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As filed with the Securities and Exchange Commission on February 25, 1999
Registration No. 333-60053
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Building One Services Corporation
(Exact name of registrant as specified in its charter)
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Delaware 7600 52-2054952
(State or other (Primary standard (I.R.S. Employer
jurisdictionof industrialclassification Identification No.)
incorporation or code number)
organization)
800 Connecticut Avenue, N.W., Suite 1111
Washington, D.C. 20006
202/261-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Jonathan J. Ledecky
Chairman of the Board and Chief Executive Officer
Consolidation Capital Corporation
800 Connecticut Avenue, N.W., Suite 1111
Washington, D.C. 20006
202/261-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
F. Traynor Beck, Esquire Linda L. Griggs, Esquire
Executive Vice President, General Morgan, Lewis & Bockius LLP
Counsel and Secretary 1800 M Street, N.W.
800 Connecticut Avenue, N.W., Suite Washington, D.C. 20036
1111 202/467-7000
Washington, D.C. 20006
202/261-6000
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission acting
pursuant to said Section 8(a) may determine.
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<PAGE>
PROSPECTUS
Nasdaq Stock Market Trading Symbol--BOSS
27,893,549 Shares of Common Stock
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Building One Services Corporation provides services that are necessary for
the operation and maintenance of buildings. The services that we currently
provide include electrical and mechanical 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 29
businesses offering a variety of facilities services.
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 Services or a subsidiary of Building One
Services;
. 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 such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933.
See "Risk Factors" beginning on page 4 for certain information that you
should consider before accepting stock as part of the purchase price for the
acquisition of your business.
Building One Services Corporation
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
202/261-6000
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 February , 1999
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Where You Can Find More Information...................................... 1
Prospectus Summary....................................................... 3
Recent Developments...................................................... 3
Risk Factors............................................................. 5
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 21
Management............................................................... 32
Executive Compensation................................................... 35
Certain Relationships and Related Party Transactions..................... 38
Principal Stockholders................................................... 39
Description of Capital Stock............................................. 40
Plan of Distribution..................................................... 41
Restrictions on Resale................................................... 41
Legal Matters............................................................ 42
Experts.................................................................. 42
</TABLE>
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). In searching for
documents filed with the SEC, please note that we changed our name from
Consolidation Capital Corporation to Building One Services Corporation on
September 17, 1998.
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, 1997;
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. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998, and September 30, 1998 (as amended); and
. Current reports on Form 8-K dated January 21, 1998, February 17, 1998,
March 25, 1998, June 5, 1998, July 8, 1998, August 28, 1998, September
22, 1998, December 24, 1998, February 10, 1999 and February 18, 1999.
You may request a copy of these filings, at no charge, by writing or
telephoning us at the following address:
Building One Services Corporation
800 Connecticut Avenue, N.W., Suite 1111
Washington, DC 20006
202/261-6000
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 leader in the facilities services
industry. We, and the companies we have acquired since our formation, had
revenues of approximately $1.2 billion in the nine months ended September 30,
1998. Our goal is to become a national single-source provider of facilities
services. Facilities services companies provide many products and services for
the routine operation and maintenance of a building. Since our initial public
offering in December 1997, our company has grown significantly by purchasing
privately-held electrical, mechanical and janitorial services businesses. Since
our formation, we have acquired 29 companies with operating locations in 96
cities and 31 states; we now provide facilities services in 48 states. Our
company currently offers electrical and mechanical installation, maintenance
and specialty services and janitorial and maintenance management services.
Recent Developments
Tender Offer. On December 23, 1998, we entered into a merger agreement with
Boss Investment LLC, an affiliate of the private investment firm of Apollo
Management, L.P. Pursuant to that agreement, we were to merge with an affiliate
of Boss Investment LLC, with our company as the surviving corporation. The
adoption of the agreement by our stockholders would have resulted in reducing
the number of shares outstanding from approximately 45.3 million to 10,578,000.
As part of the merger, stockholders would have received $25.00 in cash for each
share of common stock they owned unless they chose to keep those shares and
unless stockholders chose to keep a total of less than 10,578,000 shares.
Additionally, we would have acquired 50% of the outstanding options held by
current and former employees for $25.00 in cash less the exercise price per
share. The adoption of the merger agreement would have resulted in the
amendment of our restated certificate of incorporation, which among other
things, would have authorized the issuance of 11,000,000 shares of series
preferred stock, of which 6,000,000 shares would have been designated as a new
series of convertible preferred stock and issued to Boss Investment LLC in
exchange for $200 million. We had planned to use the $200 million of proceeds
from the sale of the preferred stock, our cash on hand, proceeds from the
issuance of $350 million of subordinated notes and a portion of funds available
under a $350 million credit facility to finance the transaction. As a result of
the merger, we would have increased the debt on our balance sheet and reduced
our total number of shares outstanding.
On February 8, 1999, we announced that we had mutually agreed with Boss
Investment LLC to terminate the merger agreement. In connection with the
announcement of the termination of the merger agreement, we announced that we
would offer to buy back shares of our common stock in a tender offer. On
February 19, 1999, we commenced an offer to our stockholders to purchase
24,365,891 shares of our common stock at a price of $25.00 per share for cash.
The 24,365,891 shares represent approximately 50% of our outstanding shares of
common stock and 50% of our outstanding stock options that have an exercise
price of less than $25.00. Additional information about this offer is set forth
in the Offer to Purchase, filed as an exhibit to the Schedule 13E-4 that we
filed with the SEC on February 19, 1999. We expect that the funds necessary to
pay such amounts will come from our available cash, $300 million in an offering
of senior subordinated notes and a proposed $100 million term loan. We also
expect to obtain a $250 million revolving credit facility to fund the cash
portion of future acquisitions, payments that are required by the terms of
certain acquisition agreements and are based upon the satisfaction of specified
performance criteria, capital requirements and future operations. We expect to
complete the tender offer in April 1999.
Recent Operating Results. On February 8, 1999, we announced preliminary diluted
earnings per share of $0.38 for the quarter ended December 31, 1998 and $1.16
for the year ended December 31, 1998. The full year results reflect a
restatement of prior quarterly results resulting from changes in the accounting
treatment for two acquisitions that were previously accounted for as pooling-
of-interests transactions. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 16 for a
further discussion of our statement.
Our Acquisition Program. We are in discussions to acquire other businesses and,
from time to time, enter into letters of intent or other agreements to acquire
businesses. However, we cannot assure you that we will complete any additional
acquisitions.
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RISK FACTORS
Before you accept our stock as part of the purchase paid in the acquisition
of your company, you should be aware that there are 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 future actions, our tender offer, our acquisition program, the
integration of acquired companies, 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 Tender Offer
We will have We will need to borrow approximately $400 million to
increased debt on finance the tender offer and its related fees and
our balance sheet expenses. In addition, we plan to enter into a
after the tender $250 million bank financing arrangement to fund the cash
offer. portion of future acquisitions, payments that are
required by the terms of certain acquisition agreements
and are based upon the satisfaction of specified
performance criteria, capital requirements and future
operations. The completion of the tender offer and this
additional indebtedness may have important consequences.
These consequences include the following:
. we will have used substantially all of our cash;
. a substantial portion of our cash flow will be used to
pay interest expense on the debt incurred to finance
the tender offer, which will reduce the funds that
would otherwise be available to us for our operations,
capital expenditures and future business opportunities
and will require us to borrow under the bank financing
arrangement;
. 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.
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We will be subject The senior bank facility that we expect to enter into
to restrictive will contain a number of significant covenants that will
debt covenants impose restrictions on us and our subsidiaries. These
after the tender covenants may include restrictions on:
offer.
. 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 existing and 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; and
. changes in business.
In addition, we expect to be 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.This indebtedness will be guaranteed by each of
our subsidiaries and will be 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 this senior
bank facility due to a default, we would be left without
sufficient liquidity.
In addition, the indenture governing the senior
subordinated notes that we will issue is expected to
contain certain covenants that will restrict, among other
things, our ability, and the ability of our subsidiaries,
to:
. incur additional indebtedness;
. pay dividends or make certain other restricted
payments;
. incur liens;
. apply net proceeds from certain assets sales;
. merge or consolidate with any other person, or sell,
assign, transfer, lease, convey or otherwise dispose
of substantially all of our assets;
. enter into certain transactions with affiliates;
. incur other senior subordinated indebtedness; or
. enter into a change of control without offering to
redeem the debt.
We may not be able We have financed, and intend to continue to finance, most
to continue the of our acquisitions with a combination of cash and shares
current pace of of our common stock. After the tender offer, we expect to
our acquisitions. have the $250 million bank financing available to use for
acquisitions, subject to various conditions, such as
continued compliance with the financial covenants,
maximum individual and aggregate purchase price
requirements, adequate remaining availability under the
facility and the nature of the particular
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business to be acquired. Depending on the pace of our
acquisitions, we may need additional debt or equity
financing in order to continue to acquire businesses.
Such 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 to continue the
current pace of our acquisitions. In addition, we may not
be able to continue the current pace of our acquisitions
if we cannot issue shares of our common stock as part of
the consideration. The owners may be unwilling to accept
shares of our common stock if our stock price drops in
value after the tender offer. 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.
Our management As of February 10, 1999, our directors and executive
could officers owned approximately 17.4% of our outstanding
significantly shares of common stock. In addition, many of the officers
influence the of our subsidiaries received shares of our common stock
election of in connection with the sales of their businesses to us.
directors and If we purchase all of the 24,365,891 shares that we have
other matters. offered to buy in the tender offer, including the
1,728,365 shares underlying employee options that we have
offered to buy and 50% of the other shares beneficially
owned by directors and executive officers, our directors
and executive officers will own 14.9% of our outstanding
shares after the tender offer. After the tender offer,
our directors and executive officers and officers of our
subsidiaries, if acting together, may be able to
significantly influence the election of directors and
other matters requiring the approval of our stockholders.
This concentration of ownership may also have the effect
of delaying or preventing a change in control of our
company. See "Principal Stockholders."
The per share After the tender offer, the price of a share of our
price of our common stock may be adversely affected by sales of
common stock could substantial amounts of our shares of common stock or by
be adversely the perception that such sales could occur. Such sales,
affected after the or the perception of such sales, could occur as a result
tender offer. of the following factors.
First, a number of our shares will become freely
tradeable when contractual restrictions expire. As of
February 10, 1999 approximately 13,200,000 shares of our
45,275,052 outstanding shares of common stock were
subject to contractual restrictions on resale under the
terms of acquisition agreements we entered into in
connection with our acquisitions of businesses. These
restrictions expire at various times, generally one to
two years from the date of our acquisition. We are
permitting persons who own shares that are subject to
such contractual restrictions to tender their shares in
the tender offer. If such persons tender all of their
shares that are subject to contractual restrictions, but
we are able to purchase only 50% of such shares because
the tender offer is oversubscribed, those persons'
remaining 6,500,000 shares will be subject to the
contractual restrictions on resale. If we purchase 50% of
the outstanding shares and 50% of the shares underlying
options having exercise prices below $25.00 per share in
the tender offer, the number of shares subject to
contractual restrictions on transfer will equal
approximately 28.7% of the outstanding shares after the
tender offer. 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.
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The price of our shares may also be adversely affected by
certain registration rights that we have provided to two
holders of warrants that are exercisable for our shares
at an exercise price of $20.00 per share. Jonathan J.
Ledecky, our chairman of the Board and chief executive
officer, and Friedman, Billings, Ramsey & Co., Inc.
("FBR") have warrants for 1,950,000 and 1,130,000 shares
of our common stock, respectively, which they acquired at
the time of our initial public offering. Jonathan J.
Ledecky and FBR have the right to require us to register
for sale the shares they acquire upon the exercise of
those warrants. If Jonathan J. Ledecky and FBR 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 February 10, 1999 we had
outstanding options for the purchase of approximately
4,100,000 shares of our common stock. We are permitting
the holders of options with exercise prices below
$25.00 per share to tender all of the shares underlying
those options in connection with a conditional exercise
of the options. If we purchase 50% of the shares
underlying those options, options for approximately
2,371,635 shares will remain after the tender offer.
Our stock price The reduction in the number of our outstanding shares
could be volatile. could cause our stock price to be volatile. In addition,
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 also be
adversely affected by confusion or uncertainty as to the
pace of our consolidation activities, 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 have not paid We have not paid any dividends on our common stock to
any dividends. date and the payment of dividends in the future will be
restricted by the terms of the financing arrangements.
See "Dividend Policy."
Risk Factors Related to our Company's Business
Our Short History
Our short history
of generating Since our initial public offering in December 1997, we
revenues may make have acquired 29 businesses. Therefore, our combined
it difficult to company has a short history of generating revenues which
evaluate our may make it difficult to evaluate our future prospects.
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 We may not be able to successfully integrate our
our acquired acquisitions without substantial costs, delays or other
companies may problems. We will have to continue to expend substantial
result in managerial, operating, financial and other resources to
substantial costs, integrate our businesses. The costs of such integration
delays or other could have an adverse effect on short-term operating
problems. results. Such costs include non-recurring acquisition
costs including accounting and legal fees, investment
banking fees, recognition of transaction-related
obligations and various other acquisition-related costs.
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 companies but we may not have
the ability to recruit additional candidates with the
necessary skills.
Risks Related to
Our Acquisition
Strategy
If we cannot
acquire additional
companies, we may Our business strategy depends, in part, upon our ability
not be able to to expand into new markets and broaden the services we
execute our provide by identifying and acquiring other businesses. We
business strategy. may not be able to identify, attract or acquire
additional businesses. 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.
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 Because in most cases we do not seek, and are not
acquisitions. 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
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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 When we buy businesses and account for them under the
acquisitions purchase method of accounting we must account for the
result in amount by which our purchase price exceeds the fair value
reductions in our of the net assets of the acquired business as an asset
net income. 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, because of the contemplated repurchase of our
common stock.
As consolidation
in our industry Many of our acquisitions are subject to the requirements
continues, of the Hart-Scott-Rodino Antitrust Improvements Act of
potential 1976, which could adversely affect the pace of our
regulatory acquisitions in one or more sectors of the facilities
requirements may services industry. Under the Hart-Scott-Rodino Act, we
slow our may be required to divest a portion of our then-existing
acquisition operations or those of the acquired business, which may
program. render a given acquisition disadvantageous. In addition,
if we acquire businesses in regulated industries, we
would be subject to regulatory requirements. Such
regulatory requirements could limit our flexibility in
growing and operating our businesses.
There may be
potential adverse As a general rule, federal and state tax laws and
tax consequences regulations have a significant impact upon the
in acquisitions. 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 We face a competitive environment in the market for
competitive, which facilities services. We compete against both large
could cause us to national and international organizations providing a wide
lower our prices variety of facilities services to their customers and
resulting in numerous smaller companies providing a single service or
reduced revenues fewer services in limited geographic areas.
and profit
margins.
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, such as Carrier
Corporation, Conditioning Company 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 of the
local market for such services. Such smaller service
providers may also have lower overhead cost structures
and may be able to provide their services at lower rates
than 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
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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, such as New York, 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 also face We also face significant competition to acquire
competition to facilities services businesses as our industry undergoes
acquire companies, continuing consolidation. Such competition could lead to
which may cause our paying higher prices for the companies that we
the prices that we acquire.
pay to acquire
companies to go
up.
We believe that the facilities services industry will
continue to undergo considerable consolidation and
changes during the next several years. In response to
such consolidation, we consider from time to time
additional strategies to enhance stockholder value. These
include, among others, strategic alliances and joint
ventures, stock buybacks, spin-offs, recapitalizations,
purchase, sale and merger transactions with other large
companies, and other similar transactions.
In considering any of these strategies, we evaluate the
consequences of such 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, such strategies could have
various other significant consequences, including changes
in management, control or operational or acquisition
strategies. None of these strategies may be pursued and,
if any are pursued, they may not be completed
successfully.
We may have Our ability to increase productivity and profitability
trouble hiring the will depend upon our ability to recruit, train and retain
employees we need large numbers of hourly wage and skilled employees
and our employment necessary to meet our service requirements. Competition
needs may increase for such employees has led to increased wage levels and
our costs. 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 electrical and mechanical 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 less than 10% of our employees are members of
unions, and the vast majority are at one janitorial
company, 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 companies 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
A downturn in
commercial and
industrial Approximately 54% of our revenues in 1998 and the
construction could revenues of the companies we acquired involved the
hurt our business. installation of electrical and mechanical systems in
newly constructed commercial, institutional, industrial
and retail buildings and plants. Our
10
<PAGE>
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. Since 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.
Adverse changes in Our success will depend upon the economic conditions in
economic the geographic areas in which a substantial number of our
conditions can operating companies are located. In addition, our success
adversely affect will depend upon occupancy levels at office buildings for
our business. which we do business. Lower occupancy 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 A substantial portion of our electrical and mechanical
customers could installation contracts are "fixed price" contracts. The
expose us to terms of these contracts require us to guarantee the
losses if our price of the services we provide and assume the risk that
estimates of our costs to perform the services and provide the
project costs materials will be greater than anticipated.
result in being
too low.
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.
We depend on
subcontractors to We depend, in part, on subcontractors to provide optimum
perform some of service to our customers. Such reliance reduces our
our business. ability to directly control both our workforce and the
quality of services we provide. We may not be able to
control our subcontractors and the quality of services
they provide.
Many of our Many of our janitorial services contracts have
contracts may be termination clauses permitting the customer to cancel the
terminated on contract on 30 to 90 days' notice. While we maintain
short notice. 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 The nature of the facilities services industry often
potential involves the transport, storage, use and disposal of
environmental cleaning solvents, lubricants, chemicals, gasoline,
liabilities. refrigerants, and other hazardous materials by employees.
Such 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.
We are subject to Due to the nature of the facilities services industry,
government our operations are subject to a variety of federal,
regulation. 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.
11
<PAGE>
Changes in such laws, regulations and licensing
requirements may constrain our ability to provide
services to customers or increase the costs of such
services. In addition, competitive pricing conditions in
the industry may constrain our ability to adjust our
billing rates to reflect any such increased costs.
Our revenues and Our electrical and mechanical installation services are
earnings may be subject to the seasonal variations in operations and
lower during the demands that affect the construction business.
winter months. 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 and fourth
quarters.
The Year 2000
issue could The Year 2000 issue refers to a number of date-related
disrupt our problems that may affect information technology and non-
business and information technology systems, including codes embedded
adversely affect in chips and other hardware devices. These problems
our financial include systems that identify a year by two digits and
condition. 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. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Issue" on page 20 for a
detailed description of the Year 2000 issue.
Management Risks
If we lose our key
people, our Our success depends principally upon the efforts of our
business would key management team, consisting of Jonathan J. Ledecky,
suffer. our chairman and chief executive officer, Timothy C.
Clayton, our chief financial officer and treasurer, F.
Traynor Beck, our general counsel and secretary, David
Ledecky, our chief administrative officer, William Love,
president of our electrical operations, Joseph Ivey,
president of our mechanical operations, Chad MacDonald,
president of our janitorial operations, Mike Sullivan,
chairman of our janitorial operations, and certain other
members of the senior management of the businesses we
have acquired or will acquire in the future.
We also depend on the senior management of the businesses
we acquire because our executive management team lacks
prior experience in managing businesses in the facilities
services industry.
We may be unable We expect to hire additional senior management, such as a
to hire needed key chief operating officer and a new chief executive
people. officer, to manage our operations. We may not be able to
successfully recruit additional management that has the
requisite skills, knowledge or experience necessary or
desirable to enhance our current management.
Our Chairman and
CEO has Our chairman and chief executive officer, Jonathan J.
obligations to Ledecky, has various other responsibilities that may
other companies divert his attention from our company. Jonathan J.
that may conflict Ledecky serves as an investor, director and/or employee
with his of several public companies, including U.S.A. Floral
obligations to our Products, Inc., UniCapital Corporation, Onemain.com,
company. Aztec Technology Partners, Inc., School Specialty, Inc.,
Workflow Management, Inc. and Navigant International,
Inc. Each of the above companies is, or is seeking to
become, a consolidator of businesses in one or more
industries. Jonathan J. Ledecky may become an investor or
director in other companies seeking to consolidate an
industry.
12
<PAGE>
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............................................. $ 21.50 $ 20.00
Fiscal Year 1998
First Quarter.............................................. $ 25 7/8 $18 3/8
Second Quarter............................................. $25 15/16 $ 19.75
Third Quarter.............................................. $ 24.50 $ 11.50
Fourth Quarter............................................. $ 22.50 $ 7 7/8
Fiscal Year 1999
First Quarter through February 19, 1999.................... $ 21.00 $ 16.50
</TABLE>
The closing sale price of our common stock on the Nasdaq Stock Market was
$17 3/16 per share on February 19, 1999. As of February 10, 1999, there were
45,275,052 shares of our existing common stock outstanding and 242 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 your Board of
Directors and will depend upon, among other things, our earnings, financial
condition, capital requirements and debt levels. Furthermore, the indebtedness
that we expect to incur in connection with the tender offer and the terms of
that indebtedness is expected to prohibit or limit our payment of dividends to
you.
13
<PAGE>
INTRODUCTION TO
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1995, 1996
and 1997 and the balance sheet data at December 31, 1996 and 1997 (except pro
forma combined amounts) 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, 1993 and 1994 and the balance
sheet data at December 31, 1993, 1994 and 1995 have been derived from our
unaudited consolidated financial statements, which are not included elsewhere
in this prospectus. The selected financial data for the nine months ended
September 30, 1997 and 1998 have been derived from our unaudited interim
consolidated financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for the
periods presented. The financial data have been restated from prior
presentations as a result of the contemplated repurchase of common stock by
the company.
The unaudited pro forma combined financial data gives effect to:
. the transactions contemplated by the tender offer, including the
offering of $300 million of senior subordinated notes and estimated
borrowings under a $100 million term loan which are necessary to finance
the purchase of 24,365,891 shares of common stock at a price of $25.00
per share, (or, in the case of shares underlying employee stock options,
at $25.00 per share less the exercise price per share of the options);
and
. the 21 business combinations completed during the nine months ended
September 30, 1998 and the five acquisitions we completed after
September 30, 1998 as if they had been consummated on January 1, 1997.
The selected unaudited pro forma combined financial data are not necessarily
indicative of operating results or financial position that would have been
achieved had the events described above been consummated and should not be
construed as representative of future operating results or financial position.
The selected financial data should be read in conjunction with the unaudited
pro forma combined financial statements and our consolidated financial
statements, included elsewhere in this prospectus.
14
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
------------------------------------------------------------------ -----------------------------------
1997 1998
1993 1994 1995 1996 1997 Pro Forma(1) 1997 1998 Pro Forma(1)
--------- --------- --------- --------- --------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Opera-
tions Data:
Revenues........... $ 36,959 $ 45,106 $ 57,287 $ 63,202 $ 70,101 $1,155,564 $ 52,410 $ 478,595 $976,690
Cost of revenues... 30,486 37,634 48,783 53,664 58,857 943,263 44,112 376,318 784,931
--------- --------- --------- --------- --------- ---------- --------- ---------- ----------
Gross profit....... 6,473 7,472 8,504 9,538 11,244 212,301 8,298 102,277 191,759
Selling, general
and
administrative..... 6,684 6,635 8,468 8,803 11,776 127,741 7,223 59,786 107,447
Goodwill
amortization....... -- -- -- -- -- 12,587 -- 4,584 9,493
Non-recurring
acquisition costs.. -- -- -- -- -- -- -- 768 --
--------- --------- --------- --------- --------- ---------- --------- ---------- ----------
Operating income
(loss)............. (211) 837 36 735 (532) 71,973 1,075 37,139 74,819
Other (income)
expense
Interest income.. (7) (41) -- -- (2,056) (2,652) -- (16,043) (1,255)
Interest
expense.......... 246 329 239 224 208 45,328 160 565 33,063
Other, net....... (21) (43) (8) 83 (221) (2,500) (35) (134) (1,362)
--------- --------- --------- --------- --------- ---------- --------- ---------- ----------
Income (loss)
before income
taxes.............. (429) 592 (195) 428 1,537 31,797 950 52,751 44,373
Provision (benefit)
for income taxes... (5) 13 94 17,754 7 22,460 21,332
--------- --------- --------- --------- --------- ---------- --------- ---------- ----------
Net income (loss).. $ (429) $ 592 $ (190) $ 415 $ 1,443 $ 14,043 $ 943 $ 30,291 $ 23,041
========= ========= ========= ========= ========= ========== ========= ========== ==========
Net income (loss)
per share--Basic... $ (0.35) $ 0.48 $ (0.15) $ 0.32 $ 0.25 $ 0.62 $ 0.30 $ 0.79 $ 1.02
========= ========= ========= ========= ========= ========== ========= ========== ==========
Net income (loss)
per share--
Diluted............ $ (0.35) $ 0.44 $ (0.15) $ 0.30 $ 0.25 $ 0.62 $ 0.29 $ 0.77 $ 1.00
========= ========= ========= ========= ========= ========== ========= ========== ==========
Weighted average
shares
outstanding --
Basic ............. 1,238,444 1,238,444 1,238,444 1,290,724 5,683,464 22,637,526 3,102,079 38,298,295 22,637,526
========= ========= ========= ========= ========= ========== ========= ========== ==========
Weighted average
shares
outstanding --
Diluted............ 1,238,444 1,353,560 1,238,444 1,405,840 5,865,550 22,657,592 3,217,195 39,368,321 23,103,065
========= ========= ========= ========= ========= ========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, September 30, 1998
------------------------------------- ----------------------
Pro Forma
1993 1994 1995 1996 1997 Actual Combined(2)
------ ------ ------ ------ -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....... $ 767 $ 300 $ (30) $ 67 $528,235 $ 333,615 $94,364
Total assets.......... 6,339 8,063 8,132 9,629 539,159 1,002,112 854,361
Long term debt, net of
current maturities.... 1,994 1,734 1,589 1,890 1,679 3,094 403,513
Stockholders' equity.. 1,405 1,496 1,299 1,578 529,480 817,247 245,396
</TABLE>
- ----
(1) Interest expense, interest income, and the provision for income taxes have
been adjusted as if the purchase of the 24,365,891 shares of common stock,
including the purchase of employee stock options having exercise prices
below $25.00 per share, for approximately $600 million (including
transaction fees) occurred on January 1, 1997 and January 1, 1998,
respectively, financed by our cash balances, the planned issuance of
$300 million of senior subordinated notes and $100 million in term
financing.
(2) The pro forma balance sheet amounts were adjusted for the purchase of the
24,365,891 shares of common stock, including the purchase of employee
stock options having exercise prices below $25.00 per share, at an
approximate cost of $600 million, including transaction fees.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with our audited
consolidated financial statements for the year ended December 31, 1997, the
unaudited financial statements for the nine months ended September 1997 and
1998 and the related notes thereto appearing elsewhere in this prospectus.
Founded in February 1997, Building One Services Corporation intends to
consolidate the facilities services industry with the corporate goal of
becoming a national single-source provider of facilities services. We
completed our initial public offering in December 1997, raising net proceeds
of approximately $527 million. To date we have used the proceeds primarily in
our acquisition program, although we are also using a portion to fund our
operations.
On February 7, 1999 our Board of Directors approved a tender offer to
purchase approximately 50% of our outstanding common stock at $25.00 per share
and approximately 50% of certain employee stock options at $25.00 per share
less the exercise price per share of the options. The tender offer replaces
the recapitalization plan announced on December 23, 1998, under which we had
intended to, among other things, repurchase approximately 34.5 million shares
of our common stock. We plan to finance this tender offer through the use of
our available cash, proceeds from the issuance of $300 million of senior
subordinated notes and estimated borrowings under a $100 million term
facility. The tender offer is subject to a number of conditions, including the
execution of a definitive credit agreement. We expect the tender offer to be
completed in April 1999.
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, 1998. We completed 24 business
combinations during the nine months ended September 30, 1998. Twenty-one of
the business combinations completed during the nine months ended September 30,
1998 have been accounted for under the purchase method. Prior to the approval
of the merger agreement with Apollo, two of these 21 business combinations had
been accounted for previously under the pooling-of-interests method. Following
the approval of the merger agreement with Apollo, we restated our historical
consolidated financial statements to account for these two business
combinations under the purchase method. Our consolidated financial statements
give retroactive effect to the three business combinations accounted for under
the pooling-of-interests method during the nine months ended September 30,
1998 and include the results of the businesses acquired in business
combinations accounted for under the purchase method from their respective
acquisition dates.
Subsequent to September 30, 1998 and through February 24, 1999, we completed
five acquisitions for aggregate consideration of $65.5 million in cash and
shares of common stock. Additionally, there is the potential for the payment
of up to an additional $14.5 million in cash and shares of common stock in
connection with a contingent consideration arrangements.
Due to our growth through acquisitions, comparisons of the historical
results of our operations have been and will continue to be affected primarily
by the addition of acquired businesses. In most instances, these dollar
increases in the various revenues and expense components of our results are
due primarily to growth from acquisitions. Neither the magnitude nor the
source of such changes is necessarily indicative of changes that will occur in
the future.
Our revenues are derived primarily from providing electrical installation
and maintenance services, mechanical installation and maintenance services and
janitorial and maintenance management services. For the nine months ended
September 30, 1998, approximately 22%, 73% and 5% of our revenues were derived
from janitorial maintenance management services, electrical installation and
maintenance services and mechanical installation and maintenance services,
respectively.
16
<PAGE>
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 and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.
Consolidated Results of Operations
Nine months ended September 30, 1998 as Compared to the Nine Months ended
September 30, 1997
Revenues. Consolidated revenues for the nine months ended September 30, 1998
increased by $426.2 million, or 813.2%, to $478.6 million from $52.4 million
for the nine months ended September 30, 1997. This increase was a result of
our acquisition of the businesses accounted for under the purchase method of
accounting during the nine months ended September 30, 1998, which have been
included since their respective dates of acquisition.
Gross profit. Gross profit for the nine months ended September 30, 1998
increased by $94.0 million, or 1132.6%, to $102.3 million from $8.3 million
for the nine months ended September 30, 1997. This increase was primarily a
result of the acquisition of the businesses accounted for 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 nine months ended September 30, 1998, from
15.8% for the nine months ended September 30, 1997. This increase in the gross
margin was primarily attributable to the higher gross margins of the
businesses accounted for under the purchase method of accounting.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1998 increased
by $52.6 million, or 727.7%, to $59.8 million from $7.2 million for the nine
months ended September 30, 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 12.5% for the
nine months ended September 30, 1998 from 13.8% for the nine months ended
September 30, 1997.
Goodwill amortization. Goodwill amortization increased by $4.6 million for
the nine months ended September 30, 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 nine months ended September 30,
1998 increased by $15.7 million from expense of $0.1 million for the nine
months ended September 30, 1997 to income of $15.6 million for the nine months
ended September 30, 1998. This increase is primarily attributable to the
interest income of $17.0 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 nine
months ended September 30, 1998 increased to $22.5 million, reflecting an
effective tax rate of 42.6% from an effective tax rate of .7% for the nine
months ended September 30, 1997. The increase in the effective rate was
primarily attributable to the increase in
17
<PAGE>
income 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 42.6% 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 we accounted for under the pooling-of-
interests method, through 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 we 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.
Year ended December 31, 1996 Compared to the Year ended December 31, 1995
Revenues. Consolidated revenues for the year ended December 31, 1996
increased by $5.9 million, or 10.3%, to $63.2 million from $57.3 million for
the year ended December 31, 1995. This increase was primarily as a result of
increases in the janitorial and maintenance management services provided by
the businesses we acquired in transactions we accounted for under the pooling-
of-interests method as they expanded into new geographic markets and further
penetrated their existing markets.
Gross profit. Gross profit for the year ended December 31, 1996 increased by
$1.0 million, or 12.2%, to $9.5 million from $8.5 million for the year ended
December 31, 1995. Gross profit as a percentage of revenues increased to 15.1%
for the year ended December 31, 1996 from 14.8% for the year ended December
31, 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 increased by $0.3
million, or 4.0%, to $8.8 million from $8.5 million for the year ended
December 31, 1995, primarily as a result of increases in the personnel of the
janitorial and maintenance management services businesses we acquired in
transactions we accounted for under the pooling-of-interests method to support
the increase in revenues. Selling, general and administrative expenses as a
percentage of
18
<PAGE>
revenues decreased to 13.9% for the year ended December 31, 1996 from 14.8%
for the year ended December 31, 1995.
Other expense, net. Other expense, net for the year ended December 31, 1996
increased by $0.1 million, to $0.3 million from $0.2 million for the year
ended December 31, 1995.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1996 increased slightly to $13,000 from a benefit of $5,000
for the year ended December 31, 1995, reflecting an effective tax rate of 3.0%
and 2.6% respectively. These effective tax rates reflect that the majority of
the pooling-of-interests companies had elected to be treated as subchapter S
corporations for tax purposes prior to our acquisition of them.
Liquidity and Capital Resources
During the nine months ended September 30, 1998, net cash provided by
operating activities was approximately $34 million. Net cash used in investing
activities for the nine months ended was $201 million, which primarily
consisted of $195 million used for acquisitions. Additionally, the
acquisitions completed during the nine months ended September 30, 1998 of
businesses accounted for under the purchase method of accounting also provide
for the potential payment of approximately $123 million in cash and shares of
our common stock based upon the performance of those businesses.
Net cash used in financing activities for the nine-months ended September
30, 1998 was $90 million, which consisted primarily of net payments on short-
term debt of $36 million, payments on long-term debt of $29 million, which
primarily consists of debt assumed in acquisitions, and $27 million of cash
used to repurchase 1,855,000 shares of our common stock. These shares were
repurchased in accordance with a stock repurchase program covering 3,100,000
shares which was announced on August 24, 1998. The number of shares to be
repurchased was determined based upon the number of shares to be issued in
connection with acquisitions to be accounted for under the purchase method of
accounting. Subsequent to September 30, 1998, we repurchased an additional
1,135,000 shares for approximately $14.8 million.
As previously discussed, our Board of Directors recently approved the tender
offer, in which we expect to purchase 24,365,891 shares of our common stock at
$25.00 per share.
Assuming that we purchase 24,365,891 shares of our common stock, including
50% of the shares underlying stock options with exercise prices below $25.00,
the estimated aggregate cost to complete the tender offer, including fees and
expenses, will be approximately $600 million. We plan to finance the tender
offer through the use of our available cash, the planned issuance of $300
million of senior subordinated notes and estimated borrowings under a $100
million term facility. The tender offer is subject to a number of conditions,
including the execution of a definitive credit agreement. We expect the tender
offer to be completed in April 1999. We anticipate that the total debt balance
subsequent to the tender offer will approximate $400 million.
We have received a highly confident letter from BT Alex. Brown Incorporated
to manage the offering of the $300 million in senior subordinated notes and a
commitment letter from Bankers Trust Company for the $100 million term loan as
well as a revolving credit facility of $250 million.
The $100 million term loan and the $250 million revolving credit facility
will likely include 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, mergers,
acquisitions and disposition of assets, sale-lease back transactions and
capital lease payments, dividends and other distributions and voluntary
prepayments on the senior subordinated notes and other indebtedness. In
addition, we expect to be required to comply with financial covenants with
respect to minimum interest coverage and maximum leverage ratios. The
$100 million term loan and the $250 million revolving credit facility will be
guaranteed by our subsidiaries and secured by a first priority lien on
substantially all of our assets and those of our subsidiaries. The commitment
will terminate on June 30, 1999, unless definitive credit documents have been
executed.
19
<PAGE>
Additionally, we expect that the indenture governing the senior subordinated
notes will also contain certain covenants that will restrict, among other
things, our ability to incur indebtedness, pay dividends, incur liens and to
sell or otherwise dispose of a substantial portion of our assets or to merge
or consolidate with another entity.
We anticipate that after the tender offer is completed, our cash flow from
operations and borrowings available under the $250 million revolving credit
facility will be sufficient to meet our liquidity requirements for our
operations, capital expenditures, contingent consideration agreements and for
our acquisition program.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
Board No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise
and Related Information," which establishes standards for reporting
information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. It also requires related disclosures
about products, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. We intend to
adopt SFAS No. 131 for the year ending December 31, 1998. Implementation of
this disclosure standard will not affect our financial position or results of
operations.
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. The 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 29 companies offering mechanical, electrical and janitorial
services. The due diligence relating to the Year 2000 issue that was performed
on these companies did not reveal any significant internal operating systems
issues. In addition, such due diligence revealed that most of the acquired
companies have addressed the Year 2000 issue, but are in different phases of
assessment and remediation. Accordingly, we are currently in the process of
conducting a comprehensive survey to be completed by management 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 is expected to cover the following areas:
. our information technology and operating systems, including job-costing,
billing, payroll and accounting systems;
. our non-information technology systems, such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology;
. the systems of our major vendors, insofar as they relate to our
business; and
. the systems of our major customers for which we have performed
installation and maintenance services.
This survey is expected to be completed during the first quarter of 1999.
20
<PAGE>
Costs Related to the Year 2000 Issue--As part of the survey mentioned above,
we will be requesting an estimate from each operating subsidiary of the
material historical and estimated costs of assessment and remediation.
Accordingly, such costs, including, among other things, the costs of
assessment, software upgrade fees, hardware changes and general implementation
of a Year 2000 action plan, are not known at this time. The projected effort
for the majority of the systems is expected to include sending letters to
substantially all of our significant hardware, software and other equipment
vendors, third-party providers and other material service providers requesting
detailed, written information relating to Year 2000 compliance and, where
necessary, upgrades to recent vendor software releases that are fully Year
2000 compliant.
We are also embarking on an initiative to develop standard information
systems for use throughout the organization for its overall information needs
that will be free of any Year 2000 limitations. However, no assurances can be
made that such systems will be in place prior to the year 2000.
Contingency Plan--Until we complete the survey described above, we will not
be able to develop our most likely worst case Year 2000 scenarios. We intend
to complete our determination of worst case scenarios after we have received
and analyzed responses to the survey and to all of the inquiries we have made
to our vendors.
