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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 8, 1999
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Building One Services Corporation
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(Exact name of registrant specified in Charter)
Delaware 000-23421 52-2054952
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
800 Connecticut Avenue, N.W., Suite 1111, Washington, DC 20006
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(Address of principal executive offices) Zip Code
Registrant's telephone, including area code: 202/261-6000
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Item 5. Other Events.
On July 8, 1999, Building One Services Corporation amended and restated its
certificate of incorporation. This report is being filed, in part, to update the
description of capital stock contained in our previous public filings. The
amended and restated certificate of incorporation is attached hereto as Exhibit
3.01.
We currently have 261,000,000 shares of authorized capital stock. The
following description of our capital stock is only a summary. As a summary, it
is not complete and is subject to the detailed provisions of, and is qualified
in its entirety by reference to, our amended and restated certificate of
incorporation, our amended and restated bylaws and the applicable provisions of
Delaware General Corporation Law.
Common Stock
We currently have 250,000,000 shares of authorized common stock. As of July
12, 1999, there were 22,229,599 shares of common stock outstanding. Our common
stockholders of record are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders. In addition, the holders of our
outstanding convertible subordinated debentures have voting rights. See "--
Convertible Subordinated Debentures." Cumulative voting is not permitted under
our amended and restated certificate of incorporation. Our common stockholders
are entitled to receive proportionately any dividends that the board of
directors declares out of legally available funds.
If we liquidate or dissolve our business, common stockholders will share
proportionately in the assets remaining after we pay our creditors and any
preferred stockholders. Common stockholders are not entitled to preemptive
rights to subscribe for additional shares of capital stock and have no right to
convert their shares into any other securities. In addition, no redemption or
sinking fund provisions are applicable to our common stock. All of the
outstanding shares of our common stock (and shares offered) are fully paid and
nonassessable.
Preferred Stock
We currently have 11,000,000 shares of authorized preferred stock. Article
Four, Section (e) of the amended and restated certificate of incorporation
authorizes the board of directors to create one or more series of preferred
stock, to fix the authorized number of shares of any series and to fix the terms
of any series, including the following:
. designation (naming) of the series;
. the terms upon which shares will be entitled to dividends including the
preference, if any, of such dividends payable on any other class or
classes or any other series of stock;
. the rights of holders of the series in the event of our liquidation,
dissolution or winding up;
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. our rights, if any, to buy back (redeem) shares;
. the terms of any of our obligations to purchase, redeem or retire
shares or maintain a fund for such purposes;
. the voting rights, if any, of the shares of the series; and
. the right, if any, to exchange or convert the shares of such series
into shares of another series of preferred stock or any other class of
stock.
The issuance of preferred stock may adversely affect the voting and
dividend rights, rights upon liquidation and other rights of the holders of our
common stock. In addition, the issuance of preferred stock could be used in the
future, under certain circumstances, as a method of discouraging, delaying, or
preventing a change in control of the company. The provision authorizing the
board to create a series of preferred shares is expected to have an
anti-takeover effect, including possibly discouraging takeover attempts that
might result in a premium over the market price for the shares of our common
stock.
Convertible Subordinated Debentures
On April 30, 1999, Boss Investment LLC, an affiliate of the private
investment firm of Apollo Management, L.P., acquired $100,000,000 in aggregate
principal amount of our 7 1/2% convertible subordinated debentures. The
convertible subordinated debentures will mature on April 30, 2012. Interest is
payable quarterly. Through the fifth anniversary of their issuance, interest is
payable in additional convertible subordinated debentures or, at the option of
the company, in cash, except that from and after the third anniversary through
the fifth anniversary, interest will be paid in cash if requested by a majority
of the holders of the convertible subordinated debentures. Thereafter, interest
is payable only in cash. The payment of interest in cash may be restricted by
the terms of our other financing arrangements.
The convertible subordinated debentures are convertible into shares of our
common stock at an initial conversion price of $22.50 per $1,000 principal
amount. The conversion price is subject to customary antidilution adjustments.
