-term debt obligations..................................... 2 18
STOCKHOLDERS' EQUITY
Common stock (5,000 shares authorized, 1,666 issued, with 933
shares outstanding in 1996 and 1997, without par value, at
aggregate stated value)..................................... 503 503
Retained earnings............................................ 496 958
Less 733 treasury shares at cost in 1996 and 1997............ (195) (195)
------ ------
Total stockholders' equity................................. 804 1,266
------ ------
Total liabilities and stockholders' equity................. $2,352 $3,608
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-168
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Contract revenue....................................... $11,792 $8,766 $10,826
Contract costs (net of affiliated company labor
transactions of $235, $505, and $472 for the years
ended December 31, 1995, 1996 and 1997................ 9,683 6,908 8,286
------- ------ -------
Gross profit....................................... 2,109 1,858 2,540
Selling and administrative expenses (net of affiliated
company reimbursement of $235, $488 and $360 for the
years ended December 31, 1995, 1996 and 1997.......... 1,325 1,394 1,593
Note receivable charge off............................. 564 -- 12
------- ------ -------
Total selling and administrative expense........... 1,889 1,394 1,605
------- ------ -------
Operating profit................................... 220 464 935
Other expense (income)
Interest expense..................................... 130 46 69
Interest income...................................... (16) -- --
Other................................................ -- 18 24
------- ------ -------
Earnings before income taxes....................... 106 400 842
Income taxes........................................... 27 185 319
------- ------ -------
Net earnings....................................... $ 79 $ 215 $ 523
======= ====== =======
Net earnings per share............................. $ 85 $ 230 $ 561
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-169
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Retained Treasury stockholders'
stock earnings stock equity
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995................. $503 $278 $(195) $ 586
Dividends, $36 per share................. -- (34) -- (34)
Net earnings............................. -- 79 -- 79
---- ---- ----- ------
Balance, December 31, 1995............... 503 323 (195) 631
Dividends, $45 per share................. -- (42) -- (42)
Net earnings............................. -- 215 -- 215
---- ---- ----- ------
Balance, December 31, 1996............... 503 496 (195) 804
Dividends, $65 per share................. -- (61) -- (61)
Net earnings............................. -- 523 -- 523
---- ---- ----- ------
Balance, December 31, 1997 $503 $958 $(195) $1,266
==== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-170
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31
------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings.............................................. $ 79 $ 215 $523
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Gain) on disposal of asset.............................. (5) (2) (4)
Deferred Federal income tax.............................. (1) (5) (31)
Depreciation and amortization............................ 102 101 144
Changes in assets and liabilities:
Accounts receivable..................................... (301) 815 (563)
Note receivable charge off.............................. 564 -- --
Inventory............................................... (7) 41 (12)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (487) 354 73
Cost and estimated earnings on uncompleted contracts in
excess of billings..................................... (78) (100) (596)
Prepaid expenses........................................ 16 (16) (2)
Accounts payable........................................ 222 (612) 220
Accrued income taxes.................................... 77 150 72
Accrued expenses........................................ 110 (33) (38)
----- ----- ----
Net cash provided by (used in) operating activities.... 291 908 (214)
Cash flows provided by (used in) investing activities:
Purchases of equipment.................................... (94) (214) (109)
Investment in Affiliate................................... -- -- (75)
Proceeds from disposal of equipment....................... 5 2 3
Increase in cash surrender value of life insurance........ (15) (16) (13)
Note receivable........................................... 59 -- --
----- ----- ----
Net cash used in investing activities.................. (45) (228) (194)
Cash flows provided by (used in) financing activities:
Dividends paid............................................ (33) (42) (61)
Proceeds (payment) of note payable........................ (502) (332) 26
Change in bank overdraft and line of credit............... 290 (305) 441
----- ----- ----
Net cash provided by (used in) financing activities.... (245) (679) 406
----- ----- ----
Net increase (decrease) in cash............................ 1 1 (2)
Cash at beginning of year.................................. 1 2 3
----- ----- ----
Cash at end of year........................................ $ 2 $ 3 $ 1
===== ===== ====
Supplemental disclosure of cash transactions:
Interest paid............................................. $ 130 $ 46 $ 69
===== ===== ====
Taxes paid................................................ $ 16 $ 39 $247
===== ===== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-171
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Company is a non-union electrical contractor performing services
primarily in the Midwest area of the United States. A summary of significant
accounting policies consistently applied in the preparation of the
accompanying financial statements follows:
1. Income Recognition
The accompanying financial statements have been prepared using the
percentage-of-completion method of accounting and, therefore, take into
account the cost, estimated earnings and revenue to date on contracts not yet
completed.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears in relation to the
anticipated final total cost, based on current estimates of cost to complete.
Actual results may vary from anticipated amounts.
Contract cost includes all direct labor and benefits, materials unique to or
installed in the project, subcontract costs, and allocated indirect
construction costs.
As long-term contracts extend over one or more years, revisions in estimates
of cost and earnings during the course of the work are reflected in the
accounting period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Inventory
Inventory is stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
3. Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service
lives, approximately three to ten years, principally on accelerated methods.
4. Income Taxes
Deferred income taxes have been provided for timing differences primarily
relating to currently non-deductible state tax accruals which completely
reverse in the subsequent year.
Permanent differences result from officers life insurance expense and meals
and entertainment expense.
5. Major Customers
Approximately 36% of 1995 revenues were derived from two customers (20% and
16% respectively). Approximately 35% of 1996 revenues were derived from three
customers (13%, 11% and 11% respectively). Approximately 31% of 1997 revenues
were derived from two customers (20% and 11% respectively).
6. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
F-172
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(Continued)
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
7. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
8. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
9. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period. Weighted average common shares outstanding were
933 shares for all periods persented.