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 we are 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.
BUSINESS
The Company
Building One Services Corporation is a leader in the facilities services
industry. Our goal is to become a national single-source provider of
facilities services. We changed our name from Consolidation Capital
Corporation to better describe our business. When our company was founded in
February 1997, our 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. The facilities services industry consists
primarily of privately held or family-owned businesses. These business owners
desire liquidity and may be unable to access the capital markets effectively.
They may not be able to expand beyond a local or regional base. We add value
by integrating these companies and marketing them nationwide.
Facilities services companies provide many products and services for the
routine operation and maintenance of a building. We currently offer the
following services:
. electrical installation, maintenance and specialty services;
. mechanical installation, maintenance and specialty services; and
. janitorial and maintenance management services.
21
<PAGE>
Our revenues in 1997, adjusted to include the revenues of the businesses we
have acquired and the businesses we hope to acquire in the near future, were
$1.2 billion on a combined basis. We have operating locations in 96 cities and
31 states. We provide facilities services in 48 states.
Since our formation, we have purchased 29 companies. We bought 16 companies
specializing in providing electrical installation, maintenance and specialty
services, six companies specializing in providing mechanical installation,
maintenance and specialty services, and seven companies specializing in
providing janitorial and maintenance management services. We intend to
continue to purchase companies in these three sectors of the facilities
services industry.
We use our business strategy of "corporate democracy" to our advantage.
Corporate democracy empowers local management and draws on local managers'
expertise and experience. Local managers of companies we have bought help
identify new acquisition targets and combine the companies. Corporate
democracy allows the prior owners of the purchased companies to reap the
benefits of being part of a large corporation, while still controlling local
operations. When local managers are in control of operational decisions, they
can provide flexible and responsive service to customers.
Industry Background
Facilities services companies provide many of the products and services
needed for the operation and maintenance of a building. Some products and
services provided by facilities service companies are listed here:
<TABLE>
<S> <C>
. 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
</TABLE>
The $165 billion facilities services industry is highly fragmented.
Currently, we believe that no single service provider holds more than a 2%
market share. Based on available industry data, we believe that electrical,
mechanical and janitorial services represent more than 75% of the revenues in
the facilities services industry.
We believe that there has been a significant trend towards 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 a
compound annual rate of approximately 20% through the year 2000.
Electrical Services Market. Virtually all construction and renovation in the
United States generates demand for electrical installation services.
Electrical work generally accounts for approximately 8% to 12% of the total
construction cost of commercial and industrial projects. In recent years,
demand for electrical installation services per project has increased due to
increased electrical code requirements, demand for additional electrical
capacity, additional data cabling requirements and increased use of computers
and control systems.
The electrical installation industry, including commercial, industrial and
residential markets, was estimated by the United States Census to have
generated annual revenues in excess of $40 billion in 1992, the most recent
year for which United States Census data is available. More recent data
reported by Electrical Contracting Magazine shows that the industry size in
1998 was approximately $72 billion. Electrical maintenance service repair and
modernization work represented approximately 55% of industry revenues, or $40
billion. Demand for electrical services is growing more rapidly than demand
for new installations.
22
<PAGE>
The 1992 Census data indicate that the industry is highly fragmented with
more than 54,000 companies in 1992. The forecasted number of companies in 1999
is more than 66,000. Most companies are small, owner-operated businesses,
performing various types of electrical work.
We believe that growth in the electrical services industry will be driven by
the following factors:
. increasing capital investment in new facility installation and
renovation of existing facilities;
. new codes for power and life safety;
. revised national energy standards requiring energy efficient lighting
fixtures and other equipment;
. new demands for backup power;
. complex systems requiring specialized technical expertise;
. cost savings that can be derived from the central monitoring and control
of integrated systems (e.g., fire protection, security systems,
temperature control);
. networking of local area and wide area computer systems; and
. minimizing downtime through predictive and preventive maintenance.
Mechanical Services Market. Mechanical systems include heating, ventilation
and air conditioning (HVAC) systems, and plumbing and process systems. The
HVAC services industry generates approximately $35 billion in annual
commercial and industrial revenues. The plumbing services industry generates
approximately $19 billion in annual commercial, industrial and residential
revenues.
We believe the mechanical services market is highly fragmented with over
50,000 businesses. Many of these are small, owner-operated companies focusing
on a single local geographic area and providing a limited range of services.
Growth in the mechanical services industry will be driven by the following
factors:
. an aging installed base of systems;
. increasing automation, sophistication and complexity of HVAC and other
systems;
. increasing restrictions on the use of refrigerants commonly used in
older HVAC systems;
. a desire by property owners/managers to outsource their maintenance
services; and
. increasing focus by property owners/managers on energy cost savings from
more efficient systems.
Janitorial Services Market. Based on data reported by the Building Owners
and Managers Association in 1996, we believe the market for janitorial
services is approximately $67 billion. It is comprised of more than 45,000
companies, most of which are small, privately owned businesses with fewer than
20 employees.
We believe that growth in the janitorial and maintenance management services
market will be driven by the following factors:
. a desire by owners/managers to outsource their cleaning management;
. increasing focus by owners/managers on retaining commercial tenants;
23
<PAGE>
. technology driven demand for niche cleaning services, such as "clean
room" maintenance; and
. increasing demand for automated "back office" janitorial management,
including insurance, invoicing, quality control and reporting.
Services
We provide electrical and mechanical installation and maintenance services
and janitorial and maintenance management services. We also provide specialty
services, including data communications cabling and building automation and
controls services.
To become a single-source provider of facilities services, we will expand
the range of products and services we offer. We may buy other facilities
services businesses in our service sectors. Alternatively, we may pursue
strategic partnerships with other facilities service providers that we choose
not to buy.
Electrical Installation, Maintenance and Specialty Services. Through the
Building One electrical group, we offer a broad range of electrical design,
installation and maintenance services for industrial, commercial, retail and
institutional customers. The services we currently offer through Building One
electrical include:
. lighting and power services;
. sale of building access, security systems, and fire protection systems;
. sale of fiber optic and other cabling for telecommunications and
computer systems;
. diagnostic evaluation of systems for predictive and preventive
maintenance;
. power systems back up;
. multi-media installations;
. telecommunications equipment installation and maintenance;
. digital control integration of life safety, lighting, temperature,
building access, surveillance, and building automation functions; and
. manufacturing process controls and instrumentation.
Our Building One electrical group is the second largest electrical
contractor in the United States based on revenues. Our 16 companies operate
with 59 branch locations in 21 states. The revenues of these 16 companies in
1997 were $700 million. The presidents of the operating companies have an
average of 27 years of experience in electrical contracting and services.
We believe the fragmented nature of this industry provides significant
opportunities to consolidate electrical installation, maintenance and
specialty service businesses. Because of these opportunities, several publicly
traded consolidators, in addition to our company, have emerged in the
electrical installation, maintenance and specialty service industry.
We plan to continue to expand our market presence. We expect to continue to
buy electrical contractors with strong cash flows, strategic locations and
value-added service offerings. We also expect to continue our strong internal
growth. We may continue to pursue strategic relationships with other value-
added service providers.
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.
24
<PAGE>
Mechanical Installation, Maintenance and Specialty Services. Our Building
One mechanical group provides mechanical installation and maintenance services
to commercial, industrial and institutional customers. We currently offer the
following services:
. heating, ventilation and air conditioning services ("HVAC");
. plumbing and process systems ("mechanical systems");
. evaluation and testing of system performance;
. cleaning and filter change-outs;
. emergency repairs;
. retrofitting and remodeling of mechanical systems;
. design and installation of HVAC, plumbing, control and monitoring, and
industrial process piping systems;
. building automation and temperature controls services;
. manufacturing and industrial process controls and instrumentation
services; and
. technical facilities management services.
In connection with our mechanical service and installation business, we sell
a wide range of related equipment, parts and supplies.
Our Building One mechanical group consists of six mechanical companies
operating with 16 branch locations and serving 20 states. The revenues of
these six companies in 1997 were $270 million. The presidents of the operating
companies have an average of 24 years of experience in mechanical contracting
and services.
We believe the fragmented nature of this industry will provide opportunities
to consolidate mechanical installation and maintenance 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 in their business. Many of these
businesses are being threatened by increased competition from larger entities
with greater financial resources, resulting in part from the deregulation of
the United States gas and electric utility industries. As a result, several
other publicly traded consolidators have emerged in the mechanical
installation and maintenance services industry.
We continue to grow through strategic purchases, partnerships with other
service providers, and internal growth. In many cases, electrical and
mechanical systems in a facility work jointly, and can be repaired and
maintained jointly.
Joint Delivery of Electrical and Mechanical Services. We currently own
electrical and mechanical companies that serve the same markets. These
companies work together on projects serving the same customers. Therefore, we
have the opportunity to "cross-sell" our electrical and mechanical systems and
services. "Cross-selling" is when one of our companies sells another of our
companies' services to existing customers.
We have an attractive opportunity for joint service delivery in energy
management services. Our electrical and mechanical groups currently deliver
"building automation and controls" services. "Building automation and
controls" is where the electrical and mechanical systems of a building come
together to control temperature and humidity, among other things. Utility
deregulation presents a good opportunity to grow this area of our services.
Deregulation also presents the opportunity to grow into energy management
services.
In addition, our Building One electrical and Building One mechanical groups
intend 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
25
<PAGE>
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. We have an advantage
over our competitors because we have opportunities to complete design build
work where our electrical and mechanical companies are working as partners.
Finally, while it is less costly to the customer, design-build work is also
attractive because it returns higher profit margins than the traditional plan
and spec work.
Janitorial and Maintenance Management Services. Our Building One Service
solutions group offers a full range of commercial janitorial cleaning services
and sells janitorial supplies and equipment. 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.
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 companies provide services in 48
states. The revenues of these companies in 1997 were $165 million. The
presidents of the operating companies have an average of 17 years of
experience in janitorial maintenance and management services.
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
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 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.
Business Strategy
Our goal is to become the premier, national single-source provider of
facilities services. To achieve this goal, we buy established local or
regional facilities services businesses and are working to combine and
integrate
26
<PAGE>
these businesses. We initiate programs to grow internally. As we grow to a
national single source provider of facilities services, we will continue to:
. pursue target companies which meet our acquisition criteria;
. attract and buy companies using our corporate democracy approach;
. combine companies to provide integrated facilities services across the
nation; and
. streamline operations to achieve operating efficiencies and synergies.
Acquisition Strategy. To date, we have purchased companies in the following
sectors:
. electrical installation, maintenance and specialty services;
. mechanical installation, maintenance and specialty services; and
. janitorial and maintenance management services.
Within these sectors, we buy companies with some or all of the following
characteristics:
. stable cash flows and recurring revenue streams from long-term customer
relationships;
. low product obsolescence and non-reliance on innovation or technology to
drive recurring revenue streams;
. long-term growth prospects for products and services offered;
. a strong "franchise" or presence in the communities served by the
candidate;
. an experienced management team comprised of recognized industry leaders;
. an ability to retain, promote and motivate management teams;
. favorable demographic trends within the local regions serviced; and
. an under-served market for products or services provided by the
candidate.
The following chart identifies the companies we have acquired since our
formation:
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
1997
Date Geographic Year Revenues
Name Service Type Acquired Coverage Founded (in 000s)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service Management USA, Janitorial and Maintenance 02/04/98 National 1984 $26,266
Inc. Management
- -----------------------------------------------------------------------------------------------
Garfield Electric Com- Electrical Installation and 03/11/98 Ohio, Indiana, 1972 10,826
pany Maintenance Kentucky
- -----------------------------------------------------------------------------------------------
Indecon, Inc. Electrical Installation and 03/11/98 Ohio, Indiana, 1989 13,672
Maintenance Kentucky
- -----------------------------------------------------------------------------------------------
Riviera Electric Con- Electrical Installation and 03/11/98 Colorado 1982 31,846
struction Company Maintenance
- -----------------------------------------------------------------------------------------------
SKC Electric Inc. Electrical Installation and 03/11/98 Kansas & 1980 23,483
Maintenance Missouri
- -----------------------------------------------------------------------------------------------
Town & Country Electric Electrical Installation and 03/11/98 Mid West 1972 48,726
Inc. Maintenance Region
- -----------------------------------------------------------------------------------------------
Tri-City Electrical Con- Electrical Installation and 03/11/98 Florida 1958 79,493
tractors, Inc. Maintenance
- -----------------------------------------------------------------------------------------------
Wilson Electric Company, Electrical Installation and 03/11/98 Arizona 1988 71,009
Inc. Maintenance
- -----------------------------------------------------------------------------------------------
Walker Engineering, Inc. Electrical Installation and 03/25/98 Texas 1981 127,672
Maintenance
- -----------------------------------------------------------------------------------------------
Crest International, LLC Janitorial and Maintenance 04/01/98 Wisconsin 1995 11,954
Management
- -----------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
1997
Date Geographic Year Revenues
Name Service Type Acquired Coverage Founded (in 000s)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United Service Solu- Janitorial and Maintenance 04/27/98 National 1997 67,772
tions, Inc. Management
- -----------------------------------------------------------------------------------------------------
Taylor Electric, Inc. Electrical Installation and 05/22/98 Utah & Nevada 1978 19,193
Maintenance
- -----------------------------------------------------------------------------------------------------
G.S. Group, Inc. Mechanical Installation and 05/22/98 National 1986 64,122
Maintenance
- -----------------------------------------------------------------------------------------------------
Perimeter Maintenance Janitorial and Maintenance 05/31/98 Southeast Region 1985 23,355
Corporation Management
- -----------------------------------------------------------------------------------------------------
Spann Building Mainte- Janitorial and Maintenance 05/31/98 Midwest Region 1959 34,115
nance Company Management
- -----------------------------------------------------------------------------------------------------
National Network Servic- Data Cabling Installation and 06/15/98 Colorado, 1990 9,249
es, Inc. Maintenance Oregon,
California,
South Dakota
- -----------------------------------------------------------------------------------------------------
Riviera Electric of Cal- Electrical Installation and 06/17/98 California 1995 7,044
ifornia, Inc. Maintenance
- -----------------------------------------------------------------------------------------------------
Regency Electric Compa- Electrical Installation and 06/24/98 Southeast & 1979 11,338
ny, Inc. Maintenance Eastern Regions
- -----------------------------------------------------------------------------------------------------
The Lewis Companies Mechanical/Electrical 06/29/98 Southwest Region 1979 45,207
Installation and Maintenance
- -----------------------------------------------------------------------------------------------------
Chambers Electronic Com- Audio, Video, & Data 07/01/98 Arizona 1969 9,391
munications, LLC Communications
- -----------------------------------------------------------------------------------------------------
McIntosh Mechanical, Mechanical Installation and 08/03/98 South Carolina & 1982 18,517
Inc. Maintenance Georgia
- -----------------------------------------------------------------------------------------------------
Ivey Mechanical, Inc. Mechanical Installation and 09/02/98 South & 1947 84,347
Maintenance Southeast Regions
- -----------------------------------------------------------------------------------------------------
Tri-M Corporation & Af- Electrical Installation and 09/03/98 Northeast Region 1964 41,749
filiates Maintenance
- -----------------------------------------------------------------------------------------------------
Robinson Mechanical, Mechanical Installation and 09/14/98 Colorado 1978 52,905
Inc. Maintenance
- -----------------------------------------------------------------------------------------------------
Watson Electrical Con- Electrical Installation and 11/02/98 North Carolina & 1935 109,518
struction Co. and Maintenance Virginia
Welcon Management Com-
pany
- -----------------------------------------------------------------------------------------------------
Boxberger, Inc. Janitorial and Maintenance 11/06/98 Southeast Region 1989 2,647
Management
- -----------------------------------------------------------------------------------------------------
Flor-Shin, Inc. Janitorial and Maintenance 11/06/98 Southeast Region 1982 1,038
Management
- -----------------------------------------------------------------------------------------------------
R.J. Miguel Services, Janitorial and Maintenance 12/04/98 New England 1986 5,246
Inc. Management (except for Maine)
- -----------------------------------------------------------------------------------------------------
Gamewell Mechanical, LP Mechanical 12/14/98 North, South 1966 24,318
Carolina, Virginia
- -----------------------------------------------------------------------------------------------------
</TABLE>
Corporate Democracy. We believe that "corporate democracy" gives us a
competitive advantage over competitors in attracting, buying and combining
companies. In corporate democracy, each of the purchased companies continues
to manage all functions that "touch the customer," including sales, marketing,
customer service, credit and collections. Our corporate office manages
accounting and finance centrally, and provides guidance on strategy and
national sales and marketing. The principles of corporate democracy include:
. Owner/Operator Control. Owners and operators who have built their
company retain operational control of the business. We centralize
certain administrative functions to provide benefits from operating
efficiencies. This is in contrast to the traditional consolidation
approach in which the
28
<PAGE>
owner/operators do not have management responsibility because it has
been centralized at the consolidator's corporate offices.
. ""Think National, Act Local" Management. Local management is empowered
to make decisions based on local market conditions and customer needs.
This local approach maintains strong customer relationships and keeps
our historical customer base. Local companies also share their
experience and ideas in information technology, human resources and
service delivery to improve their business. They can follow sales leads
and referrals from their fellow companies on a national basis. They
benefit by being a part of a national service provider.
. Local Business Identity, Management and Sales Organization. In most
cases, local companies that we buy keep their original name. That name
is recognized in the local market. The local brand, sales force and
management contribute to stronger, longer customer relationships. We
believe maintaining the local brand is an advantage because customers
buy products and services based on long-term commercial relationships.
To capture the benefit of being a national service provider, we are co-
branding local company names with our national Building One Services
brand in our janitorial and maintenance management services.
. Stock as Currency. We structure many of our purchases using our stock as
part of the purchase price. As a result of selling their companies to us
for stock, the former owners, who are also key management employees, own
a significant number of shares of common stock in our company. We
believe employee ownership creates strong incentives for good
performance. Management and employee stock ownership aligns the
objectives of management employees and stockholders.
Growth Strategy. We believe facility owners and managers are looking for a
single source provider of a full range of facility services. Services from a
single source will improve the operating efficiency of customers' facilities
and relieve our customers from managing non-core functions. Many companies
have increased the volume and types of services they outsource in order to
focus on their respective core competencies. We will continue to experience
growth from:
. day-to-day operations;
. selling new services to existing customers;
. expanding our geographic market coverage;
. purchasing new companies; and
. partnering with other service providers.
We expect to continue to grow internally and from buying new companies.
Growth through acquisitions creates opportunities for our sales force to sell
multiple services to our existing and acquired customer base. Our focus is on
growing higher value added services, such as janitorial and maintenance
management services and electrical and mechanical maintenance and specialty
services. Growth by partnering with other facilities service providers is also
important. We will select, manage and combine services provided by third
parties into our menu of services. This also will advance our goal of
providing seamless services to a broad base of customers.
Operations and Integration Strategy. We are creating and will create certain
operating efficiencies and synergies among our acquired companies. Such
operating efficiencies include:
. Combining Administrative Functions such as insurance, employee benefits
and legal support.
. Eliminating Redundant Facilities and Functions by combining smaller
business' operating functions into a larger company. We can eliminate
duplicative facilities and costs by combining certain operational
activities, such as inventory management, purchasing, shipping and
accounting.
. Implementing System and Technology Improvements to improve the operating
performance of the purchased companies. We believe that such systems may
significantly improve the quality and
29
<PAGE>
efficiency of the work completed at our local companies. The systems
will also allow tracking and measurement for optimal operations.
. Purchasing in Volume to get favorable prices and rebates from
manufacturers or distributors. Volume purchasing can increase the
service we receive from vendors and lower transaction costs and
inventory costs. Examples of items that we have already purchased or
might purchase in volume are commodity materials, insurance and bonding,
delivery vehicles, long distance voice and data services, real estate
services, and banking and financial services.
. Implementing Strategic Marketing and "Cross-Selling" to increase
services sold to existing customers of the acquired companies. Strategic
marketing will create a broader geographic market for each of the
acquired companies, increasing their customer base. One element of
strategic marketing is "cross-selling" services to existing customers.
By using existing customer relationships to sell new facilities
services, we can increase the overall revenues and profits of our
company. In addition, we are creating a brand name for Building One
Services that suggests quality, consistency and reliability. Customers
who have received excellent service from one of our companies locally
can expect to receive a similar level of service from any of our other
companies across the United States.
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 companies we
acquire in the future.
Potential Environmental Liability
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
materials may be used at and around our customers' facilities or, in certain
cases, facilities leased by us on behalf of our customers. There is stringent
and changing federal, state and local regulation of these materials. We could
be liable for the actions of our employees in handling such materials. In
addition, if our employees are exposed to these materials, they may file
claims against us. As a result, there can be no assurance that compliance with
governmental regulations or liability related to hazardous materials will not
have a negative effect on our financial condition or results of operations.
Employees
As of December 31, 1998, we employed more than 14,400 people. A small number
of our employees are members of labor unions. We have satisfactory employee
relationships.
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<PAGE>
Properties
As of December 31, 1998, we operated 173 facilities in various states. Of
these facilities, 161 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
As a result of our recent acquisitions, we are party to litigation that
arises from the normal course of the business of the acquired companies.
Management believes that none of these actions will have a material adverse
effect on our financial condition, results of operations or cash flows.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table lists the individuals who currently are the directors
and executive officers of our company.
<TABLE>
<CAPTION>
Name Age Position
---- --- -------------------------------------------------------------------
<S> <C> <C>
Jonathan J. Ledecky..... 40 Chairman of the Board and Chief Executive Officer
Timothy C. Clayton...... 44 Executive Vice President, Chief Financial Officer and Treasurer
F. Traynor Beck......... 43 Executive Vice President, General Counsel and Secretary
David Ledecky........... 38 Executive Vice President and Chief Administrative Officer; Director
William P. Love, Jr..... 39 Director; President--Building One Electrical Group
Joseph M. Ivey.......... 40 Director; President--Building One Mechanical Group
Mary K. Bush............ 49 Director
Vincent W. Eades........ 38 Director
Thomas D. Heule......... 39 Director
W. Russell Ramsey....... 38 Director
M. Jude Reyes........... 42 Director
</TABLE>
Jonathan J. Ledecky founded our company in February 1997 and serves as our
Chairman of the Board and Chief Executive Officer. 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. Prior to founding U.S. Office Products Company, he served as
the President of The Legacy Fund, Inc. from 1989 to 1991 and from 1991 to
September 1994 as President and Chief Executive Officer of Legacy Dealer
Capital Fund, Inc., a wholly owned subsidiary of Steelcase Inc., the nation's
largest manufacturer of office furniture products. Jonathan J. Ledecky
currently serves as a director of USA Floral Products, Inc., UniCapital
Corporation, Aztec Technology Partners, Inc., School Specialty, Inc., Workflow
Management, Inc., the Ledecky Foundation, Navigant International, Inc. 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. Jonathan J. Ledecky is the brother of David Ledecky.
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.
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.
David Ledecky joined our company as Senior Vice President, Secretary and
Treasurer in September 1997 and was appointed Executive Vice President and
Chief Administrative Officer on November 25, 1997. David Ledecky has also
served as a director since November 25, 1997. Prior to this, he operated
Ledecky Brothers L.L.C., the predecessor to our company, as its Vice President
and sole employee since its inception in February 1997. In that capacity, he
researched and analyzed industry consolidation and acquisition opportunities.
From 1992 to 1996, David Ledecky was an attorney at the Washington, DC law
firm of Comey, Boyd & Luskin. Prior
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<PAGE>
to 1992, he was an attorney with the law firm of Shearman & Sterling, and a
Vice President of The Legacy Fund, Inc., in Washington, DC. He is a former
consultant to the computer and telecommunications industries. He is a graduate
of Harvard College and Yale Law School. David Ledecky is the brother of
Jonathan J. Ledecky.
William P. Love, Jr. has served as the President of the Building One
Electrical 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.
Joseph M. Ivey has served as the President of the Building One Mechanical
group since September 2, 1998 and has been a director of our company since
October 8, 1998. 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 First M&F Corp.
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
Board. Prior to that, she was Vice President--International Finance at the
Federal National Mortgage Associate (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, Novacon Management Company, Washington Mutual Investors
Fund, March of Dimes, Hoover Institution, Wilberforce University, the Folger
Shakespeare Library, Project 2000, Inc., Small Enterprise Assistance Funds 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.
Thomas D. Heule has been a director of our company since May 27, 1998. Since
March 1997, Mr. Heule has served as a Managing Director of BACE Capital
Partners, LLC, an industry consolidation buyout firm based in Denver,
Colorado. Between November 1997 and May 1998, Mr. Heule also served as Vice
President of USS, a company we acquired in May 1998. Between 1991 and 1997,
Mr. Heule was a Managing Director in the Corporate Finance Department of Dain
Bosworth, Inc. He is a graduate of the University of Colorado, the College of
St. Thomas and the Wharton School of the University of Pennsylvania. Mr. Heule
is the director designee of the stockholders of USS pursuant to the
acquisition agreement between our company and USS.
W. Russell Ramsey has been a director of our company since November 25,
1997. Mr. Ramsey is President, co-founder and a director of Friedman,
Billings, Ramsey Group, Inc., a holding company engaged in brokerage,
investment banking, corporate finance and asset management activities in the
Washington, DC area. He has continuously served as President of Friedman,
Billings, Ramsey Group, Inc. and its predecessors since co-founding our
company in 1989. FBR is a wholly owned indirect subsidiary of Friedman,
Billings, Ramsey Group, Inc. and issued a fairness opinion regarding this
merger. Mr. Ramsey holds a B.A. from the George Washington University and is
director designee of FBR pursuant to an agreement with us.
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,
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<PAGE>
California. He is also a director and investor in three other beverage
distributors and two wholesale food service distributors. Mr. Reyes is a
director designee of FBR pursuant to an agreement with us.
Committees of the Board of Directors
Your Board of Directors has established an Audit Committee and a
Compensation Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to
conduct the annual audit of 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, Ramsey
and Reyes are the members of the Audit Committee.
The Compensation Committee provides a general review of our compensation
plans to ensure that they meet corporate objectives. The Compensation
Committee responsibilities also include administering the Incentive Plan and
Bonus Plan, including selecting the officers and salaried employees to whom
awards will be granted. Messrs. Eades and Reyes, who are independent
directors, are the members of the Compensation 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
$25,000. In addition, pursuant to our 1997 Non-Employee Directors' Stock Plan,
each director who is not an employee automatically receives an initial grant
of an option to purchase 20,000 shares of our common stock on the date that
person is first elected to your Board of Directors. Such directors also
receive an automatic annual grant of an option to purchase 5,000 shares. The
exercise price of each option is equal to the fair market value on the date of
grant of one share of our common stock.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning the cash
and non-cash compensation earned by or awarded to the persons who were our
executive officers during 1998. Our company's predecessor was organized in
February 1997, with David Ledecky as its sole employee. We employed the
remaining executive officers as of November 25, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------
Long-Term
Compensation
Awards
Annual Securities
Compensation Underlying
Name and Principal Fiscal Salary Options/SARS All Other
Position Year ($) (1) Bonus (#) (2) Compensation
- ------------------ ------ ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jonathan J. Ledecky...... 1998 $750,000 [ -- ] -- --
Chief Executive Officer
and 1997 $125,000 -- --
Chairman of the Board
Timothy C. Clayton....... 1998 $300,000 [ -- ] -- 4,800(3)
Executive Vice
President, 1997 $223,000 500,000 25,000(4)
Chief Financial Officer
and Treasurer
F. Traynor Beck.......... 1998 $300,000 [ -- ] -- 4,800(3)
Executive Vice
President, 1997 $223,000 500,000 --
General Counsel and
Secretary
David Ledecky............ 1998 $300,000 [ -- ] -- 4,800(3)
Executive Vice President
and 1997 $327,994(5) 500,000 --
Chief Administrative
Officer, Director
</TABLE>
- --------
(1) The 1997 figures include bonus payments of $200,000 for Mr. Clayton, Mr.
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.
(3) Represents our company's matching contribution to the employee's 401-K
plan.
(4) Represents amount paid to Mr. Clayton for consulting services during
November 1997.
(5) Includes payments made to David Ledecky by our company's predecessor.
Employment Agreements
Jonathan J. Ledecky. On November 25, 1997, our company entered into an
employment agreement with Jonathan J. Ledecky. The agreement has a one-year
term and is automatically renewable for each successive one-year term unless
either Jonathan J. Ledecky or our company gives notice that they do not intend
to renew the contract at least 90 days prior to the end of the term. Non-
renewal of the contract is the equivalent of termination without "cause" (as
defined in the employment agreement). According to the terms of the agreement,
Jonathan J. Ledecky is obligated to devote the substantial majority of his
business time, attention and efforts to his duties as Chief Executive Officer
(with certain exceptions). The agreement provides for an annual salary of
$750,000 and a discretionary bonus in an amount equal to up to 100% of his
base salary. If we terminate the agreement other than for "cause" (as defined
in the employment agreement), Jonathan J. Ledecky is entitled to receive an
amount equal to twice his base salary plus an amount equal to the bonus he
received in the prior year. The
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<PAGE>
agreement prohibits Jonathan J. Ledecky from competing with our company during
the term of his employment and for a period of one year thereafter. The
agreement also provides for certain executive perquisites.
F. Traynor Beck, Timothy C. Clayton and David Ledecky. On November 25, 1997,
our company 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 our company gives
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). This option vests
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). 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 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.
William P. Love, Jr. On March 11, 1998, our company entered into an
employment agreement with William P. Love, Jr., the President of the Building
One electrical group and a company director. The agreement has a two-year term
and may be extended according to terms that our company and Mr. Love mutually
agree upon. The agreement provides for an annual salary of $200,000 and a
performance-based incentive bonus. This bonus is payable in cash, stock
options or other non-cash awards. The compensation committee of our Board of
Directors determines the form of the bonus each year during the term of the
agreement, beginning on January 1, 1999. If we terminate the agreement other
than for "cause" (as defined in the employment agreement), Mr. Love will
receive his base salary and group health benefits in effect at that time for
either:
. one year from the date of termination; or
. the remaining length of time under the term of the agreement, whichever
is longer.
In addition, if we terminate Mr. Love without "cause," the payout of
contingent consideration that we owe to Mr. Love and to the other stockholders
of the initial companies in the electrical group will be accelerated.
Mr. Love's employment agreement also prohibits him from competing with us
during the term of his employment and, depending on the nature of his
termination of employment, for a period of up to two years from the date of
termination.
Joseph M. Ivey. On September 2, 1998, our company entered into an employment
agreement with Joseph M. Ivey, the president of the Building One Mechanical
group and a company director. The agreement has a two-year term and may be
extended according to terms that our company and Mr. Ivey mutually agree upon.
The agreement provides for an annual salary of $210,000 and, beginning
September 1, 1999, eligibility for a performance-based incentive bonus. This
bonus is payable in cash, stock options or other non-cash awards, in a
combination to be determined by our Board of Directors. If we terminate the
agreement other than for "cause" (as defined in the employment agreement), Mr.
Ivey will receive his base salary and group health benefits in effect at that
time for the remaining length of time under the term of the agreement. Mr.
Ivey's employment agreement also prohibits him from competing with us during
the term of his employment and, depending on the nature of his termination of
employment, for a period of two years from the date of termination.
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<PAGE>
Year-End Values of Options
The following table sets forth certain information concerning the exercise
and year-end values of options relating to our executive officers for 1998.
<TABLE>
<CAPTION>
Aggregated Option/SARs Exercised in 1998 and
Option/SAR Values at end of 1998
-----------------------------------------------------------------------
Number of Value of Unex-
Securities ercised In-
Underlying the-
Shares Unexercised money Options/
Acquired on Options/SARs SARs at End of
Exercise at End of 1998 1998 (Exercis-
(# Value Realized (Exercisable/ able/Unexer-
Name of shares) ($)(1) Unexercisable)(#) cisable)($)(2)
---- ----------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky..... -- -- -- --
Timothy C. Clayton...... -- -- 125,000/375,000 --
F. Traynor Beck......... -- -- 125,000/375,000 --
David Ledecky........... -- -- 125,000/375,000 --
</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 $20 7/8, which was
the closing price of our common stock on the Nasdaq Stock Market on
December 31, 1998.
37
<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, Chief Executive Officer and founder, is
the brother of David Ledecky, our Executive Vice President, Chief
Administrative Officer and a director.
W. Russell Ramsey, a director, is President and a principal stockholder of
Friedman, Billings, Ramsey Group, Inc. FBR, a wholly owned indirect subsidiary
of Friedman, Billings, Ramsey Group, Inc., rendered investment banking
services to us in connection with our initial public offering. Friedman,
Billings, Ramsey & Co., Inc., a wholly owned indirect subsidiary of Friedman,
Billings, Ramsey Group, Inc., acted as a financial advisor to our company in
connection with the terminated merger with Boss Investment LLC and received a
fee of $500,000 as consideration for an opinion letter regarding the fairness
of the proposed merger to our stockholders from a financial point of view and
will receive a fee of approximately $2.1 million contingent upon the
completion of the tender offer.
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 the president of the Building
One electrical group. The lease provides for lease payments in the amount of
$8,095 per month, or $97,140 annually.
Thomas D. Heule, a director, is a managing director of BACE Capital
Partners, LLC, and is a member of BCP Partners, LLC, which owns an 80%
interest in BACE Capital Partners, LLC. We have entered into a consulting
agreement with BACE Capital Partners under which they will provide advisory
services in connection with the identification and closing of acquisitions of
building maintenance services businesses. As compensation for its services,
BACE Capital Partners will generally receive a fee equal to a percentage of
the consideration paid in connection with the acquisitions they have
identified. To date, we have not made any payments pursuant to this agreement.
In addition, we have agreed to pay to BACE Capital Partners in twelve equal
monthly installments a termination fee in the amount of $500,000 in connection
with the termination of a consulting agreement between United Service
Solutions, Inc. and BACE Capital Partners that was entered into prior to our
acquisition of United Service Solutions, Inc. In 1998, we paid $333,353 in
termination fees under the agreement with BACE Capital Partners. Generally,
any payments to be made under our consulting agreement with BACE Capital
Partners will be offset by payments made pursuant to this termination fee.
Joseph M. Ivey, a director and the president of the Building One mechanical
group, is an officer and stockholder of two corporations which lease real
property and an airplane to our company. The leases provide for lease payments
in the aggregate amount of $26,300 per month, or $315,600 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 19, 1999 by:
. each person (or group of affiliated persons) we know to be the
beneficial owner of more than five percent of the outstanding shares of
our common stock;
. each director;
. each executive officer; and
. all of our company's current directors and executive officers as a
group.
Each of these stockholders possesses sole voting and investment power with
respect to the shares listed, unless otherwise noted.
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of Common
Beneficial Stock
Name and Address of Beneficial Owner Ownership Owned
------------------------------------ ---------- ----------
<S> <C> <C>
Executive Officers and Directors
Jonathan J. Ledecky..................................... 4,500,000(1) 9.9%
c/o Building One Services Corporation
800 Connecticut Ave., NW, Suite 1111
Washington, DC 20006
David Ledecky........................................... 125,000(2) *
F. Traynor Beck......................................... 125,000(2) *
Timothy C. Clayton...................................... 127,000(2) *
Joseph M. Ivey.......................................... 624,131(3) 1.4%
William P. Love, Jr..................................... 423,322(4) *
Thomas D. Heule......................................... 208,831(5) *
Vincent W. Eades........................................ 22,500(6) *
W. Russell Ramsey....................................... 1,682,500(7) 3.7%
M. Jude Reyes........................................... 42,500(7) *
Mary K. Bush............................................ 10,000 *
All directors and executive
officers as a group (11 persons)..................... 7,890,784 17.4%
</TABLE>
- --------
*Less than one percent
(1) This includes 1,950,000 shares underlying a warrant issued to Jonathan J.
Ledecky in connection with our initial public offering. We have agreed
that, at Jonathan J. Ledecky's request, we 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, we have agreed to give Jonathan J. Ledecky
the right to request that we include the shares underlying the warrant on
a registration statement filed by us during a twelve-year period beginning
on November 25, 1997.
(2) This figure includes 125,000 shares which may be acquired upon the
exercise of options that are exercisable within 60 days.
(3) This figure includes 300,000 shares held in the Joseph M. Ivey, Jr.
Annuity Trust, of which Mr. Ivey is the trustee.
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<PAGE>
(4) This figure includes 207,428 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.
(5) On April 27, 1998, BCP Partners, LLC distributed to Mr. Heule his 208,831
allocable shares. Of these shares, 174,430 shares are held by Denargo
Investments, L.L.C., of which Mr. Heule is the sole member.
(6) This figure represents shares which may be acquired upon the exercise of
options that are exercisable within 60 days.
(7) This figure includes 22,500 shares which may be acquired upon the exercise
of options that are exercisable within 60 days, 500,000 shares owned by
FBR Asset Investment Corporation, of which Mr. Ramsey is an officer,
director and indirect shareholder, and 1,130,000 shares underlying a
warrant owned by Friedman, Billings, Ramsey & Co., Inc., of which Mr.
Ramsey is an officer, director and shareholder.
DESCRIPTION OF CAPITAL STOCK
We currently have 250,500,000 shares of authorized capital stock. As of
February 10, 1999, there were 45,275,052 shares outstanding. 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, our
amended and restated bylaws and the applicable provisions of Delaware General
Corporation Law.
Common Stock
Our common stockholders of record are entitled to one vote for each share
held on all matters submitted to a vote of the stockholders. Cumulative voting
is not permitted under our restated certificate of incorporation. Our common
stockholders are entitled to receive proportionately any dividends that your
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.
Delaware Anti-takeover Law and Certain Provisions of our 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 their 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 the approval of your Board of Directors and of 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.
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<PAGE>
Our 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.
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
41
<PAGE>
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.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
BUILDING ONE SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements..................................................... F-2
Unaudited Pro Forma Combined Balance Sheet...................... F-3
Unaudited Pro Forma Combined Statements of Operations........... F-4
Notes to Unaudited Pro Forma Combined Financial Statements...... F-6
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
SERVICE MANAGEMENT USA, INC.