Upon conversion of the convertible subordinated debentures, a holder will
receive a number of shares of common stock equal to the principal amount of the
convertible subordinated debentures being converted plus accrued interest
thereon divided by the conversion price then in effect. If the convertible
subordinated debentures are converted prior to the fifth anniversary of their
issuance, the number of shares of common stock issuable on conversion will also
give effect to the amount of interest that would have been paid on the
convertible subordinated debentures through the fifth anniversary subject to a
maximum of 30 months of additional interest unless such conversion is in
connection with a change of control of the company.
Our amended and restated certificate of incorporation entitles the holders
of the convertible subordinated debentures to elect as a class three directors
to our board of directors (or if the board has more than ten directors, no less
than 30% of the board) and otherwise to vote on an as converted
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basis with the holders of shares of our common stock on all matters submitted to
the holders of common stock.
In the event of (i) a payment default, or any other default giving rise to
a right to accelerate, under any indebtedness of the company and (ii) any
material, intentional breach by the company of the agreements relating to the
investment by Boss Investment, holders of the convertible subordinated
debentures will be entitled to elect a majority of the board of directors until
such time as such event ceases to exist. However, the holders' ability to
exercise this right will be subject to certain notice and cure periods.
So long as Boss Investment owns 50% of the outstanding convertible
subordinated debentures, certain significant corporate actions will require the
prior consent of Boss Investment. The significant corporate actions requiring
such consent are:
. mergers of the company, unless in connection with a
"permitted acquisition;"
. a recapitalization, liquidation or reorganization of the
company's business or a material change in the company's
business;
. acquisitions or dispositions having an aggregate value in
excess of $100 million;
. dividends;
. acquisitions of capital stock or indebtedness junior to the
convertible subordinated debentures;
. the hiring, firing or amendment of the employment terms of
our chief executive officer;
. any increase in the size of the board of directors above ten
directors unless designees of Boss Investment continue to
comprise at least 30% of the board;
. transactions with affiliates not in the ordinary course of
business; and
. any agreement that would restrict our ability to honor the
rights of the holders of the convertible subordinated
debentures.
In addition, Boss Investment has the preemptive right to acquire 50% of the
shares of our common stock or convertible securities that we offer to sell in a
private placement.
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Delaware Anti-takeover Law and Certain Provisions of our Amended and Restated
Certificate of Incorporation
We are subject, as a Delaware corporation, to Section 203 of the Delaware
General Corporation Law. Section 203 generally prohibits a publicly-held
Delaware corporation from engaging in a "business combination" transaction with
any "interested stockholder" for a period of three years following the date of
the transaction on which the person became an "interested stockholder." For
purposes of Section 203, an "interested stockholder" is a person who, together
with its affiliates and associates, owns 15% or more of a company's voting
stock. A "business combination" includes a merger, asset sale or other such
transaction that results in a financial benefit to the interested stockholder.
Section 203 is subject to certain exceptions, such as transactions done with
persons that became interested stockholders with the approval of your board of
directors, such as Boss Investment, and transactions approved by the board and
the holders of at least a majority of the outstanding shares of voting stock
that is not owned by the "interested stockholder."
Section 203 is designed to have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium over the market
price for the shares of our common stock.
Our amended and restated certificate of incorporation permits us to
eliminate the personal liability of our directors to us or you, the
stockholders, for monetary damages for a breach of the director's fiduciary
duty. However, we may not eliminate a director's personal liability for the
following:
. for breach of the director's duty of loyalty;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. for certain unlawful dividends and stock repurchases; or
. for any transaction from which the director derived an improper
personal benefit.
The effect of this provision is to eliminate our rights and the rights of our
stockholders (through stockholder derivative suits brought on our behalf) to
recover monetary damages against a director for breach of fiduciary duty except
as described in the four situations above. If the Delaware General Corporation
Law is later amended to authorize the further elimination or limitation of the
liability of a director, then the liability of our directors shall be eliminated
or limited to the fullest extent of the amended Delaware law.