NOTE B--EQUIPMENT--LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
December 31
-------------
1996 1997
------ ------
<S> <C> <C>
Automobiles and trucks........................................ $ 393 $ 400
Equipment..................................................... 658 718
Fixtures...................................................... 114 115
------ ------
1,165 1,233
Accumulated depreciation...................................... 837 939
------ ------
$ 328 $ 294
====== ======
</TABLE>
Depreciation expense was $102, $101 and $144 for the years ended December
31, 1995, 1996 and 1997.
NOTE C--EMPLOYEE BENEFIT PLANS
The Company has a contributory profit-sharing plan covering all full time
employees. Contributions are made at the discretion of the Board of Directors.
Effective March 1, 1989, the plan was amended to include a 401(k) plan, to
which contributions may be made by the Corporation. Contributions to the plan
totaled $20 and $22, and $57 in December 31, 1995, 1996 and 1997.
F-173
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE D--LEASES
The Company occupies premises owned by related parties under month-to-month
leases at monthly rentals of approximately $4 in 1995, 1996, and 1997. Total
rental expense was $92, $89, and $139 for December 31, for 1995, 1996 and
1997.
NOTE E--DEBT
The Company has a $1,250 revolving credit note with interest at prime (8.75%
at December 31, 1997) plus .5% of which $474, and $838 are outstanding at
December 31, 1996, and 1997. The note is secured by inventory, equipment and
contract rights. This is guaranteed by stockholders of the company and there
are cross guarantees in place with Indecon, Inc. a related company.
Equipment obligations are payable in monthly installments of approximately
$1 including interest at December 31, 1997. This obligation matures in 2000.
NOTE F--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31
--------------
1996 1997
------ ------
<S> <C> <C>
Costs incurred on uncompleted contracts...................... $2,324 $3,934
Estimated earnings........................................... 761 1,268
------ ------
3,085 5,202
Less billings to date...................................... 2,583 4,177
------ ------
$ 502 $1,025
====== ======
Presented on the balance sheet as follows:
Costs and estimated earnings in excess of billings......... $ 615 $1,211
Billings in excess of costs and estimated earnings......... (113) (186)
------ ------
$ 502 $1,025
====== ======
</TABLE>
The backlog of contracts yet to be completed at December 31, 1997 includes
revenue, costs and gross profit of approximately $3,201, $2,235 and $966,
respectively.
F-174
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE G--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
Years Ended
December 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current................................................... $22 $134 $285
Deferred.................................................. (1) (5) (31)
State and local........................................... 6 56 65
--- ---- ----
$27 $185 $319
=== ==== ====
Components of effective income tax rate:
Federal:
Statutory rate............................................ 22% 34% 34%
Permanent differences..................................... (3) (1) --
Other..................................................... -- (1) --
State and local........................................... 6 14 8
--- ---- ----
Net effective income tax rate............................ 25% 46% 42%
=== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
December 31
-----------
1996 1997
----- -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual........................ $ 6 $ 32
</TABLE>
NOTE H--RELATED PARTIES
The Company receives a management fee from related companies as a
reimbursement of the cost of performance of administrative functions. This
amounted to approximately $235, $488 and $360 in December 31, 1995, 1996 and
1997 which has been reflected as a reduction of selling and administrative
expenses.
The Company and its related party, from time to time provide workers to each
other during peak labor needs. These charges are recorded at cost, including
benefits and related payroll taxes. The totals charged to the related party by
the Company for work performed by its workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively. The totals charged to the
Company for work performed by the related party's workers was $40, $34 and $5
for the years ended 1995, 1996 and 1997 respectively.
F-175
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE I--TREASURY STOCK
The Company has repurchased the shares of a former shareholder for a total
of $132. This amount is being repaid in twelve quarterly installments of
approximately $11 plus interest at 10%. The note is reflected in the financial
statements at $132 less payments made to date. The financial instrument is
recorded at cost which approximates fair value. As of December 31, 1997 all
payments have been made.
NOTE J--UNCOLLECTIBLE NOTE RECEIVABLE
The Company advanced money to and performed services for another
construction company from time to time. During the year ended December 31,
1995, it became known to the Company that the amounts advanced would be
uncollectible and the asset was written off.
NOTE K--COMMITMENT
On January 29, 1998 the Corporation entered into a letter of intent with
Consolidation Capital Corporation (CCC) for the potential sale of Garfield
Electric Company to CCC.
NOTE L--CONTINGENCIES
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations. In addition, a shareholder resigned from the Company on
April 30, 1993 and his stock was redeemed in accordance with the shareholders
agreement. He has refused to accept the amount paid by the Company and asserts
that a larger amount is due. No suit has been filed.
NOTE M--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Company the option to
purchase the shares at book value as of the last audited financial statement.
F-176
<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.
/s/ Grant Thornton LLP
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-177
<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
uncompleted contracts......................................... 464 56
Prepaid expenses............................................... 1 3
Deferred Federal income tax.................................... 15 42
------ ------
Total current assets....................................... 2,741 3,315
Equipment--net................................................. 126 200
Deposits....................................................... 1 1
------ ------
Total assets............................................... $2,868 $3,516
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................. $ 71 $ 728
Bank overdraft................................................. 382 16
Accounts payable:
Trade........................................................ 388 209
Affiliate.................................................... 297 302
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 4 134
Accrued income taxes........................................... 186 164
Deferred federal income tax.................................... -- 8
Accrued expenses:
Payroll...................................................... 365 388
Other........................................................ 110 51
------ ------
Total current liabilities.................................. 1,803 2,000
STOCKHOLDERS' EQUITY
Common stock (750 shares authorized and issued, with 500
shares outstanding in 1996 and 1997, with a stated value of
$4 per share)............................................... 3 3
Retained earnings............................................ 1,095 1,546
Less 250 treasury shares at cost in 1995 and 1996............ (33) (33)
------ ------
Total stockholders' equity................................. 1,065 1,516
------ ------
Total liabilities and stockholders' equity................. $2,868 $3,516
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-178
<PAGE>
INDECON, INC.
STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Contract revenue..................................... $7,425 $11,291 $13,672
Contract costs (net affiliated company labor
transactions of $235, $505 and $472 for the years
ended December 31, 1995, 1996 and 1997.............. 5,886 9,199 11,301
------ ------- -------
Gross profit..................................... 1,539 2,092 2,371
Selling and administrative expenses (including
administrative expense reimbursement to affiliate of
$210, $441and $360 for the years ended December 31,
1995, 1996 and 1997)................................ 1,006 1,244 1,376
------ ------- -------
Operating profit................................. 533 848 995
Other expense (income)
(Gain) on disposal of asset........................ (2) -- (1)
Interest--expense.................................. 22 24 33
Interest income.................................... (17) (16) (40)
------ ------- -------
Earnings before income taxes..................... 530 840 1,003
Income taxes......................................... 214 356 452
------ ------- -------
Net earnings..................................... $ 316 $ 484 $ 551
====== ======= =======
Net earnings per common share--primary........... $ 632 $ 968 $ 1,102
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-179
<PAGE>
INDECON, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Retained Treasury stockholders'
stock earnings stock equity
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995............... $ 3 $ 335 $(31) $ 307
Net earnings........................... -- 316 -- 316
--- ------ ---- ------
Balance, December 31, 1995............. 3 651 (31) 623
Dividends, $80 per share............... -- (40) -- (40)
Purchase price adjustment on treasury
shares................................ -- -- (2) (2)
Net earnings........................... -- 484 -- 484
--- ------ ---- ------
Balance, December 31, 1996............. 3 1,095 (33) 1,065
Dividends, $200 per share.............. -- (100) -- (100)
Net earnings........................... -- 551 -- 551
--- ------ ---- ------
Balance, December 31, 1997............. $ 3 $1,546 $(33) $1,516
=== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-180
<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
provided by (used in) operating activities:
(Gain) on disposal of asset............................. (2) -- (1)
Deferred Federal income tax............................. 3 (11) (19)
Depreciation and amortization........................... 59 65 81
Changes in assets and liabilities
Accounts receivable.................................... (411) (477) (612)
Inventory.............................................. -- (136) 98
Unbilled receivables on completed contracts............ (394) 157 45
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 62 (58) 130
Cost and estimated earnings on uncompleted contracts in
excess of billings.................................... 130 (441) 408
Prepaid expenses....................................... 1 1 (2)
Accounts payable....................................... 267 305 (174)
Accrued income taxes................................... 5 58 (22)
Accrued expenses....................................... 239 101 (36)
----- ----- -----
Net cash provided by operating activities............. 275 48 447
Cash flows (used in) investing activities:
Proceeds from sale of equipment.......................... -- -- 1
Purchases of equipment................................... (71) (61) (155)
Increase in notes receivable affiliate................... (167) (91) (484)
----- ----- -----
Net cash used in investing activities................. (238) (152) (638)
Cash flows provided by (used in) financing activities:
Increase in purchase price of treasury stock............. -- (2) --
Dividends paid........................................... -- (40) (100)
(Proceeds) payment of note payable....................... (288) 42 657
Increase (decrease) in bank overdraft.................... 251 104 (366)
----- ----- -----
Net cash provided by (used in) financing activities... (37) 104 191
----- ----- -----
Net decrease in cash...................................... -- -- --
Cash at beginning of year................................. -- -- --
----- ----- -----
Cash at end of year....................................... $ -- $ -- $ --
===== ===== =====
Supplemental disclosure of cash transactions:
Interest paid............................................ $ 22 $ 20 $ 33
===== ===== =====
Taxes paid............................................... $ 205 $ 309 $ 297
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-181
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Corporation is an industrial electrical contractor whose work is
primarily in Ohio and Kentucky. A summary of significant accounting policies
applied in the preparation of the accompanying financial statements follows:
1. Income Recognition
The Corporation recognizes income on the percentage of completion method.
The percentage of completion is calculated on the cost to cost method using
cost to date and total estimated cost on a job by job basis. Actual results
may vary from estimates. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is accrued. The current asset
caption "unbilled receivables on completed contracts" includes revenues earned
in excess of billings for time and materials contracts as of December 31, 1996
and 1997. Contract Revenues include $4,520, $8,122, and $10,936 in 1995, 1996,
and 1997 derived from time and material jobs.
2. Inventory
Inventory represents materials purchased for jobs which have not commenced
at December 31. The inventory is carried at the lower of cost or market on a
FIFO basis.
3. Equipment
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
approximately three to ten years, principally on accelerated methods.
4. Income Taxes
The provision for tax is charged to current earnings. Deferred taxes have
been recorded for timing differences in deductibility of state income taxes
which completely reverse in the subsequent year and differences in
depreciation methods for book and tax purposes.
5. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
6. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
F-182
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
7. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
8. Earnings Per Share
Basic earnings per share is computed based upon weighted-average shares
outstanding during the period. Weighted-average shares outstanding for all
periods was 500 shares.
NOTE B--NOTES RECEIVABLE--AFFILIATE
The notes receivable--affiliate result from cash advances to two different
affiliated Companies which have common ownership with this Company. The notes
are due on demand and bear interest at a rate equal to the Corporations line
of credit. The notes are unsecured.
NOTE C--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Office equipment............................................. $ 108 $ 142
Construction equipment....................................... 249 364
------ ------
357 506
Accumulated depreciation................................... (231) (306)
------ ------
$ 126 $ 200
====== ======
</TABLE>
Depreciation expense for the year ended December 31, 1995, 1996 and 1997 was
$59, $65 and $81, respectively.