Report of Independent Accountants............................... F-31
Combined Balance Sheet.......................................... F-32
Combined Statement of Operations................................ F-33
Combined Statement of Stockholder's Equity...................... F-34
Combined Statement of Cash Flows................................ F-35
Notes to Combined Financial Statements.......................... F-36
TRI-CITY ELECTRICAL CONTRACTORS, INC.
Independent Auditors' Report.................................... F-41
Consolidated Balance Sheets..................................... F-42
Consolidated Statements of Operations........................... F-43
Consolidated Statements of Stockholders' Equity................. F-44
Consolidated Statements of Cash Flows........................... F-45
Notes to Consolidated Financial Statements...................... F-47
WILSON ELECTRIC COMPANY, INC.
Report of Independent Accountants............................... F-55
Balance Sheet................................................... F-56
Statements of Income and Retained Earnings...................... F-57
Statements of Cash Flows........................................ F-58
Notes to Financial Statements................................... F-59
SKC ELECTRIC, INC. AND AFFILIATE
Report of Independent Accountants............................... F-64
Combined Balance Sheet.......................................... F-65
Statement of Income............................................. F-66
Statement of Cash Flows......................................... F-67
Notes to Financial Statements................................... F-69
RIVERA ELECTRIC CONSTRUCTION CO.
Independent Accountants' Report................................. F-76
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Balance Sheets.......... F-77
Statements of Income.... F-78
Statements of Changes in
Stockholders' Equity... F-79
Statements of Cash
Flows.................. F-80
Notes to Financial
Statements............. F-81
TOWN & COUNTRY ELECTRIC
INC.
Report of Independent
Certified Public
Accountants............ F-86
Balance Sheets.......... F-87
Statements of Earnings.. F-89
Statement of
Stockholders' Equity... F-90
Statements of Cash
Flows.................. F-91
Notes to Financial
Statements............. F-92
GARFIELD ELECTRIC COMPANY
Report of Independent
Certified Public
Accountants............ F-97
Balance Sheet........... F-98
Statements of Earnings.. F-99
Statements of
Stockholders' Equity... F-100
Statements of Cash
Flows.................. F-101
Notes to Financial
Statements............. F-102
INDECON, INC.
Report of Independent
Certified Public
Accountants............ F-107
Balance Sheet........... F-108
Statements of Earnings.. F-109
Statements of
Stockholders' Equity... F-110
Statements of Cash
Flows.................. F-111
Notes to Financial
Statements............. F-112
UNITED SERVICE SOLUTIONS,
INC.
Report of Independent
Public Accountants..... F-117
Balance Sheets.......... F-118
Statements of Income.... F-119
Statements of
Stockholders' Equity
(Deficit).............. F-120
Statements of Cash
Flows.................. F-121
Notes to Financial
Statements............. F-123
TAYLOR ELECTRIC, INC.
Report of Independent
Certified Public
Accountants............ F-131
Balance Sheet........... F-132
Statement of Earnings
and Retained Earnings.. F-133
Statement of Cash
Flows.................. F-134
Notes to Financial
Statements............. F-135
WALKER ENGINEERING, INC.
Independent Auditors'
Report................. F-138
Balance Sheet........... F-139
Statement of Income and
Changes in Retained
Earnings............... F-140
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Statement of Cash
Flows.................. F-141
Notes to Financial
Statements............. F-142
G. S. GROUP, INC.
Independent Auditors'
Report................. F-148
Consolidated Balance
Sheets................. F-149
Consolidated Statements
of Operations.......... F-150
Consolidated Statements
of Stockholder's
Equity................. F-151
Consolidated Statements
of Cash Flows.......... F-152
Notes to Consolidated
Financial Statements... F-153
NATIONAL NETWORK SERVICES,
INC.
Independent Auditors'
Report................. F-160
Balance Sheet........... F-161
Statement of Income and
Retained Earnings...... F-162
Statement of Cash
Flows.................. F-163
Notes to Financial
Statements............. F-164
REGENCY ELECTRIC COMPANY,
INC.
Independent Auditor's
Report................. F-167
Consolidated Balance
Sheets................. F-168
Consolidated Statements
of Income.............. F-169
Consolidated Statements
of Changes in
Stockholder's Equity... F-170
Consolidated Statements
of Cash Flows.......... F-171
Notes to Consolidated
Financial Statements... F-172
TRI-M, CORPORATION, INC.
Independent Auditors'
Report................. F-177
Combined Balance
Sheets................. F-178
Combined Statements of
Income and Retained
Earnings............... F-179
Combined Statements of
Cash Flows............. F-180
Notes to Combined
Financial Statements... F-181
IVEY MECHANICAL, INC.
Independent Auditors'
Report................. F-188
Combined Balance Sheet.. F-189
Combined Statement of
Income and Partnership
Equity................. F-190
Combined Statement of
Cash Flows............. F-191
Notes to Combined
Financial Statements... F-192
ROBINSON MECHANICAL, INC.
Report of Independent
Accountants............ F-199
Balance Sheet........... F-200
Statement of
Operations............. F-201
Statement of
Stockholders' Equity... F-202
Statement of Cash
Flows.................. F-203
Notes to the Financial
Statements............. F-204
</TABLE>
iii
<PAGE>
BUILDING ONE SERVICES CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The financial statements of Building One Services Corporation (the
"Company") included in the following unaudited pro forma combined financial
statements represent the consolidated financial statements of the Company,
which are included elsewhere in this Prospectus. The unaudited pro forma
financial statements give effect to the following: (i) the purchase of
24,365,891 shares of common stock (22,637,526 shares at a price of $25.00 per
share and an estimated 1,728,365 shares at a price of $25.00 per share less
the exercise price for 50% of outstanding employee stock options) ("Share
Repurchase"), (ii) the planned offering of $300,000 of senior subordinated
notes and $100,000 term facility ("New Borrowings") necessary to finance the
Share Repurchase (iii) five acquisitions completed subsequent to September 30,
1998 through January 29, 1999 (the "Subsequent Acquisitions") and (iv) the
repurchase of 1,135,000 shares of Common Stock ("Treasury Stock") subsequent
to September 30, 1998.
The following unaudited pro forma combined balance sheet of the Company
gives effect to the Share Repurchase, the New Borrowings, the Subsequent
Acquisitions and the Treasury Stock as if they had been consummated as of the
Company's most recent balance sheet date, September 30, 1998.
The unaudited pro forma combined statements of operations give effect to (i)
the Share Repurchase, (ii) the New Borrowings (iii) the 21 acquisitions
completed during the nine months ending September 30, 1998 which were
accounted for under the purchase method of accounting ("1998 Acquisitions")
and (iv) the Subsequent Acquisitions as if they had been consummated on
January 1, 1997.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data does not purport to represent what the
Company's consolidated financial position and results of operations would
actually have been if such transactions in fact had occurred on the assumed
dates and are not necessarily representative of our Company's consolidated
financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
F-2
<PAGE>
F-3
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Subsequent
Building One Purchase of Repurchase
Services Subsequent Combined Purchase Treasury New of Common Pro Forma
Corporation Acquisitions Total Accounting Stock Borrowings Stock Combined
------------ ------------ ---------- ---------- ----------- ---------- ---------- ---------
ASSETS (A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 272,022 $ 9,587 $ 281,609 $(45,390) $(14,784) $385,500 $(584,120) $ 22,815
Accounts receivable,
net.................... 205,502 27,310 232,812 232,812
Cost and estimated
earnings in excess of
billings on
uncompleted
contracts.............. 20,410 3,782 24,192 24,192
Prepaid expenses and
other current assets... 12,955 3,750 16,705 16,705
---------- ------- ---------- -------- -------- -------- --------- --------
Total current
assets............... 510,889 44,429 555,318 (45,390) (14,784) 385,500 (584,120) 296,524
Property and equipment,
net..................... 31,718 3,865 35,583 35,583
Intangible assets, net.. 454,862 24 454,886 44,974 499,860
Other assets............ 4,643 3,251 7,894 14,500 22,394
---------- ------- ---------- -------- -------- -------- --------- --------
Total assets......... 1,002,112 51,569 1,053,681 (416) (14,784) 400,000 (584,120) 854,361
========== ======= ========== ======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........ 3,864 474 4,338 4,338
Accounts payable....... 57,352 13,548 70,900 70,900
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.............. 59,361 8,737 68,098 68,098
Income taxes payable... 7,304 7,304 (5,073) 2,231
Accrued compensation... 31,796 862 32,658 32,658
Accrued liabilities.... 17,597 1,606 19,203 4,732 23,935
---------- ------- ---------- -------- -------- -------- --------- --------
Total current
liabilities.......... 177,274 25,227 202,501 4,732 (5,073) 202,160
Long-term debt.......... 3,094 419 3,513 400,000 403,513
Other liabilities....... 4,497 1,988 6,485 (3,193) 3,292
---------- ------- ---------- -------- -------- -------- --------- --------
Total liabilities.... 184,865 27,634 212,499 1,539 400,000 (5,073) 608,965
Stockholders' equity:
Common Stock........... 44 95 139 (92) (1) (23) 23
Convertible Non-Voting
common stock........... 1 1 (1)
Additional paid-in
capital................ 814,791 3,336 818,127 18,641 (615,368) 221,400
Treasury stock......... (27,048) (27,048) (14,783) 41,831
Retained earnings...... 30,083 20,504 50,587 (20,504) (5,486) 24,597
Accumulated other
comprehensive
income (loss).......... (624) (624) (624)
---------- ------- ---------- -------- -------- -------- --------- --------
Total stockholders'
equity .............. 817,247 23,935 841,182 (1,955) (14,784) (579,047) 245,396
---------- ------- ---------- -------- -------- -------- --------- --------
Total liabilities and
stockholders'
equity............... $1,002,112 $51,569 $1,053,681 $ (416) $(14,784) $400,000 $(584,120) $854,361
========== ======= ========== ======== ======== ======== ========= ========
</TABLE>
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Building
One
Services
Corporation
-----------
<S> <C>
Revenues......... $ 70,101
Cost of
revenues........ 58,857
----------
Gross profit.... 11,244
Selling, general
and
administrative
expenses........ 11,776
Goodwill amortization..
----------
Operating income
(loss)......... (532)
Other (income)
expense:
Interest
expense........ 208
Interest
income......... (2,056)
Other, net...... (221)
----------
Income (loss)
before provision
for income
taxes........... 1,537
Provision for
income taxes.... 94
----------
Net income
(loss).......... $ 1,443
==========
Net income per
share--Basic.... $ 0.25
==========
Net income per
share--Diluted.. $ 0.25
==========
Weighted average
shares
outstanding--
Basic (Note 3).. 5,683,464
==========
Weighted average
shares
outstanding--
Diluted
(Note 3)........ 5,865,550
==========
<CAPTION>
1998 Acquisitions
----------------------------------------------------------------------------------------------
Service Garfield Riviera Tri-City Town &
Management SKC and Electric Electrical Country Wilson Taylor Regency
USA, Inc. Electric Indecon Construction Contractors Electric Electric Electric Electric
---------- --------- --------- ------------ ----------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $26,266 $23,482 $24,498 $37,049 $79,493 $48,726 $71,009 $19,193 $60,283
Cost of
revenues........ 19,856 16,971 19,587 31,607 63,551 39,701 59,036 13,799 44,556
---------- --------- --------- ------------ ----------- --------- --------- --------- --------
Gross profit.... 6,410 6,511 4,911 5,442 15,942 9,025 11,973 5,394 15,727
Selling, general
and
administrative
expenses........ 3,832 4,200 2,981 3,999 9,925 7,006 10,514 1,272 5,448
Goodwill amortization..
---------- --------- --------- ------------ ----------- --------- --------- --------- --------
Operating income
(loss)......... 2,578 2,311 1,930 1,443 6,017 2,019 1,459 4,122 10,279
Other (income)
expense:
Interest
expense........ 53 102 229 53 75 110 587
Interest
income......... (168) (156) (113) (416)
Other, net...... 6 (40) (16) (119) 26 (113) 77 (43) 29
---------- --------- --------- ------------ ----------- --------- --------- --------- --------
Income (loss)
before provision
for income
taxes........... 2,519 2,351 1,844 1,333 6,106 2,057 1,428 4,278 10,079
Provision for
income taxes.... 52 1,150 771 462 894 625
---------- --------- --------- ------------ ----------- --------- --------- --------- --------
Net income
(loss).......... $ 2,467 $ 1,201 $ 1,073 $ 1,333 $ 5,644 $ 1,163 $ 803 $ 4,278 $10,079
========== ========= ========= ============ =========== ========= ========= ========= ========
Net income per
share--Basic....
Net income per
share--Diluted..
Weighted average
shares
outstanding--
Basic (Note 3)..
Weighted average
shares
outstanding--
Diluted
(Note 3)........
</TABLE>
<TABLE>
<CAPTION>
1998 Acquisitions
-----------------
Insignificant Subsequent Combined Pro Forma Pro Forma
Acquisitions Acquisitions Total Adjustments Combined
------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues......... $543,640 $151,824 $1,155,564 $ $ 1,155,564
Cost of
revenues........ 446,296 129,446 943,263 943,263
------------- ------------ ----------- -------------- ------------
Gross profit.... 97,344 22,378 212,301 212,301
Selling, general
and
administrative
expenses........ 78,117 16,691 155,761 (32,020)(A)
4,000 (C) 127,741
Goodwill amortization.. 12,587 (E) 12,587
------------- ------------ ----------- -------------- ------------
Operating income
(loss)......... 19,227 5,687 56,540 15,433 71,973
Other (income)
expense:
Interest
expense........ 2,392 128 3,937 39,941 (G)
1,450 (B) 45,328
Interest
income......... (1,266) (311) (4,486) 1,834 (H) (2,652)
Other, net...... (2,292) 206 (2,500) (2,500)
------------- ------------ ----------- -------------- ------------
Income (loss)
before provision
for income
taxes........... 20,393 5,664 59,589 (27,792) 31,797
Provision for
income taxes.... 4,184 2,263 10,495 7,259 (I) 17,754
------------- ------------ ----------- -------------- ------------
Net income
(loss).......... $ 16,209 $ 3,401 $ 49,094 $(35,051) $ 14,043
============= ============ =========== ============== ============
Net income per
share--Basic....
Net income per
share--Diluted..
Weighted average
shares
outstanding--
Basic (Note 3)..
Weighted average
shares
outstanding--
Diluted
(Note 3)........
</TABLE>
F-4
<PAGE>
BUILDING ONE SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Building
One
Services 1998 Subsequent Combined Pro Forma Pro Forma
Corporation Acquisitions Acquisitions Total Adjustments Combined
----------- ------------ ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 478,595 $379,288 $118,807 $976,690 $ $ 976,690
Cost of revenues........ 376,318 309,591 99,022 784,931 784,931
---------- -------- -------- -------- -------- ----------
Gross profit........... 102,277 69,697 19,785 191,759 191,759
Selling, general and
administrative
expenses............... 59,786 55,111 13,826 128,723 (21,276)(A) 107,447
Goodwill asset
amortization........... 4,584 234 4,818 4,675 (E) 9,493
Non-recurring pooling
costs.................. 768 768 (768)(D)
---------- -------- -------- -------- -------- ----------
Operating income....... 37,139 14,352 5,959 57,450 17,369 74,819
Other (income) expense:
Interest expense....... 565 1,764 73 2,402 30,248 (G)
(675)(F)
1,088 (B) 33,063
Interest income........ (16,043) (1,483) (252) (17,778) 16,523 (H) (1,255)
Other, net............. (134) (1,574) 346 (1,362) (1,362)
---------- -------- -------- -------- -------- ----------
Income before provision
for income taxes....... 52,751 15,645 5,792 74,188 (29,815) 44,373
Provision for income
taxes.................. 22,460 4,665 2,261 29,386 (8,054)(I) 21,332
---------- -------- -------- -------- -------- ----------
Net income.............. $ 30,291 $ 10,980 $ 3,531 $ 44,802 $(21,761) $ 23,041
========== ======== ======== ======== ======== ==========
Net income per share--
Basic.................. $ 0.79 $ 1.02
========== ==========
Net income per share--
Diluted................ $ 0.77 $ 1.00
========== ==========
Weighted average shares
outstanding--Basic
(Note 3)............... 38,298,295 22,637,526
========== ==========
Weighted average shares
outstanding--Diluted
(Note 3)............... 39,368,321 23,103,065
========== ==========
</TABLE>
F-5
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(A) Adjustment to reflect the purchase of the Subsequent Acquisitions for
consideration of approximately $45,390 in cash (excluding related
professional fees) and 1,701,671 shares of common stock resulting in
excess purchase price over the fair value of net assets acquired of
$44,974. Such allocations are preliminary in nature, pending the outcome
of a detailed analysis being performed by our company of the assets and
liabilities acquired. For purposes of computing the estimated purchase
price for business combinations accounted for under the purchase method of
accounting, the value of the shares was determined in consideration of
restrictions, if applicable, on the transferability of the shares issued.
(B) Adjustment to reflect the subsequent repurchase of 1,135,000 shares of the
Company's common stock for a total of $14,784 which occurred subsequent to
September 30, 1998.
(C) Adjustment to reflect the planned offering of $300,000 of Senior Notes at
an assumed interest rate of 10.5%, and the $100,000 Term Facility at an
assumed rate of 8.25% necessary to finance the Share Repurchase.
Additionally, adjustment reflects approximately $14,500 of debt issue
costs which will be capitalized and amortized over the life of the debt.
(D) Adjustment to reflect the use of cash to repurchase 24,365,891 of the
shares of common stock (22,637,526 shares at a price of $25.00 per share
and an estimated 1,728,365 shares at a price of $25.00 per share less the
exercise price for 50% of outstanding employee stock options), including
applicable transaction fees of $5,500. The funds to finance the repurchase
are expected to be obtained from the following sources: the Company's cash
balances, $300,000 in Senior Notes and the $100,000 Term Facility.
As a result of the Company allowing for the exchange of an estimated
1,728,365 employee stock options in the Share Repurchase, compensation
expense is recorded to the extent that the optionholder exercises the stock
option for the net cash payments made upon exercise. Upon completion of the
Repurchase, stock options not exchanged will revert to fixed option awards
with terms identical to those prior to the commencement of the Repurchase.
The Company estimates that the compensation expense related to the option
shares purchased in the Share Repurchase will approximate $9,144, assuming
all eligible options will be exchanged. For purposes of the pro forma
combined balance sheet, the Company has reflected the after-tax compensation
expense of $5,486 ($9,144 before benefit from income taxes) as a reduction
to retained earnings. Additionally, income taxes payable has been decreased
by approximately $5,073 to reflect the expected income tax benefit and
additional paid-in-capital has been increased by $1,415. The Company has not
included these items as compensation expense in the unaudited pro forma
combined statement of operations because they are of a non-recurring nature
and are directly related to the Share Repurchase.
F-6
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE 2--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(A) Adjustment to reflect the modifications in salaries, bonuses and benefits
to owners of the 1998 Acquisitions and the Subsequent Acquisitions to
which they have agreed prospectively.
(B) Adjustment to reflect the amortization of debt issuance costs incurred in
connection with the issuance of $300,000 of Senior Notes and the $100,000
Term Facility over the terms of the respective borrowings.
(C) Adjustment to reflect an increase in general and administrative expenses
associated with Building One Services Corporation's management and
corporate activities.
(D) Adjustment to reflect the reduction in one-time non-recurring acquisition
costs related to pooling-of-interests business combinations. These costs
consist of legal, accounting and broker fees.
(E) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the 1998 Acquisitions
and the Subsequent Acquisitions for the periods prior to the date of
acquisition. The goodwill is being amortized over an estimated life of 40
years.
(F) Adjustment reflects reduction in interest expense associated with debt
paid in conjunction with the acquisition of one of the 1998 Acquisitions.
(G) Adjustment to reflect the increase in interest expense in connection with
the $300,000 Senior Notes at an estimated rate of 10.5% and the $100,000
Term Facility at an estimated rate of 8.25%. Depending on market
conditions at the time the Senior Notes are offered and the Term Facility
obtained, the interest rates may vary from those indicated herein.
(H) Adjustment to eliminate interest income relating to the cash consideration
used in the acquisition of the 1998 Acquisitions and cash used in the
Share Repurchase.
(I) Adjustment to reflect the incremental provision for federal and state
income taxes assuming a combined federal and state statutory rate of
approximately 40% and the non-deductibility of certain goodwill
amortization.
F-7
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 3--SHARES USED TO COMPUTE EARNINGS PER SHARE
Basic pro forma earnings per share is calculated based upon 22,637,526
weighted average shares of common stock outstanding for the year ended
December 31, 1997 and the nine months ended September 30, 1998. This amount
represents the common stock outstanding subsequent to the 50% Share Repurchase
of 22,637,526 shares as well as the repurchase of 1,728,365 shares from the
exercise of certain employee stock options.
Diluted earnings per share is calculated based upon the weighted average
shares of common stock outstanding of 22,637,526 and the dilution attributable
to stock options and warrants outstanding subsequent to the transaction.
The weighted average shares outstanding used to calculate pro forma earnings
per share for the year ended December 31, 1997 and the nine months ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997:
<S> <C>
Pro forma weighted average common shares outstanding -- Basic
(subsequent to the Share Repurchase).............................. 22,637,526
==========
Dilution attributable to stock options and warrants still
outstanding....................................................... 20,067
----------
Pro forma weighted average shares outstanding -- Diluted........... 22,657,592
==========
For the nine months ended September 30, 1998:
Pro forma weighted average common shares outstanding -- Basic
(subsequent to the Share Repurchase).............................. 22,637,526
==========
Dilution attributable to stock options and warrants still
outstanding....................................................... 465,540
----------
Pro forma weighted average shares outstanding -- Diluted........... 23,103,065
==========
</TABLE>
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain wholly-owned subsidiaries, which
statements reflect total assets of $4.0 million and $3.5 million at December
31, 1997 and 1996, respectively, and total revenues of $28.5 million, $11.1
million and $9.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for those wholly-owned subsidiaries, is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable basis for
the opinion expressed above.
As described in Note 3, as a result of the announcement of the
Recapitalization Plan, the Company has restated its financial statements to
account for certain business combinations as purchase transactions.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 27, 1998, except as
to Note 4, which is as of
June 26, 1998, the fourth
paragraph of Note 14, which
is as of November 25, 1998,
and Note 3, which is as of
February 7, 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 seperately herein), and
the related statements of operations, retained earnings, and cash flows for
the year ended December 31, 1997 (not presented seperately 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 seperately
herein), and the related statements of income, accumulated deficit and cash
flows for the years ended December 31, 1997 and 1996 (not presented seperately
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, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1996 1997 1998
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 303 $528,972 $ 272,022
Accounts receivable, less allowance
for doubtful accounts of
$136, $104 and $1,651,
respectively........................ 5,157 5,193 205,502
Costs and estimated earnings in
excess of billings on
uncompleted contracts............... -- -- 20,410
Prepaid expenses and other current
assets.............................. 764 2,065 12,955
------ -------- ----------
Total current assets............... 6,224 536,230 510,889
Property and equipment, net............ 2,984 2,593 31,718
Intangible assets, net................. 234 152 454,862
Other assets........................... 187 184 4,643
------ -------- ----------
Total assets....................... $9,629 $539,159 $1,002,112
====== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt...................... $1,481 $ 1,553 $ 3,864
Accounts payable..................... 2,305 1,800 57,352
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... -- -- 59,361
Accrued compensation................. 834 2,237 31,796
Income taxes payable................. 7 298 7,304
Accrued liabilities.................. 1,530 2,107 17,597
------ -------- ----------
Total current liabilities.......... 6,157 7,995 177,274
Long-term debt......................... 1,890 1,679 3,094
Other liabilities...................... 4 5 4,497
------ -------- ----------
Total liabilities.................. 8,051 9,679 184,865
------ -------- ----------
Stockholders' equity:
Common stock, $.001 par value,
250,000,000 shares authorized,
1,290,724, 31,440,724 and 44,160,179
shares issued and outstanding,
respectively........................ 1 31 44
Convertible Non-Voting Common Stock,
$.001 par, 500,000 shares
authorized, issued and outstanding.. -- 1 1
Additional paid-in capital........... 1,577 529,441 814,791
Treasury stock....................... -- -- (27,048)
Retained earnings.................... 7 30,083
Accumulated other comprehensive
income (loss)....................... (624)
------ -------- ----------
Total stockholders' equity......... 1,578 529,480 817,247
------ -------- ----------
Total liabilities and stockholders'
equity............................ $9,629 $539,159 $1,002,112
====== ======== ==========
</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>
Nine Months Ended
For the Years Ended December 31, September 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 57,287 $ 63,202 $ 70,101 $ 52,410 $ 478,595
Cost of revenues........ 48,783 53,664 58,857 44,112 376,318
---------- ---------- ---------- --------- ----------
Gross profit...... 8,504 9,538 11,244 8,298 102,277
Selling, general and
administrative
expenses............... 8,468 8,803 11,776 7,223 59,786
Goodwill amortization... -- -- -- -- 4,584
Non-recurring
acquisition costs...... -- -- -- -- 768
---------- ---------- ---------- --------- ----------
Operating income
(loss)........... 36 735 (532) 1,075 37,139
Other (income) expense:
Interest income....... -- -- (2,056) -- (16,043)
Interest expense...... 239 224 208 160 565
Other, net............ (8) 83 (221) (35) (134)
---------- ---------- ---------- --------- ----------
Income (loss) before
taxes.................. (195) 428 1,537 950 52,751
Provision (benefit) for
income taxes........... (5) 13 94 7 22,460
---------- ---------- ---------- --------- ----------
Net income (loss)....... $ (190) $ 415 $ 1,443 $ 943 $ 30,291
========== ========== ========== ========= ==========
Net income (loss) per
share--Basic........... $ (0.15) $ 0.32 $ 0.25 $ 0.30 $ 0.79
========== ========== ========== ========= ==========
Net income (loss) per
share--Diluted......... $ (0.15) $ 0.30 $ 0.25 $ 0.29 $ 0.77
========== ========== ========== ========= ==========
Weighted average shares
outstanding--Basic..... 1,238,444 1,290,724 5,683,464 3,102,079 38,298,295
========== ========== ========== ========= ==========
Weighted average shares
outstanding--Diluted... 1,238,444 1,405,840 5,865,550 3,217,195 39,368,321
========== ========== ========== ========= ==========
</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>
Convertible
Non-Voting Accumulated
Common Stock Common Stock Other
------------------- ------------------ Additional Comprehensive Total Total
Shares Shares Paid-in- Treasury Retained Income Stockholders' Comprehensive
Outstanding Amount Outstanding Amount Capital Stock Earnings (loss) Equity Income (Loss)
----------- ------ ----------- ------ ---------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994......... 1,238,444 $ 1 $-- $ 1,382 $ $ $ $ 1,383 $ --
Transactions of
Pooled
Companies:
Distributions
paid........... (210) (210)
Common stock
Issued......... 217 217
Net loss......... (190) (190) (190)
-------
Total
comprehensive
loss............ $ (190)
---------- --- ------- ---- -------- -------- ------- ----- -------- =======
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........... (830) (830)
Capital
contribution.... 2,300,000 2 124 126
Common stock
issued.......... 27,850,000 28 500,000 1 527,134 527,163
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
Unaudited data:
Transactions of
Pooled
Companies:
Distributions
paid........... (628) (628)
Stock issued
upon exercise
of options..... 115,116 1 216 217
Issuance of
common stock for
acquisitions.... 14,443,040 14 285,373 285,387
Stock issued
under employee
stock purchase
plan............ 16,299 174 174
Stock
repurchase...... (1,855,000) (2) (27,048) (27,050)
Unrealized loss
on marketable
securities --
net of tax...... (624) (624) (624)
Net income....... 215 30,076 30,291 30,291
-------
Total
comprehensive
income.......... $29,667
---------- --- ------- ---- -------- -------- ------- ----- -------- =======
Balance, September
30, 1998
(unaudited)...... 44,160,179 $44 500,000 $ 1 $814,791 $(27,048) $30,083 $(624) $817,247
========== === ======= ==== ======== ======== ======= ===== ========
</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 Years Ended Nine Months Ended
December 31, September 30,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------ -------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............ $ (190) $ 415 $ 1,443 $ 943 $ 30,291
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 849 926 945 626 7,946
Deferred income taxes........ (205)
Gain (loss) on sale of
equipment................... (60) 1 (52) (1) 27
Changes in operating assets
and liabilities:
Accounts receivable........ (131) (511) (36) (1,006) (21,323)
Costs and estimated
earnings in excess of
billings.................. 3,190
Prepaid expenses and other
current assets............ 127 (27) (1,319) (786) (2,237)
Billings in excess of costs
and estimated earnings.... (479) 9,787
Accounts payable........... 503 486 (505) 120 (2,485)
Accrued liabilities........ 390 69 2,254 990 7,538
Change in other assets....... (36) 39 3 40 1,135
------- ------ -------- ------- ----------
Net cash provided by
operating activities.... 1,452 1,398 2,733 447 33,664
------- ------ -------- ------- ----------
Cash flows from investing
activities:
Cash paid for acquisitions,
net of cash acquired........ (195,155)
Purchases of property and
equipment................... (589) (703) (699) (395) (6,677)
Proceeds on sale of
equipment................... 77 18 387 740
Other........................ (10) (6) (7) 24
------- ------ -------- ------- ----------
Net cash used in
investing activities.... (522) (691) (319) (395) (201,068)
------- ------ -------- ------- ----------
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............. 181 (140) 145 269 (36,355)
Payments on long-term debt... (1,050) (153) (253) (165) (28,690)
Proceeds on long-term debt... 100 398 2,239
Payment of dividends at
Pooled Companies............ (210) (140) (830) ( 100) (628)
Net proceeds (payments) on
related party loans......... (500) (194) 547
Payments under capital
lease....................... (55) (177)
Purchase of treasury stock... (27,050)
Proceeds from stock options
exercised................... 217
Proceeds from issuance of
stock under employee stock
purchase plan............... 174
Contributions of capital by
stockholders of Pooled
Companies................... 217
Contributions by founding
stockholder................. 126
Other cash flows from
financing activities........ (97)
------- ------ -------- ------- ----------
Net cash provided by
(used in)
financing activities.... (817) (609) 526,255 (190) (89,546)
------- ------ -------- ------- ----------
Net increase (decrease) in cash
and cash equivalents.......... 113 98 528,669 (138) (256,950)
Cash and cash equivalents,
beginning of period........... 92 205 303 303 528,972
------- ------ -------- ------- ----------
Cash and cash equivalents, end
of period..................... $ 205 $ 303 $528,972 $ 165 $ 272,022
======= ====== ======== ======= ==========
Supplemental cash flow
information:
Cash paid for interest....... $ 246 $ 357 $ 290
</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 nine months ended September 30, 1998. The fair values
of the assets acquired and liabilities assumed at the dates of acquisition are
as follows (unaudited):
<TABLE>
<S> <C>
Accounts receivable................................................... $178,497
Inventories........................................................... 2,117
Costs and earnings in excess of billings.............................. 26,045
Prepaid expenses and other current assets............................. 9,108
Property and equipment................................................ 27,530
Intangible assets..................................................... 459,446
Other assets.......................................................... 6,293
Short-term debt....................................................... (29,358)
Accounts payable...................................................... (57,420)
Accrued liabilities................................................... (45,280)
Billings in excess of costs and estimated earnings.................... (49,776)
Long-term debt........................................................ (40,848)
Other long-term liabilities........................................... (5,812)
--------
Net assets acquired................................................. $480,542
========
These acquisitions were funded as follows:
Common stock, 14,443,040 shares..................................... $285,387
Cash, net of cash acquired.......................................... 195,155
--------
$480,542
========
</TABLE>
See accompanying notes to consolidated 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"), a
Delaware corporation, was incorporated in September 1997. Ledecky Brothers
L.L.C., ("LLC"), a limited liability corporation formed in February 1997,
merged with and into the Company in September 1997 (the "Merger"). The sole
member of LLC received, in connection with the Merger, 2,300,000 shares of
Common Stock of the Company which represents all of its issued and outstanding
Common Stock, in exchange for 100% of his ownership interest in the LLC. The
Merger was implemented to facilitate a public offering of securities. Because
both of the organizations were under control of the one sole owner, the Merger
has been accounted for on a historical cost basis.
The Company completed an initial public offering 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.
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
maintenance and management services throughout the United States.
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
F-17
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
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. 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.
New Accounting Pronouncements
In June 1997, the FASB 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. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131
for the year ending December 31, 1998. Implementation of this disclosure
standard will not affect the Company's financial position or results of
operations.
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. The Company's temporary cash investments
consist of readily marketable, investment grade financial instruments of a
nature which should reduce risk of loss. Additionally, concentration of credit
risk with respect to trade receivables results from these amounts not being
collateralized and, as a result, management continually monitors the financial
condition of its customers to reduce risk of loss.
Fair Value of Financial Instruments
The carrying 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
The Company accounts for marketable securities in accordance with the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Marketable securities consist of investments in equity
securities and are classified as available for sale. The unrealized gains, net
of income taxes, are reported as an increase to stockholders' equity. Realized
gains and losses are included in other income. The cost of securities sold is
based on the specific identification method.
F-18
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
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 40 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. The Company evaluates the recoverability of long-lived assets not
held for sale by measuring the carrying value of the assets against the
estimated undiscounted future cash flows associated with them. At such time
evaluations indicate that the future undiscounted cash flows of certain long-
lived assets are not sufficient to recover the carrying value of such assets,
the assets are adjusted to their fair values. Based on these evaluations
there were no adjustments recognized through September 30, 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 September 30, 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 statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Certain companies acquired in pooling-of-interests transactions
elected to be taxed as subchapter S corporations and, accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by Building One.
Net Income Per Share
Basic net income per share is determined by dividing net income by the
weighted average number of common shares outstanding during the periods.
Diluted net income per share reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock at the beginning of the period.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at September 30, 1998,
and the results of its operations and its cash flows for the nine months ended
September 30, 1998 and 1997, as presented in the accompanying unaudited
interim financial statements.
F-19
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 3--TENDER OFFER
On February 7, 1999, the Company's Board of Directors approved a plan to
repurchase 50% of its outstanding common stock at $25 per share and 50% of
employee stock options at $25 per share less the exercise price of the options
(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 $300,000 of senior subordinated notes and a $100,000 term
facility. The Company expects the Tender Offer to be completed in the second
quarter of 1999.
Purchase Accounting Restatement
On August 3, 1998, the Company filed a Registration Statement on Form S-4
with the Securities and Exchange Commission which included audited
supplemental consolidated financial statements. These supplemental
consolidated financial statements gave retroactive effect to a business
combination with The Lewis Companies, Inc. consummated during the quarter
ended June 30, 1998 originally recorded under the pooling-of-interests method
of accounting. Additionally, on November 13, 1998, the Company filed its
Quarterly Report on Form 10-Q for the period ended September 30, 1998 with the
Securities and Exchange Commission which included financial statements that
gave retroactive effect to a business combination with Robinson Mechanical,
Inc. consummated during the quarter ended September 30, 1998 originally
accounted for under the pooling-of-interests method.
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 these
acquisitions under the purchase method of accounting. In relation to the
supplemental consolidated financial statements, this restatement resulted in a
reduction (increase) to the Company's reported total assets at December 31,
1997 and 1996 by $32,105 and $33,066, respectively, and reported net income
for fiscal 1995, 1996 and 1997 of $920, $(2,277) and $2,243, respectively.
Additionally, the restatement of the two business combinations as purchase
transactions gave rise to approximately $51 million of goodwill during the
nine months ended September 30, 1998.
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 "Pooled Companies"). The Company's consolidated
financial statements give retroactive effect to the acquisitions of the Pooled
Companies for all periods presented.
F-20
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
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, 1995
Revenues....................................... $ -- $57,287 $ 57,287
Net loss....................................... -- (190) (190)
For the year ended December 31, 1996
Revenues....................................... $ -- $63,202 $ 63,202
Net income..................................... -- 415 415
For the year ended December 31, 1997
Revenues....................................... $ -- $70,101 $ 70,101
Net income..................................... 7 1,436 1,443
For the nine months ended September 30, 1997
(unaudited)
Revenues....................................... $ -- $52,410 $ 52,410
Net income..................................... -- 943 943
For the nine months ended September 30, 1998
(unaudited)
Revenues....................................... $451,873 $26,722 $478,595
Net income..................................... 30,076 215 30,291
</TABLE>
Purchase Method (Unaudited)
During the period January 1, 1998 through September 30, 1998, the Company
completed 21 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 14,443,040 shares of
the Company's Common Stock, 403,389 options assumed in one acquisition at an
exercise price below fair market value, $228,715 in cash, including applicable
fees, and the assumption of approximately $33,847 in debt which was paid at
closing. These amounts do not include the potential payment of contingent
consideration of up to approximately $122,845 in cash and in shares of Common
Stock of the Company based upon the performance of the businesses acquired.
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $458,518. 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
restrictions on the sale and transferability of the shares issued. The shares
generally will be subject to the following restrictions on resale: up to one-
third of the shares may be resold twelve months after their date of
acquisition, the first one-third and an additional one-third may be resold
beginning eighteen months after their date of acquisition and the first two-
thirds and the remaining one-third may be resold beginning twenty-four months
after their date of acquisition.
F-21
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and the nine month periods ended
September 30, 1997 and 1998, respectively, as if all of the Purchased
Companies had been consummated 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 Nine Months Ended
Year Ended September 30,
December 31, -------------------
1997 1997 1998
------------ --------- ---------
<S> <C> <C> <C>
Revenues................................... $1,003,740 $ 733,380 $ 857,884
Net income................................. $ 35,591 $ 25,774 $ 44,920
Net income per share-basic................. $ 1.01 $ 0.75 $ 0.95
Net income per share-diluted............... $ .99 $ 0.74 $ 0.93
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisitions occurred as of January 1, 1997 or the results that may occur
in the future.