Unanimous Written Consent
Our amended and restated certificate of incorporation requires unanimous
written consent if stockholder approval of a matter is solicited by written
consent rather than at a meeting of stockholders. The requirement that
stockholder action in writing be given by all of the stockholders makes it
impractical for stockholders to act by written consent. This means that if an
acquiror wanted to attempt to take over the company, action by written consent
would be difficult for the acquiror to achieve and the acquiror would not be
able to avoid a stockholder meeting on the
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takeover proposal. The need to hold a meeting provides the board with additional
time to consider the takeover proposal and, as appropriate, negotiate with the
would-be acquiror.
We are not aware of any existing or planned effort on the part of any party
to accumulate material amounts of our common stock, or to acquire control of our
company by means of a merger, tender offer, solicitation in opposition to
management or otherwise, or to change our management. We are aware that a number
of unsolicited acquisition proposals in connection with takeover activities have
employed, or have sought to employ, tactics which are designed to force a
response by the target company through threats or attempts to secure action
without a meeting and without affording a reasonable opportunity for the boards
of directors of such companies to consider whether such proposals are in the
best interests of its stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements -- Incorporated by reference herein are the financial
statements for Welcon Management Company and its subsidiary, Watson Electrical
Construction Co., as of March 31, 1998, 1997 and 1996 and for the three year
period ended March 31, 1998. These financial statements are attached hereto as
Exhibit 99.01.
(b) Pro Forma Financial Information -- (Not applicable).
(c) Exhibits.
3.01 Amended and Restated Certificate of Incorporation of Building
One Services Corporation.
23.01 Consent of Bunch & Company, LLP.
99.01 Financial Statements for Welcon Management Company and its
subsidiary, Watson Electrical Construction Co.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BUILDING ONE SERVICES CORPORATION
Dated: July 15, 1999 By: /s/ F. Traynor Beck
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F. Traynor Beck
Executive Vice President,
General Counsel and Secretary
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EXHIBIT INDEX
Exhibit
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3.01 Amended and Restated Certificate of Incorporation of Building One
Services Corporation.
23.01 Consent of Bunch & Company, LLP.
99.01 Financial Statements for Welcon Management Company and its subsidiary,
Watson Electrical Construction Co.
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Exhibit 3.01
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
BUILDING ONE SERVICES CORPORATION
BUILDING ONE SERVICES CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware does hereby certify
as follows:
1. The name of the corporation is Building One Services Corporation. The
name of the corporation was initially Consolidation Capital Corporation and the
date of filing of its Certificate of Incorporation with the Secretary of State
was September 15, 1997, as amended on September 16, 1998.
2. This Amended and Restated Certificate of Incorporation restates,
integrates, and further amends the Certificate of Incorporation of this
corporation to read in its entirety as follows:
ARTICLE ONE
NAME
The name of the Corporation is Building One Services Corporation (the
"Corporation").
ARTICLE TWO
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
19801, and the name of the registered agent at such address is The Corporation
Trust Company.
ARTICLE THREE
PURPOSES
The nature of the business or purposes of the Corporation is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware, and by such statement all
lawful acts and activities shall be within the purposes of the Corporation,
except for express limitations, if any. The Corporation shall possess and
exercise all the powers and privileges granted by the General Corporation Law of
the State of Delaware, by any other law or by this Certificate, together with
any powers incidental thereto as far as such powers and privileges are necessary
or convenient to the conduct, promotion, or attainment of the purposes of the
Corporation.
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ARTICLE FOUR
COMMON STOCK, DEBENTURES AND PREFERRED SHARES
4.1 AUTHORIZED SHARES. The total number of shares of capital stock which the
Corporation shall have authority to issue is 261,000,000 shares, consisting of:
(a) 250,000,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"); and
(b) 11,000,000 shares of Preferred Stock, par value $0.001 per share (the
"Preferred Shares").
4.2 SUBORDINATED DEBENTURES. The Corporation has issued 7 1/2% Convertible
Subordinated Pay in Kind Debentures Due 2012 (the "Debentures").