NOTE D--NOTE PAYABLE
The Corporation used at December 31, 1996 and 1997 $71 and $728 of a $1,200
revolving note from the bank. The interest rate is 1% over the prime rate
(currently 8.25%) as of December 31, 1997. The note is secured by inventory
and accounts receivable and is guaranteed by the stockholders. There are also
guarantees in place with Garfield Electric Company, a related company.
F-183
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE E--OPERATING LEASES
The Corporation entered into an agreement in June 1997 which leases office
space under an operating lease. The following is a schedule, by years, of the
future minimum rental payments which expire January 31, 2003:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998 $59,316
1999 $59,952
2000 $59,952
2001 $59,952
2002 $59,952
2003 $ 4,996
</TABLE>
Total rent expense under the operating lease was $66,761 for 1997.
NOTE F--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current.................................................. $162 $282 $352
Deferred................................................. 3 (11) (19)
State and local.......................................... 49 85 119
---- ---- ----
$214 $356 $452
==== ==== ====
Components of effective income tax rate:
Federal:
Statutory................................................ 34% 34% 34%
Permanent differences.................................... -- -- --
Other.................................................... (3) -- --
State and local.......................................... 10 6 12
---- ---- ----
Net effective income tax rate.......................... 41% 40% 46%
==== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
December 31
------------
1996 1997
------ -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual....................... $ 15 $ 42
====== =====
Deferred tax liability depreciation.......................... $ -- $ 8
====== =====
</TABLE>
NOTE G--RELATED PARTIES
Two of the stockholders of Indecon, Inc. are stockholders of a related
company to which payments are made to perform some of the administrative
functions of Indecon. The total of this administrative fee paid to reimburse
F-184
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE G--RELATED PARTIES (continued)
the cost of the services provided was $210, $441 and $360, in 1995, 1996 and
1997, respectively. The Corporation and its' related party from time to time
provide workers to each other during peak labor needs. These charges are
recorded at cost, including benefits and payroll taxes. The totals charged to
the related party for work performed by its' workers was $40, $34 and $5 for
the years ended 1995, 1996 and 1997, respectively. The totals charged to the
Corporation for work performed by its' workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively.
In 1997, the company separated its Data Network Solutions Cabling division
and sold its net assets at book value to a separate company owned
substantially by Indecon's shareholders.
NOTE H--MAJOR CUSTOMERS
The Corporation had sales to one customer totaling for 79% of total revenue
in 1995, and sales to three customers for 40% of total revenues (15%, 13% and
12%) in 1996 and sales to one customer for 56% of total revenues in 1997.
NOTE I--PROFIT-SHARING PLAN
As of January 1, 1991, the Corporation implemented a 401(k) profit-sharing
plan for all eligible employees. Employer contributions are made at the
discretion of the Board of Directors, with all costs funded as accrued.
Contributions by the Corporation in 1995, 1996 and 1997 totaled $40, $65 and
$44.
NOTE J--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31
-------------
1996 1997
----- ------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 442 $163
Estimated earnings.......................................... 145 17
----- ------
587 180
Less billings to date....................................... 127 258
----- ------
$ 460 $ (78)
===== ======
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $ 464 $ 56
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... (4) (134)
----- ------
$ 460 $ (78)
===== ======
</TABLE>
NOTE K--SETTLEMENT OF STOCKHOLDER LAWSUIT
In February 1996, a lawsuit with a stockholder was settled. The Corporation
was directed to pay a total of $27 for the stockholder's one hundred twenty-
five shares, pursuant to the Corporation's stock repurchase agreement. An
additional $2 was paid to the stockholder.
F-185
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE L--COMMITMENT
On January 29, 1998 the Corporation entered into a Letter of Intent with
Consolidation Capital Corporation (CCC) for the potential sale of Indecon,
Inc. to CCC.
NOTE M--LITIGATION
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE N--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Corporation the option to
purchase shares at book value as of the last audited financial statement.
F-186
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Taylor Electric, Inc.
We have audited the accompanying balance sheet of Taylor Electric, Inc. as
of December 31, 1997, and the related statements of earnings, retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taylor Electric, Inc. as
of December 31, 1997 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Leverich, Phillips, Rasmuson & Company
Leverich, Phillips, Rasmuson & Company
Salt Lake City, Utah
February 20, 1998
F-187
<PAGE>
TAYLOR ELECTRIC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (Note F)............................... $1,158,324 $2,942,591
Contracts receivable (including retentions
of $1,370,552)
(Note A5).................................. 3,918,633 4,159,332
Employee receivable......................... 1,315 3,011
Inventory (Note A6)......................... 113,778 198,805
Prepaid expenses............................ 55,097 33,117
Costs and estimated profits in excess of
billings on uncompleted contracts (Note
B)......................................... 316,191 44,999
---------- ----------
TOTAL CURRENT ASSETS...................... 5,563,338 7,381,855
PROPERTY AND EQUIPMENT, net of accumulated
depreciation (Note C)........................ 420,591 405,575
OTHER ASSETS
Deposits.................................... 9,125 9,449
---------- ----------
TOTAL ASSETS............................ $5,993,054 $7,796,879
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Including retentions of
$44,304 and $27,174)....................... $ 505,664 $1,092,520
Accrued expenses............................ 493,821 323,281
Billings in excess of costs and estimated
profits on uncompleted contracts (Note B).. 908,277 1,895,733
---------- ----------
TOTAL CURRENT LIABILITIES................. 1,907,762 3,311,534
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized
50,000 shares, issued and outstanding
1,222 shares............................... 425,986 425,986
Retained earnings........................... 3,659,306 4,059,359
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................ 4,085,292 4,485,345
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $5,993,054 $7,796,879
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-188
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
Year Ended
December
31, 1997 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Construction revenue....................... $19,192,685 $4,070,974 $4,782,343
Construction costs......................... 13,799,340 3,287,914 4,099,057
----------- ---------- ----------
Gross Profit........................... 5,393,345 783,060 683,286