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<CAPTION>
December 31,
--------------------------------
1995 1996 1997
------------ --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............. $ 113 $ 120 $ 136
Additions to costs and expenses............ 7 16 5
Write-offs................................. (37)
---------- --------- ---------
Balance at end of period................... $ 120 $ 136 $ 104
========== ========= =========
</TABLE>
NOTE 6--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
September 30, 1998
------------------ ---
(unaudited)
<S> <C> <C>
Costs incurred on uncompleted contracts............... $740,367
Estimated earnings.................................... 161,223
--------
901,590
Less: Billings to date................................ 940,541
--------
$(38,951)
========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
September 30, 1998
------------------
(unaudited)
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 20,410
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 59,361
--------
$(38,951)
========
</TABLE>
F-22
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Equipment............................................... $ 3,092 $ 3,160
Office furniture and equipment.......................... 915 1,029
Autos and trucks........................................ 630 593
Buildings and improvements.............................. 1,247 1,107
Land.................................................... 69 53
------- -------
5,953 5,942
Less: Accumulated depreciation.......................... (2,969) (3,349)
------- -------
$ 2,984 $ 2,593
======= =======
</TABLE>
Depreciation expense for years 1995, 1996 and 1997 was $1,138, $1,268 and
$1,284, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1996 1997 1998
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Goodwill........................................ $ 92 $ 151 $458,492
Non-compete agreements.......................... 835 1,060
Other........................................... 64 18 521
------ ----- --------
991 169 461,962
Less: Accumulated amortization.................. (757) (17) (4,684)
------ ----- --------
Net intangible assets........................ $ 234 $ 152 $455,389
====== ===== ========
</TABLE>
Amortization expense for years 1995, 1996 and 1997 was $183, $177 and $141,
respectively, and $4,584 for the nine months ended September 30, 1998
(unaudited).
NOTE 9--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Credit facilities with banks, interest ranging from prime
to prime plus 1 3/4% (average rate of 9.25% at December
31, 1997)................................................. $ 987 $1,133
Payable to Pooled Company stockholder...................... 151 151
Current maturities of long-term debt....................... 343 269
------ ------
Total short-term debt.................................... $1,481 $1,553
====== ======
</TABLE>
F-23
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Notes payable to banks with average interest rates
ranging from 9.75%-11%.................................. $1,217 $1,112
Notes payable, interest rates ranging from 11.32% -
15.86% due in monthly installments of $19 through
September, 2002 secured by certain assets of the Company
........................................................ 868 768
Capital lease obligations................................ 26 46
Other.................................................... 122 22
------ ------
2,233 1,948
Less: Current portion.................................... (343) (269)
------ ------
Total long-term debt.................................. $1,890 $1,679
====== ======
</TABLE>
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998............................................................... $ 269
1999............................................................... 225
2000............................................................... 253
2001............................................................... 286
2002............................................................... 284
Thereafter......................................................... 631
------
$1,948
======
</TABLE>
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) are comprised as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Income taxes currently payable:
Federal............................................ $ (3) $ 5 $ 83
State.............................................. 2 11
------ ----- -----
(3) 7 94
------ ----- -----
Deferred income taxes:
Federal............................................ (1) 4
State.............................................. (1) 2
------ ----- -----
(2) 6
------ ----- -----
Total tax expense (benefit).......................... $(5) $13 $ 94
====== ===== =====
</TABLE>
F-24
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal statutory rate...... (34.0)% 34.0 % 34.0 %
State income taxes, net of
federal tax benefit............. (.3) 1.0 .6
Subchapter S corporation income
not subject to corporate level
taxation........................ 42.0 (28.8) (30.8)
Other............................ (10.3) (3.2) 2.3
---------- ---------- ----------
Effective income tax rate........ (2.6)% 3.0 % 6.1 %
========== ========== ==========
</TABLE>
Certain of the Pooled Companies were organized as subchapter S corporations
prior to being acquired by the Company and, as a result, the federal tax on
their income was the responsibility of their individual stockholders.
Accordingly, the Pooled Companies provided no federal income tax expense prior
to these acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109 as if the Pooled Companies had been subject to
applicable federal and state income taxes for all periods presented:
<TABLE>
<CAPTION>
December 31
------------------
1995 1996 1997
----- ---- ------
<S> <C> <C> <C>
Income (loss) before taxes per income statement.............. $(195) $428 $1,537
Pro forma income tax provision............................... (78) 171 615
----- ---- ------
Pro forma net income (loss).................................. $(117) $257 $922
===== ==== ======
</TABLE>
NOTE 11--LEASE COMMITMENTS
The Company leases various types of office facilities, equipment, and
furnitures and fixtures under noncancelable lease agreements which expire at
various dates. Future minimum lease payments under noncancelable capital and
operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1998.................................................... $31 $ 692
1999.................................................... 12 463
2000.................................................... 4 277
2001.................................................... 132
2002.................................................... 46
Thereafter.............................................. 70
--- ------
Total minimum lease payments............................ 47 $1,680
======
Less: Amounts representing interest..................... (1)
---
Present value of net minimum lease payments............. $46
===
</TABLE>
Rent expense for all operating leases for 1995, 1996 and 1997 was $670, $514
and $339, respectively.
F-25
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 12--COMMITMENTS AND CONTINGENCIES
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this
litigation will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
NOTE 13--RELATED PARTY TRANSACTIONS FOR POOLED COMPANIES
The Company paid management fees to affiliates of $298, $466, and $954 for
the years ended December 31, 1995, 1996, and 1997, respectively.
The Company has an unsecured demand note payable to a stockholder for $151,
dated January 1, 1994, bearing interest at 12% with interest paid monthly.
NOTE 14--STOCKHOLDERS' EQUITY
Common Stock
On November 25, 1997, the Company effected a one-for-1.918159 reverse stock
split of the Company's Common Stock. Accordingly, all share data reflected in
these financial statements have been retroactively restated.
On September 19, 1997, the sole member of LLC received 2,300,000 shares of
Common Stock of the Company in connection with the Merger in exchange for his
100% ownership interest in LLC. The sole member made contributions to LLC from
time to time to fund expenses in the aggregate amount of $126. These
contributions were included in common stock and additional paid-in capital.
The Company completed its initial public offering ("IPO") in December 1997,
selling 27,850,000 shares of Common Stock and 500,000 shares of Convertible
Non-Voting Common Stock at $20.00 per share and raising net proceeds of
approximately $527,000. Proceeds from the IPO, net of underwriting fees and
other stock issuance costs, were included in common stock and additional paid-
in capital.
Convertible Non-Voting Common Stock
In connection with the IPO, the Company sold 500,000 shares of Convertible
Non-Voting Common Stock to Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the
representative of the underwriters in the Company's IPO, for $20 per share.
After one year, the shares on Convertible Non-Voting Common Stock
automatically convert into an equivalent number of shares of Common Stock.
Accordingly, on November 25, 1998 these 500,000 shares were converted to
500,000 shares of Common Stock.
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 are exercisable on or after the
first anniversary and will expire on the fifth anniversary of the IPO. FBR has
the right, beginning November 25, 1998, to require the Company to register
such shares for sale.
F-26
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
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 during the
ten-year period following the IPO, Jonathan Ledecky may request the company
register the shares underlying his warrants. 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 15--STOCK PURCHASE AND AWARD PLANS
Long-Term Incentive Plan
The Company adopted, a 1997 Long-Term Incentive Plan and in September 1998
adopted the 1998 Long-Term Incentive Plan, ("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 1997 Long-Term Incentive Plan and the
1998 Long-Term Incentive Plan is equal to 9% and 14%, respectively of the
number of shares of Common Stock outstanding from time to time.
Options to purchase 1,500,000 shares of Common Stock under the 1997 Long-
Term Incentive Plan were granted at the time of the IPO at an exercise price
equal to the IPO price. These options will vest 25% each on the first four
anniversaries of the date of grant and will expire on the tenth anniversary of
the grant date. In the event of a change in control of the Company prior to
normal vesting, all options not already exercisable will become fully vested
and exercisable.
Additionally, in connection with business combinations consummated during
the period from January 1, 1998 through September 30, 1998, the Company has
granted options for approximately 1,520,844 shares (unaudited) of the
Company's Common Stock, and is expected to issue options for an additional
107,764 shares (unaudited) of the Company's Common Stock, under these Long-
Term Incentive Plans. All options vest over a four year period from date of
grant. These options have been, or will be, granted with an exercise price
equal to the fair value share price of the Company's Common Stock at the date
of grant.
1997 Non-Employee Directors' Stock Plan
The Company's Board of Directors has adopted, and the Company's stockholder
have approved, the 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which provides for the automatic grant to each non-employee director
of an option to purchase 20,000 shares on the later of the effective date of
the registration statement for the initial public offering of the Company's
Common Stock or the date that such person commences services as a director.
Thereafter, each non-employee director will be entitled to receive, on the day
after each annual meeting of the Company's stockholders, an option to purchase
5,000 shares of Common Stock. A maximum of 300,000 shares of Common Stock may
be issued under the Directors' Plan. Options to purchase 60,000 shares of
Common Stock under the Directors' Plan were granted at the time of the IPO at
an exercise price equal to the IPO price. Additionally, during the period from
January 1, 1998 through September 30, 1998 an additional 35,000 options
(unaudited) were granted at an exercise price equal to fair market value at
the grant date.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant options
and will expire at the earlier of 10 years from the date of grant or 90
F-27
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
days after termination of service as a director. Options will vest and become
exercisable ratably as to 50% of the shares underlying the option on the six
month and one year 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's 1997 Employee Stock 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.
As of September 30, 1998, the Company issued 16,299 shares (unaudited) of
common stock to employees under the Company's Employee Stock Purchase Plan.
Accounting for Stock Based Compensation
In 1997, the Company adopted the SFAS No. 123 "Accounting for Stock-Based
Compensation," which encourages, but does not require, companies to recognize
compensation cost for stock-based compensation plans over the vesting period
based upon the fair value of awards on the date of the grant. However, the
statement allows the alternative of the continued use of the intrinsic value
method as prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." Therefore, as permitted, the
Company has applied APB No. 25, and related interpretations, in accounting for
its stock based compensation plans. Accordingly, no compensation expense has
been recognized by the Company for warrants granted in connection with the IPO
or for options granted under the Incentive Plan and the Directors' Plan.
Had compensation expense for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997
-------
<S> <C> <C>
Net income (loss):
As reported................................................ $ 1,443
Pro forma.................................................. $(5,782)
Net income (loss) per share--basic and diluted:
As reported................................................ $ 0.25
Pro forma.................................................. $ (1.02)
</TABLE>
F-28
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The weighted average fair value per option and warrant at the date of grant
for options granted in 1997 and 1996 was $7.46 and $2.21, respectively. The
fair value of options and warrants granted (which is amortized to expense over
the option vesting period in determining the pro forma impact) is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997:
<TABLE>
<CAPTION>
1997
-----------------
Options Warrants
------- --------
<S> <C> <C>
Expected life of option................................ 5 years 2 years
Risk-free interest rate................................ 5.76% 5.69%
Expected volatility factor............................. 45.0% 45.0%
</TABLE>
NOTE 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. Duluted 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, 1997 and the nine months
periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
--------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(unaudited)
Basic earnings per
share:
Net income (loss)...... $ (190) $ 415 $ 1,443 $ 943 $ 30,291
Weighted average shares
outstanding--Basic.... 1,238,444 1,290,724 5,683,464 3,102,079 38,298,295
---------- ---------- ---------- ---------- -----------
Net income per share--
Basic $ (0.15) $ 0.32 $ 0.25 $ 0.30 $ 0.79
========== ========== ========== ========== ===========
Diluted earnings per
share
Net income (loss)...... $ (190) $ 415 $ 1,443 $ 943 $ 30,291
========== ========== ========== ========== ===========
Weighted average shares
outstanding--Basic.... 1,238,444 1,290,724 5,683,464 3,102,079 38,298,295
Convertible Non-Voting
Common Stock.......... -- -- 49,315 -- 500,000
Common stock
equivalents from stock
options and warrants.. -- 115,116 132,771 115,116 389,347
Contingently issuable
shares................ -- -- -- 180,679
---------- ---------- ---------- ---------- -----------
Total weighted average
shares outstanding--
Diluted................ 1,238,444 1,405,840 5,865,550 3,217,195 39,368,321
---------- ---------- ---------- ---------- -----------
Net income per share--
Diluted............... $ (0.15) $ 0.30 $ 0.25 $ 0.29 $ 0.77
========== ========== ========== ========== ===========
</TABLE>
Outstanding stock options and warrants to purchase 6,255,774 shares
(unaudited) of Common Stock as of September 30, 1998 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.
F-29
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data of the
Company:
<TABLE>
<CAPTION>
1996 Quarters
----------------------------------------------
First Second Third Fourth Total
------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Revenues................... $15,305 $ 15,664 $ 15,784 $ 16,449 $63,202
Gross profit............... $ 2,228 $ 2,415 $ 2,520 $ 2,375 $ 9,538
Operating income (loss).... $ 91 $ 120 $ 249 $ 275 $ 735
Net income (loss).......... $ (10) $ 42 $ 208 $ 175 $ 415
Net income (loss) per
share--Basic.............. $ (0.01) $ 0.03 $ 0.16 $ 0.14 $ 0.32
Net income (loss) per
share--Diluted (1)........ $ (0.01) $ 0.03 $ 0.15 $ 0.12 $ 0.30
<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
<CAPTION>
1998 Quarters
--------------------------------------
First Second Third Nine Months
------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................... $54,610 $171,661 $252,324 $478,595
Gross profit............... $10,377 $ 36,662 $ 55,238 $102,277
Operating income........... $ 2,135 $ 12,485 $ 22,519 $ 37,139
Net income................. $ 5,081 $ 10,046 $ 15,164 $ 30,291
Net income per share--Basic
(1)....................... $ 0.15 $ 0.26 $ 0.35 $ 0.79
Net income per share--
Diluted (1)............... $ 0.15 $ 0.25 $ 0.34 $ 0.77
</TABLE>
- --------
(1) The arithmetic total of the individual quarterly net income per share
amounts does not reconcile to the annual amount of net income per share
due to the timing of net income (loss) in relation to the issuance of
common shares during the course of the year.
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In addition to those business combinations consummated during the period
from January 1, 1998 through September 30, 1998, subsequent to September 30,
1998 the Company completed five business combinations, two in the electrical
installation and maintenance services business, one in the mechanical
installation and maintenance services business and two in the janitorial and
maintenance management services business, for total consideration of $65,537
in cash and shares of Common Stock. Additionally, there is the potential for
the payment of up to an additional $14,500 in cash and shares of Common Stock
in connection with contingent consideration agreements.
F-30
<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-31
<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-32
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1996 1997
------ ------- -------
<S> <C> <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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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> <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-66
<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-67
<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-68
<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-69
<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-70
<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> <C>
Current............................................... $4,108,444 $4,679,185
Retainage............................................. 579,677 622,327
Less allowance for doubtful accounts.................. -- (140,000)
---------- ----------
$4,688,121 $5,161,512
========== ==========
</TABLE>
At December 31, 1996, the Company considered the receivables to be fully
collectible; therefore, no allowance for doubtful accounts was recorded.
Retainages are due upon completion of the contracts and all are expected to be
collected in the next 12 months.
3. Costs and estimated earnings on uncompleted contracts
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 4,901,213 $ 9,916,098
Estimated earnings................................. 798,890 4,033,573
----------- ------------
5,700,103 13,949,671
Less--Billings to date............................. (7,130,098) (15,467,200)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 125,597 $ 134,759
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (1,555,592) (1,652,288)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
</TABLE>
F-71
<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-72
<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-73
<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-74
<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-75
<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-76
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31,
ASSETS -----------------------
1996 1997
----------- -----------
<S> <C> <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> <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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Service Solutions, Inc.:
We have audited the accompanying balance sheet of UNITED SERVICE SOLUTIONS,
INC. (the "Company") as of December 31, 1997, and the related statements of
income, stockholders' equity (deficit) and cash flows for the period from
inception (October 17, 1997) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Service Solutions,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the period from inception (October 17, 1997) to December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur andersen llp
Arthur andersen llp
Denver, Colorado,
March 16, 1998 (except with respect
to the matter discussed in Note 7,
as to which the date is April 6,
1998).
F-117
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................. $ 16,752 $ 920,010
Accounts receivable, net of allowance for
doubtful accounts of $227,000 and
$227,000, respectively.................... 1,658,011 6,433,201
Unbilled services.......................... 2,420,675 1,713,307
Supply inventory........................... 131,802 126,563
Current deferred tax asset................. 17,518 17,518
Prepaid expenses and other current assets.. 30,478 366,077
Employee receivables....................... 19,060 18,579
Income tax receivable...................... -- 231,465
----------- -----------
Total current assets..................... 4,294,296 9,826,720
EQUIPMENT, net of accumulated depreciation of
$49,572 and $228,381, respectively.......... 1,962,234 2,811,367
INTANGIBLE ASSETS, net of accumulated
amortization of $33,309 and $194,984,
respectively................................ 7,363,563 26,078,747
DEBT ISSUANCE COSTS, net of accumulated
amortization of $3,570 and $56,160,
respectively................................ 243,704 573,116
OTHER ASSETS................................. -- 220,038
----------- -----------
Total assets............................. $13,863,797 $39,509,988
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdrafts............................ $ 74,423 $ --
Accounts payable........................... 1,180,958 2,358,737
Equipment financing obligation............. 725,754 398,432
Accrued expenses........................... 579,605 2,826,033
Accrued interest........................... 73,319 357,871
Income taxes payable....................... 83,509 --
Due to related parties..................... 508,367 350,000
Current portion of long-term debt.......... 500,000 1,520,000
Deferred revenue........................... -- 1,326,356
----------- -----------
Total current liabilities................ 3,725,935 9,137,429
LONG-TERM DEBT............................... 8,255,925 22,105,545
LONG-TERM DEBT--RELATED PARTY................ 4,042,222 9,067,221
DEFERRED INCOME TAX LIABILITY--NONCURRENT.... 35,285 35,285
----------- -----------
Total liabilities........................ 16,059,367 40,345,480
WARRANTS WITH PUT OPTION..................... 303,733 504,503
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value, 1,500,000
shares authorized, 1,000,000 and 1,060,996
issued and outstanding, respectively...... 1,000 1,061
Common stock--Class A, $0.001 par value, 0
and 53,530 shares authorized, issued and
outstanding, respectively................. -- 54
Common stock--Class B, non-voting, $0.001
par value, 0 and 62,541 shares authorized,
issued and outstanding, respectively...... -- 63
Additional paid-in capital................. 4,018 806,818
Accumulated deficit........................ (2,504,321) (2,147,991)
----------- -----------
Total stockholders' equity (deficit)..... (2,499,303) (1,339,995)
----------- -----------
Total liabilities and stockholders'
equity (deficit)........................ $13,863,797 $39,509,988
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-118
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
October 17, 1997
(inception) to
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
OPERATING REVENUES:
Service revenues, net....................... $4,458,195 $15,746,844
Lease revenues.............................. 40,689 185,409
---------- -----------
Total operating revenues.................. 4,498,884 15,932,253
OPERATING EXPENSES:
Subcontractor expenses...................... 3,028,328 10,996,500
Supply costs................................ 358,226 1,094,315
Salaries, wages and benefits................ 369,543 1,201,842
Selling, general and administrative
expenses................................... 211,134 845,077
Insurance expenses.......................... 11,561 49,239
Depreciation and amortization............... 82,881 340,484
Management fees to related party............ 27,777 124,998
---------- -----------
Total operating expenses.................. 4,089,450 14,652,455
---------- -----------
OPERATING INCOME.............................. 409,434 1,279,798
OTHER INCOME (EXPENSE):
Interest expense............................ (142,316) (685,916)
Other....................................... 837 --
---------- -----------
Total other expense....................... (141,479) (685,916)
---------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES...... 267,955 593,882
PROVISION FOR INCOME TAXES:
Current..................................... (83,509) (237,552)
Deferred.................................... (17,767) --
---------- -----------
NET INCOME.................................... $ 166,679 $ 356,330
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-119
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (OCTOBER 17, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Class A Class B
Common Common Common Stock
------------- ------------- ---------------- Additional Accumulated
Shares Amount Shares Amount Shares Amount Paid-In Capital Deficit Total
------ ------ ------ ------ --------- ------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 17,
1997 (Inception)....... -- $-- -- $-- -- $ -- $ -- $ -- $ --
Issuance of stock to
BACE Capital
Partners............. -- -- -- -- 800,000 800 4,218 -- 5,018
Issuance of stock to
selling shareholder.. -- -- -- -- 200,000 200 (200) -- --
Deemed dividend to
selling shareholder.. -- -- -- -- -- -- -- (2,671,000) (2,671,000)
Net income............ -- -- -- -- -- -- -- 166,679 166,679
------ ---- ------ ---- --------- ------ -------- ----------- -----------
BALANCE, December 31,
1997................... -- -- -- -- 1,000,000 1,000 4,018 (2,504,321) (2,499,303)
Issuance of stock to
subordinated debt
holders (unaudited).. 53,530 54 62,541 63 -- -- 173,991 -- 174,108
Issuance of stock
(unaudited).......... -- -- -- -- 60,996 61 628,809 -- 628,870
Net income
(unaudited).......... -- -- -- -- -- -- -- 356,330 356,330
------ ---- ------ ---- --------- ------ -------- ----------- -----------
BALANCE, March 31, 1998
(unaudited)............ 53,530 $ 54 62,541 $ 63 1,060,996 $1,061 $806,818 $(2,147,991) $(1,339,995)
====== ==== ====== ==== ========= ====== ======== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-120
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 17, 1997
(inception) to
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 166,679 $ 356,330
Adjustments to reconcile net income to cash
provided by operating activities--
Depreciation and amortization............. 82,881 340,484
Amortization of debt issuance costs....... 3,570 52,590
Noncash interest charges.................. 51,880 185,496
Deferred tax provision.................... 17,767 --
Change in operating assets and
liabilities--
Accounts receivable and unbilled
services............................... (885,645) 343,992
Accounts payable and accrued expenses... 556,938 421,767
Supply inventory........................ (81,802) 5,239
Accrued interest........................ 73,319 284,552
Income taxes payable.................... 83,509 (314,974)
Deferred revenue........................ -- 220,296
Prepaid expenses and other assets....... (29,337) (539,283)
----------- ------------
Cash provided by operating activities... 39,759 1,356,489
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment...................... (42,910) (394,087)
Purchase of California Professional Cleaning
Services, Inc and related entities, net of
cash acquired.............................. (8,682,212) --
Purchase of Sullivan Service Company........ -- (15,063,268)
----------- ------------
Cash used in investing activities....... (8,725,122) (15,457,355)
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-121
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 17, 1997
(inception) to
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................. $ 74,423 $ (74,423)
Proceeds from long--term debt.............. 8,750,000 15,073,380
Debt issuance costs........................ (247,274) (382,002)
Payments on equipment financing
obligation................................ (180,052) (327,322)
Payment on term loan....................... -- (230,000)
Proceeds from issuance of stock............ 5,018 802,978
Proceeds from issuance of warrants......... 300,000 141,513
---------- -----------
Cash provided by financing activities...... 8,702,115 15,004,124
INCREASE IN CASH AND CASH EQUIVALENTS........ 16,752 903,258
CASH AND CASH EQUIVALENTS, beginning of
period...................................... -- 16,752
---------- -----------
CASH AND CASH EQUIVALENTS, end of period..... $ 16,752 $ 920,010
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................. $ 17,117 $ 163,278
========== ===========
Taxes paid................................. $ -- $ 552,526
========== ===========
SUPPLEMENTAL DISCLOSURE OF NON--CASH
FINANCING AND INVESTING ACTIVITIES:
Note to selling shareholder................ $4,000,000 $ 4,925,000
========== ===========
Deferred purchase consideration............ $ 500,000 $ --
========== ===========
Deemed dividend to selling shareholder..... $2,671,000 $ --
========== ===========
Equipment financed through equipment
financing obligation...................... $ 56,991 $ --
========== ===========
Equipment acquired in acquisition.......... $1,911,905 $ 633,855
========== ===========
Working capital acquired................... $2,276,742 $ 332,237
========== ===========
Equipment financing obligation assumed..... $ 848,815 $ --
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-122
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) BUSINESS AND OPERATIONS
United Service Solutions, Inc. (the "Company") was incorporated on October
17, 1997 in Delaware. Operations began on November 22, 1997 when the Company
purchased the principal operating assets and assumed certain liabilities of
California Professional Cleaning Services, Inc. ("CPCS") and related entities
(the "Acquisition"). The Company is a subsidiary of the members of BACE
Capital Partners LLC, a venture capital fund organized in Colorado.
The Company is engaged in the business of contract facilities management
services primarily to regional and national chain retailers in various regions
of the continental United States. The services the Company manages generally
involve the sweeping, stripping, scrubbing and buffing of facility floors. The
Company's principal customers are in the grocery, pharmacy and consumer
products businesses. Additionally, the Company leases floor maintenance
equipment to certain customers and subcontractors.
A significant portion of the Company's operations are in California. The
Company also operates in Arizona, Colorado, Florida, Idaho, Nebraska, Nevada,
New Mexico, New York, Oregon, Texas, Utah, Washington, West Virginia and
Wyoming.
The Acquisition
On November 22, 1997, the Company acquired certain net assets of CPCS for
$6.7 million in cash, subordinated purchase money notes payable of $4 million
and 200,000 shares of the Company's common stock. In addition, the Company
paid $2.0 million for covenants not to compete ranging from 5 to 15 years. The
Company will be required to pay an additional $0.5 million in December 1998,
assuming CPCS's operating income does not decline from the prior year's
levels. This additional amount has been accrued at the date of acquisition
because payment is reasonably assured. The acquisition was accounted for using
the purchase method. Accordingly, the purchase price was allocated to the net
assets acquired based upon their estimated fair values for the 80% acquired by
new equity interests and based upon predecessor cost for the 20% interest
retained by the seller. The excess of the consideration received by the
selling shareholder over the predecessor cost of the assets contributed
relating to the 20% interest retained has been charged to equity as a deemed
dividend in accordance with Emerging Issues Task Force (EITF) Issue No. 88-16.
This treatment resulted in approximately $5.4 million of cost in excess of net
assets acquired as of November 22, 1997. Such excess is being amortized on a
straight-line basis over 40 years. CPCS results of operations have been
included since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
year ended December 31, 1997 assume the acquisition occurred as of the
beginning of the period:
<TABLE>
<CAPTION>
1997
-------------
(in millions)
<S> <C>
Total revenues............................................. $32.1
Net income................................................. 0.9
</TABLE>
The preliminary allocation to property and equipment, goodwill and other
intangibles is contingent upon the Company finalizing its appraisal of the
assets acquired from CPCS.
In connection with the Acquisition, the Company entered into an employment
and consulting agreement with the seller. The employment agreement and
subsequent consulting agreement each have six month terms. Cash remuneration
paid under the employment agreement was approximately $13,000 in 1997.
F-123
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments not subject to market
risk, with a maturity of three months or less at the date of purchase, to be
cash equivalents.
Equipment
Equipment is stated at cost. The Company uses the straight-line method of
depreciation for financial reporting purposes. Following is a summary of
estimated useful lives:
<TABLE>
<CAPTION>
Asset Years
----- -----
<S> <C>
Automobiles and trucks.............................................. 5-7
Machinery and equipment............................................. 3-5
Office equipment.................................................... 5-7
</TABLE>
At December 31, 1997, equipment consisted of the following:
<TABLE>
<S> <C>
Machinery and equipment........................................ $ 678,843
Equipment leased to customers and subcontractors (Note 6)...... 1,119,490
Automobiles and trucks......................................... 152,780
Office equipment............................................... 60,693
----------
2,011,806
Less--accumulated depreciation................................. (49,572)
----------
$1,962,234
==========
</TABLE>
Long-Lived Assets
The Company evaluates its long-lived assets for recoverability whenever
changes in its business or other events warrant such a review. A long-lived
asset is considered impaired when projected undiscounted cash flows are
insufficient to recover the carrying amount. As of December 31, 1997,
management believes there has not been any impairment of the Company's long-
lived assets.
Intangible Assets
The Company amortizes its intangible assets over the following periods:
<TABLE>
<S> <C>
Organizational costs................. 5 years
Noncompete agreements................ Term of the agreement (5 to 15 years)
Goodwill............................. 40 years
</TABLE>
At December 31, 1997 intangible assets consisted of the following:
<TABLE>
<S> <C>
Organizational costs........................................... $ 5,000
Noncompete agreements.......................................... 1,959,513
Goodwill....................................................... 5,432,359
----------
7,396,872
Less--Accumulated amortization................................. (33,309)
----------
$7,363,563
==========
</TABLE>
F-124
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
Deferred Income Taxes
The Company accounts for income taxes according to the liability method.
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and income tax purposes in
different periods. Deferred taxes are classified as current or noncurrent,
depending on the classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or noncurrent depending on
the periods in which the temporary differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
Concentration of Credit Risk
In 1997, the Company derived approximately 32%, 16% and 9% of its revenue
from three regional and national chain customers. These customers comprised
22%, 19% and 19%, respectively, of the accounts receivable balance as of
December 31, 1997.
In 1997, two vendors comprised approximately 27% and 23% of total
subcontractor expenses.
Revenue Recognition
Service revenue represents revenue for servicing customer floors and is
recognized when the service is provided. Services provided but which have not
yet been billed are included in unbilled services in the accompanying balance
sheet. Leasing revenue for leasing floor maintenance equipment is recognized
on a straight-line basis over the minimum lease term, regardless of payment
terms.
Advertising
The Company expenses advertising costs as incurred.
Supply Inventory
Supply inventory is recorded at the lower of cost or market, with cost
determined under a first-in, first-out method.
Stock Options and Warrants
Employee stock options are accounted for using the intrinsic value method
under which no compensation is generally recognized if the exercise price
equals or exceeds the fair value of the stock at the date of grant. Stock
options and warrants issued to non-employees are accounted for at their fair
value at date of grant. Fair value for non-employee grants is determined using
the Black-Scholes option pricing model or the value of the services received,
whichever is more readily determinable. Subsequent to yearend, the Company
established a stock option plan for key employees. There are 30,000 shares of
stock available for issuance under the plan and each stock option is evidenced
by a stock option agreement, the terms of which are at the discretion of the
board of directors. The exercise period of any grant can be up to 10 years.
Options will be granted with exercise prices at least equal to fair market
value at the date of grant. On February 25, 1998, pursuant to the stock option
plan
F-125
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
for key employees, the Company granted incentive stock options to key
employees for 7,300 shares of the Company's common stock with an exercise
price of $10.31 per share, a five year ratable vesting period and a ten year
life.
Financial Instruments
Substantially all of the Company's financial instruments (which includes
cash equivalents, accounts receivable and payable and borrowings) have been
issued or revalued in connection with the Acquisition. As such, their carrying
amounts reflect fair value December 31, 1997.
The fair value of the warrants with a put option to the Company for cash
beginning in 2002 is $303,733 at December 31, 1997. Each warrant is putable at
a price determined by valuing the Company's net assets at six times the
trailing twelve month EBITDA (net earnings before interest, tax, depreciation
and amortization expenses), less borrowings and dividing by the total number
of common shares and warrants outstanding. At December 31, 1997, the minimum
put amount is approximately $500,000. The redemption price may change in the
future depending upon the future results of operations. The Company is
accreting these putable warrants to their estimated redemption value at the
earliest put date. The accretion is charged to interest expense. As of
December 31, 1997, a total of $3,733 has been charged to interest expense
related to these warrants.
Unaudited Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 1998 and the results of operations and
cash flows for the period presented. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations. The results of operations for the period
presented are not necessarily indicative of the results for the full year.
(3) BORROWINGS
Borrowings at December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
Due Year Ended December 31,
------------------------------ Unamortized
By Priority 1998 1999 2000 2001 2002 Thereafter Discount
----------- ---- ---- ------ ------ ------ ---------- -----------
(in $000's)
<S> <C> <C> <C> <C> <C> <C> <C>
Term Loan................ $500 $750 $1,000 $1,000 $3,800 $ -- $ --
Notes payable............ -- -- -- -- 2,000 -- (294)
Related party note....... -- -- -- -- -- 4,042 --
---- ---- ------ ------ ------ ------ -----
$500 $750 $1,000 $1,000 $5,800 $4,042 $(294)
==== ==== ====== ====== ====== ====== =====
</TABLE>
Financing Facility with a Financial Institution
Revolving Line of Credit
The Company has a revolving line of credit with a financial institution
("Lender") for up to $2.0 million. The revolving line of credit is
collateralized by substantially all of the assets of the Company and ranks
pari passu with the Term Loan. The term of the line is for 5 years with
automatic one-year renewal periods. Interest is at the institution's base rate
plus 0.75% (9.0% at December 31, 1997) and is payable monthly in arrears.
Principal on the line of credit is paid by daily collections on the Company's
accounts receivable, which first pay any outstanding amounts on the line of
credit. A LIBOR option is available to the Company, periodically, for all or
portions of the outstanding principal balance. The rate is based upon the
Company's achieved level of EBITDA, as defined in the agreement, and ranges
from LIBOR plus 2.5% to LIBOR plus 3.0%. The Company must pay a fee for the
unused portion of the line of credit equal to 0.375% of the average monthly
unused principal balance. The fee is payable monthly in arrears. There were no
amounts drawn on the line of credit at December 31, 1997.
F-126
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
Term Loan
The Company has a term loan with the Lender for $7.05 million. The term loan
bears interest at the financing institution's base rate plus 1% (9.25% at
December 31, 1997). A LIBOR option is available to the Company, periodically,
for all or a portion of the outstanding principal balance. The rate is based
upon the Company's achieved level of EBITDA, as defined in the agreement, and
ranges from LIBOR plus 2.75% to LIBOR plus 3.25%. The term loan is
collateralized by substantially all of the assets of the Company and ranks
pari passu with the revolving line of credit. Interest is payable monthly in
arrears. Principal is payable quarterly, beginning March 1, 1998, with
quarterly amounts ranging from $125,000 to $250,000. Additionally the Company
must pay additional principal each year equal to 75% of excess cash flow,
defined as 75% of the amount derived by EBITDA less fixed charges and accrued
management fees, which is applied in inverse order of maturity.
If the Company terminates the revolving line of credit or term loan, a
termination charge of 0% to 1.0% of the total credit facility will be assessed
to the Company (0% through December 31, 1998).
The Company is subject to certain financial and nonfinancial covenants
related to the term loan and revolving line of credit. The financial covenants
specify minimum EBITDA levels, an EBITDA to fixed charges ratio, maximum
collateral levels, limitations on additional indebtedness and capital
expenditure limits. As of December 31, 1997 the Company was in compliance with
all covenants.
Notes Payable
The Company entered into note agreements with three financial institutions
for a total of $2.0 million. The notes are subordinated to the term loan and
revolving line of credit. Principal is due in November 2002. Interest is
payable quarterly in arrears at 12%. The notes payable are collateralized by
substantially all of the assets of the Company, although subordinated to the
above revolving line of credit and term loan. The notes were issued with the
warrants discussed in Note 4 which results in an effective interest rate of
approximately 18% on the notes.
The Company is subject to certain financial and nonfinancial covenants
substantially the same as in the credit facility described above.
Equipment Financing Obligation
The Company has an equipment financing arrangement for 263 buffers and 33
auto scrubbers. The obligation at December 31, 1997 was $725,754. Payment
terms are 180 days, without interest, from the invoice date. The amounts due
are as follows: approximately $380,000 is due March 1998, approximately
$312,000 is due May 1998 and approximately $34,000 is due June 1998.
Related Party Note Payable
In connection with the acquisition of the net assets of California
Professional Cleaning Services, Inc. and related entities, the Company issued
a note to the seller for $4.0 million. The principal balance is due in 4 equal
quarterly payments beginning March 1, 2003 or earlier if the Company files a
registration statement under the Securities and Exchange Commission Act of
1933 and issues shares in an initial public offering. Accrued interest at 10%
per annum for the first year is added to the principal balance, thereafter,
interest is payable annually in arrears. The related party note is
subordinated to the Company's other borrowings and is uncollateralized.
F-127
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
(4) EQUITY
Stock Split
On January 27, 1998, the Company effected a 1,000-for-1 split of the
Company's common stock. The number of common shares, the capital accounts and
stock options and warrants have been restated to give retroactive effect to
the stock split.
Stock Options
The Company grants stock options to employees at a price equal to the
estimated fair value of the stock on the date of grant. The options vest
ratably over a five year period. Options granted in 1997 are as follows:
<TABLE>
<CAPTION>
Remaining
Exercise Contractual
Shares Price Life
------ -------- -----------
<S> <C> <C> <C>
Granted.......................................... 40,000 $.0001
Exercised........................................ -- --
Cancelled........................................ -- --
------ ------
Outstanding...................................... 40,000 $.0001 9.9 years
Exercisable...................................... -- --
</TABLE>
The fair value of the options granted during 1997 had a nominal value and
would not have affected reported net income if recorded at fair value and
amortized over their vesting period as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Fair
value was estimated using the minimum value method available for private
companies under which no volatility was assumed for the stock price. A risk
free interest rate of 5.39% and no dividends were assumed in estimating fair
value.
Warrants
The Company has issued warrants to purchase common stock to the three
financial institutions providing debt financing during 1997. The 103,000
warrants have an aggregate exercise price of $300 and because of the put
feature described below, had an estimated fair value of $300,000 at the time
of issuance. The warrants are exercisable at the earliest of November 21, 2001
or a triggering event, as defined in the agreement, and expire in 2002. The
warrants can be put to the Company beginning in November 2002 for a cash
redemption value based on valuing the Company's net assets at six times the
trailing twelve month EBITDA, less borrowings and dividing by the total number
of common shares and warrants outstanding. The Company is accreting the
warrants to the estimated cash redemption value at the earliest redemption
date.