4.3 DESIGNATIONS, PREFERENCES, ETC. OF THE COMMON STOCK , THE DEBENTURES AND THE
PREFERRED SHARES. The designations, preferences, powers, qualifications and
special or relative rights and privileges of the Common Stock, the Debentures,
and the Preferred Shares are as follows:
(a) DIVIDENDS. (1) When, as, and if dividends are declared by the
Corporation's Board of Directors, whether payable in cash, property or
securities of the Corporation, the holders of shares of Common Stock shall be
entitled to share equally in and to receive such dividends, in accordance with
the number of shares of Common Stock held by each such holder.
(ii) Dividends payable under this Paragraph 4.3(a) shall be
paid to the holders of record of shares of the outstanding Common Stock
as their names shall appear on the stock register of the Corporation on
the record date fixed by the Board of Directors in advance of
declaration and payment of each dividend.
(iii) Notwithstanding anything contained herein to the
contrary, no dividends on shares of Common Stock shall be declared by
the Corporation's Board of Directors or paid or set apart for payment
by the Corporation at any time that such declaration, payment, or
setting apart is prohibited by applicable law.
(b) LIQUIDATION RIGHTS. Upon any voluntary or involuntary liquidation,
dissolution, or winding-up of the affairs of the Corporation, the holders of
shares of Common Stock shall be entitled to share ratably, in accordance with
the number of shares of Common Stock held by each such holder, in all remaining
assets of the Corporation available for distribution among the holders of shares
of Common Stock, whether such assets are capital, surplus or earnings. For the
purposes of this Paragraph 4.3(b), neither the consolidation or merger of the
Corporation with or into any other corporation or corporations in which the
stockholders of the Corporation receive capital stock and/or other securities
(including debt securities) of the acquiring or merged corporation (or of the
direct or indirect parent corporation of the acquiring or merged corporation),
nor the sale, lease, or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation, shall be
deemed to be a voluntary or involuntary liquidation, dissolution, or winding up
of the Corporation as those terms are used in this Paragraph 4.3(b).
(c) VOTING RIGHTS. All rights to vote and all voting power shall be
vested in the holders of shares of Common Stock and the holders of the
Debentures. In accordance with Section 221 of the General Corporation Law of the
State of Delaware, each Debenture shall entitle the holder thereof to
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notice of and to vote, in person or by proxy, at any special or annual meeting
of stockholders, on all matters submitted to holders of shares of Common Stock
and any other series or class of voting stock voting together as a single class
with all other shares entitled to vote thereon. With respect to any such vote,
(i) each Debenture shall entitle the holder thereof to cast that number of whole
votes (and fractions thereof) per $1,000 outstanding principal amount as is
equal to the number of votes that such holder would be entitled to cast had such
holder converted its Debentures into shares of Common Stock as of the record
date for determining the stockholders of the Corporation eligible to vote on any
such matters and (ii) each holder of shares of Common Stock shall be entitled to
one vote for each share held by such holder.
(d) NO PREEMPTIVE OR SUBSCRIPTION RIGHTS. Except as agreed to and set
forth in any agreement between the Corporation and a holder of shares of Common
Stock, no holder of shares of Common Stock shall be entitled to preemptive or
subscription rights.
In addition, the Debentures shall have such powers, preferences, rights,
terms and privileges as are set forth in the Indenture dated as of April 30,
1999 between the Corporation and United States Trust Company of New York, as
trustee, as such Indenture may be amended, supplemented or restated from time to
time.