General and administrative expenses........ 1,271,756 278,129 296,912
----------- ---------- ----------
Earnings from Operations............... 4,121,589 504,931 386,374
Other income/(expense)
Miscellaneous income (expense)........... 41,458 (8,582) (23,013)
Interest income.......................... 112,759 13,680 30,509
Interest expense......................... (31) -- (18)
Gain on sale of assets................... 1,298 6,771 6,201
----------- ---------- ----------
NET EARNINGS........................... 4,277,073 516,800 400,053
Retained earnings--beginning of year....... 2,610,579 2,610,578 3,659,306
Shareholder distributions.................. (3,228,346) -- --
----------- ---------- ----------
Retained earnings--end of year............. $ 3,659,306 $3,127,378 $4,059,359
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-189
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF CASH FLOWS
Increase/(Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended
December Three Months Ended
31, 1997 March 31,
---------- ----------------------
1997 1998
---------- ----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................. $4,277,073 $ 516,800 $ 400,053
Adjustment to reconcile net earnings to
net cash provided by operating
activities:
Depreciation............................. 125,043 29,539 27,614
Gain on sale of assets................... (1,298) -- --
Changes in operating assets and
liabilities:
(Increase)/Decrease in:
Contracts receivable................... (420,127) 309,622 (218,719)
Inventory.............................. 135,510 (43,515) (85,027)
Costs and estimated profits in excess
of billings on uncompleted contracts.. (291,089) -- 271,192
Employee receivable.................... 8,119 3,546 (1,696)
Prepaid expenses....................... (4,190) -- --
Deposits............................... 694 619 (325)
(Decrease)/Increase in:
Billings in excess of costs and
estimated profits on uncompleted
contracts............................. 22,989 -- 987,456
Accounts payable....................... (210,170) 95,028 509,272
Accrued expenses....................... (96,491) (16,403) (92,956)
---------- ---------- ----------
Total adjustment to net earnings...... (731,010) 378,436 1,396,811
---------- ---------- ----------
Net Cash Provided by Operating
Activities.......................... 3,546,063 895,236 1,796,864
Cash flows from investing activities:
Purchase of equipment..................... (118,112) (37,193) (12,598)
Proceeds from sale of assets.............. 6,832 -- --
---------- ---------- ----------
Net Cash Used by Investing
Activities.......................... (111,280) (37,193) (12,598)
Cash flows from financing activities:
Shareholder distributions................. (3,228,346) -- --
---------- ---------- ----------
Net Cash Used by Financing
Activities.......................... (3,228,346) -- --
---------- ---------- ----------
Net increase in cash....................... 206,437 858,043 1,784,266
Cash--beginning of year.................... 951,887 951,887 1,158,325
---------- ---------- ----------
Cash--end of year.......................... $1,158,324 $1,809,930 $2,942,591
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-190
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Method of accounting for long-term construction contracts
The Company is engaged in electrical contracting under long-term
construction contracts in Utah and surrounding areas. The accompanying
financial statements have been prepared using the percentage-of-completion
method measured by percentage of cost incurred to date to estimated total cost
for each contract and, therefore, take into account the cost, estimated
earnings, and revenue to date on the contracts not yet complete. That method
is used because management considers total cost to be the best available
measure of progress on the contracts.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final total costs, based on current estimates of cost to complete. It is not
related to the progress billings to customers.
Revenue earned on contracts in process in excess of billings (underbillings)
is classified as a current asset. Amounts billed in excess of revenue earned
(overbillings) are classified as current liabilities.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Use of estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, and the reported revenues and expenses.
3. Operating cycle
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheet, as
they will be liquidated in the normal course of contract completion, although
this may be more than one year.
4. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. During the year ended December 31, 1997, the Company paid
interest of $31, none of which was required to be capitalized. There were no
non-cash investing or financing activities for the year ended December 31,
1997.
5. Allowance for doubtful accounts
The Company considers contracts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts has been provided. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
The Company also expects all retention receivables to be collected within
the normal course of contract completion.
F-191
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
6. Inventory
The inventory of the Company consists of electrical materials and supplies
used on construction contracts. Inventory is stated at the lower of cost or
market using the first-in, first-out (FIFO) method of accounting. At December
31, 1997, the inventory was valued at $113,778.
7. Income taxes
The income taxes on the net operations for the year are payable personally
by the shareholders pursuant to an election under Subchapter S of the Internal
Revenue Code not to have the Company taxed as a corporation. Accordingly, no
provision has been made for taxes. The tax liability would be approximately
$1,668,058 had such taxes been payable by the Corporation at December 31,
1997.
NOTE B--COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts......................... $ 8,797,615
Estimated earnings.............................................. 3,563,703
-----------
12,361,318
Less: Billings to date.......................................... 12,953,404
-----------
(592,086)
===========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated profits in excess of billings on uncompleted
contracts...................................................... 316,191
Billings in excess of costs and estimated profits on uncompleted
contracts...................................................... (908,277)
--------
(592,086)
========
</TABLE>
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Accumulated Book
Cost Depreciation Value
--------- ------------ ---------
<S> <C> <C> <C>
Leasehold improvements.................... $ 169,205 $ 43,904 $ 125,301
Furniture and fixtures.................... 177,986 102,175 75,811
Construction equipment.................... 256,116 154,249 101,867
Vehicles.................................. 339,179 221,567 117,612
--------- -------- ---------
$ 942,486 $521,895 $ 420,591
========= ======== =========
</TABLE>
Depreciation expense is computed using the straight-line method in amounts
sufficient to write off the cost of depreciable assets over their estimated
useful lives. Depreciation expense for the year ended December 31, 1997
amounted to $125,043. Of this amount, $90,184 was included in direct equipment
costs and $34,859 was included in general and administrative expenses.