(5) INCOME TAXES
At December 31, 1997, the provision for taxes includes:
<TABLE>
<CAPTION>
Federal State
------- -------
<S> <C> <C>
Current...................................................... $67,874 $15,635
Deferred..................................................... 14,441 3,326
------- -------
$82,315 $18,961
======= =======
</TABLE>
F-128
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
The difference in income taxes provided and the amounts determined by
applying the federal statutory rate to income before income taxes result from
the following:
<TABLE>
<S> <C>
Income tax provision using federal statutory rate.................... 35.0%
Effect of graduated federal rates.................................... (2.7)
State income taxes, net of federal benefit........................... 4.6
Meals and entertainment.............................................. 0.9
----
37.8%
====
</TABLE>
Temporary differences giving rise to deferred taxes at December 31, 1997 are
as follows:
<TABLE>
<S> <C>
Current deferred tax asset and liability:
Vacation accrual.............................................. $ 21,828
Prepaid insurance............................................. (4,310)
--------
Net deferred tax asset--current............................. $ 17,518
========
Noncurrent deferred tax liability:
Basis difference of tangible and intangible assets............ $(35,285)
========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has various operating leases in effect for office space and
equipment. The leases have initial terms ranging from one month to five years,
with renewal options generally being available.
Minimum commitments under all operating leases at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998............................................................... $ 5,700
1999............................................................... 4,521
2000............................................................... 4,128
2001............................................................... 996
-------
Total............................................................ $15,345
=======
</TABLE>
Rental expense amounted to approximately $10,600 for the year ended December
31, 1997.
Operating Lease Contracts
The Company leases floor maintenance equipment to customers and
subcontractors under a three year lease. If the customer terminates the
related service contract earlier than three years from the date of acquisition
of the equipment, the Company may put the leased asset to the customer for its
fair market value. Minimum future rentals receivable on noncancelable leases
are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998............................................................ $ 739,140
1999............................................................ 739,140
2000............................................................ 491,225
----------
Total......................................................... $1,969,505
==========
</TABLE>
F-129
<PAGE>
UNITED SERVICE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
Legal Matters
Prior to the Acquisition, CPCS has been a party to various legal actions and
claims arising in the normal course of business. The Company is not presently
subject to any such legal actions or claims.
Management Fee
The Company has a management agreement with its majority stockholder. Under
the agreement, the Company receives consulting services concerning business
planning, acquisitions, financing and other management matters. The fee is
$250,000 per year increased by the consumer price index beginning in 1999.
Additionally, beginning in 1998, the management agreement contains an
incentive bonus of up to $250,000 if agreed upon performance is achieved. The
agreement continues as long as the majority stockholder owns greater than 50%
of the outstanding stock of the Company.
Year 2000
Management is currently addressing the Year 2000 issue and its impacts on
the Company and the Company's customers and vendors. The Company is currently
quantifying the costs of becoming Year 2000 compliant but believes such costs
will not be material to its financial position or results of operations.
(7) SUBSEQUENT EVENTS
On January 27, 1998, the Company purchased all of the outstanding stock of
Sullivan Service Company ("SSC") for $14.825 million in cash and $4.925
million in subordinated debt from the seller. SSC provides similar contract
facilities management services to regional and national retailers in the
eastern and mid-west portions of the United States and in Puerto Rico. The
acquisition was accounted for using the purchase method.
On April 6, 1998, the Company entered into a definitive agreement to merge
with Consolidation Capital Corporation with closing of the transaction
scheduled in early April.
(8) QUARTERLY INFORMATION (UNAUDITED)
On January 27, 1998, the Company purchased SSC for total consideration of
$19.75 million. The quarterly information presented includes the net assets
purchased and the income from the operations of SSC from the acquisition date
through the end of the quarter. The Company acquired working capital of
$332,237 and equipment of $633,855 in the acquisition.
The excess of the purchase price over the fair value of identifiable assets
acquired of $18.8 million was tentatively allocated to goodwill and will be
amortized over forty years. The final allocation of purchase price will be
determined upon completion of an appraisal of the acquired assets.
The acquisition was financed through the issuance of $15.1 million in debt,
seller financing of $4.9 million and the sale of 53,530 shares of Class A
common and 62,541 shares of Class B Nonvoting common stock for total proceeds
of approximately $174,000. In connection with the issuance of the debt, the
Company issued warrants to purchase 94,342 shares of common stock valued at
approximately $142,000.
During March 1998, the Company issued 60,996 shares of common stock to
related parties for $628,870 in cash.
F-130
<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-131
<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-132
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<S> <C> <C> <C> <C>
Year Ended Three Months Ended
December 31, 1997 March 31,
----------------- ---------------------- ---
1997 1998
---------- ----------
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-133
<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-134
<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-135
<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-136
<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-137
<PAGE>
INDEPENDENT AUDITORS' REPORT
Walker Engineering, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Walker Engineering, Inc.,
(an S Corporation) as of December 31, 1997, and the related statement of
income and changes in retained earnings and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Walker Engineering, Inc.,
as of December 31, 1997, and the results of its operations and changes in
retained earnings, and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Hutton, Patterson & Company
Hutton, Patterson & Company
February 27, 1998
Dallas, Texas
F-138
<PAGE>
WALKER ENGINEERING, INC.
BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash.............................................................. $ 5,074,179
Contracts receivable.............................................. 19,059,634
Notes receivable, employees....................................... 31,202
Investment in life insurance contracts............................ 284,188
Unbilled revenues................................................. 281,404
-----------
TOTAL CURRENT ASSETS............................................ 24,730,607
-----------
PROPERTY AND EQUIPMENT
Automotive equipment.............................................. 1,459,259
Operating equipment............................................... 1,134,603
Office furniture and equipment.................................... 423,321
Computer and software............................................. 459,209
Leasehold improvements............................................ 69,211
-----------
3,545,603
Less accumulated depreciation and amortization.................... 1,790,274
-----------
NET PROPERTY AND EQUIPMENT...................................... 1,755,329
-----------
OTHER ASSETS.................................................... 180,530
-----------
$26,666,466
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $ 5,751,485
Accrued expenses.................................................. 4,291,921
Excess billings................................................... 7,435,796
Capital leases payable, current portion........................... 126,332
Notes payable, shareholder........................................ 4,000,000
-----------
TOTAL CURRENT LIABILITIES....................................... 21,605,534
-----------
LONG-TERM LIABILITIES
Capital leases payable, net of current portion.................... 76,334
-----------
TOTAL LIABILITIES............................................... 21,681,868
-----------
SHAREHOLDERS' EQUITY
Common stock (no par value; 1,000,000 shares authorized; 116,452
shares issued and outstanding)................................... 11,645
Paid-in capital................................................... 917,869
Retained earnings................................................. 4,055,084
-----------
TOTAL SHAREHOLDERS' EQUITY...................................... 4,984,598
-----------
$26,666,466
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE>
WALKER ENGINEERING, INC.
STATEMENT OF INCOME AND CHANGES IN RETAINED EARNINGS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
REVENUES EARNED................................................... $127,672,430
COSTS OF REVENUES EARNED.......................................... 106,346,712
------------
GROSS PROFIT...................................................... 21,325,718
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 21,785,658
------------
LOSS FROM OPERATIONS.............................................. (459,940)
------------
OTHER INCOME (LOSS)
Interest income................................................. 327,992
Loss on sale of assets.......................................... (35,720)
------------
292,272
------------
NET LOSS.......................................................... (167,668)
RETAINED EARNINGS, beginning...................................... 4,222,752
------------
RETAINED EARNINGS, ending......................................... $ 4,055,084
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE>
WALKER ENGINEERING, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................... $ (167,668)
Adjustments to reconcile net loss to net cash flows used in
operating activities
Loss on sale of assets....................................... 35,720
Depreciation and amortization................................ 391,468
Changes in assets and liabilities
Increase in contracts receivable........................... (1,891,690)
Decrease in unbilled revenues.............................. 31,061
Increase in accounts payable............................... 213,798
Increase in accrued expenses............................... 2,429,709
Decrease in excess billings................................ (470,531)
-----------
Net cash flows provided by operating activities................ 571,867
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............................. (1,314,417)
Proceeds from sale of property and equipment................... 34,439
Increase in investment in life insurance contracts............. (23,356)
Employee loans advanced........................................ (5,082)
Payments received on employee loans............................ 31,724
Other asset additions.......................................... (96,175)
-----------
Net cash flows used in investing activities.................. (1,372,867)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on lease obligations.................................. (126,296)
Proceeds from shareholder loan................................. 5,000,000
Payments on shareholder loan................................... (3,000,000)
-----------
Net cash flows provided by financing activities.............. 1,873,704
-----------
NET INCREASE IN CASH............................................. 1,072,704
CASH, beginning.................................................. 4,001,475
-----------
CASH, ending..................................................... $ 5,074,179
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for Interest......................................... $ 230,598
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--HISTORY AND BUSINESS
Walker Engineering, Inc. (the Company) was incorporated in Texas on June 1,
1981. The principal business activity of the Company is electrical engineering
in the commercial/ industrial field and the specialized area of airport
lighting contracts. Large contracts typically require ten to twenty-four
months to complete. The Company conducts these activities primarily within the
state of Texas.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Federal Income Taxes
Effective July 1, 1996, the Company, with the consent of its shareholders,
elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the shareholders are
liable for individual federal income tax on the Company's taxable income.
Therefore, no provision or liability for federal income taxes has been
included in the financial statements. The adoption of Subchapter S status
necessitated changing from a fiscal year ending June 30 to a calendar year
ending December 31.
Revenue and Cost Recognition
Earned revenues are recognized on the percentage-of-completion method
measured on the basis of labor costs incurred to date to total estimated labor
costs for airport contracts and total costs incurred to date to total
estimated costs for all other contracts. Management considers total costs to
be the best available measure of progress on the majority of the Company's
contracts. However, management considers labor to be a more accurate measure
of progress on airport contracts since FAA regulations require the purchase of
all materials prior to commencement of the work and the inclusion of prepaid
material costs would accelerate the recognition of income beyond actual
progress. Adjustments to cost estimates are made periodically.
Contract costs include all direct labor and material costs. Indirect costs
related to contract performance, such as insurance, supplies, repairs and
depreciation costs are charged to cost of sales during the period in which
they are incurred. Selling, general and administrative costs are charged to
expense as incurred. Provision for estimated losses on uncompleted contracts
is made in the period in which such losses are determined.
The asset "Unbilled revenues" represents revenues recognized on contracts
for which billings have not been rendered. The liability "Excess billings"
represents billings in excess of revenues recognized.
Revenue and expense on time and material jobs are recognized when the job is
billed. Unbilled time and material costs are included in prepaid expenses;
however, at December 31, 1997, all costs associated with time and material
jobs had been billed.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost.
Expenditures for maintenance and repairs are charged against operations.
Renewals and betterments that materially extend the lives of the assets are
capitalized at cost.
F-142
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The cost of assets sold, retired, or otherwise disposed of and the related
allowance for depreciation are eliminated from the accounts, and any resulting
gain or loss is included in operations for the period in which the disposal
occurred.
Property and equipment are depreciated over the estimated useful lives of
the assets using principally accelerated methods for both federal income tax
and financial reporting purposes.
Leasehold improvements are amortized over the life of the related lease. The
rates used to depreciate property and equipment are based on the following
estimated useful lives:
<TABLE>
<S> <C>
Automotive equipment........................................... 15 years
Operating equipment............................................ 5-7 years
Office furniture and equipment................................. 5-7 years
Computer and software.......................................... 3-5 years
Leasehold improvements......................................... 39 years
</TABLE>
Total depreciation and amortization expense for the year ended December 31,
1997, amounted to $391,468.
Investment in Life Insurance Contracts
The Company's investment in life insurance contracts is stated at cash
surrender value as of the balance sheet date.
The Company maintains two insurance policies on the life of a key officer in
the face amounts of approximately $445,000 and $325,000, respectively. The
Company is the sole beneficiary of the $445,000 policy. The Company may borrow
on the cash surrender value of the policies at any time; therefore, management
classifies the investments as current assets.
Allowance for Doubtful Accounts
The Company's policy is to expense accounts receivable which are considered
to be uncollectible; therefore, no allowance is provided.
Concentration of Credit
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments in government
securities. Concentrations of credit risk with respect to trade receivables
are limited due to the industry practice of requiring performance bonds on
long-term contracts. The Company's customer base consists of general
construction contractors concentrated in Dallas-Fort Worth and surrounding
areas.
The Company maintains operating cash accounts and interest bearing accounts
with various financial institutions. The total amount of these accounts at
December 31, 1997, in excess of the federally insured limits was $126,579. At
any point in time, the current balance exceeding the federally insured limits
would be at risk in the event the institution is unable to continue business.
F-143
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE C--CONTRACTS RECEIVABLE
The Company's contracts receivable were as follows at December 31, 1997:
<TABLE>
<S> <C>
Completed contracts........................................... $ 624,545
Contracts in progress......................................... 11,746,133
Time and material jobs........................................ 3,554,357
Retention..................................................... 3,134,599
-----------
$19,059,634
===========
</TABLE>
NOTE D--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts (including job
costs prepaid (payable) on airport contracts)............. $75,932,591
Gross profit from inception................................ 13,086,972
-----------
89,019,563
Less billed to date........................................ 96,173,955
-----------
$(7,154,392)
===========
</TABLE>
These amounts are included in the accompanying balance sheet under the
following captions:
<TABLE>
<S> <C>
Unbilled revenues............................................. $ 281,404
Excess billings............................................... (7,435,796)
-----------
$(7,154,392)
===========
</TABLE>
NOTE E--OTHER ASSETS
Other assets consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Deposits......................................................... $ 2,780
Country club membership deposit.................................. 3,675
Country club initiation deposit.................................. 138,775
Dallas Cowboys bonds and options................................. 20,100
Texas Rangers bonds and options.................................. 15,200
--------
$180,530
========
</TABLE>
F-144
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE F--COMMITMENTS AND CONTINGENCIES
Operating Leases
In November 1997, the Company entered into a 60 month lease on a building
owned by the president (NOTE G). Monthly rental payments are $16,000. The
Company also maintains various lease agreements for the rental of additional
office space and pickup trucks for use in the Company's operations. The
Company expects to renew these leases in the ordinary course of business.
Future minimum rental payments under these operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $346,904
1999.............................................................. $216,886
2000.............................................................. $192,000
2001.............................................................. $192,000
2002.............................................................. $160,000
</TABLE>
Total rent charged to selling, general and administrative expense for the
year ended December 31, 1997, totaled $240,951.
Line of Credit
At December 31, 1997, the Company had an unused line of credit of $1,000,000
available to be drawn upon as needed at 1% above the bank prime rate.
Capital Leases
During the current year, the Company acquired automotive equipment totaling
$237,537 under capital leases. Additionally, the Company has operating
equipment totaling $192,604 which was acquired under capital leases in prior
years. Future minimum rental payments under these capital leases are as
follows for the years ended December 31:
<TABLE>
<S> <C>
1998............................................................ $ 47,958
1999............................................................ 72,026
---------
Total minimum lease payments.................................... 219,984
Amount representing interest.................................... (17,318)
---------
Present value of future lease payments.......................... 202,666
Less current portion............................................ (126,332)
---------
$ 76,334
=========
</TABLE>
During the year ended December 31, 1997, the Company recorded $83,549 in
amortization expense related to leased operating equipment. Accumulated
amortization on leased operating equipment totaled $124,774 at December 31,
1997.
Retirement Plan
Substantially all employees of the Company are covered under the Company's
retirement plan which was adopted during the year ended June 30, 1982.
F-145
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Effective July 1, 1995, the Company amended its retirement plan and adopted
an arrangement pursuant to Section 401(k) of the Internal Revenue Code. The
Company has agreed to match fifty percent of employees contributions to the
plan up to six percent of employee gross wages. At the discretion of the Board
of Directors, the Company may also authorize additional contributions to the
plan. During the year ended December 31, 1997, the Company recorded matching
contributions to the plan totaling $407,989. No discretionary contributions
were made during the period then ended.
NOTE G--RELATED PARTY TRANSACTIONS
The Company conducts its operations from a building owned by the president
(NOTE F). During the year ended December 31, 1997, the Company paid rent of
$152,000 to the president.
In addition, during the year ended December 31, 1997, the president loaned
the Company $5,000,000. The Company repaid the outstanding loan balance of
$2,000,000 from December 31, 1996, and $1,000,000 of the current year loans,
including interest at 10% per annum, prior to December 31, 1997. The remaining
note payable of $4,000,000 bears interest at 10% per annum and is due on
demand or December 17, 1999. Total interest expense paid to the president
during the year ended December 31, 1997 was $210,525.
NOTE H--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Accrued salaries............................................... $ 395,303
Payroll taxes withheld and accrued............................. 2,189,093
Workers compensation insurance................................. 933,209
Other insurance premiums....................................... 212,969
Accrued vacation............................................... 311,908
Sales tax withheld............................................. 249,439
----------
$4,291,921
==========
</TABLE>
NOTE I--BACKLOG
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997:
<TABLE>
<S> <C>
Balance, December 31, 1996................................... $ 64,334,473
Contract adjustments......................................... 27,509,457
New contracts signed......................................... 75,645,770
------------
167,489,700
Less contract revenue earned in current period............... 113,188,860
------------
Balance, December 31, 1997................................... $ 54,300,840
============
</TABLE>
Subsequent to December 31, 1997, the Company executed new contracts and
received signed letters of intent totaling $22,343,000.
F-146
<PAGE>
WALKER ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE J--MAJOR CUSTOMERS
The Company derived 57% of its revenue for the year ended December 31, 1997,
from two general contractors (multiple contracts) and one major customer. The
total revenue from these contracts was approximately $64.5 million. Amounts
owed the Company by these entities at December 31, 1997, were $5,865,763.
NOTE K--SUBSEQUENT EVENT
Subsequent to year end, the Company entered into a letter of intent whereby
Consolidation Capital Corporation would acquire Walker Engineering, Inc.
F-147
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
G. S. Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of G. S. Group,
Inc. and Subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholder's equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of G. S.
Group, Inc. and Subsidiaries as of December 31, 1997 and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Wallingford, McDonald, Fox & Co., P.C.
Wallingford, McDonald, Fox & Co., P.C.
Houston, Texas
May 8, 1998
F-148
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997
<TABLE>
<CAPTION>
December 31 March 31
ASSETS 1997 1998
------ ----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 115,205 $ 226,479
Accounts receivable, including retentions of $872,057 at
1997.................................................... 12,037,913 11,823,384
Costs and estimated earnings on uncompleted contracts in
excess of related billings (Note 2)..................... 380,135 401,849
Receivable from employees................................ 21,217 19,684
Deferred income tax benefit (Note 5)..................... 326,800 326,800
Prepaid expenses and other............................... 115,671 132,304
----------- -----------
Total current assets................................. 12,996,941 12,930,500
----------- -----------
PROPERTY AND EQUIPMENT
Construction equipment and vehicles...................... 1,767,587 1,764,618
Land and building........................................ 2,328,517 2,328,517
Leasehold improvements................................... 556,841 556,841
Shop equipment and tools................................. 334,388 334,388
Office furniture and equipment........................... 488,376 469,217
----------- -----------
5,475,709 5,453,581
Less accumulated depreciation and amortization........... 2,461,948 2,500,678
----------- -----------
Net property and equipment........................... 3,013,761 2,952,903
----------- -----------
OTHER ASSETS
Investment in insurance company, at cost (Note 3)........ 1,950,000 1,950,000
Notes receivable from related parties.................... -- 327,763
Deferred income tax benefit (Note 5)..................... 426,123 426,123
Miscellaneous............................................ 242,000 223,178
----------- -----------
Total other assets................................... 2,618,123 2,927,064
----------- -----------
$18,628,825 $18,810,467
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable--trade.................................. $ 4,024,319 $ 3,086,024
Current maturities of long-term debt (Note 4)............ 402,403 402,403
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 2).......................... 1,597,035 688,191
Federal income taxes payable............................. 164,500 288,498
Accruals:
Employee compensation and benefits..................... 2,393,073 3,799,539
Miscellaneous.......................................... 301,223 202,029
Other payables (Note 1).................................. 223,533 --
----------- -----------
Total current liabilities............................ 9,106,086 8,466,684
LONG-TERM DEBT
Long-term debt, net of current maturities (Note 4)....... 3,275,130 3,130,377
----------- -----------
Total liabilities.................................... 12,381,216 11,597,061
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 7, 8 and 10)
STOCKHOLDER'S EQUITY
Common stock:
Class A (voting)....................................... 12,676 12,676
Class B (nonvoting).................................... 3,241 3,241
Additional paid-in capital............................... 7,554,875 7,554,875
Retained earnings........................................ 7,048,459 8,014,256
----------- -----------
14,619,251 15,585,048
Treasury stock, at cost (Note 6)......................... (8,371,642) (8,371,642)
----------- -----------
Total stockholder's equity........................... 6,247,609 7,213,406
----------- -----------
$18,628,825 $18,810,467
=========== ===========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-149
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year ended December 31, 1997
<TABLE>
<CAPTION>
For the For the Three For the Three
Year Ended Months Ended Months Ended
December 31 March 31 March 31
1997 1998 1997
----------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Contract revenue (Note 10)............ $64,121,575 $21,125,014 $15,518,808
----------- ----------- -----------
Contract costs:
Labor............................... 29,145,858 9,495,569 7,343,380
Material............................ 6,035,338 1,541,903 1,258,295
Other............................... 23,259,129 7,924,366 5,739,091
----------- ----------- -----------
Total contract costs.............. 58,440,325 18,961,838 14,340,766
----------- ----------- -----------
Gross profit...................... 5,681,250 2,163,176 1,178,042
Operating expenses.................... 3,505,213 913,723 920,390
----------- ----------- -----------
Operating income.................. 2,176,037 1,249,453 257,652
----------- ----------- -----------
Other income (expense):
Interest expense.................... (198,586) (55,096) (47,186)
Interest income..................... 48,843 6,958 7,402
Other income (expense), net (Notes 3
and 9)............................. 543,010 262,014 (39,896)
----------- ----------- -----------
Total other income and (expense),
net.............................. 393,267 213,876 (79,680)
----------- ----------- -----------
Income before income taxes........ 2,569,304 1,463,329 177,972
Provision for income taxes (Note 5)... 873,563 497,532 60,510
----------- ----------- -----------
Net income........................ $ 1,695,741 $ 965,797 $ 117,462
=========== =========== ===========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-150
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Class A Class B
Common Stock (1) Common Stock (1) Treasury Stock
----------------- ---------------- ----------------------
Additional
Number of Number of Number of paid-in Retained
shares Amount shares Amount shares (2) Amount capital earnings Total
--------- ------- --------- ------ ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 1,267,644 $12,676 324,033 $3,241 447,818 $(2,888,265) $7,554,875 $5,352,718 $10,035,245
Purchase of treasury
stock................. -- -- -- -- 677,018 (5,483,377) -- -- (5,483,377)
Net income for the
year.................. -- -- -- -- -- -- -- 1,695,741 1,695,741
--------- ------- ------- ------ --------- ----------- ---------- ---------- -----------
Balance, December 31,
1997................... 1,267,644 12,676 324,033 3,241 1,124,836 (8,371,642) 7,554,875 7,048,459 6,247,609
Net income for the
three months
(unaudited)........... -- -- -- -- -- -- -- 965,797 965,797
--------- ------- ------- ------ --------- ----------- ---------- ---------- -----------
Balance March 31, 1998
(unaudited)............ 1,267,644 $12,676 324,033 $3,241 1,124,836 $(8,371,642) $7,554,875 $8,014,256 $ 7,213,406
========= ======= ======= ====== ========= =========== ========== ========== ===========
</TABLE>
- -------
(1) $0.01 par--10,000,000 shares authorized.
(2) 802,172 shares of Class A and 322,664 shares of Class B at December 31,
1997.
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-151
<PAGE>
G. S. GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
For the For the Three For the Three
Year Ended Months Ended Months Ended
December 31 March 31 March 31
1997 1998 1997
----------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $1,695,741 $ 965,797 $ 117,462
Adjustment to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 505,266 89,420 134,128
Deferred income tax benefit......... (168,585) -- (209,706)
Loss on sale and write-down of
assets............................. 214,772 2,397 190,128
Decrease in other receivables....... 160,714 -- 160,714
(Increase) decrease in accounts
receivable......................... (3,311,905) 214,529 (206,239)
Decrease (increase) in costs and
estimated profits on uncompleted
contracts in excess of billings.... 99,181 (21,714) 320,704
Decrease (increase) in prepaid
expenses and other current assets.. 93,570 (16,633) 962
(Increase) decrease in miscellaneous
long-term assets................... (30,794) -- 17,890
Increase (decrease) in accounts
payable............................ 1,188,572 (938,295) (1,193,128)
Decrease in billings in excess of
costs and estimated profits on
uncompleted contracts.............. (399,714) (908,844) (534,755)
Increase in accruals................ 462,623 1,307,272 958,953
(Decrease) increase in federal
income taxes payable............... (5,287) 123,998 --
Increase (decrease) in other
payables........................... 223,533 (223,533) --
---------- --------- ----------
Net cash provided by (used in)
operating activities............. 727,687 594,394 (242,887)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in notes
payable--officer..................... (74,481) (61,459) 55,949
Capital expenditures.................. (35,183) (33,631) (995)
Proceeds from sale of assets.......... 577,506 16,705 35,705
Net reduction (increase) in notes
receivable from affiliates and
related parties...................... 90,321 (321,441) 33,266
---------- --------- ----------
Net cash provided by (used in)
investing activities................. 558,163 (399,826) 123,925
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank loan........... 2,127,596 (68,494) --
Repayments of bank loan and notes
payable.............................. (1,456,561) (14,800) (148,563)
Payments to purchase treasury stock... (4,298,702) -- (14,246)
---------- --------- ----------
Net cash used in financing
activities....................... (3,627,667) (83,294) (162,809)
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................... (2,341,817) 111,274 (281,771)
CASH AND CASH EQUIVALENTS, at beginning
of period............................. 2,457,022 115,205 2,457,022
---------- --------- ----------
CASH AND CASH EQUIVALENTS, at end of
period................................ $ 115,205 $ 226,479 $2,175,251
========== ========= ==========
</TABLE>
The Accounting Policies and Notes to Financial Statements are integral parts of
these statements.
F-152
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Organization
G.S. Group, Inc. & Subsidiaries (the "Company") is a holding company for
G.S. Financial, Inc., an investment company, and two industrial contractors,
Gulf States, Inc. and G.S.I. of California, Inc., specializing in industrial
construction and maintenance services nationwide. See Note 12 regarding
subsequent business combination agreement.
Principles of Consolidation
The consolidated financial statements include the accounts of G.S. Group,
Inc. ("the Company") and its wholly-owned subsidiaries, Gulf States, Inc.,
G.S. Financial, Inc. and G.S.I. of California, Inc. All significant
intercompany balances, transactions and stockholdings have been eliminated.
Unaudited Interim Financial Statement Information
In connection with the subsequent business combination agreement and related
Securities and Exchange Commission filing requirements, the management of the
Company has included unaudited interim financial statement information. In the
opinion of management, the Company has made all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
condition of the Company as of March 31, 1998 and 1997 and the results of
operations and cash flows for the three months ended March 31, 1998 and 1997,
and the statement of stockholder's equity as of and for the three months ended
March 31, 1998, as presented in the accompanying unaudited interim financial
statement information.
Change of Corporate Year-End
On December 31, 1996, the Company changed its corporate fiscal year-end from
June 30th to December 31st.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Income on long-term contracts is recognized on the basis of the Company's
estimates of the percentage-of-completion of individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Percentage-of-completion is determined on
the basis of the Company's engineering estimates of labor earned or on total
costs incurred as a percentage of total estimated costs. Inasmuch as these
long-term contracts extend over one or more years, any revisions in cost and
profit estimates required by changing facts and circumstances occurring after
issuance of the financial statements are reflected in the subsequent
accounting period. At the time a loss is anticipated, the entire amount of the
estimated ultimate loss on both short and long-term contracts is recognized
and accrued. The current asset caption, "Costs and estimated earnings in
excess of billings on uncompleted contracts," represents revenues recognized
in excess of amounts billed. The current liability caption, "Billings in
excess of costs and estimated earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
F-153
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Equipment, Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily on the straight line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Construction equipment and vehicles.............. 3-10
Leasehold improvements........................... 3-10
Shop equipment and tools......................... 3- 5
Office furniture and equipment................... 3- 7
Buildings........................................ 30-40
</TABLE>
Asset Valuation
The carrying amounts of long-life assets are reviewed periodically. If the
asset carrying amount is not recoverable, the asset is considered to be
impaired and the value is adjusted.
Retrospective Insurance Premiums--Other Payables
The Companies maintain insurance coverage through incurred loss
retrospective insurance agreements for their workers' compensation, general
liability, and automobile policies. The policies and related coverage are
provided through an affiliated insurance company as described in Note 3 to the
financial statements. Computations of the retrospective premium payable or
receivable are prepared by the insurance company at various valuation dates
beginning at eighteen months after the inception of the policy. Valuations and
any related adjustments continue at twelve month intervals thereafter through
seventy-eight months after the expiration of the policy. The estimated payable
totaling $223,533 at December 31, 1997 is based on preliminary claim loss
reports prepared by the insurance company and any additional amounts reserved
by the Company to cover both reported and incurred but unreported claims.
Periodic valuation adjustments to the policy premiums and the related effect
on the estimated receivable or payable are recorded in the period in which the
adjustment becomes known. The estimated insurance payable is included in
"other payables" on the balance sheet.
Intangibles
Included in other miscellaneous assets at December 31, 1997 are non-compete
agreements, net of accumulated amortization, totaling $204,884. The agreements
are amortized on a straight-line basis over periods ranging up to sixty months
through December 31, 2000. Amortization expense for the year ended December
31, 1997 totaled $83,290.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due under federal and
state income tax regulations plus deferred taxes related primarily to
differences between balance sheet accounts with different bases for financial
and income tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
F-154
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Uncompleted Contracts
As of December 31, 1997, contracts totaling approximately $25,200,000 were
in process. Information with respect to these uncompleted contracts is
summarized as follows:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Costs incurred........................... $ 9,542,992
Estimated earnings....................... 1,597,395
------------
11,140,387
Progress billings........................ (12,357,287)
------------
$ (1,216,900)
============
</TABLE>
These amounts were included in the accompanying consolidated balance sheets
under the following captions:
<TABLE>
<CAPTION>
<S> <C>
Costs and estimated earnings on uncom-
pleted contracts in excess of related
billings................................ $ 380,135
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (1,597,035)
-----------
$(1,216,900)
===========
</TABLE>
Note 3. Investment in Insurance Company
The Company owns a less than 5% interest in an insurance company. The
Company's investment in the insurance company is accounted for on the cost
method. Ownership of the insurance company is held by various construction
contractors nationwide. The insurance company provides cost effective workers'
compensation and liability insurance for its shareholders. Premiums paid to
the insurance company for 1997 totaled approximately $1.2 million.
As a shareholder, the Company is generally entitled to voting rights and
distributions on the basis of individual underwriting profit and investment
income contributions to the insurance company. The Company may, with certain
limitations as delineated in the by-laws, elect to withdraw and liquidate its
equity interest in the insurance company for consideration equal to the book
value of the common shares of the insurance company multiplied by its
percentage of ownership. At December 31, 1997, the Company's carrying value on
these financial statements approximated its book value interest based on the
insurance company's audited December 31, 1997 financial statement report.
The by-laws also contain provisions relating to certain changes in ownership
of the member companies. Such changes in ownership are subject to review and
approval by the board of directors of the insurance company as it relates to
retaining shareholder interest in the insurance company.
Included in other income are dividend distributions from the insurance
company totaling $736,352 for the year ended December 31, 1997.
F-155
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Bank Loans and Long-Term Debt
Bank loans and long-term debt at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Bank line of credit, $5,000,000 available at December 31, 1997,
interest payable monthly at bank prime (approximately 8.5%)
plus 0.75%, principal and any unpaid interest due at maturity
on June 30, 1999.............................................. $2,127,596
Installment note payable to related party partnership due in
monthly installments of $12,500 plus interest at bank prime
rate (8.5%) plus 1%, payable through January 1, 2000;......... 300,000
Installment note payable to a former officer and shareholder
due in monthly installments of $23,458 including interest at
8.5%, payable through November 1, 2002........................ 1,151,485
Installment note payable to former officer and shareholder, due
in monthly installments of $4,296 including interest at 8.5%,
payable through January 17, 2000.............................. 98,452
----------
Total.......................................................... 3,677,533
Less current maturities........................................ 402,403
----------
Long-term debt................................................. $3,275,130
==========
</TABLE>
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1999...................................... $2,549,333
2000...................................... 242,782
2001...................................... 255,788
2002...................................... 227,227
----------
Total................................... $3,275,130
==========
</TABLE>
The bank loans are collateralized by substantially all of the Company's
assets, including its investment in subsidiaries, as well as a personal
guarantee of an officer of the Company.
The bank loan agreements contain certain restrictive covenants which, among
other things, require the maintenance of specified levels of working capital
and net worth, limit the incurrence of any additional indebtedness, liens,
loans or investments, and restrict the payment of cash dividends.
Additionally, the bank loan and notes to former shareholders contain
provisions relating to the sale, merger or change in ownership of the Company
which may cause the loans and notes to become due on demand.
Note 5. Income Taxes
The provision for income taxes consists of current and deferred taxes and
differs from amounts that would be calculated by applying federal statutory
rates to income before taxes, due to the effect of nondeductible items such as
officers' life insurance and entertainment limitations, as well as the effect
of the provision for state income taxes.
F-156
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
1997
------------
<S> <C>
Current................................... $1,042,148
Deferred.................................. (168,585)
----------
Total provision......................... $ 873,563
==========
</TABLE>
At December 31, 1997, deferred tax assets and liabilities have been
recognized for the following temporary differences in tax and financial
accounting for:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Insurance reserves............................ $ 5,400
Vacation accruals............................. 130,000
Incentive bonus accruals...................... 191,400
Investment in insurance company............... 451,700
Other......................................... 9,423
--------
Subtotal.................................... 787,923
Deferred tax asset valuation allowance........ (35,000)
--------
Total....................................... $752,923
========
</TABLE>
The net deferred tax benefits in the accompanying balance sheets include the
following components:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Current deferred tax assets................... $326,800
--------
Noncurrent deferred tax assets................ 461,123
Deferred tax valuation allowance.............. (35,000)
--------
Subtotal--Net noncurrent deferred tax as-
sets....................................... 426,123
--------
Total....................................... $752,923
========
</TABLE>
Note 6. Employee Benefit Plans
Employee Stock Ownership Plan
As of June 30,1996 the Company had an employee stock ownership plan (ESOP)
covering substantially all employees. Contributions were determined annually
by the Board of Directors and were limited to amounts deductible for federal
income tax purposes. Contributions were funded through the issuance of the
Company's common stock at fair value as determined at the last independent
valuation date and through cash contributions. On January 3, 1997 the Board of
Directors voted to terminate the ESOP and reacquire all stock held in the plan
as treasury stock. By December 31, 1997, all shares had been reacquired and
the plan terminated.
Incentive Stock Option Plans
The Company adopted the 1995 Incentive Stock Option Plan (the "1995 Plan")
in December 1995, whereby certain key officers and employees were granted
options to purchase 172,500 shares of the Company's
F-157
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Class A stock at prices ranging from $6.61 to $7.27 per share. During 1997,
the options for the 1995 plan were canceled. Concurrently with the
cancellation of the stock option plan, the Company established cash bonus
incentive plans for certain salaried personnel. The incentive plans provide
for quarterly cash bonuses based upon reaching various financial and operating
results. The plans may be discontinued in any subsequent quarter at the
discretion of the board of directors.
Salary Deferral Plan
On August 15, 1994, the Company established an Employee's Salary Deferral
Plan covering substantially all employees. The plan qualifies as a defined
contribution plan under Section 401(k) of the Internal Revenue Code. Each
employee can elect to defer up to 10% of their compensation and the Company
will match up to a maximum of 25% of the first 6% of the employee's salary
deferral contribution. The Plan also allows for additional contributions by
the Company at the discretion of the Board of Directors. Company matching
contributions vest over periods ranging to seven years. The Company's matching
expense was $176,759 for the year ended December 31, 1997.
Note 7. Operating Leases
The Companies lease certain buildings, construction equipment and vehicles
under leases classified as operating leases.
A schedule by years of future minimum lease payments under remaining
operating leases as of December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Operating
leases
---------
<S> <C>
Year ending December 31,
1998....................................... $214,431
1999....................................... 162,039
2000....................................... 70,000
--------
$446,470
========
</TABLE>
Rental expense under operating leases for land, buildings and equipment and
vehicles for the year ended December 31, 1997 totaled approximately
$4,100,000.
Note 8. Commitments and Contingencies
Litigation
The Company was named as a defendant in various lawsuits arising in the
normal course of business. It is the opinion of management that the outcome of
the suits will not materially affect the financial position of the Company.
Sales Tax
Periodically, the Company is subject to state sales and use tax audits. The
Company has been notified of an audit by the State of Texas for the years 1994
through 1997. Management of the Company believes that amounts due, if any, as
a result of the audit, would not be material.
F-158
<PAGE>
G.S. GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Other Income and Expense
Included in Other Income and Expense for the year ended December 31, 1997
are the following individually significant items:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Dividend income from investment in insurance
company..................................... $736,352
Loss on disposal of assets................... (214,772)
Other miscellaneous income (expense)......... 21,430
--------
Total...................................... $543,010
========
</TABLE>
Note 10. Concentration of Credit Risk and Major Customers
The Company provides industrial contracting and maintenance services
primarily to petrochemical companies in Texas and California. Approximately
62% of the annual revenues were derived from Texas contracts and 18% from
California contracts. The Company's financial instruments that are subject to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. Accounts receivable totaled approximately $12,038,000
at December 31, 1997. At December 31, 1997, approximately $9,300,000 was
receivable from two customers. The Company manages credit risk with its
various customers, as appropriate. Collateral is not required for credit
extended to the Company's customers. Additionally, the Company places its cash
and temporary investments in a high credit quality institution. At times, such
investments may be in excess of the FDIC limits.