(e) AUTHORITY TO CREATE SERIES OF PREFERRED SHARES. The Board of Directors
of the Corporation is hereby expressly granted authority, to the full extent now
or hereafter permitted herein and by the laws of the State of Delaware, at any
time or from time to time, by resolution or resolutions, to create one or more
series of the Preferred Shares, to fix the authorized number of shares of any
series (which number of shares may vary as between series and be changed from
time to time by like action), and to fix the terms of such series, including but
not limited to, the following:
(i) the designation of such series, which may be by distinguishing
number, letter, or title;
(ii) the rate or rates at which shares of such series shall be entitled
to receive dividends, the periods in respect of which dividends are
payable, the conditions upon, and times of payment of, such dividends, the
relationship and preference, if any, of such dividends to dividends payable
on any other class or classes or any other series of stock, whether such
dividends shall be cumulative and, if cumulative, the date or dates from
which such dividends shall accumulate, and the other terms and conditions
applicable to dividends upon shares of such series;
(iii) the rights of the holders of the shares of such series in case
the Corporation be liquidated, dissolved, or wound up (which may vary
depending upon the time, manner, or voluntary or involuntary nature or
other circumstances of such liquidation, dissolution, or winding up) and
the relationship and preference, if any, of such rights to rights of
holders of shares of stock of any other class or classes or any other
series of stock;
(iv) the right, if any, to redeem shares of such series at the option
of the Corporation, including any limitation of such right, and the amount
or amounts to be payable in respect of the shares of such series in case of
such redemption, and the manner, effect, and other terms and conditions of
any such redemption thereof;
(v) the obligation, if any, of the Corporation to purchase, redeem, or
retire shares of such series and/or to maintain a fund for such purpose,
and the amount or amounts to be payable from
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time to time for such purpose or into such fund, or the number of shares to
be purchased, redeemed or retired, the per share purchase price or prices,
and the other terms and conditions of any such obligation or obligations;
(vi) the voting rights, if any, full, special, or limited, to be given
the shares of such series, including without limiting the generality of the
foregoing, the right, if any, as a series or in conjunction with other
series or classes, to elect one or more members of the Board of Directors
either generally or at certain times or under certain circumstances, and
restrictions, if any, on particular corporate acts without a specified vote
or consent of holders of such shares (such as, among others, restrictions
on modifying the terms of such series or of the Preferred Shares,
restricting the permissible terms of other series or the permissible
variations between series of the Preferred Shares, authorizing or issuing
additional shares of the Preferred Shares, creating debt, or creating any
class of stock ranking prior to or on a parity with the Preferred Shares or
any series thereof as to dividends, or assets remaining for distribution to
the stockholders in the event of the liquidation, dissolution, or winding
up of the Corporation);
(vii) the right, if any, to exchange or convert the shares of such
series into shares of any other series of the Preferred Shares or into
shares of any other class of stock of the Corporation, and the rate or
basis, time, manner, terms, and conditions of exchange or conversion or the
method by which the same shall be determined; and
(viii) the other special rights, if any, and the qualifications,
limitations, or restrictions thereof, of the shares of such series.
The Board of Directors shall fix the terms of each such series by
resolution or resolutions adopted at any time prior to the issuance of the
shares thereof, and the terms of each such series may, subject only to
restrictions, if any, imposed by this Amended and Restated Certificate of
Incorporation or by applicable law, vary from the terms of other series to the
extent determined by the Board of Directors from time to time and provided in
the resolution or resolutions fixing the terms of the respective series of the
Preferred Shares.
Shares of any series of the Preferred Shares, whether provided for herein
or by resolution or resolutions of the Board of Directors, which have been
redeemed (whether through the operation of a sinking fund or otherwise) or
which, if convertible or exchangeable, have been converted into or exchanged for
shares of stock of any other class or classes, or which have been purchased or
otherwise acquired by the Corporation, shall have the status of authorized and
unissued shares of the Preferred Shares of the same series and may be reissued
as a part of the series of which they were originally a part or may be
reclassified and reissued as part of a new series of the Preferred Shares to be
created by resolution or resolutions of the Board of Directors or as part of any
other series of the Preferred Shares, all subject to the conditions or
restrictions on issuance set forth herein or in the resolution or resolutions
adopted by the Board of Directors providing for the issue of any series of the
Preferred Shares.