F-192
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE D--BACKLOG
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997:
<TABLE>
<S> <C>
Balance--beginning of year...................................... $ 8,181,324
New contracts and change orders................................. 30,601,370
-----------
38,782,694
Less contract revenue earned at December 31, 1997............... 19,192,685
-----------
Balance--end of year............................................ $19,590,009
===========
</TABLE>
NOTE E--SALARY REDUCTION AND PROFIT SHARING PLAN
The Company maintains a defined contribution retirement plan pursuant to the
Internal Revenue Code 401(k). All employees that work over 1,000 hours and
have completed one year of service are eligible to enter the plan on the
plan's entry date. Participants are 100% vested in the employer's
contributions upon admission to the plan. The plan allows for a maximum
employee contribution of 10% of compensation up to the maximum amount allowed
by law. The Company matches 45% of employee contributions. For the year ended
December 31, 1997, the Company contributed $137,290 to the plan.
NOTE F--CONCENTRATIONS OF CREDIT RISK
The Company verifies sources of payment and has legal lien rights on all
significant private and commercial jobs. In compliance with state laws, the
Company pursues and perfects its mechanical lien rights against all
significant projects.
As of December 31, 1997, the Company held cash in demand accounts at banks
in excess of the federally insured amounts.
NOTE G--RELATED PARTY TRANSACTIONS
The Company rents the buildings it occupies from Jerald M. Taylor, president
and majority shareholder of the Company. Total rents paid to Mr. Taylor for
the year ended December 31, 1997 amounted to $56,100.
NOTE H--MAJOR CUSTOMERS
Construction contracts with three major customers accounted for 58% of
current year revenues.
F-193
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Regency Electric Company, Inc.
We have audited the accompanying consolidated balance sheets of Regency
Electric Company, Inc. (an S corporation) and subsidiaries, as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholder's equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Regency Electric Company, Inc. and subsidiaries, as of December 31, 1997
and 1996 and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Harbeson Beckerleg & Fletcher
Harbeson Beckerleg & Fletcher
Jacksonville, Florida
February 18, 1998
F-194
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 6,688,354 $11,337,758 $15,002,062
Short-term investments................... 4,511,541 3,726,007 3,918,438
Contract receivables (Note 2)............ 11,392,358 16,692,180 13,293,712
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note
3)...................................... 1,821,958 1,798,759 2,259,038
Deposits................................. 300,000 -- --
Prepaid expenses and other current
assets.................................. 200,156 282,202 330,653
----------- ----------- -----------
Total current assets................... 24,914,367 33,836,906 34,803,903
Property and equipment, less accumulated
depreciation (Note 4)..................... 243,501 3,513,029 3,467,252
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Notes payable, due within one year (Note
5)...................................... $ 1,000 $ 1,000 --
Accounts payable......................... 2,300,601 3,218,620 3,803,910
Accrued expenses......................... 1,682,130 1,208,867 2,714,353
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note
3)...................................... 5,750,211 10,282,005 7,846,055
----------- ----------- -----------
Total current liabilities.............. 9,733,942 14,710,492 14,364,318
Stockholder's equity:
Common stock, $.01 par value, 10,000
shares authorized, issued and
outstanding............................. 70 100 100
Additional paid-in capital............... 1,358,800 1,358,800 1,358,800
Retained earnings........................ 14,065,056 21,280,543 22,547,937
----------- ----------- -----------
Total stockholder's equity............. 15,423,926 22,639,443 23,906,837
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-195
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three For the Three
Year Ended December 31, Months Ended Months Ended
------------------------ 3/31/97 3/31/98
1996 1997 (unaudited) (unaudited)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Contract revenues earned
and contract
assignments............ $64,412,229 $66,161,538 14,405,500 21,307,430
Contract assignments
(Note 1)............... (4,099,877) (5,878,594) (1,940,134) (856,120)
----------- ----------- ---------- -----------
Contract revenues
earned................. 60,312,352 60,282,944 12,465,366 20,451,310
Cost of revenues
earned................. (43,688,707) (44,338,484) (8,964,767) (15,300,594)
----------- ----------- ---------- -----------
Gross profit.......... 16,623,645 15,944,460 3,500,599 5,150,716
Selling, general and
administrative
expenses............... (7,080,475) (7,162,763) (1,948,568) (2,095,422)
Other income (expense):
Interest and other.... 851,256 1,296,003 272,656 355,046
Minority interest in
joint venture........ (58,546) -- -- --
----------- ----------- ---------- -----------
Net income.............. $10,335,880 $10,077,700 $1,824,687 $ 3,410,340
=========== =========== ========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-196
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1997 and 1996
and the Three Months Ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Retained Earnings
------------------------------------
Additional Accumulated Tax Timing
Common Paid-in Adjustments Differences
Stock Capital Account and Other Total
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995 $ 60 $ 500,000 $10,286,585 $(289,355) $ 9,997,230
Issuance of common
stock................ 10 -- -- -- --
Capital contribution.. -- 858,800 -- -- --
Taxable income........ -- -- 10,561,335 -- 10,561,335
Tax deferred income... -- -- -- (290,341) (290,341)
Nondeductible
expenses............. -- -- (13,668) -- (13,668)
Dividends............. -- -- (6,268,054) -- (6,268,054)
Nontaxable income..... -- -- -- 78,554 78,554
---- ---------- ----------- --------- -----------
Balance, December 31,
1996 70 1,358,800 14,566,198 (501,142) 14,065,056
S corporation parent
election............. 30 -- -- -- --
Taxable income........ -- -- 8,489,798 -- 8,489,798
Tax deferred income... -- -- -- 1,310,037 1,310,037
Nondeductible
expenses............. -- -- (8,732) -- (8,732)
Dividends............. -- -- (2,727,264) -- (2,727,264)
Nontaxable income..... -- -- -- 151,648 151,648
---- ---------- ----------- --------- -----------
Balance, December 31,
1997 100 1,358,800 20,320,000 960,543 21,280,543
Net income
(unaudited).......... -- -- 3,410,340 -- 3,410,340
Dividends