During the year ended December 31, 1997, the Company recorded revenues
resulting from contracts with two major customer totaling approximately
$39,360,000.
Note 11. Supplemental Disclosures of Cash Flow Information
For purposes of the statement of cash flows, the Company considers demand
deposits in banks and all highly liquid investments purchased with a maturity
of three months or less to be cash and cash equivalents.
The company paid interest of $215,000 and income taxes of $1,066,000 during
the year ended December 31, 1997
During 1997, the Company acquired $1,184,675 of treasury stock from a former
officer/shareholder through a debt financing agreement.
Note 12. Subsequent Event--Business Combination Agreement
Subsequent to December 31, 1997, the Company and its stockholder have
entered into an agreement to be acquired by a subsidiary of Consolidation
Capital Corporation ("CCC"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of the CCC subsidiary's common
stock.
The business combination is expected to be effected and finalized in late
May 1998. These December 31, 1997 financial statements do not reflect any
adjustments or reclassifications related to the pending 1998 business
combination.
F-159
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
National Network Services, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of National Network Services,
Inc. as of December 31, 1997, and the related statement of income and retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Network Services,
Inc. as of December 31, 1997, and the results of operations and cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Bradley, Allan & Associates, P.C.
Bradley, Allan & Associates, P.C.
Lakewood, Colorado
May 20, 1998
F-160
<PAGE>
NATIONAL NETWORK SERVICES, INC. BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
ASSETS ----------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash (Note 1)............................ $ 743,500 $1,122,185
Accounts receivable - trade, net of al-
lowance for doubtful accounts of
$10,000................................. 2,105,316 2,347,900
Work in process (Note 1)................. 655,932 308,944
Prepaid expenses......................... 5,370 --
Due from employees....................... -- 1,596
---------- ----------
Total current assets.................... 3,510,118 3,780,625
========== ==========
Property and equipment, at cost (Notes 1
and 3):
Computer equipment....................... 75,137 87,980
Furniture and fixtures................... 37,154 38,290
Leasehold improvements................... 26,485 26,485
Machinery and equipment.................. 165,040 165,105
Vehicles................................. 203,765 203,765
---------- ----------
507,581 521,625
Less accumulated depreciation and amorti-
zation.................................. 217,421 241,865
---------- ----------
290,160 279,760
---------- ----------
Other assets:
Deposits................................. 32,610 70,082
Distribution rights, net of accumulated
amortization of $1,000 and $3,000 (Note
1)...................................... 14,000 12,000
---------- ----------
46,610 82,082
---------- ----------
$3,846,888 $4,142,467
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of notes payable, banks
(Note 3)................................ $ 10,192 $ 10,313
Accounts payable, trade.................. 554,285 442,954
Accrued expenses......................... 197,307 260,413
Billings in excess of cost............... -- 84,462
---------- ----------
Total current liabilities............... 761,784 798,142
========== ==========
Long-term liabilities:
Notes payable, banks, net of current por-
tion (Note 3)........................... 29,927 27,325
---------- ----------
Commitments (Note 6)
Shareholders' equity:
Common stock, $.10 par value; authorized
20,000 shares, issued and outstanding
6,667 shares............................ 667 667
Paid-in capital.......................... 46,333 46,333
Retained earnings........................ 3,008,177 3,270,000
---------- ----------
3,055,177 3,317,000
---------- ----------
$3,846,888 $4,142,467
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-161
<PAGE>
NATIONAL NETWORK SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the three For the three
For the year ended months ended months ended
December 31, 1997 March 31, 1997 March 31, 1998
------------------ -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Earned revenues.............. $9,248,759 1,888,584 2,304,256
Cost of earned revenues...... 6,840,353 1,317,675 1,607,895
---------- --------- ---------
Gross profit................. 2,408,406 570,909 696,361
General and administrative
expenses.................... 1,091,367 236,668 379,949
---------- --------- ---------
Operating income............. 1,317,039 334,241 316,412
---------- --------- ---------
Other income (expense):
Interest expense............ (3,339) (41) (689)
Interest income............. 26,535 4,426 9,765
Gain on sale of assets...... -- -- 1,292
---------- --------- ---------
23,196 4,385 10,368
---------- --------- ---------
Net income (Note 1).......... 1,340,235 338,626 326,780
Retained earnings,
beginning................... 1,951,475 1,951,475 3,008,177
Shareholder distributions.... ( 283,533) (25,333) (64,957)
---------- --------- ---------
Retained earnings, ending.... $3,008,177 2,264,768 3,270,000
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-162
<PAGE>
NATIONAL NETWORK SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three For the three
For the year ended months ended months ended
December 31, 1997 March 31, 1997 March 31, 1998
------------------ -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income................... $1,340,235 $338,626 $ 326,780
Non-cash items included in
net income:
Depreciation and amortiza-
tion....................... 87,824 17,579 26,444
(Increase) decrease in:
Accounts receivable,
trade..................... (531,001) 585,062 (242,584)
Due from employees......... -- (1,420) (1,596)
Work in process............ 249,279 (92,369) 346,988
Prepaid expenses........... 868 2,705 5,370
Increase (decrease) in:
Accounts payable, trade.... 210,920 82,194 (111,331)
Accrued expenses........... (65,701) (31,454) 63,106
Billings in excess of
costs..................... -- -- 84,462
---------- -------- ----------
Net cash provided by oper-
ating activities......... 1,292,424 900,923 497,639
---------- -------- ----------
Cash flows from investing
activities:
Acquisition of property and
equipment................... (198,385) (6,338) (14,044)
Payment of deposits.......... (28,385) (3,078) (37,472)
Acquisition of distribution
rights...................... (15,000)
---------- -------- ----------
Net cash used by investing
activities............... (241,770) (9,416) (51,516)
---------- -------- ----------
Cash flows from financing
activities:
Proceeds from long-term
debt........................ 53,227 -- --
Debt reduction, short-term... (68,400) (68,400) --
Debt reduction, long-term.... (13,108) -- (2,481)
Cash distributions to share-
holders..................... (283,533) (25,333) (64,957)
---------- -------- ----------
Net cash used by financing
activities............... (311,814) (93,733) (67,438)
---------- -------- ----------
Net increase in cash.......... 738,840 797,774 378,685
Cash, beginning............... 4,660 4,660 743,500
---------- -------- ----------
Cash, ending.................. $ 743,500 $802,434 $1,122,185
========== ======== ==========
Supplemental disclosures re-
garding cash flows:
Cash paid for:
Interest.................... $ 3,339 $ 41 $ 689
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-163
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1.Nature of Operations and Summary of Significant Accounting Policies
Nature of operations:
National Network Services, Inc. was incorporated in the State of Colorado
in March, 1992. The company provides installation and service of data,
video, and other communication cable and hardware in Colorado, Oregon,
California, and South Dakota.
Unaudited Interim Financial Statement Information:
In connection with the subsequent business combination agreement and
related Securities and Exchange Commission filing requirements, the
management of the Company has included unaudited interim financial
statement information. In the opinion of management the Company has made
all adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the financial condition of the Company as of March 31,
1998 and 1997 and the results of operations and cash flows for the three
months ended March 31, 1998 and 1997, and the statement of stockholder's
equity as of and for the three months ended March 31, 1998, as presented in
the accompanying unaudited interim financial statement information.
Revenue recognition:
The company follows the percentage-of-completion method of accounting for
contracts. Accordingly, income is recognized in the ratio that costs
incurred bears to estimated total costs. Adjustments to cost estimates are
made periodically, and losses expected to be incurred on contracts in
progress are charged to operations in the period such losses are
determined. The aggregate of costs incurred and income recognized on
uncompleted contracts in excess of related billings is shown as work in
process.
Cash equivalents:
The Company considers currency on hand, demand deposits with banks or other
financial institutions, treasury bills, commercial paper, money market
funds or other investments with original maturities of three months or less
to be cash and cash equivalents. At December 31, 1997, cash and cash
equivalents consisted of currency on hand, demand deposits with banks and
other financial institutions, and money market funds.
The company maintains its cash at a bank where accounts are insured up to
$100,000 by the Federal Deposit Insurance Corporation.
Property, equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation and amortization is
provided by use of the straight-line method over the estimated useful lives
of the related assets, ranging from five to seven years.
Repairs and maintenance are charged to operations as incurred. Major
renewals and betterments that extend the useful lives of property and
equipment are capitalized.
Distribution rights:
In November, 1997, the Company acquired the rights to use, sell and
distribute equipment that carries cable. The cost is being amortized on a
straight-line basis over thirty months, which is management's estimate of
the duration of use before sale of the rights to other parties. The
agreement requires the Company to remit royalties at 7.5% of the net
profits generated after the initial cost is recouped.
Income taxes:
The Company, with consent of its shareholders, has elected to be treated as
a Subchapter S Corporation. In lieu of corporate income taxes, the
shareholders are taxed on their proportionate share of the company's
taxable income. Therefore, no provision or liability for income taxes are
reflected in these financial statements.
F-164
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
YEAR ENDED DECEMBER 31, 1997
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Advertising costs:
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of direct-
response advertising are capitalized and amortized over the period during
which future benefits are expected to be received. There was no direct
response advertising incurred in 1997. Total advertising expense for the
year ended December 31, 1997 was $26,351.
2.Note Payable, Bank
The company has a line of credit and a term note with a bank under one loan
agreement. Under this agreement, the line and note are subject to certain
loan covenants, including current ratio, tangible net worth, and debt to
net worth requirements.
The company had no outstanding balance under the line of credit or the term
note at December 31, 1997.
3.Long-Term Debt
Long-term debt consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
7.3% note, payable to a bank in monthly
installments of $424, including interest,
through May, 2001. Secured by vehicle. $15,366
7.3% note, payable to a bank in monthly
installments of $335, including interest,
through September, 2001. Secured by vehicle. 13,134
6.75% note, payable to a bank in monthly
installments of $300, including interest,
through August, 2001. Secured by vehicle. 11,619
-------
40,119
Less current portion 10,192
-------
$29,927
=======
</TABLE>
Annual maturities of long-term debt for years ending after December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Year
ended
December
31
--------
<S> <C>
1998 $ 10,192
1999 10,941
2000 11,745
2001 7,241
--------
$ 40,119
========
</TABLE>
F-165
<PAGE>
NATIONAL NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
YEAR ENDED DECEMBER 31, 1997
4.Concentration of Credit Risk
The company grants credit to its customers who include both commercial and
governmental entities. At December 31, 1997, the Company had approximately
$1,119,300 concentrated into eight individual accounts receivable, ranging
from approximately $60,800 to $351,800. By February 20, 1998, approximately
$826,100 of the above amounts were paid.
5.Major Customers
For the year ended December 31, 1997, over 21% of sales were made to one
customer.
6.Commitments
Operating leases:
On April 1, 1997, the Company entered into a five-year lease agreement,
expiring in March, 2002, for office space at its primary location in
Colorado. The lease requires an initial base rent of $4,200 per month, plus
a proportionate share of common area maintenance charges. The monthly base
rent increases to $4,600, effective April 1, 2000. The common area charges
can be modified annually based on total charges incurred by the lessor to
the Company's percentage of total rentable square footage.
The Company has also executed other lease agreements for office space in
California, Oregon, and South Dakota. These lease agreements range from
$560 to $2,685 in monthly rent with expiration dates from November, 1998 to
February, 2000. The term of one agreement is one-year in length, with the
other two agreements for three-years each.
The minimum annual commitment under the terms of these leases for years
ending after December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
- ----------------------
<S> <C>
1998 $ 107,220
1999 104,328
2000 80,651
2001 55,200
2002 13,800
---------
$ 361,199
=========
</TABLE>
The rent expense for the year ended December 31, 1997 was $87,515.
7.Employee Benefit Plan
Salary reduction profit sharing plan:
The Company has a salary reduction profit sharing plan covering all its
employees. Qualified participants must attain an age of at least twenty-one
years and have a least one year of service with the Company. Accrued
benefits vest at the rate of 20% per year from one to five years of
service. The contribution to the salary reduction profit sharing plan is
equal to 50% of the first 4% of pay deferred by the participant, but will
not exceed 2% of the participant's total annual compensation. Company
contributions to the salary reduction plan were approximately $18,300 for
the year ended December 31, 1997.
The company also has a Section 125 plan available to all employees that
includes day care, health insurance and disability coverage.
8.Subsequent Event
In April 1998, a Letter of Intent, which is non-binding to either party,
was executed whereby the Shareholders would sell 100% of the fully diluted
and outstanding shares to an unrelated third party. The parties are
presently in negotiation which, if successful, would result in an approval
of the agreement by June, 1998.
F-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Tri-M Network
Kennett Square, Pennsylvania
We have audited the accompanying combined balance sheet of Tri-M Network (S
corporations) as of December 31, 1997 and 1996 and the related combined
statements of income and retained earnings and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Tri-M Network as
of December 31, 1997 and 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the combined
financial statements taken as a whole. The additional information presented in
the schedules on pages 18 through 31 is presented for the purposes of
additional analysis and is not a required part of the combined financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the combined financial statements and, in our
opinion, is fairly stated in all material respects in relation to the combined
financial statements taken as a whole.
/s/ Maillie, Falconiero & Company, LLP
Maillie, Falconiero & Company, LLP
West Chester, Pennsylvania
February 9, 1998
F-177
<PAGE>
Tri-M NETWORK
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended
December 31, June 30,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................... $ 834,076 $ 2,259,934
Accounts receivable................................ 8,916,180 9,503,581
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 1,135,453 1,972,378
Inventories........................................ 292,642 344,471
Prepaid insurance.................................. 47,030 9,992
Other prepayments.................................. 17,713 14,644
----------- -----------
TOTAL CURRENT ASSETS............................. 11,243,094 14,105,000
PROPERTY AND EQUIPMENT............................... 1,240,602 1,409,664
OTHER ASSETS
Restricted cash.................................... 50,000 50,000
Cash value of life insurance....................... 94,727 115,794
Organizational costs............................... 1,240 826
----------- -----------
145,967 166,620
----------- -----------
$12,629,663 $15,681,284
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable................................... $ 3,079,801 $ 4,825,724
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 1,391,673 541,782
Notes payable, bank, under line of credit
agreements........................................ 1,940,000 1,949,632
Current portion of long-term debt.................. 329,943 253,189
Accrued salaries and wages......................... 751,513 1,038,133
Accrued taxes...................................... 62,581 81,707
Retirement plan contributions payable.............. 158,174 74,555
Provision for self-insured medical plan............ 207,620 188,030
Provision for anticipated loss on contracts........ 10,663 --
----------- -----------
TOTAL CURRENT LIABILITIES........................ 7,931,968 8,952,752
LONG-TERM DEBT, less current portion................. 315,008 209,798
STOCKHOLDER'S EQUITY
Capital stock...................................... 25,000 25,000
Additional paid-in capital......................... 1,742,163 1,742,663
Retained earnings.................................. 2,615,524 4,751,071
----------- -----------
4,382,687 6,518,734
----------- -----------
$12,629,663 $15,681,284
=========== ===========
</TABLE>
See accompanying notes.
F-178
<PAGE>
Tri-M NETWORK
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the For the For the For the
Year Ended Year Ended Six Months Ended Six Months Ended
December 31, December June 30, June 30,
1996 31, 1997 1997 1998
------------ ----------- ----------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CONTRACT REVENUES....... 30,410,589 $41,759,229 $18,898,809 $29,280,897
DIRECT COSTS............ 22,139,743 30,237,956 13,415,384 20,616,703
---------- ----------- ----------- -----------
GROSS EARNINGS...... 8,270,846 11,521,273 5,483,425 8,664,194
INDIRECT COSTS.......... 4,904,684 6,145,216 2,627,091 3,388,669
---------- ----------- ----------- -----------
GROSS PROFIT........ 3,366,162 5,376,057 2,856,334 5,275,525
GENERAL AND
ADMINISTRATIVE
EXPENSES............... 2,482,145 3,082,212 1,318,131 1,679,322
---------- ----------- ----------- -----------
INCOME FROM
OPERATIONS......... 884,017 2,293,845 1,538,203 3,596,203
OTHER INCOME (EXPENSE)
Management Fees....... -- -- 14,151 9,600
Other income.......... 154,732 160,345 57,919 153,912
Interest expense...... (215,961) (236,096) (111,418) (125,149)
Interest income....... 33,902 34,812 17,225 28,624
Gain on sale of
equipment............ 2,500 14,300 2,160 --
---------- ----------- ----------- -----------
(24,827) (26,639) (19,963) 66,987
---------- ----------- ----------- -----------
NET INCOME.......... 859,190 2,267,206 1,518,240 3,663,190
RETAINED EARNINGS AT
BEGINNING OF PERIOD.... 1,877,255 2,584,767 2,584,767 2,615,524
Dividends paid........ (151,678) (2,236,449) (622,343) (1,527,643)
---------- ----------- ----------- -----------
RETAINED EARNINGS AT
END OF PERIOD...... $2,584,767 $ 2,615,524 $ 3,480,664 $ 4,751,071
========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-179
<PAGE>
Tri-M NETWORK
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the For the
Year Ended Year Ended Six Months Six Months
December 31, December 31, Ended June Ended June
1996 1997 30, 1997 30, 1998
------------ ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 859,190 $ 2,267,206 $1,518,240 $ 3,663,190
Adjustments to
reconcile net income
to net cash provided
by operating
activities
Depreciation and
amortization.......... 325,546 460,719 186,855 271,101
(Increase) decrease in
Accounts receivable... (2,816,003) (1,281,298) (193,608) (587,401)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts............ (130,736) (577,195) (373,181) (836,925)
Inventories........... 90,052 82,609 (32,396) (51,829)
Prepaid expenses...... 1,908 38,600 23,336 40,107
Restricted cash....... 115,000 -- -- --
Increase (decrease) in
Accounts payable...... 929,926 135,158 230,798 1,745,923
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts............ 561,448 501,352 252,681 (849,891)
Accrued salaries and
wages................ 352,765 96,697 (338,993) 286,620
Provision for self-
insured medical
plan................. 9,682 78,669 72,679 (19,590)
Other current
liabilities.......... 152,657 (10,701) (125,856) (75,156)
----------- ----------- ---------- -----------
NET CASH PROVIDED BY
OPERATING
ACTIVITIES.......... 451,435 1,791,816 1,220,555 3,586,149
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment, net.... (315,301) (807,424) (346,499) (439,749)
Increase in cash value
of life insurance..... (55,560) (39,167) (21,068) (21,067)
Organizational costs... (2,068) -- -- --
Collections on note
receivable............ 20,644 249,908 10,997 --
Repayment by officer... 46,750 -- -- --
----------- ----------- ---------- -----------
NET CASH USED BY
INVESTING
ACTIVITIES.......... (305,535) (596,683) (356,570) (460,816)
CASH FLOWS FROM
FINANCING ACTIVITIES
Net borrowings on line
of credit agreements.. 212,141 96,562 1,011,562 9,632
Proceeds from long-term
debt.................. 386,000 397,000 222,000 --
Payments on long-term
debt.................. (420,244) (305,237) (139,133) (181,964)
Proceeds from issuing
capital stock......... 5,000 -- -- --
Additional paid-in
capital............... -- 1,160,866 -- 500
Dividends paid......... (151,678) (2,236,449) (622,343) (1,527,643)
----------- ----------- ---------- -----------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES.......... $ 31,219 $ (887,258) $ 472,086 $(1,699,475)
NET INCREASE IN
CASH................ 177,119 307,875 1,336,071 1,425,858
CASH AT BEGINNING OF
PERIOD................. 349,082 526,201 526,201 834,076
----------- ----------- ---------- -----------
CASH AT END OF
PERIOD.............. $ 526,201 $ 834,076 $1,862,272 $ 2,259,934
=========== =========== ========== =========== ===
</TABLE>
See accompanying notes.
F-180
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE A NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Companies provide services for the design, construction and operation of
electrical systems.
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 June 30, 1997 and 1998 and the results of
operations and cash flows for the six months ended June 30, 1998 and 1997, and
the statement of stockholder's equity as of and for the six months ended June
30, 1998, as presented in the accompanying unaudited interim financial
statement information.
Concentration of Credit Risk
The Network's customer base is located primarily in the Middle Atlantic
region of the United States.
At December 31, 1997, the Companies had bank deposits of $1,026,416 in
excess of FDIC insurance limits.
Major Customer
One customer accounted for approximately 16% and 27% of contract revenues in
1996 and 1997, respectively. A second customer accounted for approximately 11%
of contract revenues in 1997.
A summary of the Network's significant accounting policies follows:
Revenue and Cost Recognition
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the percentage of cost incurred to date to
estimated total cost for each contract. This method is used because management
considers expended costs to be the best available measure of progress on these
contracts.
Contract costs include the cost of materials, labor and other direct
expenses as reflected on internal job costing records. Indirect cost and
general and administrative expenses 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 billings in excess of revenues recognized.
Inventories
Inventories of electrical materials and supplies are valued at the lower of
cost (first-in, first-out method) or market value.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is provided on a
declining balance method over estimated useful lives of 3 to 7 years.
Improvements to buildings leased from the Companies' stockholder are being
amortized over 7 to 39 years on the straight-line basis.
Organizational costs are being amortized over five years.
F-181
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
S Corporation Income Tax Status
The Companies, with the consent of their stockholder, have elected under the
Internal Revenue Code to be S corporations. In lieu of corporation income
taxes, the stockholders of S corporations are taxed on their proportionate
share of the Companies' taxable income. Therefore, no provision or liability
for federal or state income taxes has been included in the accompanying
combined financial statements.
NOTE B PRINCIPLES OF COMBINATION
Tri-M Network is comprised of six separate S corporations, all wholly owned
by the same stockholder. They include Tri-M Corporation, Tri-M Electrical
Construction Corp., Tri-M Building Automation Systems Corp., Tri-M Information
Systems Corp., Tri-M Integrated System Solutions Corp. and Warren Electrical
Construction Corp. All significant intercompany transactions and balances have
been eliminated in the combined financial statements.
NOTE C NOTE RECEIVABLE
The note receivable was payable to Tri-M Electrical Construction Corp. from
Multi-Test Maintenance Corp., formerly a member of Tri-M Network. The note was
paid in full in 1997.
NOTE D COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contacts consisted of:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Costs incurred on uncompleted contracts...................... $ 22,232,538
Estimated earnings........................................... 6,705,653
------------
28,938,191
Billings to date............................................. (29,194,411)
------------
$ (256,220)
============
Included in the accompanying balance sheets under the following captions:
<CAPTION>
1997
------------
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... $ 1,135,453
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... (1,391,673)
------------
$ (256,220)
============
</TABLE>
F-182
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
NOTE E PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Transportation equipment........................................ $ 1,889,856
Machinery and job equipment..................................... 469,510
Office equipment................................................ 1,042,837
Improvements to leased buildings................................ 195,988
-----------
3,598,191
Accumulated depreciation and amortization....................... (2,357,589)
-----------
$ 1,240,602
===========
</TABLE>
NOTE F LINES OF CREDIT
The Companies have available the following demand lines of credit with
Wilmington Trust of Pennsylvania:
<TABLE>
<CAPTION>
Amount
Borrowed at
Line of December 31,
Company Credit 1997
------- ---------- ------------
<S> <C> <C>
Tri-M Corporation.................................... $ 100,000 $ --
Tri-M Electrical Construction Corp................... 800,000 --
Tri-M Building Automation Systems Corp............... 1,000,000 750,000
Tri-M Information Systems Corp....................... 300,000 240,000
Warren Electrical Construction Corp.................. 1,000,000 950,000
Warren Electrical Construction Corp.................. 1,500,000 --
</TABLE>
The agreements provide for interest at prime plus 1/2% and are secured by a
lien on each respective Company's accounts receivable, inventory and
equipment. In addition, each Company's agreement is guaranteed by the
remaining Companies comprising Tri-M Network and personally guaranteed by the
stockholder.
The Companies have available the following equipment lines of credit with
Wilmington Trust of Pennsylvania to finance the purchase of vehicles and/or
equipment:
<TABLE>
<CAPTION>
Amount
Borrowed at
Term December 31,
Company Line 1997
------- -------- ------------
<S> <C> <C>
Tri-M Corporation...................................... $ 50,000 $ --
Tri-M Electrical Construction Corp..................... 300,000 228,262
Tri-M Building Automation Systems Corp................. 300,000 43,333
Tri-M Information Systems Corp......................... 150,000 53,333
Warren Electrical Construction Corp.................... 300,000 39,000
</TABLE>
Interest is at prime plus 3/4% and is fixed at the time of borrowing. Each
loan is secured by a lien on each respective Company's accounts receivable,
inventory and equipment. In addition, each Company's equipment line is
guaranteed by the remaining Companies comprising Tri-M Network and personally
guaranteed by the stockholder.
F-183
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
NOTE G LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Tri-M Corporation
Note payable, Wilmington Trust of Pennsylvania, payable in monthly
installments of $1,044 (principal and interest) through August 1998,
8.5%, secured by equipment........................................... $ 8,107
--------
SUBTOTAL FORWARD.................................................... 8,107
Tri-M Electrical Construction Corp.
Note payable, Wilmington Trust of Pennsylvania, payable in monthly
installments of $4,766 (principal and interest) through August 1998,
8.5%, secured by equipment........................................... 37,011
Note payable, Wilmington Trust of Pennsylvania, payable in monthly
installments of $2,845 (principal and interest) through March 2000,
9%, secured by equipment............................................. 69,929
Notes payable, Wilmington Trust of Pennsylvania, $4,723 plus interest
payable monthly, 9%, secured by equipment............................ 158,333
Capitalized lease obligation, payable in monthly installments of
$3,206 (principal and interest at 8.75%) through November 1998,
secured by vehicles.................................................. 33,774
Capitalized lease obligations, payable in monthly installments of
$3,284 (principal and interest at 7.94% to 11%) through October 1999,
secured by job equipment............................................. 64,254
--------
SUBTOTAL FORWARD.................................................... 363,301
--------
Tri-M Building Automation Systems Corp.
Note payable, Wilmington Trust of Pennsylvania, payable in monthly
installments of $2,905 (principal and interest) through August 1998,
8.5%, secured by equipment........................................... 22,559
Notes payable, Wilmington Trust of Pennsylvania, $1,708 plus interest
payable monthly, 9.25%, secured by vehicles.......................... 43,333
--------
SUBTOTAL FORWARD.................................................... 65,892
Tri-M Information Systems Corp.
Note payable, Wilmington Trust of Pennsylvania, $1,667 plus interest
payable monthly, 9.25%, secured by vehicles.......................... 53,333
--------
SUBTOTAL FORWARD.................................................... 53,333
</TABLE>
F-184
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Tri-M Corporation
SUBTOTAL FORWARDED................................................ 8,107
Tri-M Electrical Construction Corp.
SUBTOTAL FORWARDED................................................ 363,301
Tri-M Building Automation Systems Corp.
SUBTOTAL FORWARDED................................................ 65,892
Tri-M Information Systems Corp.
SUBTOTAL FORWARDED................................................ 53,333
Warren Electrical Construction Corp.
Note payable, Wilmington Trust of Pennsylvania, payable in monthly
installments of $2,267 (principal and interest) through August
2001, 8.5%, secured by equipment................................... 85,361
Notes payable, Wilmington Trust of Pennsylvania, $2,403 plus
interest payable monthly, 9.25%, secured by equipment.............. 39,000
Capitalized lease obligations, payable in monthly installments of
$1,854 (principal and interest) through February 1999, secured by
job equipment...................................................... 15,980
Capitalized lease obligation, payable in monthly installments of
$568 (principal and interest) through March 2000, secured by
vehicle............................................................ 13,977
---------
154,318
---------
TOTAL LONG-TERM DEBT, ALL COMPANIES................................. 644,951
Current portion..................................................... (329,943)
---------
$ 315,008
=========
</TABLE>
Maturities of long-term debt in future years are as follows:
<TABLE>
<S> <C>
1998.............................................................. $329,943
1999.............................................................. 192,832
2000.............................................................. 102,124
2001.............................................................. 20,052
--------
$644,951
========
</TABLE>
NOTE H LEASE AGREEMENTS
The Companies lease buildings located in Kennett Square, Pennsylvania and
Myersville, Maryland, from their sole stockholder. The lease agreements renew
annually. Monthly rent as of January 1, 1998, is $51,317. Annual rent expense
was $427,380 (1996) and $529,185 (1997).
F-185
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
Tri-M Electrical Construction Corp. leases office and warehouse space
located in Allentown, Pennsylvania, under a five-year lease which expires
December 31, 1998. The lease requires monthly rental payments of $2,332 and is
not renewable. Rent expense was $27,979 in 1996 and 1997.
NOTE I EMPLOYEE BENEFIT PLAN
The Network has a qualified profit-sharing and savings plan which includes a
salary reduction provision under Section 401(k) of the Internal Revenue Code.
Participants of the plan are full-time employees who are at least 21 years of
age and have completed one year of service. The Plan covers eligible employees
of all Companies.
Participants may elect to make contributions to the Plan up to a maximum of
15% of payroll, with the Companies matching 50% of the participant's
contribution, limited to the first 6% of the participant's contribution. The
Companies may also make discretionary contributions.
Matching contributions were $173,936 and $205,390 in 1996 and 1997,
respectively. The Companies made discretionary contributions of $100,000 in
1996 and 1997.
NOTE J SELF-INSURED MEDICAL PLAN
Tri-M Corporation provides a self-insured medical plan covering employees of
all Companies. The plan requires restricted cash deposits of $50,000 as
security for claims submitted.
Accruals for medical claims were $507,564 in 1996 and $866,671 in 1997. At
December 31, 1997, a provision of $207,620 was provided as management's
estimate for submitted and unsubmitted claims. This estimate is subject to
future change.
NOTE K STOCKHOLDER'S EQUITY
Stockholder's equity at December 31, 1997, is comprised of the following:
<TABLE>
<CAPTION>
Additional Retained
Capital Paid-In Earnings
Stock Capital (Deficit)
------- ---------- ----------
<S> <C> <C> <C>
Tri-M Corporation, $1 par value, 10,000
shares authorized, 5,000 shares issued and
outstanding................................. $ 5,000 $ 379,822 $ (86,597)
Tri-M Electrical Construction Corp., $1 par
value, 10,000 shares authorized, 5,000
shares issued and outstanding............... 5,000 100,782 2,126,835
Tri-M Building Automation Systems Corp., $1
par value, 10,000 shares authorized, 5,000
shares issued and outstanding............... 5,000 267,000 914,261
Tri-M Information Systems Corp., $1 par
value, 10,000 shares authorized, 5,000
shares issued and outstanding............... 5,000 369,044 (160,857)
Tri-M Integrated System Solutions Corp., $1
par value, 10,000 shares authorized, 5,000
shares issued and outstanding............... 5,000 -- (2,759)
Warren Electrical Construction Corp., $1 par
value, 1,000 shares authorized, 100 shares
issued and outstanding...................... 100 650,415 (200,359)
Combining eliminations....................... (100) (24,900) 25,000
------- ---------- ----------
$25,000 $1,742,163 $2,615,524
======= ========== ==========
</TABLE>
F-186
<PAGE>
Tri-M NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
NOTE L CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
Interest paid was $230,858 in 1996 and $233,450 in 1997.
Supplemental schedule of noncash financing activity:
In 1996, Tri-M Electrical Construction Corp. incurred capital lease
obligations of $104,574 for the purchase of job equipment.
In 1996, Warren Electrical Construction Corp. incurred capital lease
obligations of $53,292 for the purchase of transportation and job equipment.
F-187
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Partners
Ivey Mechanical Company
Kosciusko, Mississippi
We have audited the accompanying combined balance sheet of Ivey Mechanical
Company (a partnership) as of June 30, 1998, and the related combined
statements of income and partnership equity, and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 our audit provides a reasonable basis for
our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Ivey Mechanical
Company (a partnership) as of June 30, 1998, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Davenport, Holiday and Spring
Davenport, Holiday and Spring
Ridgeland, Mississippi
July 24, 1998
(except for Note S, as to which the date is July 31, 1998)
F-188
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
COMBINED BALANCE SHEET
June 30, 1998
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash--Note O.................................................... $ 4,818,133
Contracts receivable, including retainage, Note C............... 21,043,142
Accounts receivable, trade...................................... 1,456,523
Accounts receivable, other...................................... 319,362
Inventories..................................................... 115,843
Costs and estimated earnings in excess of billings on
uncompleted contracts-- Note D ................................ 1,182,235
Prepaid expenses................................................ 150,690
-----------
TOTAL CURRENT ASSETS.......................................... 29,085,928
FIXED ASSETS, at cost--Note G
Land and buildings.............................................. 128,584
Office furniture and fixtures................................... 2,123,566
Machinery and equipment......................................... 2,903,812
-----------
5,155,962
Less accumulated depreciation................................... (3,344,209)
-----------
1,811,753
-----------
OTHER ASSETS
Goodwill........................................................ 162,368
Other assets.................................................... 433,333
-----------
595,701
-----------
$31,493,382
===========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt--Note G.................... $ 561,848
Accounts payable--Note E........................................ 8,750,082
Accrued expenses and withholdings............................... 4,497,682
Billings in excess of costs and estimated earnings on
uncompleted contracts--Note D.................................. 8,610,661
-----------
TOTAL CURRENT LIABILITIES..................................... 22,420,273
LONG-TERM DEBT, net of current portion--Note G.................... 2,130,695
MINORITY INTEREST IN JOINT VENTURE--Note K........................ 4,299
OWNERS' EQUITY
Partnership equity.............................................. 6,938,115
-----------
$31,493,382
===========
</TABLE>
See notes to financial statements.
F-189
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
COMBINED STATEMENT OF INCOME AND PARTNERSHIP EQUITY
Year Ended June 30, 1998
<TABLE>
<CAPTION>
1998
------------
<S> <C>
CONTRACT REVENUES EARNED........................................ $ 99,301,414
OTHER REVENUES.................................................. 6,550,382
------------
105,851,796
------------
COST OF CONTRACT REVENUES....................................... 86,275,033
COST OF OTHER REVENUES.......................................... 4,902,200
------------
91,177,233
------------
GROSS MARGIN.................................................. 14,674,563
APPLIED OVERHEAD................................................ 5,606,229
------------
GROSS PROFIT.................................................. 9,068,334
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES....................... 9,363,983
LESS APPLIED OVERHEAD........................................... (5,606,229)
------------
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES, net of applied
overhead....................................................... 3,757,754
------------
NET INCOME FROM OPERATIONS.................................... 5,310,580
OTHER INCOME (EXPENSE).......................................... (598,706)
------------
NET INCOME BEFORE MINORITY INTERESTS.......................... 4,711,874
EARNINGS (LOSS) FROM MINORITY INTEREST--Note K.................. (46)
------------
NET INCOME.................................................... 4,711,828
PARTNERSHIP EQUITY, BEGINNING OF YEAR........................... 5,728,277
DISBRIBUTIONS................................................... (3,501,990)
------------
PARTNERSHIP EQUITY, END OF YEAR............................... $ 6,938,115
============
</TABLE>
See notes to financial statements.
F-190
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
COMBINED STATEMENT OF CASH FLOWS
Year Ended June 30, 1998
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 4,711,828
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 591,241
Gain on sale of assets........................................... (4,805)
(Increase) decrease in:
Contracts receivable............................................. (9,742,425)
Affiliate receivable/payable..................................... 158,992
Accounts receivable, other....................................... (285,803)
Accounts receivable, trade....................................... (797,667)
Inventories...................................................... (34,794)
Prepaid expenses................................................. (21,090)
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... (433,782)
Other Assets..................................................... (240,392)
Increase (decrease) in:
Accounts payable................................................. 3,692,082
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... 5,002,833
Accrued expenses and payroll taxes............................... 1.278.991
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 3,875,209
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment........................ (709,691)
Proceeds from sale of property, plant and equipment.............. 21,283
Increase in minority interest.................................... 46
-----------
NET CASH USED BY INVESTING ACTIVITIES........................... (688,362)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on debt obligations...................................... (299,375)
Proceeds from issuance of long-term debt......................... 1,650,000
Partner distributions paid....................................... (3,501,990)
-----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................ (2,151,365)
NET INCREASE (DECREASE) IN CASH................................... 1,035,482
CASH--BEGINNING OF YEAR........................................... 3,782,651
-----------
CASH--END OF YEAR............................................... $ 4,818,133
===========
CASH PAID DURING THE YEAR FOR:
Interest......................................................... $ 243,129
NONCASH INVESTING AND FINANCING TRANSACTIONS:
Acquisition of certain net assets of Lexington Mechanical
Company, Inc. through long-term financing arrangements:
Fixed assets..................................................... $ 885,233
Goodwill......................................................... 168,368
Other assets..................................................... 288,317
-----------
$ 1,341,918
===========
</TABLE>
See notes to financial statements.
F-191
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Ivey Mechanical Company (the Company) is a partnership organized as a
Mississippi general partnership on October 1, 1990, upon execution of the
Agreement of Partnership of Ivey Mechanical Company (the Partnership
Agreement) by and between Ivey's, Inc., a Mississippi corporation and Ivey
Mechanical Corporation, a Mississippi corporation (collectively, the General
Partners). The combined financial statements include the accounts of the
Company, Barnes-Ivey Mechanical Company, LLC (formerly J. J. Barnes Mechanical
Company, LLC) (99% ownership), Lexington/Ivey Mechanical Company, LLC (99%
ownership) and Ivey Mechanical Services, LLC (100% ownership). All significant
intracompany accounts have been eliminated except for those transactions
involving the fabrication division of Ivey Mechanical Company disclosed in
Note N.