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ARTICLE FIVE
MANAGEMENT OF THE CORPORATION
The following provisions relate to the management of the business and the
conduct of the affairs of the Corporation and are inserted for the purpose of
creating, defining, limiting, and regulating the powers of the Corporation and
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by and
under the direction of the Board of Directors;
(b) The number of directors shall be as provided in the Corporation's
Bylaws;
(c) The holders of the Debentures, voting as a separate class, shall be
entitled to elect three (3) directors to the Board of Directors of the
Corporation (or if the Board of Directors of the Corporation shall consist of
more than 10 persons, no less than 30% of the total number of directors on the
Board);
(d) In any election of directors by the holders of the Debentures
pursuant to paragraph (c) of ARTICLE FIVE, the Corporation shall take all
actions necessary to effectuate the terms and provisions of such paragraph. The
special and exclusive voting rights of the holders of the Debentures, voting
separately as one class, contained in paragraph (c) of ARTICLE FIVE may be
exercised either at a special meeting of the holders of the Debentures called as
provided below, or at any annual or special meeting of the stockholders of the
Corporation, or by written consent of such holders in lieu of a meeting. The
directors to be elected pursuant to paragraph (c) of ARTICLE FIVE shall serve
for terms extending from the date of their election and qualification until
their successors shall have been elected and qualified;
(e) If at any time any directorship to be filled by the holders of the
Debentures pursuant to paragraph (c) of ARTICLE FIVE has been vacant for a
period of 10 days, the Secretary of the Corporation shall, upon the written
request of any holder of Debentures, call a special meeting of the holders of
the Debentures for the purpose of electing a director or directors to fill such
vacancy or vacancies. Such meeting shall be held at the earliest practicable
date, and at such place, as is specified in or determined in accordance with the
Bylaws of the Corporation. If such meeting shall not be called by the Secretary
of the Corporation within 10 days after personal service of such written request
on him or her, then any holder of Debentures may designate in writing one of
their members to call such meeting at the expense of the Corporation, and such
meeting may be called by such person so designated upon the notice required for
annual meetings of shareholders and shall be held at such place as specified in
such notice;
(f) At any meeting held for the purpose of electing directors as
provided in paragraph (c) of ARTICLE FIVE, the presence, in person or by proxy,
of the holders of record of Debentures representing at least a majority of the
voting power of the Debentures then outstanding (such voting power determined in
accordance with Section 4.3(c) of ARTICLE FOUR) shall be required to constitute
a quorum of the Debentures for such election. A vacancy in the directorships to
be elected by the holders of the Debentures pursuant to paragraph (c) of ARTICLE
FIVE may be filled only by vote or written consent in lieu of a meeting of the
holders of a majority of the voting power of the Debentures;
(g) If a Trigger Event (as such term is defined in the Investors'
Rights Agreement, dated as of March 22, 1999, as amended as of April 6, 1999, by
and among the Corporation and certain of its investors as such agreement may be
amended, supplemented or restated from time to time) shall occur,
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the holders of the Debentures, voting as a separate class, shall be entitled to
elect a majority of the Board of Directors of the Corporation and the
Corporation shall take all actions necessary or desirable to effectuate the
terms and provisions of this paragraph (g) of ARTICLE FIVE, including, without
limitation, increasing the size of the Board of Directors of the Corporation;
(h) The Board of Directors shall have the power to make, alter, amend,
or repeal the Bylaws of the Corporation, except to the extent that the Bylaws
otherwise provide;
(i) All corporate powers and authority of the Corporation (except as at
the time otherwise provided by statute, by this Amended and Restated Certificate
of Incorporation, or by the Bylaws) shall be vested in and exercised by the
Board of Directors; and
(j) The stockholders and directors shall have the power, if the Bylaws
so provide, to hold their respective meetings within or without the State of
Delaware and may (except as otherwise required by statute) keep the
Corporation's books outside the State of Delaware, at such places as from time
to time may be designated by the Bylaws or the Board of Directors.