(unaudited).......... -- -- (2,142,946) -- (2,142,946)
---- ---------- ----------- --------- -----------
Balance, March 31, 1998
(unaudited) $100 $1,358,800 $21,587,394 $ 960,543 $22,547,937
==== ========== =========== ========= ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-197
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Increase (decrease) in
cash and cash equivalents
Cash flow from operating
activities:
Cash received from
customers.............. $60,136,320 $59,538,115 $12,516,558 $20,953,549
Cash paid to
subcontractors,
suppliers and
employees.............. (54,188,057) (50,909,563) (10,605,680) (15,295,225)
Interest and other
income................. 508,284 648,637 272,656 355,046
Interest paid........... (5,332) (29,234) -- --
----------- ----------- ----------- -----------
Cash from operating
activities........... 6,451,215 9,247,955 2,183,534 6,013,370
----------- ----------- ----------- -----------
Cash flow from investing
activities:
Sales (purchases) of
short-term investments,
net.................... (3,651,725) 1,253,389 2,280,185 (192,431)
Purchase of equipment... (357,691) (4,635,460) (10,602) (12,689)
Deposit on airplane..... (300,000) 300,000 -- --
Sale of equipment....... 1,639,108 1,359,500 -- --
----------- ----------- ----------- -----------
Cash (for) from
investing
activities........... (2,670,308) (1,722,571) 2,269,583 (205,120)
----------- ----------- ----------- -----------
Cash flow from financing
activities:
Dividends paid.......... (6,268,054) (2,876,010) (928,276) (2,142,946)
Capital contribution.... 858,800 -- -- --
Distribution to minority
partner................ (223,389) -- -- --
Issuance of common
stock.................. 10 -- --
S corporation parent
election............... -- 30 30 --
Repayment of debt....... -- (1,000)
----------- ----------- ----------- -----------
Cash used for
financing
activities........... (5,632,633) (2,875,980) (928,246) (2,143,946)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (1,851,726) 4,649,404 3,524,871 3,664,304
Cash and cash equivalents:
Beginning of period..... 8,540,080 6,688,354 6,688,354 11,337,758
----------- ----------- ----------- -----------
End of period........... $ 6,688,354 $11,337,758 $10,213,225 $15,002,062
=========== =========== =========== ===========
Reconciliation of net
income to cash provided
by (used for) operating
activities
Net income................ $10,335,880 $10,077,700 $ 1,824,687 $ 3,410,340
Adjustments:
Depreciation............ 126,525 185,953 31,385 58,466
Gain on sale of fixed
assets................. (153,592) (179,521) -- --
Gain on short-term
investments............ (189,380) (467,845) -- --
Minority interest in
joint venture.......... 58,546 -- -- --
Changes in:
Contract receivables
and related billings
vs. earnings.......... (176,032) (744,829) 59,192 502,239
Prepaids and other
assets................ (7,247) (82,046) (143,804) (48,451)
Accounts payable and
accrued expenses...... (3,543,485) 458,543 420,074 2,090,776
Notes Receivable....... -- -- (8,000) --
----------- ----------- ----------- -----------
$ 6,451,215 $ 9,247,955 $ 2,183,534 $ 6,013,370
=========== =========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-198
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Note 1--Significant Accounting Policies:
Basis of Presentation
The consolidated statements include Regency Electric Company, Inc. (REC),
Regency Electric Company Jacksonville Office, Inc. (REC Jacksonville), Regency
Electric Company Atlanta Office, Inc. (REC Atlanta), Regency Electric Company
Orlando Office, Inc. (REC Orlando), Regency Electric Company Charlotte Office,
Inc. (REC Charlotte), Regency Electric Company Projects Group, Inc. (REC
Proj.) and Regency Aviation Company, Inc. (RAC). All significant intercompany
accounts and transactions have been eliminated. In 1993, REC Orlando entered
into a joint venture agreement and became a 90% partner in Regency/Zap
Electrical Construction Team, a Joint Venture (Joint Venture). The sole
contract of the Joint Venture was completed during 1996 and the Joint Venture
was liquidated
REC became an S corporation parent effective January 1, 1997 when the
company's shareholder contributed the stock of the other entities and they
elected to become qualified S corporation subsidiaries. Consolidated financial
statements have been prepared as if the entities had always been parent and
subsidiary entities.
Unaudited Interim Financial Statement Information
In connection with the subsequent business combination agreement and related
Securities and Exchange Commission filing requirements, the management of the
Company has included unaudited interim financial statement information. In the
opinion of management, the Company has made all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
condition of the Company as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1998 and 1997, and the
statements of stockholder's equity as of and for the three months ended March
31, 1998, as presented in the accompanying unaudited interim financial
statements information.
Company's Activities and Operating Cycle
The companies are engaged in the construction industry as electrical
contractors, with the exception of RAC which provides aviation services to the
companies. The work is performed under fixed-price, cost plus and fixed-fee
contracts.
The length of the companies' contracts vary, but typically do not extend
beyond 18-24 months. Assets and liabilities are classified as current and
noncurrent because the contract-related items in the balance sheet have
realization and liquidation periods within the operating cycle.
Accounting Estimates
The financial statements include various estimates and assumptions by
management that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period.
Revenue and Cost Recognition
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the cost-to-cost method.
Contract assignments include material or equipment furnished to the
contractor by the owner in which the contractor assumes all obligations,
liabilities and responsibilities for the material or equipment including but
not limited to the following: risk of loss, cost of unloading, handling,
maintenance, insuring, storing, securing, protecting, installing, starting-up,
checking-out, and safeguarding such material and equipment.
F-199
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Contracts and costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization
is reasonably assured. Additional contract revenue relating to claims is
recognized only when realization is probable and the amount can be reliably
estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the companies consider all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Short-Term Investments
The companies consider all short-term investments to be trading securities
as defined by SFAS 115 and as such are reported at fair value.