Business Activity
The Company enters into contracts for all types of mechanical construction
and operates out of divisional offices located in Mississippi, Georgia,
Tennessee, North Carolina, Kentucky and Texas. The Company's projects include
healthcare, correctional, manufacturing, and industrial facilities, among
others.
Revenue and Cost Recognition
Revenues from construction contracts are recognized on the percentage-of-
completion method in the ratio that costs incurred bears to estimated cost at
completion. Contract costs include all direct costs and those indirect costs
related to contract performance such as indirect labor, supplies, tools and
payroll taxes. A portion of general and administrative expense is allocated to
contracts in process and included in cost of sales at the time of revenue
recognition. 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 may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. Estimated earnings are included in revenues when their realization
is reasonably assured. 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 revenue
recognized.
Receivables
Receivables are stated at estimated net realizable values. Anticipated bad
debts are considered by management to be negligible and, accordingly, no
provision for bad debts has been included in the accompanying statements. The
Company extends credit to its customers in the normal course of business and
does not require collateral on its outstanding receivables.
Other Assets
Other long-term assets include certain employment agreements associated with
the acquisition of certain assets from Lexington Mechanical Company, Inc. The
Company is amortizing these assets over the terms of these agreements
(60 months) using the straight-line method.
Goodwill
Goodwill resulting from the purchase of Lexington Mechanical Company, Inc.
is amortized by the Company over fifteen years using the straight-line method.
F-192
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories of material not allocable to job costs are valued at the lower
of cost or net realizable value as determined on the first-in, first-out
method.
Property, Plant, and Equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets. Expenditures for repairs and maintenance
are charged to expense as incurred. Expenditures for major renewals and
betterments which significantly extend the useful lives of existing property,
plant and equipment are capitalized and depreciated. Upon retirement or
disposition of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in income.
Income Taxes
The accompanying combined financial statements do not contain a provision
for income taxes for Ivey Mechanical Company (a partnership) or Barnes-Ivey
Mechanical Company, LLC, Lexington/Ivey Mechanical Company, LLC or Ivey
Mechanical Services, LLC. Pursuant to the legal form of operation of these
entities under current Internal Revenue Service (IRS) regulations, the profits
of these entities are recognized by the individual partners or members in
their respective income tax returns.
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
disclosures 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.
NOTE B--TRANSACTIONS WITH RELATED PARTIES
The Company rents offices, warehouse buildings and land from J. Marlin Ivey,
a shareholder of a corporation with common ownership, on a monthly basis for
$16,750 per month.
A shareholder of a corporation with common ownership is on the board of
directors of a bank at which the Company has material cash deposits. However,
the Company does not have any loans outstanding with the aforementioned bank.
The Company has related party transactions with other entities in which it
has a financial interest. These relationships are as follows:
Ivey National Corporation
This corporation is the 100% owner (parent) of Ivey's, Inc. Ivey's, Inc. is
a general partner in Ivey Mechanical Company. The primary activity between
Ivey's, Inc., and Ivey National Corporation is the payment of dividends by
Ivey's, Inc. to its parent.
F-193
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE C--CONTRACTS RECEIVABLE
Contracts receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
1998
-----------
<S> <C>
Contracts completed,
including retainage.............................................. $ 4,011,227
Contracts in progress............................................ 12,540,246
Retainage on contracts in progress............................... 4,491,669
-----------
$21,043,142
===========
NOTE D--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<CAPTION>
June 30,
1998
-----------
<S> <C>
Costs incurred on uncompleted contracts.......................... $75,208,504
Estimated earnings............................................... 3,616,501
-----------
78,825,005
Less billings to date............................................ (86,253,431)
-----------
$(7,428,426)
===========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... $ 1,182,235
Billings in excess of costs and estimated earnings on uncompleted
contracts....................................................... (8,610,661)
-----------
$(7,428,426)
===========
</TABLE>
NOTE E--ACCOUNTS PAYABLE AND AMOUNTS DUE SUBCONTRACTORS
Accounts payable include amounts due to subcontractors totaling $843,969 at
June 30, 1998, which have been retained pending completion and customer
acceptance of jobs.
NOTE F--NOTE PAYABLE, LINE OF CREDIT
Ivey Mechanical Company has obtained from Trustmark National Bank an
unsecured working capital line of credit for $4,000,000, which expires October
31, 1998. There were no borrowings outstanding on this line of credit at June
30, 1998.
Ivey Mechanical Company has also obtained from Trustmark National Bank, an
acquisition line of credit for $3,000,000, which expires November 30, 1998.
Borrowings of $1,000,000 are to be repaid at 7.75% interest over 60 monthly
payments. This $1,000,000 term note is collateralized by machinery and
equipment. See Note G.
F-194
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE G--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
1998
----------
<S> <C>
7.75% note payable to bank in monthly installments of $20,144, due
December 2002, secured by machinery and equipment................ $ 916,064
8.25% note payable to bank in monthly installments of $13,258, due
September 2002, secured by furniture and equipment............... 568,753
8.0% note payable to individual in 10 semi-annual installments of
$134,191 principal, plus interest, due July 2002, secured by
membership interest in Lexington/Ivey Mechanical Co. LCC......... 1,207,726
----------
2,692,543
LESS CURRENT PORTION............................................. (561,848)
----------
LONG-TERM DEBT.................................................. $2,130,695
==========
</TABLE>
The following is a schedule of maturities of long-term debt as of June 30,
1998:
<TABLE>
<S> <C>
1999............................................. $ 561,848
2000............................................. 586,045
2001............................................. 612,238
2002............................................. 640,593
2003............................................. 291,819
----------
$2,692,543
==========
</TABLE>
Interest expense totaled $243,129 for the year ended June 30, 1998.
NOTE H--COMMITMENTS AND CONTINGENCIES
Litigation
The Company is engaged in various lawsuits arising in the ordinary course of
business. In the opinion of management, based upon advice of counsel, the
ultimate outcome of these lawsuits should not have a material impact on the
Company's combined financial statements.
Self-Insured Medical Benefit Plan
The Company maintains a self-insured program for that portion of health care
costs not covered by insurance. The Company is liable for claims up to $35,000
per employee annually or net claims paid in any year which exceeds the
aggregate attachment point. The aggregate attachment point is defined as the
total number of employees covered on the first day of each plan month during
the year multiplied by $165.08. The Company is liable for claims up to
$2,000,000 per employee in a lifetime. Self-insurance costs are based upon the
Company's claims experience.
F-195
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Self-Insured Workers' Compensation Plan
The Company is self-insured for workers' compensation benefits. This plan is
administered by the Argonaut for claims incurred after July 1, 1996. Claims
incurred prior to July 1, 1996 are administered by Zurich Insurance Company,
the former administrator. The amount charged to expense for workers'
compensation was based on actual and estimated claims incurred. As of June 30,
1998, the Company recorded a liability of $331,541 for actual reserved claims
and $559,116 for claims incurred but not reported (IBNR). These amounts are
included in other accrued expenses in the accompanying combined balance sheet.
NOTE I--BACKLOG
The following schedule shows a reconciliation of backlog representing
existing signed contracts:
<TABLE>
<CAPTION>
June 30,
1998
------------
<S> <C>
Balance, beginning of year........................................ $ 70,258,677
New contracts and adjustments..................................... 100,965,867
------------
171,224,544
Less contract revenue earned...................................... (99,301,414)
------------
Balance, end of year.............................................. $ 71,923,130
============
</TABLE>
NOTE J--PROFIT DISTRIBUTION
The General partners of the Company, Ivey Mechanical Corporation and Ivey's,
Inc., are participants in an agreement that allows for the profits of the
Partnership to be divided as follows:
1. From inception to June 30, 1991, Ivey Mechanical Corporation received
60% and Ivey's, Inc., received 40% of divisible profits.
2. After June 30, 1991, Ivey Mechanical Corporation receives 75% and
Ivey's, Inc., receives 25% of divisible profits.
3. If any party contributes additional capital to the joint venture it
will receive a 12% annual return on its investments.
4. Ivey's, Inc., may receive its share of the profits annually in cash.
Under the agreement, it is to receive a minimum of $150,000, or its share,
whichever is less.
NOTE K--ADVANCES TO AND EQUITY IN JOINT VENTURE
In July 1992, Ivey Mechanical Company and Hess Mechanical Corporation (an
unrelated company) completed the formation of a partnership, Ivey-Hess Joint
Venture (Ivey-Hess) for the purpose of securing a contract and performing
mechanical construction on the Francis Scott Key Medical Center--Phase II
Redevelopment--Acute Patient Tower in Baltimore, Maryland. The partnership is
owned 55% by Ivey Mechanical Company and 45% by Hess Mechanical Corporation.
F-196
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
In June 1995, Ivey Mechanical Company and R. T. Contractors, Inc. (an
unrelated company) completed the formation of a partnership, Ivey/R. T., A
Joint Venture (Ivey/R.T.) for the purpose of securing a contract with Fluor
Daniel, Inc. and performing mechanical construction on the Mercedes Automobile
Manufacturing Facility in Tuscaloosa, Alabama. The partnership is owned 75% by
Ivey Mechanical Company and 25% by R. T. Contractors, Inc.
NOTE L--EMPLOYEE BENEFIT PLAN
Ivey's, Inc. established the Ivey's, Inc. Salary Reduction Plan (the Plan)
on May 1, 1975. The Plan as amended allows participants to make contributions
to a related trust. Employees of Ivey Mechanical Company, Barnes-Ivey
Mechanical Company, LLC, Lexington/Ivey Mechanical Company, LLC and Ivey
Mechanical Corporation who meet eligibility requirements defined in the plan
documents, as amended, are eligible to participate in the Plan. For every
dollar an employee contributes (up to 4% of one's income on a pretax basis),
the Company will make a 50% matching contribution. In 1998, the charge to
operations for matching contributions was $178,027.
Although it has not expressed any intention to do so, the Company has the
right to terminate the Plan at any time. In the event the Plan terminates,
100% of the participant's account balance becomes vested, but no more Company
contributions will be made. However, in the event a participant terminates
service with the Company, or the participant is terminated, he will receive
only his vested benefits as determined by the vesting provisions of the Plan.
NOTE M--OPERATING LEASE COMMITMENTS
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred.
The following is a schedule by year of future minimum lease payments under
operating leases as of June 30, 1998, that have initial or remaining lease
terms in excess of one year.
<TABLE>
<S> <C>
1999.............................................................. $421,187
2000.............................................................. 291,695
2001.............................................................. 135,576
2002 and Thereafter............................................... 65,175
--------
$913,633
========
</TABLE>
Total rental expense for all operating leases was $437,083, for the year
ended June 30, 1998.
NOTE N--INTRA-COMPANY TRANSACTIONS
The Company had intra-company transactions in the amount of $3,941,375 from
the fabrication to the construction division of Ivey Mechanical Company in the
year ended June 30, 1998.
Management has included these sales in Other Revenues and Cost of Contract
Revenues in the accompanying combined Statement of Income for consistency
purposes.
F-197
<PAGE>
IVEY MECHANICAL COMPANY (a partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE O--CONCENTRATION OF CREDIT RISK
During the year ended June 30, 1998, the Company had funds on deposit with a
federally insured bank in excess of federal deposit insurance coverage limits.
NOTE P--BUSINESS ACQUISITIONS
On August 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Lexington Mechanical Company, Inc. The acquisition was recorded
as a purchase and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the
purchase date. The Company paid cash of $1,347,125 and issued a note payable
to the former shareholder for the remaining balance of $1,341,918 for the net
assets acquired.
The original purchase price allocation follows:
<TABLE>
<S> <C>
Assets acquired:
Accounts receivable........................................... $ 3,151,236
Contract underbillings........................................ 113,131
Other accounts receivable..................................... 4,650
Inventories................................................... 34,383
Other fixed assets............................................ 885,233
Goodwill...................................................... 120,000
-----------
Total Assets Acquired....................................... $ 4,308,633
-----------
Liabilities assumed:
Accounts Payable.............................................. $(1,337,629)
Contract overbillings......................................... (217,641)
Other accrued liabilities..................................... (64,320)
-----------
Total Liabilities Assumed................................... $(1,619,590)
-----------
NET ASSETS ACQUIRED......................................... $ 2,689,043
===========
</TABLE>
The following is a summary of the unaudited results of operations of
Lexington Mechanical Company for the period beginning November 1, 1996,
through August 31, 1997 (date of acquisition):
<TABLE>
<S> <C>
Revenues......................................................... $14,666,849
===========
Net Income....................................................... $ 799,887
===========
</TABLE>
In September 1997, the Company purchased certain assets from T.W.W.
Enterprises, Inc. d/b/a A/C Service Specialties (a residential service
company) and began operations as Ivey Mechanical Services, LLC. The purchase
price is immaterial to the accompanying combined financial statements.
Results of the operations of the acquired entities have been included in the
accompanying combined statement of income from the dates of acquisition
forward.
NOTE Q--SUBSEQUENT EVENT
On July 31, 1998, the General Partners executed a letter of intent to sell
the stock of these companies to Consolidation Capital Corporation for an
amount in excess of book value.
F-198
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Robinson Mechanical Company
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Robinson Mechanical Company (the
"Company") at December 31, 1997 and the results of its operations and its cash
flows for 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 audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Pricewaterhousecoopers llp
Pricewaterhousecoopers llp
Minneapolis, Minnesota
November 13, 1998
F-199
<PAGE>
ROBINSON MECHANICAL COMPANY
BALANCE SHEET (In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 3,725 $ 1,814
Accounts receivable, net ........................... 11,325 10,261
Prepaid expenses.................................... 27 22
Costs and estimated earnings in excess of billings.. 517 204
------- -------
Total current assets.............................. 15,594 12,301
------- -------
Property and equipment.............................. 680 626
Investment in limited liability company............. 125 188
------- -------
Total assets...................................... $16,399 $13,115
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................... $ 5,989 $ 4,154
Accrued wages and bonuses........................... 1,893 829
Liability to former stockholder..................... 660 660
Accrued warranty reserve............................ 452 966
Other accrued liabilities........................... 699 1,854
Billings in excess of costs and estimated earnings.. 3,097 2,213
------- -------
Total current liabilities......................... 12,790 10,676
------- -------
COMMITMENTS (note 12)
STOCKHOLDERS' EQUITY
Common stock:
Class A Voting, $.10 par value; 300,000 shares
authorized, 75,000 shares issued.................... 8 8
Class B Non-Voting, $.10 par value; 190,000 shares
authorized, 75,000 shares issued.................... 8 8
Additional paid-in capital.......................... 85 85
Retained earnings................................... 3,508 2,338
------- -------
Total stockholders' equity........................ 3,609 2,439
------- -------
Total liabilities and stockholders' equity........ $16,399 $13,115
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-200
<PAGE>
ROBINSON MECHANICAL COMPANY
STATEMENT OF OPERATIONS (In thousands)
<TABLE>
<CAPTION>
For the For the
Year Ended Six Months
December 31, Ended June 30,
1997 1997 1998
------------ ------- -------
(unaudited)
<S> <C> <C> <C>
Revenues from construction and service
contracts...................................... $51,471 $26,754 $25,277
Costs from construction and service contracts... 45,354 22,276 20,038
------- ------- -------
Gross profit.................................... 6,117 4,478 5,239
General and administrative expenses............. 3,687 3,252 4,666
------- ------- -------
Income from operations.......................... 2,430 1,226 573
------- ------- -------
Other income (expense)
Interest income............................... 115 35 62
Miscellaneous income (expense)................ 30 -- (544)
------- ------- -------
Other income (expense)--net.................. 145 35 (482)
------- ------- -------
Net income...................................... $ 2,575 $ 1,261 $ 91
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-201
<PAGE>
ROBINSON MECHANICAL COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Total
------------- ------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ---------- -------- ------------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 75,000 $ 8 75,000 $ 8 $85 $2,594 $2,695
Stockholder
distributions......... -- -- -- -- -- (1,661) (1,661)
Net income............. -- -- -- -- -- 2,575 2,575
------ --- ------ --- --- ------ ------
Balance, December 31,
1997................... 75,000 8 75,000 8 85 3,508 3,609
Stockholder
distributions
(unaudited)........... -- -- -- -- -- (1,261) (1,261)
Net income
(unaudited)........... -- -- -- -- -- 91 91
------ --- ------ --- --- ------ ------
Balance, June 30, 1998
(unaudited)............ 75,000 $ 8 75,000 $ 8 $85 $2,338 $2,439
====== === ====== === === ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-202
<PAGE>
ROBINSON MECHANICAL COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Year Ended For the Six Months
December 31, Ended June 30,
1997 1997 1998
------------ --------- ---------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $2,575 $ 1,261 $ 91
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation............................... 221 89 147
Changes in operating assets and
liabilities:
Accounts receivable....................... (310) 803 1,064
Prepaid expenses and other current
assets................................... 4 5 5
Costs and estimated earnings in excess of
billings on uncompleted contracts........ (54) 353 313
Accounts payable.......................... 1,174 (1,849) (1,835)
Accrued wages and bonuses................. 459 299 (1,064)
Liability to former stockholder........... (386) -- --
Other accrued liabilities................. 468 114 1,669
Billings in excess of costs and estimated
earnings on uncompleted contracts........ (430) (428) (884)
------ --------- --------
Net cash provided by (used in) operating
activities............................. 3,721 647 (494)
------ --------- --------
Cash flows from investing activities:
Investment in limited liability company..... (125) -- (63)
Purchase of property and equipment.......... (242) (106) (93)
------ --------- --------
Net cash used in investing activities... (367) (106) (156)
------ --------- --------
Cash flows from financing activities:
Stockholder distributions................... (1,661) (1,261)
(1,331)
------ --------- --------
Net cash used in financing activities... (1,661) (1,331) (1,261)
------ --------- --------
Net increase (decrease) in cash and cash
equivalents................................. 1,693 (790) (1,911)
Cash and cash equivalents at beginning of
period...................................... 2,032 2,032 3,725
------ --------- --------
Cash and cash equivalents at end of period... $3,725 $ 1,242 $ 1,814
====== ========= ========
Supplemental disclosures of non-cash
transactions:
Interest paid............................... $ 1 $ -- $ --
====== ========= ========
Income taxes paid........................... $ 11 $ -- $ --
====== ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-203
<PAGE>
ROBINSON MECHANICAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1--BUSINESS AND ORGANIZATION
Robinson Mechanical Company (the "Company") is a construction and service
contractor for heating, air conditioning, ventilation and process piping
systems, primarily in the Denver Metro Area. The Company is headquartered in
Boulder, Colorado, and operates a branch office in Vail, Colorado.
On August 31, 1998, all of the issued and outstanding common stock of the
Company was acquired by Building One Services Corporation ("BOSC") for
1,539,456 shares of BOSC common stock (the "Acquisition").
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities and Operating Cycle
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.
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 Colorado region.
Consequently, the Company's ability to collect the amounts due from customers
is affected by the economic fluctuations in these geographic areas.
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 June 30, 1998, and the results of
its operations and its cash flows for the six months ended June 30, 1997 and
1998, and the statement of stockholders' equity as of and for the six months
ended June 30, 1998, as presented in the accompanying unaudited interim
financial statement information.
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
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.
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
F-204
<PAGE>
ROBINSON MECHANICAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Disclosures about Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, trade receivables
and trade payables. The carrying amounts approximate fair value because of the
short maturity of these instruments.
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 and accelerated methods 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.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Any assets identified for impairment to be
disposed of are reported at the lower of the carrying amount or the fair value
less costs to sell. The Company has not identified any impairments as of
December 31, 1997 and June 30, 1998 (unaudited).
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Income Taxes
The Company has elected to be taxed under the Subchapter "S" provisions of
the Internal Revenue Code, effective May 1, 1994. Under those provisions, the
Company does not pay Federal and State income taxes. Instead, the shareholders
are liable for individual income taxes on their respective share of the
Company's taxable income. As a result, no deferred income tax liability is
recorded on timing differences, since the tax is a liability of the
shareholders.
Advertising Costs
The Company expenses advertising costs in the period they are incurred as
the benefits derived from the advertising expense are realized in the current
period. Advertising expense charged to operations for the year ended December
31, 1997 and the six months ended June 30, 1998 (unaudited) was $62 and $29,
respectively.
F-205
<PAGE>
ROBINSON MECHANICAL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
New Accounting Standards
NOTE 3--ACCOUNTS RECEIVABLE
The accounts receivable consist of the following contract receivables:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Current................................................ $ 9,724 $ 8,432
Retainage.............................................. 1,608 1,836
Less allowance for doubtful accounts................... (7) (7)
------- -------
$11,325 $10,261
======= =======
</TABLE>
Retainages are due upon completion of the contracts and all are expected to
be collected in the next twelve months.
NOTE 4--COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Costs incurred to date................................ $36,468 $ 35,493
Estimated earnings.................................... 3,452 2,450
------- --------
39,920 37,943
Less--Billings to date................................ (42,500) (39,952)
------- --------
$(2,580) $ (2,009)
======= ========
</TABLE>
The above amounts are included in the accompanying Balance Sheet under the
following captions:
<TABLE>
<CAPTION>
December 31 June 30,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
Costs and estimated earnings in excess of billings..... $ 517 $ 204
Billings in excess of costs and estimated earnings..... (3,097) (2,213)
------- -------
$(2,580) $(2,009)
======= =======
</TABLE>
NOTE 5--Note Payable
On May 14, 1997, the Company renegotiated their line-of-credit agreement
with Norwest Bank of Boulder, in the amount of $1,000. The agreement, which
provides for interest at 1.0% above Norwest's prime rate, matures on April 30,
1998. The line is secured by accounts receivable, inventory, furniture,
fixtures and equipment. There were no outstanding balances at December 31,
1997 and June 30, 1998 (unaudited).
F-206
<PAGE>
ROBINSON MECHANICAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
NOTE 6--Accrued Wages and Bonuses
Accrued wages and bonuses at December 31, 1997 and June 30, 1998 (unaudited)
consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Salaries and wages payable............................. $ 265 $439
Bonuses payable........................................ 1,628 390
------ ----
Total................................................ $1,893 $829
====== ====
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT
A summary of the investment in property and equipment is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Office equipment, furniture and fixtures.............. $ 906 $ 974
Machinery and equipment............................... 522 522
Transportation equipment.............................. 108 108
Leasehold improvements................................ 244 244
------- ------
1,780 1,848
Accumulated depreciation.............................. (1,100) (1,222)
------- ------
$ 680 $ 626
======= ======
</TABLE>
Depreciation expense, charged to operations, for the year ended December 31,
1997 and the six months ended June 30, 1998 (unaudited) was $221 and $147,
respectively.
NOTE 8--CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents and trade receivables.
The Company maintains its cash accounts primarily with banks located in
Colorado. The total cash balances are insured by the F.D.I.C up to $100,000
per bank. The Company had cash balances on deposit with one Colorado bank in
four accounts at December 31, 1997 and at June 30, 1998 (unaudited).
The Company's trade receivables result primarily from its construction and
service contracts and reflect a broad customer base, primarily located in the
Denver. The Company routinely assesses the financial strength of its
customers. As a consequence, concentrations of credit risk are limited.
NOTE 9--PROFIT SHARING PLAN
The Company has a 401(K) profit sharing plan that covers all employees who
have completed one year of service. The plan has two contribution methods.
Elective contributions to the profit sharing plan are at the discretion of the
Board of Directors. As of December 31, 1997 and June 30, 1998 (unaudited), no
contributions had been authorized. Contributions to the 401(K) plan can be
made by eligible employees. The Company will match 50% of the employees'
contributions on the first 6% of their total annual compensation. The expense
relating to the Company's match for the year ending December 31, 1997 and June
30, 1998 (unaudited) was $200 and $121, respectively.
F-207
<PAGE>
ROBINSON MECHANICAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
NOTE 10--LEASES
The Company leases its office space and numerous automobiles under operating
leases. Minimum future lease payments for the years ending December 31 are as
follows:
<TABLE>
<S> <C>
1998..................................................................... $ 688
1999..................................................................... 625
2000..................................................................... 497
2001..................................................................... 333
2002 and thereafter...................................................... 978
------
$3,121
======
</TABLE>
Lease expense charged to operations for the year ended December 31, 1997 and
the six months ended June 30, 1998 (unaudited) was $355 and $423,
respectively.
NOTE 11--STOCKHOLDERS' EQUITY
The Company has issued certain shares of the Class B Common Stock that, upon
occurrence of certain events, may be repurchased by the Company at book value.
Additionally, upon termination of employment by certain stockholders, the
Company is required to repurchase these shares at book value.
NOTE 12--COMMITMENTS AND RELATED PARTY TRANSACTIONS
In accordance with the provisions of a buyout agreement entered into with a
former stockholder in 1992, the Company is required to make payments to the
former stockholder over a predetermined period of time. At December 31, 1997
and June 30, 1998 (unaudited), the balances related to this provision were
$660 and $660, respectively. During the year ended December 31, 1997 and the
six months ended June 30, 1998 (unaudited) the Company made payments of $265
and $0, respectively, under this agreement. In conjunction with the
Acquisition, the liability associated with this agreement has been fulfilled.
The Company has entered into a contract with Acoustiflo, Inc., a company
affiliated with the Company through common ownership, to supply materials on
the Texas Instruments project. Included in "Costs incurred to date" (see Note
4) at December 31, 1997 and June 30, 1998 (unaudited) are $1,940 and $1,978,
respectively, relating to this contract.
NOTE 13--INVESTMENT IN LIMITED LIABILITY COMPANY
During the year ended December 31, 1997, the Company purchased an interest
in a Limited Liability Company known as No. 25 Downing, LLC, for $125. The LLC
intends to develop a residential real estate project in Denver, Colorado. The
Company expects to receive $88 of its initial capital contribution back upon
acquisition of the construction loan. The Company's liability for this
investment is limited to $125.
F-208
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of
directors to the corporation or its stockholders for monetary damages for
breaches of fiduciary duty, except for liability (a) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.
Article 8 of the Company's Restated Certificate of Incorporation provides that
the personal liability of directors of the Company is eliminated to the extent
permitted by Section 102(b)(7) of the DGCL.
Section 145 of the DGCL (i) requires a corporation to indemnify for
expenses, including attorney's fees, incurred by a director or officer who has
been successful in defending any claim or proceeding in which the director or
officer is involved because of his or her position with the corporation, (ii)
permits indemnification (a) for judgments, fines, expenses and amounts paid in
settlement in the case of a claim by a party other than the corporation or in
the right of the corporation, even where a director or officer has not been
successful, in cases where the director or officer acted in good faith and in
a manner that he or she reasonably believed was in or not opposed to the best
interests of the corporation provided, in the case of a criminal proceeding,
that the director or officer had no reason to believe his or her conduct was
unlawful or (b) for expenses in the case of a claim or proceeding by or in the
right of the corporation, including a derivative suit (but not judgments,
fines or amounts in settlement), if the director or officer acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation and has not been adjudged liable to the
corporation unless a court determines that, despite such adjudication but in
view of all of the circumstances, he or she is entitled to indemnification,
and (iii) permits the advancement of expenses to directors and officers who
are defending an action, lawsuit or proceeding upon receipt of an undertaking
for the repayment of such advance if it is ultimately determined that the
director or officer has not met the applicable standard of conduct and is,
therefore, not entitled to be indemnified. Section 145 also provides that the
permissive indemnification described above is to be made upon a determination
that the director or officer has met the required standard of conduct by (a) a
majority of disinterested directors, (b) a committee of disinterested
directors designated by a majority of such directors, (c) independent legal
counsel or (d) the stockholders.
The Company has entered into Indemnity Agreements because the Board believes
that the Company's directors' and officers' insurance does not fully protect
the directors and executive officers and that the absence of Indemnity
Agreements may threaten the quality and stability of the governance of the
Company by reducing the Company's ability to attract and retain qualified
persons to serve as directors and executive officers of the Company, and by
deterring such persons in the making of entrepreneurial decisions for fear of
later legal challenge. In addition, the Board of Directors believes that the
Indemnity Agreements complement the indemnification rights and liability
protections currently provided directors and executive officers of the Company
under the Amended and Restated Bylaws. These rights and protections were
designed to enhance the Company's ability to attract and retain highly
qualified individuals to serve as directors and executive officers in view of
the high incidence of litigation, often involving large amounts, against
publicly-held companies and the need to provide such persons with reliable
knowledge of the legal risks to which they are exposed. The Indemnity
Agreements complement these rights and protections by providing directors and
executive officers with contractual rights to indemnification, regardless of
any amendment to or repeal of the indemnification provisions in the Bylaws.
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify to the fullest extent authorized or permitted by law directors and
officers of the Company who have been made or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding by reason of
the fact that he or she is or was a director or officer of the Company.
II-1
<PAGE>
The Indemnity Agreements are predicated upon Section 145(f) which recognizes
the validity of additional indemnity rights granted by contractual agreement.
The Indemnity Agreements alter or clarify statutory indemnity provisions in a
manner consistent with the Company's Amended and Restated Bylaws in the
following respects; (i) indemnification is mandatory, rather than optional, to
the full extent permitted by law, including partial indemnification under
appropriate circumstances, except that the Company is not obligated to
indemnify an indemnitee with respect to a proceeding initiated by the
indemnitee (unless the Board should conclude otherwise), payments made by an
indemnitee in a settlement effected without the Company's written consent,
payments that are found to violate the law, conduct found to constitute bad
faith or active and deliberate dishonesty or short-swing profit liability
under Section 16(b) of the Exchange Act or to the extent that indemnification
has been determined to be unlawful in an arbitration proceeding conducted
pursuant to the provisions of the Indemnity Agreement; (ii) prompt payment of
litigation expenses in advance is mandatory, rather than optional, provided
the indemnitee undertakes to repay such amounts if it is ultimately determined
that the indemnitee is not entitled to be indemnified and provided the
indemnitee did not initiate the proceeding; (iii) any dispute arising under
the Indemnity Agreement is to be resolved through an arbitration proceeding,
which will be paid for by the Company unless the arbitrator finds that the
indemnitee's claims or defenses were frivolous or in bad faith, unless such
arbitration is inconsistent with an undertaking given by the Company, such as
to the Securities and Exchange Commission, that the Company will submit to a
court the question of indemnification for liabilities under the Securities Act
of 1933, as amended, and be governed by the final adjudication of such issue;
and (iv) mandatory indemnification shall be paid within 45 days of the
Company's receipt of a request for indemnification unless a determination is
made that the indemnitee has not met the relevant standards for
indemnification by the Board of Directors, or if a quorum of the directors is
not obtainable, at the election of the Company, either by independent legal
counsel or a panel of arbitrators.
The Company maintains a directors' and officers' liability insurance policy
covering certain liabilities which may be incurred by directors and officers
in connection with the performance of their duties. The entire premium for
such insurance is paid by the Company.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are or will be filed as part of this registration
statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.01 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC2 Acquisition Co., SKC Electric, Inc. and the
stockholders named therein. (Exhibit 2.01 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.02 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC3 Acquisition Co., Riviera Electric, Inc. and
the stockholders named therein. (Exhibit 2.02 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.03 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC4 Acquisition Co., Garfield Electric Company and
the stockholders named therein. (Exhibit 2.03 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.04 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC5 Acquisition Co., Indecon, Inc. and the
stockholders named therein. (Exhibit 2.04 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.05 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC6 Acquisition Co., Tri-City Electrical
Contractors, Inc. and the stockholders named therein. (Exhibit 2.05 of
the Company's Pre-Effective Amendment No. 1 to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (File No.
333-42317) is hereby incorporated by reference).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.06 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC Acquisition Co., 6, Town & Country Electric,
Inc. and the stockholders named therein. (Exhibit 2.06 of the
Company's Pre-Effective Amendment No. 1 to Post-Effective Amendment
No. 2 to the Registration Statement on Form S-1 (File No. 333-42317)
is hereby incorporated by reference).
2.07 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC8 Acquisition Co., Wilson Electric, Inc. and the
stockholders named therein. (Exhibit 2.07 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.08 Agreement and Plan of Reorganization, dated January 29, 1998, by and
among the Company, CCC Acquisition Corp 1., Service Management USA and
the stockholder named therein (Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 4, 1997 is hereby incorporated by
reference).
2.09 Agreement and Plan of Reorganization, dated March 15, 1998, by and
among the Company, CCC Acquiring Co. No. 10, Walker Engineering, Inc.
and the shareholders named therein (Exhibit 2.09 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference).
2.10 Agreement and Plan of Reorganization, dated May 8, 1998, by and among
the Company, CCC 12 Acquisition Corporation, Taylor Electric, Inc. and
the shareholders named therein. (Exhibit 2.01 of the Company's Current
Report on Form 8-K dated May 22, 1998 is hereby incorporated by
reference).
2.11 Agreement and Plan of Reorganization, dated June 1, 1998, by and among
the Company, RECI Acquisition Corp., Regency Electric Company, Inc.
and the stockholders named therein. (Exhibit 2.11 of the Company's
Post-Effective Amendment No. 4 to the Registration Statement on Form
S-1 (File No. 333-42317) is hereby incorporated by reference).
3.01 Restated Certificate of Incorporation of Building One Services
Corporation (Exhibit 99.1 of the Company's Current Report on Form 8-K
(File No. 000-23421) is hereby incorporated by reference).
3.02 Amended and Restated Bylaws of Building One Services Corporation
(Exhibit 3.02 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
5.01* Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
securities being registered.
10.01 The Company's 1997 Long-Term Incentive Plan (Exhibit 10.01 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.02 The Company's 1997 Non-Employee Directors' Stock Plan (Exhibit 10.02
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 by reference).
10.03 The Company's 1997 Employee Stock Purchase Plan (Exhibit 10.03 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.04 The Company's 1997 Section 162(m) Bonus Plan (Exhibit 10.04 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.05 The Company's Executive Deferred Compensation Plan (Exhibit 10.05 of
the Company's Post-Effective Amendment No. 1 to Registration Statement
on Form S-1 (File No. 333-42317) is hereby incorporated by reference).
10.06 Employment Agreement between the Company and Jonathan J. Ledecky
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.07 Employment Agreement between the Company and Timothy C. Clayton
(Exhibit 10.06 of the Company's Registration Statement on Form S-1
(File No.333-36193) is hereby incorporated by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.08 Employment Agreement between the Company and F. Traynor Beck (Exhibit
10.07 of the Company's Registration Statement on Form S-1 (File No.
333-36193) is hereby incorporated by reference).
10.09 Employment Agreement between the Company and David Ledecky (Exhibit
10.08 of the Company's Registration Statement on Form S-1 (File No.
333-36193) is hereby incorporated by reference).
10.10 Form of Indemnity Agreement for Executive Officers and Directors of
the Company (Exhibit 10.09 of the Company's Registration Statement on
Form S-1 (File No. 333-36193) is hereby incorporated by reference).
10.11 Employment Agreement between the Company and William P. Love, Jr.
(Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is hereby incorporated by
reference).
10.12 Form of Warrant Agreement, dated November 25, 1997, between the
Company and Friedman, Billings, Ramsey & Co., Inc. (Exhibit 4.10 of
the Company's Registration Statement on Form S-1 (File No. 333-36193)
is hereby incorporated by reference).
10.13 Form of Warrant Agreement, dated November 25, 1997, between the
Company and
Jonathan J. Ledecky (Exhibit 10.10 of the Company's Registration
Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.14 Building One Services Corporation 1998 Long-Term Incentive Plan
(Exhibit A of the Company's Proxy Statement on Schedule 14A (File No.
000-23421) is hereby incorporated by reference).
10.15 Employment Agreement between the Company and Joseph M. Ivey.
21.01 List of Subsidiaries of Building One Services Corporation.
23.01 Consents of PricewaterhouseCoopers LLP.
23.02 Consent of KPMG LLP.
23.03 Consent of Barry & Moore P.C.
23.04 Consent of Baird, Kurtz & Dobson.
23.05 Consents of Grant Thorton LLP.
23.06 Consent of Arthur Andersen LLP.
23.07 Consent of Leverich, Rasmuson, Banyard
23.08 Consent of Hutton, Patterson & Company.
23.09 Consent of Wallingford, McDonald, Fox & Co., P.C.
23.10 Consent of Bradley, Allen & Associates, P.C.
23.11 Consent of Harbeson, Beckerleg & Fletcher.
23.13 Consent of Davenport, Holliday & Spring
23.14 Consent of Maillie, Falconiero & Company, LLP
23.16 Consent of Frazier & Deeter, LLC.
23.17 Consent of Shinners, Hucovski & Company, S.C.
24.01* Power of Attorney (on the signature page of the initial filing of this
registration statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or accompanying notes.
II-4
<PAGE>
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which any offers or sales are being
made, a post-effective amendment to the registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any other material change to such information in the registration
statement.
(2) That for the purpose of determining any liability under the Act each
such post-effective amendment may be deemed to be a new registration
statement relating to the securities being offered therein and the offering
of such securities at the time may be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities which are being registered which remain unsold at the
termination of the offering.
(4) To supply by means of a post-effective amendment, Rule 424(c)
supplement or information incorporated by reference, all information
concerning a material transaction, and the company being acquired involved
there, that was not the subject of and included in the registration
statement when it became effective.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(6) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (5) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement on to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Washington,
District of Columbia, on February 24, 1999.
Building One Services Corporation
/s/ Jonathan J. Ledecky
By: _________________________________
Jonathan J. Ledecky Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and Chief
/s/ Jonathan J. Ledecky Executive Officer
- ------------------------------------- (Principal Executive February 24, 1999
Jonathan J. Ledecky Officer)
* Executive Vice
- ------------------------------------- President, Chief February 24, 1999
Timothy C. Clayton Financial Officer and
Treasurer (Principal
Financial and
Accounting Officer
* Executive Vice
- ------------------------------------- President, Chief February 24, 1999
David Ledecky Administrative
Officer and Director
Director
* February 24, 1999
- -------------------------------------
Mary K. Bush
Director
- ------------------------------------- February 24, 1999
Vincent E. Eades
* Director
- ------------------------------------- February 24, 1999
W. Russell Ramsey
* Director
- ------------------------------------- February 24, 1999
M. Jude Reyes
* Director
- ------------------------------------- February 24, 1999
William P. Love, Jr.