ARTICLE SIX
AMENDMENTS
The Corporation reserves the right to amend or repeal any provisions
contained in this Amended and Restated Certificate of Incorporation from the
time and at any time in the manner now or hereafter prescribed in this Amended
and Restated Certificate of Incorporation and by the laws of the State of
Delaware, and all rights herein conferred upon stockholders are granted subject
to such reservation; provided, however, that without the prior consent of
holders of a majority of the outstanding principal amount of the Debentures, the
Corporation may not amend or repeal any provisions of this Amended and Restated
Certificate of Incorporation, whether by merger, consolidation, combination,
reclassification or otherwise, in any manner adverse to the holders of the
Debentures.
ARTICLE SEVEN
INDEMNIFICATION
The Corporation shall, to the extent required, and may, to the extent
permitted, by Section 145 of the General Corporation Law of Delaware, as the
same may be amended from time to time, indemnify and reimburse all directors and
officers whom it may indemnify and reimburse pursuant thereto.
ARTICLE EIGHT
LIMITATION OF LIABILITY OF DIRECTORS
A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, that nothing contained in this ARTICLE EIGHT shall
eliminate or limit the liability of a director (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 that
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involve intentional misconduct or a knowing violation of law, (c) under Section
174 of the General Corporation Law of the State of Delaware, or (d) for any
transaction from which the director derived an improper personal benefit. If the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended. The
provisions of this ARTICLE EIGHT shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability of a director
that has not been eliminated by the provisions of this ARTICLE EIGHT.
ARTICLE NINE
WRITTEN CONSENT OF STOCKHOLDERS
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, no action required or permitted to be taken at any annual or
special meeting of both the stockholders of the Corporation and the holders of
the Debentures may be taken without a meeting except by the unanimous written
consent of both the stockholders and the holders of the Debentures entitled to
vote thereon.
This Amended and Restated Certificate was duly adopted in accordance with
Sections 242 and 245 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Building One Services Corporation has caused this
Amended and Restated Certificate of Incorporation to be signed by Joseph M.
Ivey, its President and Chief Executive Officer, and attested by F. Traynor
Beck, its Secretary, this 8th day of July, 1999.
BUILDING ONE SERVICES CORPORATION
By: /s/ Joseph M. Ivey
-----------------------------------------------
Joseph M. Ivey, President & Chief Executive Officer
ATTEST:
/s/ F. Traynor Beck
- -------------------------------
F. Traynor Beck, Secretary
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-4 (Registration Nos.
333-81737 and 333-60053) and to the incorporation by reference in the
Registration Statements on Form S-8 (Registration Nos. 333- 43659 and 333-59205)
of Building One Services Corporation of our report dated May 7, 1996 (except for
Note 9 which is dated July 13, 1999), May 1, 1997 (except for Note 9 which is
dated July 13, 1999), May 1, 1998, (except for Note 9 which is dated July 13,
1999) and July 13, 1999 relating to the financial statements of Welcon
Management Company and its subsidiary, Watson Electrical Construction Co., which
appear in the Current Report on Form 8-K dated July 15, 1999. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Bunch & Company, LLP
---------------------------------
Bunch & Company, LLP
Rocky Mount, North Carolina
July 15, 1999
<PAGE>
EXHIBIT 99.01
Audited Financial Statements
Welcon Management Co.
and Subsidiary
Year ended March 31, 1996
with Report of Independent Auditors
<PAGE>
Welcon Management Co.
Audited Financial Statements
Year Ended March 31, 1996
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 1
AUDITED FINANCIAL STATEMENTS
Consolidated balance sheet 2-3
Consolidated statement of income 4
Consolidated statement of retained earnings 5
Consolidated statement of cash flows 6
Notes to the financial statements 7-14
</TABLE>
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Welcon Management Co.
Wilson, North Carolina
We have audited the accompanying consolidated balance sheet of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31,
1996, and the related consolidated statements of income, retained earnings, 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31, 1996
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, the Company changed its
method of accounting for postretirement benefits.