Property and Equipment
Depreciation and amortization are provided principally on the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Useful
Classification Lives
-------------- ---------
<S> <C>
Construction equipment.......................................... 3-5 years
Transportation equipment........................................ 3-5 years
Trailers........................................................ 5 years
Office furniture and equipment.................................. 3-5 years
Leasehold improvements.......................................... 2-5 years
</TABLE>
Income Taxes
The company, with the consent of its shareholder, elected under the Internal
Revenue Code to be an S corporation. In lieu of Federal corporation income
taxes, the shareholder will be taxed on the Company's taxable income. The
Companies pay state income taxes on behalf of the stockholder. Those payments
are reflected as dividends in the financial statements as the income tax is
paid.
Stock Appreciation Rights
Effective January 1, 1998 the Company adopted a Stock Appreciation Rights
Plan (the Plan) to reward personnel whose services are important to the
Company. The Plan provides that the award of Stock Appreciation Rights (SARs)
may be paid in cash or the issue of non-voting stock. The maximum number of
SARs outstanding at any time is 5,000. The SARs may have a fixed maturity date
of not less than twelve (12) months nor more than ten (10) years, however,
they will immediately mature and become payable upon a change in control of
the Company. Upon the maturity date an employee shall be entitled to receive
an amount equal to the sum of the excess of the fair market value over the
"Basis Value." On January 1, 1998 approximately 3,650 SARs were
F-200
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
outstanding with a "Basis Value" of $4,437. This value was based on a
professional appraisal of the Company as of December 31, 1997, therefore,
there has been no compensation recorded to date under the Plan.
Note 2--Contract Receivables:
Contract receivables are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts.............................. $ 150,790 $ 369,234
Contracts in progress............................ 8,040,244 13,763,133
Retained......................................... 3,201,324 2,559,813
----------- -----------
$11,392,358 $16,692,180
=========== ===========
</TABLE>
All amounts are expected to be collected within one year.
Note 3--Costs and Estimated Earnings on Uncompleted Contracts:
Costs and estimated earnings on uncompleted contracts are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..... $ 73,300,607 $ 69,436,470
Estimated earnings.......................... 21,301,733 20,137,303
Less-billings to date....................... (98,530,593) (98,057,019)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... $ 1,821,958 $ 1,798,759
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (5,750,211) (10,282,005)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
</TABLE>
Note 4--Property and Equipment:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Construction equipment............................. $ 231,854 $ 231,854
Transportation equipment........................... 87,561 3,468,034
Office furniture and equipment..................... 313,578 351,004
Leasehold improvements............................. 117,653 147,759
--------- ----------
750,646 4,198,651
Less-accumulated depreciation...................... (507,145) (685,622)
--------- ----------
$ 243,501 $3,513,029
========= ==========
</TABLE>
Depreciation expense was $185,953 in 1997 and $126,525 in 1996.
F-201
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Note 5--Notes Payable:
The Company has $4,000,000 in various credit facilities available at
December 31, 1997. These facilities include (a) an unsecured $2,000,000 line
of credit, (b) an irrevocable standby letter of credit of $450,000 and (c)
$1,550,000 credit availability. The line of credit, due June 30, 1998, had an
outstanding balance of $1,000 at December 31, 1997 and 1996. The line of
credit provides for borrowings of up to $2,000,000 at the prime rate. The
credit facilities are guaranteed by all of the combined companies and are also
personally guaranteed up to $2,000,000 by Alan J. Green.
The Company has an irrevocable standby letter of credit of $450,000 at
December 31, 1997, which guarantees the Company's payment of workers'
compensation insurance claims.
Additionally, the Company has $1,550,000 of additional credit availability
at December 31, 1997 under an Advised Guidance Line. The option to obtain the
additional credit has not been exercised as of December 31, 1997.
Note 6--Commitments and Contingencies:
Litigation
The Company may be a party to various claims, complaints and disputed
amounts arising in the normal course of its construction activities. In the
opinion of management such matters involve such amounts that the unfavorable
disposition would not have a material affect on the financial position of the
Company.
Lease Commitments
The assets utilized under operating lease arrangements in various operations
are as follows: office facilities, warehouse, office equipment and
transportation equipment.
The following is a schedule of minimum lease commitments outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C>
1998............................................................ $481,345
1999............................................................ 365,237
2000............................................................ 101,776
2001............................................................ 14,421
--------
$962,779
========
</TABLE>
Lease expense under operating leases was $506,018 in 1997 and $497,543 in
1996.
Note 7--Backlog:
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997 and 1996
<TABLE>
<CAPTION>
Balance, December 31, 1996.................................. $ 67,306,941
<S> <C>
Contract adjustments and new contracts...................... 51,171,503
------------
118,478,444
Less contract revenue earned................................ (60,042,333)
------------
Balance, December 31, 1997.................................. $ 58,436,111
============
</TABLE>
F-202
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Contract adjustments include owner purchased materials of $5,878,594 in 1997
and $4,099,877 in 1996 (Note 1).
Note 8--Profit Sharing Plan:
The Companies all participate in a 401(k) profit sharing plan covering
substantially all employees. The plan became effective January 1, 1990.
Employer's contributions charged to earnings were $87,866 in 1997 and $56,077
in 1996.
Note 9--Risks and Uncertainties:
The companies are subject to a concentration of credit risk on accounts
receivable balances (Note 2) since business operations are limited to a
specific industry and geographical area. To limit these risks, it is the
companies' policy to obtain references on potential customers and contractors
prior to granting credit.
At times, cash balances held at financial institutions were in excess of
FDIC insurance limits. The companies place temporary cash investments with
high-credit, quality financial institutions. The companies believe no
significant concentration of credit risk exists with respect to these cash
investments.
F-203