* Director
- ------------------------------------- February 24, 1999
Thomas D. Heule
* Director--Building One February 24, 1999
- ------------------------------------- Mechanical Group
Joseph M. Ivey
</TABLE>
* /s/ Jonathan J. Ledecky
- -------------------------------------
Jonathan J. Ledecky,
Attorney-in-Fact, Pursuant to Powers
of Attorney previously filed as part
of this Registration Statement
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.01 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC2 Acquisition Co., SKC Electric, Inc. and the
stockholders named therein. (Exhibit 2.01 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.02 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC3 Acquisition Co., Riviera Electric, Inc. and
the stockholders named therein. (Exhibit 2.02 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.03 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC4 Acquisition Co., Garfield Electric Company and
the stockholders named therein. (Exhibit 2.03 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.04 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC5 Acquisition Co., Indecon, Inc. and the
stockholders named therein. (Exhibit 2.04 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.05 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC6 Acquisition Co., Tri-City Electrical
Contractors, Inc. and the stockholders named therein. (Exhibit 2.05 of
the Company's Pre-Effective Amendment No. 1 to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (File No.
333-42317) is hereby incorporated by reference).
2.06 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC Acquisition Co., 6, Town & Country Electric,
Inc. and the stockholders named therein. (Exhibit 2.06 of the
Company's Pre-Effective Amendment No. 1 to Post-Effective Amendment
No. 2 to the Registration Statement on Form S-1 (File No. 333-42317)
is hereby incorporated by reference).
2.07 Agreement and Plan of Reorganization, dated February 27, 1998, by and
among the Company, CCC8 Acquisition Co., Wilson Electric, Inc. and the
stockholders named therein. (Exhibit 2.07 of the Company's Pre-
Effective Amendment No. 1 to Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-42317) is hereby
incorporated by reference).
2.08 Agreement and Plan of Reorganization, dated January 29, 1998, by and
among the Company, CCC Acquisition Corp 1., Service Management USA and
the stockholder named therein (Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 4, 1997 is hereby incorporated by
reference).
2.09 Agreement and Plan of Reorganization, dated March 15, 1998, by and
among the Company, CCC Acquiring Co. No. 10, Walker Engineering, Inc.
and the shareholders named therein (Exhibit 2.09 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference).
2.10 Agreement and Plan of Reorganization, dated May 8, 1998, by and among
the Company, CCC 12 Acquisition Corporation, Taylor Electric, Inc. and
the shareholders named therein. (Exhibit 2.01 of the Company's Current
Report on Form 8-K dated May 22, 1998 is hereby incorporated by
reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.11 Agreement and Plan of Reorganization, dated June 1, 1998, by and among
the Company, RECI Acquisition Corp., Regency Electric Company, Inc.
and the stockholders named therein. (Exhibit 2.11 of the Company's
Post-Effective Amendment No. 4 to the Registration Statement on Form
S-1 (File No. 333-42317) is hereby incorporated by reference).
3.01 Restated Certificate of Incorporation of Building One Services
Corporation (Exhibit 3.01 of the Company's Current Report on Form 8-K
(File No. 000-23421) is hereby incorporated by reference).
3.02 Amended and Restated Bylaws of Building One Services Corporation
(Exhibit 3.02 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
5.01 Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
securities being registered.
10.01 The Company's 1997 Long-Term Incentive Plan. (Exhibit 10.01 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.02 The Company's 1997 Non-Employee Directors' Stock Plan (Exhibit 10.02
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 by reference).
10.03 The Company's 1997 Employee Stock Purchase Plan (Exhibit 10.03 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.04 The Company's 1997 Section 162(m) Bonus Plan (Exhibit 10.04 of the
Company's Registration Statement on Form S-1 (File No. 333-36193) is
hereby incorporated by reference).
10.05 The Company's Executive Deferred Compensation Plan (Exhibit 10.05 of
the Company's Post-Effective Amendment No. 1 to Registration Statement
on Form S-1 (File No. 333-42317) is hereby incorporated by reference).
10.06 Employment Agreement between the Company and Jonathan J. Ledecky
(Exhibit 10.05 of the Company's Registration Statement on Form S-1
(File No. 333-36193) is hereby incorporated by reference).
10.07 Employment Agreement between the Company and Timothy C. Clayton
(Exhibit 10.06 of the Company's Registration Statement on Form S-1
(File No.333-36193) is hereby incorporated by reference).
10.08 Employment Agreement between the Company and F. Traynor Beck (Exhibit
10.07 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.09 Employment Agreement between the Company and David Ledecky (Exhibit
10.08 of the Company's Registration Statement on Form S-1 (File
No.333-36193) is hereby incorporated by reference).
10.10 Form of Indemnity Agreement for Executive Officers and Directors of
the Company (Exhibit 10.09 of the Company's Registration Statement on
Form S-1 (File No.333-36193) is hereby incorporated by reference).
10.11 Employment Agreement between the Company and William P. Love, Jr.
(Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is hereby incorporated by
reference).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.12 Form of Warrant Agreement, dated November 25, 1997, between the
Company and Friedman, Billings, Ramsey & Co., Inc. (Exhibit 4.10 of
the Company's Registration Statement on Form S-1 (File No. 333-36193)
is hereby incorporated by reference).
10.13 Form of Warrant Agreement, dated November 25, 1997, between the Company
and Jonathan J. Ledecky (Exhibit 10.10 of the Company's Registration
Statement on Form S-1 (File No. 333-36193) is hereby incorporated by
reference).
10.14 Building One Services Corporation 1998 Long-Term Incentive Plan
(Exhibit A of the Company's Proxy Statement on Schedule 14A (File
No. 000-23421) is hereby incorporated by reference).
10.15 Employment Agreement between the Company and Joseph M. Ivey.
21.01 List of Subsidiaries of Building One Services Corporation.
23.01 Consents of PricewaterhouseCoopers LLP.
23.02 Consent of KPMG LLP.
23.03 Consent of Barry & Moore P.C.
23.04 Consent of Baird, Kurtz & Dobson.
23.05 Consents of Grant Thorton LLP.
23.06 Consent of Arthur Andersen LLP.
23.07 Consent of Leverich, Rasmuson, Banyard
23.08 Consent of Hutton, Patterson & Company.
23.09 Consent of Wallingford, McDonald, Fox & Co., P.C.
23.10 Consent of Bradley, Allen & Associates, P.C.
23.11 Consent of Harbeson, Beckerleg & Fletcher.
23.13 Consent of Davenport, Holliday & Spring
23.14 Consent of Maillie, Falconiero & Company, LLP
23.16 Consent of Frazier & Deeter, LLC.
23.17 Consent of Shinners, Hucovski & Company, S.C.
24.01* Power of Attorney (on the signature page of the initial filing of this
registration statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or accompanying notes.
3
<PAGE>
Exhibit 10.15
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement, dated this 2nd day of September, 1998, is by and
between Ivey Mechanical Company, Inc., a Mississippi corporation (the "Company")
and Joseph M. Ivey, a resident of the State of Mississippi ("Employee").
R E C I T A L S
The Company desires to employ Employee and to have the benefit of his
skills and services, and Employee desires to accept employment with the Company,
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. Employment; Term. The term of this Agreement shall begin on the date
----------------
hereof and continue for two (2) years (the "Term"), and, unless terminated as
herein provided, may be extended on such terms and conditions as the parties
hereto mutually agree.
2. Position and Duties. The Company hereby employs Employee as
-------------------
Chairman and Chief Executive Officer of Company. Employee shall have such
responsibilities, duties and authority as are accorded to the office of Chairman
and Chief Executive Officer, and/or otherwise assigned to him by the Board of
Directors of Consolidation Capital Corporation and/or the Company's Board of
Directors (the "Board"). Employee shall report directly to the Board. Employee
shall be responsible for all employment decisions, including, but not limited to
all decisions to hire, retain and/or terminate other Company employees.
3. Compensation. For all services rendered by Employee, the Company shall
------------
compensate Employee as follows:
(a) Base Salary. Effective on the date, hereof, the base salary
payable to Employee shall be Two Hundred Ten Thousand Dollars ($210,000.00) per
year, payable on a regular basis in accordance with the Company's standard
payroll procedures, but not less than monthly. On at least an annual basis, the
Board will review Employee's performance and may make increases to such base
salary if, in its discretion, any such increase is warranted.
(b) Incentive Bonus Plan. Company agrees to establish an Incentive
Bonus Plan ("Company's Incentive Bonus Plan") on or before September 1, 1999.
Employee shall be eligible to receive a performance-based incentive bonus for
each twelve (12) month period during the Term beginning September 1, 1999, based
upon the achievement of the criteria specified in the Company's Incentive Bonus
Plan, as may be modified or amended from time to time. The incentive bonus, if
earned, will be payable in
<PAGE>
EMPLOYMENT AGREEMENT - Page 2
the form of cash, stock options in Consolidation Capital Corporation, the parent
company of Company, or other non-cash awards (or any combination of the
foregoing), in such proportions, and in such forms, as are determined by the
Board or a compensation committee thereof. If the Company's Incentive Bonus Plan
is terminated for any reason, the Company will implement a reasonable
alternative incentive bonus arrangement for Employee.
(c) Perquisites, Benefits, and Other Compensation. Employee shall be
entitled to the same perquisites and benefits as Employee is receiving as of the
date of Employee's execution of this Agreement, subject to such changes,
additions, or deletions as the Company may make from time to time, as well as
such other perquisites or benefits as may be specified from time to time by the
Board.
4. Expense Reimbursement. The Company shall reimburse employee for (or,
---------------------
at the Company's option, pay) all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of his services
hereunder during the Term. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request for
reimbursement, and in a format and manner consistent with the Company's expense
reporting policy, as well as applicable federal and state tax record keeping
requirements.
5. Place of Performance. Employee shall carry out his duties and
--------------------
responsibilities here under principally in and from the State of Mississippi.
The Company agrees that it may not request or require, for any reason
whatsoever, Employee to relocate from his present residence to another
geographic location.
6. Termination; Rights on Termination. Employee's employment may be
----------------------------------
terminated in any one of the following ways, prior to the expiration of the
Term:
(a) Death. The death of Employee shall immediately terminate the
Term, and no severance compensation shall be owed to Employee's estate.
(b) Disability. If, as a result of incapacity due to physical or
mental illness or injury, Employee shall have been unable to perform the
material duties of his position on a full-time basis for a period of four (4)
consecutive months, or for six months out of any twelve month period, then 30
days after written notice to the Employee (which notice may be given before or
after the end of the aforementioned periods, but which shall not be effective
earlier than the last day of the last day of the applicable period), the Company
may terminate Employee's employment hereunder if Employee is unable to resume
his full-time duties at the conclusion of such notice period. Also, Employee
may terminate his employment hereunder if his health should become impaired to
the extent that makes the continued performance of his duties hereunder
hazardous to his physical or mental health or his life, provided that Employee
shall have furnished the Company with a written statement from a qualified
doctor to such effect and provided further, that, at the Company's request made
within 30 days from the date of such written statement, Employee shall submit to
an examination by a doctor selected by the
<PAGE>
EMPLOYMENT AGREEMENT - Page 3
Company who is reasonably acceptable to Employee or Employee's doctor and such
doctor shall have concurred in the conclusion of Employee's doctor. Subject to
Section 6(g) below, if Employee's employment is terminated as a result of
Employee's disability, the Company shall continue to pay Employee his base
salary at the then-current rate for six (6) months from the effective date of
termination. Such payments shall be made in accordance with the Company's
regular payroll cycle.
(c) Termination by the Company "For Cause." The Company may terminate
the Agreement ten (10) days after written notice to Employee for good cause,
which shall be: (1) Employee's willful, material and irreparable breach of this
Agreement; (2) Employee's gross negligence in the performance or intentional
nonperformance (continuing for ten (10) days after receipt of written notice of
need to cure) of any of employee's material duties and responsibilities
hereunder; (3) Employee's unwillingness or failure to perform his duties
satisfactorily (as determined by the Board) in accordance with the provisions
specified herein and such unwillingness or failure is not cured by Employee
within ten (10) days of written notice thereof; (4) Employee's dishonesty, fraud
or misconduct with respect to, or disparagement of, the business or affairs of
the Company which materially and adversely affects the operations or reputation
of the Company; (5) Employee's conviction of a felony; or (6) alcohol or illegal
drug abuse by Employee. In the event of a termination for good cause, as
enumerated above, Employee shall have no right to any severance compensation.
(d) Without Cause. At any time after the commencement of employment,
the Company may, without cause, terminate the Term and Employee's employment,
effective thirty (30) days after written notice is provided to the Employee.
Should Employee be terminated by the Company without cause, subject to Sections
6(f) and 6(g) below, Employee shall receive from the Company the base salary at
the rate, plus paid group health insurance, then in effect, for whatever time
period is remaining under the Term. Such payments shall be made in accordance
with the Company's regular payroll cycle.
(e) Termination by Employee for Good Reason. Employee may resign or
terminate his employment hereunder for "Good Reason." As used herein, "Good
Reason" shall mean the continuance, after ten (10) days' prior written notice by
Employee to the Company, specifying the basis for such Employee's having Good
Reason to terminate this Agreement, any material breach of this Agreement by the
Company, including the failure to pay Employee on a timely basis the amounts to
which he is entitled under this Agreement. If Employee resigns or otherwise
terminates his employment for any reason other than Good Reason as defined
herein, Employee shall receive no severance compensation. If Employee resigns
for Good Reason, Employee shall be entitled to severance as if he had been
terminated without cause.
(f) Payment Through Termination. Upon termination of Employee's
employment for any reason provided above, Employee shall be entitled to receive
all compensation earned and all benefits and reimbursements (including payments
for accrued vacation and sick leave, in each case in accordance with applicable
policies of the Company) due through the effective date of termination.
Additional compensation subsequent to
<PAGE>
EMPLOYMENT AGREEMENT - Page 4
termination, if any, will be due and payable to Employee only to the extent and
in the manner expressly provided above in this Section 6. With respect to
incentive bonus compensation, Employee shall be entitled to receive any bonus
declared but not paid prior to termination. In addition, in the event of a
termination under Section 6(d) or 6(e), Employee shall be entitled to receive
incentive bonus compensation through the end of the Company's fiscal year in
which termination occurs, calculated as if Employee had remained employed by the
Company through the end of such fiscal year, and paid in such amounts, at such
times, and in such forms as are determined pursuant to Section 3(b) above. In
the event of a termination under Section 6(b), Employee shall be entitled to
receive incentive bonus compensation for the fiscal year in which termination
occurs, calculated only through the date of Employee's termination, and paid in
such amounts, at such times, and in such forms as are determined pursuant to
Section 3(b) above. Except as specified in the preceding three (3) sentences,
Employee shall not be entitled to receive any incentive bonus compensation after
the effective date of termination of his employment. All other rights and
obligations of the Company and Employee under this Agreement shall cease as of
the effective date of termination, except that the Company's obligations under
Section 11 below and Employee's obligations under Sections 7, 8, 9 and 10 below
shall survive such termination in accordance with their terms.
(g) Right to Offset. In the event of any termination of Employee's
employment under this Agreement, the Employee shall have no obligation to seek
other employment; provided, that in the event that (1) Employee secures new
employment or any consulting or other similar arrangement during the period that
any payment is continuing pursuant to the provisions of this Section 6 and which
Employee did not have at the time of such termination, or (2) Employee secures
increased compensation under any other employment, consulting or other similar
arrangement during the period that any payment is continuing pursuant to the
provisions of this Section 6, the Company shall have the right to reduce the
amounts to be paid hereunder by the amount of Employee's earnings or increased
earnings (net of executive placement fees or other similar costs), as the case
may be, from such other employment, consulting or other arrangement.
(h) Options. The rights relating to Employee's stock options shall be
governed by the terms and conditions of Consolidated Capital Corporation's Long-
Term Incentive Plan (the "Incentive Plan"), it being understood and agreed that
upon or after Employee's termination of employment with the Company for any
reason, including termination without cause, his options shall only be
exercisable if and to the extent that they had become exercisable before such
termination and shall remain exercisable only to the extent provided by that
plan.
<PAGE>
EMPLOYMENT AGREEMENT - Page 5
7. Restrictions on Competition.
---------------------------
(a) During the Term, and thereafter, if Employee continues to be
employed by the Company, for the duration of such period, and thereafter for the
Restricted Period (defined below), Employee shall not, directly or indirectly,
for himself or on behalf of or in conjunction with any other person, company,
partnership, corporation, business, group, or other entity (each, a "Person"):
(i) engage, as an officer, director, shareholder, owner,
partner, member, joint venturer, or in a managerial capacity, whether as an
employee, independent contractor, consultant, advisor, or sales representative,
in any business selling any products or services in direct competition with the
Company, within 100 miles of any office of the Company and/or any office of the
Company's subsidiaries (the "Territory");
(ii) call upon any Person who is, at that time, within the
Territory, an employee of the Company in a managerial capacity for the purpose
or with the intent of enticing such employee away from or out of the employ of
the Company and/or any of the Company's subsidiaries;
(iii) call upon any Person within the Territory who is, at the
time, or has been, within one year prior to that time, a customer of the Company
and/or the Company's subsidiaries for the purpose of soliciting or selling
products or services in direct competition with the Company and/or any of the
Company's subsidiaries within the Territory;
(iv) call upon any Person who is, at the time, or has been,
within one year prior to that time, a customer of Consolidation Capital
Corporation ("CCC") and/or any of CCC's subsidiaries and affiliates with whom
Employee has had personal contact for the purpose of soliciting or selling
products or services in direct competition with CCC and/or CCC's subsidiaries
and affiliates;
(v) on Employee's own behalf or on behalf of any competitor,
call upon any Person as a prospective acquisition candidate who is or, during
Employee's employment by the Company, was, to Employee's knowledge, either
called upon by the Company as a prospective acquisition candidate or was the
subject of an acquisition analysis conducted by the Company. Employee, to the
extent lacking the knowledge described in the preceding sentence, shall
immediately cease all contact with any prospective acquisition candidate upon
being informed, in writing, that the Company had so called upon such candidate
or made an acquisition analysis thereof.
(b) The foregoing covenants shall not be deemed to prohibit Employee
from acquiring as an investment not more than one percent (1%) of the capital
stock of a competing business, whose stock is traded on a national securities
exchange or through the automated quotation system of a registered securities
association.
<PAGE>
EMPLOYMENT AGREEMENT - Page 6
(c) It is further agreed that, in the event that Employee shall cease
to be employed by the Company and enters into a business or pursues other
activities that, at such time, are not in competition with the Company, Employee
shall not be chargeable with a violation of this Section 7 if the Company
subsequently enters the same (or a similar) competitive business or activity or
commences competitive operations within 100 miles of the Employee's new business
or activities. In addition, if Employee has no actual knowledge that his actions
violate the terms of this Section 7, Employee shall not be deemed to have
breached the restrictive covenants contained herein if, promptly after being
notified by the Company of such breach, Employee ceases the prohibited actions.
(d) For the purposes of this Section 7, references to "the Company"
shall mean Consolidated Capital Corporation and its subsidiaries.
(e) The covenants in this Section 7 are severable and separate, and the
unenforceability ability of any specific covenant shall not affect the
provisions of any other covenant. If any provision of this Section 7 relating to
the time period or geographic area of the restrictive covenants shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or geographic area, as applicable, that such court deems reasonable and
enforceable, said time period or geographic area shall be deemed to be, and
thereafter shall become, the maximum time period or largest geographic area that
such court deems reasonable and enforceable and this Agreement shall
automatically be considered to have been amended and revised to reflect such
determination.
(f) All of the covenants in this Section 7 shall be construed as an
agreement independent pendent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants; provided, that upon
the termination of Employee's employment by Employee for Good Reason pursuant to
Section 6(e) hereof, the Employee may, upon 30 days' prior written notice to the
Company, waive his right to receive any additional compensation pursuant to this
Agreement and engage in any activity prohibited by the covenants of this Section
7. It is specifically agreed that the Restricted Period defined in this Section
7, during which the agreements and covenants of Employee made in this Section 7
shall be effective, shall be computed by excluding from such computation any
time during which Employee is in violation of any provision of this Section 7.
(g) Employee has carefully read and considered the provisions of this
Section 7 and, having done so, agrees that the restrictive covenants in this
Section 7 impose a fair and reason able restraint on Employee and are
reasonably required to protect the interests of the Company and its officers,
directors, employees, and stockholder. It is further agreed that the Company
and Employee intend that such covenants be construed and enforced in accordance
with the changing activities, business, and locations of the Company throughout
the term of these covenants.
<PAGE>
EMPLOYMENT AGREEMENT - Page 7
(h) As used herein, the "Restricted Period" shall be defined as
follows: (1) in the event Employee's employment hereunder is terminated for
cause as defined in Section 6(c), the "Restricted Period" shall mean that period
of time equal to the longer of: (i) two (2) years from the date of this
Agreement; or (ii) the period during which Employee is entitled to receive and
is receiving any payment pursuant to paragraph 6 hereof; (2) in the event
Employee's employment hereunder is terminated without cause pursuant to Section
6(d), or for good reason as defined in Section 6(e), the "Restricted Period"
shall mean that period of time equal to the longer of: (i) one (1) year from
the date following the termination of his employment under this Agreement or
(ii) whatever time period is remaining under the Term; or (3) in the event
Employee terminates his employment for any reason other than for "good reason"
as defined in Section 6(e), the "Restricted Period" shall be two (2) years from
the date Employee terminates his employment hereunder.
8. Confidential Information. Employee is employed hereunder by the
------------------------
Company in a confidential relationship wherein Employee, in the course of his
employment with the Company, has and will continue to become familiar with and
aware of information as to the Company's customers, specific manner of doing
business, including the processes, techniques and trade secrets utilized by the
Company and its future plans with respect thereto, all of which has been and
will be established and maintained at great expense to the Company. This
information is confidential and constitutes the valuable good will of the
Company. Employee therefor agrees that he will not, during or after the term of
his employment with the Company, disclose the specific terms of the Company's
relationships or agreements with its significant vendors or customers or any
other significant and material trade secret of the Company whether in existence
or proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever, with the exception that the provisions of this
Section will not apply to Confidential Information that otherwise becomes
generally known in the industry or to the public through no act of the Employee
or any person or entity acting by or on the Employee's behalf, or which is
required to be disclosed by court order or applicable law.
9. Inventions. Employee shall disclose promptly to the Company any and
----------
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and which Employee conceives as a result of his
employment by the Company. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
10. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company (including
the respective subsidiaries thereof) or their representatives, vendors or
customers which pertain to the business of the Company (including the respective
subsidiaries thereof) shall be and remain the property of the Company, and
<PAGE>
EMPLOYMENT AGREEMENT - Page 8
be subject at all times to its discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company which is collected by Employee shall be delivered promptly to the
Company without request by it upon termination of Employee's employment.
11. Indemnification. In the event Employee is made a party to any
---------------
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Employee), by reason of the fact that he is or was performing services
under this Agreement then the Company shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reason ably incurred by Employee in connection
therewith to the fullest extent provided by law and in accordance with the
Company's By-laws.
12. No Prior Agreements. Employee hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Employee and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against the Company based upon or arising out of any non-competition
agreement, invention or secrecy agreement between Employee and such third party
which was in existence as of the date of this Agreement.
13. Assignment; Binding Effect. Employee understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Employee agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. Company
may assign this Agreement only to the purchaser of substantially all of the
assets of the Company. Subject to the preceding two (2) sentences, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors and assigns.
14. Complete Agreement; Waiver; Amendment. This Agreement is not a promise
-------------------------------------
of future employment. Employee has no oral representations, understandings, or
agreements with the Company or any of its officers, directors, or
representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete, and exclusive statement and expression of the
agreement between the Company and Employee with respect to the subject matter
hereof, and cannot be varied, contradicted, or supplemented by evidence of any
prior or contemporaneous oral of written agreements. This written Agreement may
not be later modified except by a further writing signed by a duly authorized
officer of the Company and Employee, and no term of this agreement may be waived
except by a writing signed by the party waiving the benefit of such term.
<PAGE>
k<PAGE>
EMPLOYMENT AGREEMENT - Page 9
15. Notice. Whenever any notice is required hereunder, it shall be given
------
in writing addressed as follows:
To the Company: Ivey Mechanical Company, Inc.
c/o F. Traynor Beck
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
To the Employee: Joseph M. Ivey
314 North Wells
Kosciusko, MS 39090
16. Severability; Headings. If any portion of this Agreement is held
----------------------
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. This
severability provision shall be in addition to, and not in place of, the
provisions of Section 7(e) above. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of this Agreement or of any part hereof.
17. Equitable Remedy. Because of the difficulty of measuring economic
----------------
losses to the Company as a result of a breach of the restrictive covenants set
forth in Sections 7, 8, 9 and 10, and because of the immediate and irreparable
damage that would be caused to the Company for which monetary damages would not
be a sufficient remedy, it is hereby agreed that in addition to all other
remedies that may be available to the Company at law or in equity, the Company
shall be entitled to specific performance and any injunctive or other equitable
relief as a remedy for any breach or threatened breach of the aforementioned
restrictive covenant.
18. Arbitration. Any unresolved dispute or controversy arising under or
-----------
in connection with this Agreement shall be settled exclusively by arbitration,
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. The arbitrators shall have the authority to order back-pay,
severance compensation, reimbursement of costs, including those incurred to
enforce this Agreement, and interest thereon in the event the arbitrators
determine that Employee was terminated without disability or good cause, as
defined herein, or that the Company has otherwise materially breached this
Agreement. A decision by a majority of the arbitration panel shall be final and
binding. Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of any arbitration proceeding shall be borne
by the Company. The arbitration proceeding shall be held in the city where the
Company's corporate headquarters is located. Notwithstanding the foregoing, the
Company shall be entitled to seek injunctive or other equitable relief, as
contemplated by Section 17 above, from any court of competent jurisdiction,
without the need to resort to arbitration.
19. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of Mississippi.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed as of the date first written above.
"COMPANY"
/s/ F. Traynor Beck
--------------------------------------------
By: F. Traynor Beck
Vice President and Assistant Secretary
"EMPLOYEE"
/s/ Joseph M. Ivey
--------------------------------------------
Joseph M. Ivey
<PAGE>
Exhibit 21.01
Subsidiaries of Building One Services Corporation
-------------------------------------------------
"." represents the second tier subsidiary of BOSC
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Name of Location of
Subsidiary Principal Office
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Service Management USA, Inc. Sterling, Virginia
. Boxberger, Inc.
. Flor-Shin, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
SKC Electric, Inc. Lenexa, Kansas
. Cramer Electric, Inc.
. SKCE, Inc.
Prowire Security Systems
- -------------------------------------------------------------------------------------------------------------------------------
Riviera Electric Construction Co. Englewood, Colorado
- -------------------------------------------------------------------------------------------------------------------------------
Garfield/Indecon Electrical Services, Inc. Cincinnati, Ohio
NOTE: Garfield Electrical Services, Inc. & Indecon, Inc. merged into one
entity on 12/31/98 whereby the Surviving Entity changed its name to
Garfield/Indecon Electrical Services, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
Tri-City Electrical Contractors, Inc. Altamonte Springs, Florida
- -------------------------------------------------------------------------------------------------------------------------------
Wilson Electric Company, Inc. Scottsdale, Arizona
. Chambers Electronic Communications, LLC Phoenix, Arizona
- -------------------------------------------------------------------------------------------------------------------------------
Town & Country Electric, Inc. Appleton, Wisconsin
- -------------------------------------------------------------------------------------------------------------------------------
Walker Engineering, Inc. Dallas, Texas
- -------------------------------------------------------------------------------------------------------------------------------
Tess Holdings, Inc. Green Bay, Wisconsin
. Crest International, LLC
- -------------------------------------------------------------------------------------------------------------------------------
United Service Solutions, Inc. Arroyo Grande, California
Red Bank, New Jersey (USS East Division)
- -------------------------------------------------------------------------------------------------------------------------------
The G. S. Group, Inc. Freeport, Texas
. G.S. Financial, Inc.
. Gulf States, Inc.
. GSI of California, Inc.
. Testronics, Inc.
Brazosport Management, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
Taylor Electric, Inc. Salt Lake City, Utah
- -------------------------------------------------------------------------------------------------------------------------------
Spann Management Group, Inc. St. Louis, Missouri
Spann Building Maintenance Company
- -------------------------------------------------------------------------------------------------------------------------------
Perimeter Maintenance Corporation Atlanta, Georgia
. Appearance Management Services, Inc.
. Center Services, Inc.
. Brick, Inc.
. Reliable Paper Service Company, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
National Network Services, Inc. Denver, Colorado
- -------------------------------------------------------------------------------------------------------------------------------
Riviera Electric of California, Inc. Anaheim, California
- -------------------------------------------------------------------------------------------------------------------------------
Regency Electric Company, Inc. Jacksonville, Florida
. Regency Electric Company of Jacksonville Office, Inc.
Regency Electric Company of Orlando Office, Inc.
Regency Electric Company of Atlanta Office, Inc.
Regency Electric Company Projects Group, Inc.
Regency Electric Company of South Florida, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
Lewis Companies Tulsa, Oklahoma
. Oil Capital Electric, Inc.
. Engineering Design Group, Inc. (93% owned)
. Electrical Design & Construction, Inc.
. Fred Clark Electrical Contractors, Inc.
Omni Mechanical Services (50% owned)
- -------------------------------------------------------------------------------------------------------------------------------
McIntosh Mechanical, Inc. Sumter, South Carolina
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Name of Location of
Subsidiary Principal Office
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Ivey Mechanical Company Kosciusko, Mississippi
Ivey Mechanical Company
Barnes Ivey Mechanical Company, LLC
Lexington/Ivey Mechanical Company, LLC
Ivey Mechanical Services, LLC
- -------------------------------------------------------------------------------------------------------------------------------
Tri-M Corporation Kennett Square, Pennsylvania
. tri-M Corporation
. tri-M Electrical Construction Corp.
. tri-M Building Automation Systems Corp.
. tri-M Information Systems Corp.
. tri-M Integrated System Solutions Corp.
Warren Electrical Construction Corp. Myersville, Maryland
- -------------------------------------------------------------------------------------------------------------------------------
Robinson Mechanical Company Boulder, Colorado
- -------------------------------------------------------------------------------------------------------------------------------
Watson Electric Construction Co. Wilson, North Carolina
NOTE: Watson Electric Construction Co. merged with and into Welcon
Management Co. on 12/31/98. Welcon, the Surviving Corporation, changed
its name to Watson Electric Construction Co.
- -------------------------------------------------------------------------------------------------------------------------------
Gamewell Mechanical, Inc. Salisbury, North Carolina
- -------------------------------------------------------------------------------------------------------------------------------
BUYR, Inc. * Washington, D.C.
- -------------------------------------------------------------------------------------------------------------------------------
Building One Mechanical Services, Inc. ** Kosciusko, Mississippi
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Electrical Group, Inc. *** Kansas City, Kansas
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*This corporation was formed to hold cash only.
**This corporation has no operations.
***This corporation has no operations. This corporation will change its
name to be Building One Electrical Services, Inc.
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4, of our reports dated (i) February 27,
1998, except as to Note 4, which is as of June 26, 1998, the fourth paragraph
of Note 14, which is as of November 25, 1998, and Note 3, which is as of
February 7, 1999, relating to the financial statements of Building One
Services Corporation; (ii) February 19, 1998, relating to the combined
financial statements of Service Managtement USA, Inc. and its affiliates; and
(iii) November 13, 1998, relating to the financial statements of Robinson
Mechanical Company, which appear in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 22, 1999
<PAGE>
EXHIBIT 23.01
(Continued)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 17, 1998
relating to the financial statements of SKC Electric, Inc. and Affiliate and
Lovecor, Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 22, 1999
<PAGE>
[Letterhead] EXHIBIT 23.02
The Board of Directors
Tri-City Electrical Contractors,Inc.:
We consent to the inclusion of our report dated February 16, 1998 included
herein, with respect to the consolidated balance sheets of Tri-City Electrical
Contractors, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997 and to the
reference to our firm under the heading "Experts" including herein.
/s/ KPMG LLP
Orlando, Florida
February 22, 1999
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated January 30, 1998,
relating to the financial statements of Wilson Electric Company, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Barry & Moore, P.C.
Phoenix, Arizona
February 22, 1999
<PAGE>
EXHIBIT 23.04
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Riviera Electric Construction Co.
We consent to the use in the registration statement of Building One Services
Corporation on Form S-4 of our report dated February 18, 1998, with respect to
the balance sheets of RIVIERA ELECTRIC CONSTRUCTION CO. as of December 31,
1997 and 1996, and the related statements of income, stockholders' equity and
cash flows for the three years in the period ended December 31, 1997. We also
consent to the reference to us under the heading "Experts" in such
registration statement.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 24, 1999
<PAGE>
Exhibit 23.05
We have issued our report dated February 6, 1998, accompanying the financial
statements of Town & Country Electric Inc. contained in the Post Effective
Amendment Number 1 to the Registration Statement on Form S-4 for Building One
Services Corporation. We consent to the use of the aforementioned report in
the Post Effective Amendment Number 1 to the Registration Statement on Form S-
4 filed on or about February 22, 1999, and to the use of our name as it
appears under the caption "Experts."
/s/ Grant Thornton LLP
Appleton, Wisconsin
February 22, 1999
<PAGE>
Exhibit 23.05
(continued)
We have issued our report dated February 12, 1998, accompanying the financial
statements of Garfield Electric Company contained in the Post Effective
Amendment Number 1 to the Registration Statement on Form S-4 for Building One
Services Corporation. We consent to the use of the aforementioned report in
the Post Effective Amendment Number 1 to the Registration Statement on Form S-
4 filed on or about February 22, 1999, and to the use of our name as it
appears under the caption "Experts."
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 22, 1999
<PAGE>
Exhibit 23.05
(continued)
We have issued our report dated February 12, 1998, accompanying the financial
statements of Indecon, Inc. contained in the Post Effective Amendment Number 1
to the Registration Statement on Form S-4 for Building One Services
Corporation. We consent to the use of the aforementioned report in the Post
Effective Amendment Number 1 to the Registration Statement on Form S-4 filed
on or about February 22, 1999, and to the use of our name as it appears under
the caption "Experts."
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 22, 1999
<PAGE>
EXHIBIT 23.06
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado
February 22, 1999
<PAGE>
EXHIBIT 23.07
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 20, 1998
relating to the financial statements of Taylor Electric, Inc. which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Leverich, Rasmuson & Banyard
Salt Lake City, Utah
February 19, 1999
<PAGE>
EXHIBIT 23.08
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Building One Services Corporation of our
report dated February 27, 1998, relating to the financial statements of Walker
Engineering, Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Hutton, Patterson & Company, P.C.
Hutton, Patterson & Company, P.C.
Dallas, Texas
February 22, 1999
<PAGE>
EXHIBIT 23.09
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 Amendment 1 of our report dated May 8,
1998, relating to the financial statements of G.S. Group Inc. and
Subsidiaries, which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Wallingford, McDonald, Fox &
Co., P.C.
Houston, Texas
February 22, 1999
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated May 20, 1998, relating
to the financial statements of National Network Services, Inc., which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Bradley, Allen & Associates, P.C.
Bradley, Allen & Associates , P.C.
Lakewood, Colorado
February 22, 1999
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 18, 1998,
relating to the financial statements of Regency Electric Company, Inc. and
subsidiaries which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Harbeson, Beckerleg & Fletcher
Harbeson, Beckerleg & Fletcher
Jacksonville, Florida
February 22, 1999
<PAGE>
EXHIBIT 23.13
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated July 24, 1998, relating
to the combined financial statements of Ivey Mechanical Company (a
Partnership), which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Davenport, Holliday & Spring
Davenport, Holliday & Spring
Ridgeland, Mississippi
February 24, 1999
<PAGE>
EXHIBIT 23.14
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 9, 1998,
relating to the financial statements of Tri-M Network which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Maillie, Falconiero & Company, LLP
Maillie, Falconiero & Company, LLP
West Chester, Pennsylvania
February 22, 1999
<PAGE>
Exhibit 23.16
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 19, 1998,
relating to the financial statements of Perimeter Maintenance Corporation
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Frazier & Deeter, LLC
Frazier & Deeter, LLC
Atlanta, Georgia
February 24, 1999
<PAGE>
EXHIBIT 23.17
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 17, 1998,
relating to the financial statements of Crest International, LLC which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Shinners, Hucovski & Company, S.C.
Green Bay, Wisconsin
February 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements included in the Company's Quarterly
Report on Form 10-Q/A and consolidated financial statements for the year ended
December 31, 1997 as filed on Form 8-K on February 18, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS Year
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-1-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 272,022 528,972
<SECURITIES> 0 5,193
<RECEIVABLES> 207,153 0
<ALLOWANCES> (1,651) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 510,889 536,230
<PP&E> 31,718 2,593
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,002,112 539,159
<CURRENT-LIABILITIES> 177,274 7,995
<BONDS> 0 0
0 0
0 0
<COMMON> 44 31
<OTHER-SE> 817,203 529,449
<TOTAL-LIABILITY-AND-EQUITY> 1,002,112 539,159
<SALES> 252,324 70,101
<TOTAL-REVENUES> 252,324 70,101
<CGS> 197,086 58,857
<TOTAL-COSTS> 197,086 58,857
<OTHER-EXPENSES> 32,719 11,776
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 239 208
<INCOME-PRETAX> 26,376 1,537
<INCOME-TAX> 11,212 94
<INCOME-CONTINUING> 15,164 1,443
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,164 1,443
<EPS-PRIMARY> .35 .25
<EPS-DILUTED> .34 .25
</TABLE>