Bunch & Company, LLP
Rocky Mount, North Carolina
May 7, 1996
(except for Note 9, as to which the date is July 13, 1999)
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1996
<TABLE>
Assets
<S> <C>
Current Assets
Cash and cash equivalents $ 2,219,352
Temporary cash investments 3,500,000
Accounts receivable 14,294,895
Accounts receivable-other 28,080
Inventories - merchandise 1,754,666
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,665,161
Prepaid expenses 173,620
Deferred income tax benefit 224,000
-----------
Total current assets 24,859,774
-----------
Property and Equipment
Property and equipment 7,228,532
Less accumulated depreciation 5,964,492
-----------
Net property and equipment 1,264,040
-----------
Other Assets
Deferred income tax benefit 796,000
Other assets 552,227
-----------
Total other assets 1,348,227
-----------
Total Assets $27,472,041
===========
</TABLE>
See accompanying notes.
Page 2
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1996
Liabilities and Stockholders' Equity
<TABLE>
<S> <C>
Current Liabilities
Current portion of notes payable $ 261,237
Accounts payable 8,229,641
Accrued expenses 2,348,013
Income taxes payable 694,213
Reserve for supplemental compensation 43,759
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,813,402
-----------
Total current liabilities 16,390,265
-----------
Long Term Liabilities
Notes payable, less current maturities 1,079,361
Reserve for supplemental compensation 1,239,540
Accrued postretirement benefits 836,000
-----------
Total long term liabilities 3,154,901
-----------
Total liabilities 19,545,166
-----------
Stockholders' Equity
Common stock, $1 par value; authorized 100,000 shares;
issued and outstanding 15,000 shares 15,000
Capital contributed in excess of par 135,000
Retained earnings 7,776,875
-----------
Total stockholders' equity 7,926,875
-----------
Total Liabilities and Stockholders' Equity $27,472,041
===========
</TABLE>
See accompanying notes.
Page 3
<PAGE>
Welcon Management Co.
Consolidated Statement of Income
Year Ended March 31, 1996
<TABLE>
<S> <C>
CONSTRUCTION INCOME $88,443,931
JOB COSTS 78,717,204
-----------
Gross profit 9,726,727
GENERAL AND ADMINISTRATIVE EXPENSES 5,562,491
-----------
Income from operations 4,164,236
OTHER INCOME (EXPENSE) -----------
Interest income, net of interest expense 41,524
Other income 33,662
-----------
Net other income 75,186
-----------
Income before income taxes and cumulative
effect of change in accounting principle 4,239,422
PROVISION FOR INCOME TAX 1,683,413
-----------
Net income before cumulative effect of change
in accounting principle $ 2,556,009
Cumulative effect on prior years (to March 31, 1995)
of changing to a different method of reporting
postretirement benefits (net of $344,000 tax) (546,000)
-----------
NET INCOME $2,010,009
===========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
Welcon Management Co.
Consolidated Statement of Retained Earnings
Year Ended March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Retained earnings - beginning $5,766,866
Net income 2,010,009
-----------
Retained earnings - ending $7,776,875
===========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
Welcon Management Co.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended March 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 2,010,009
-----------
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 765,961
Deferred income taxes (398,000)
Gain on disposal of property (4,126)
Changes in operating assets and liabilities:
Accounts receivable 446,745
Inventories 66,333
Cost in excess of billings 733,221
Prepaid expenses (96,694)
Accounts payable (5,436)
Accrued liabilities 789,228
Billings in excess of costs 1,549,806
Income taxes payable 463,474
Supplemental compensation reserve 134,294
Accrued postretirement benefits 836,000
-----------
Total adjustments 5,280,806
-----------
Net cash provided by operating activities 7,290,815
-----------
Cash flow from investing activities
Cash proceeds from sale of property 13,414
Cash payments for purchase of property (1,093,554)
Net cash value life insurance increase (58,967)
-----------
Net cash used by investing activities (1,139,107)
-----------
Cash flow from financing activities
Proceeds from long-term debt 16,044
Net borrowings (payments) on line of credit (450,000)
Principal payments on long-term debt (443,846)
-----------
Net cash used by financing activities (877,802)
-----------
Net increase in cash and equivalents 5,273,906
Cash and equivalents, beginning of year 445,446
-----------
Cash and equivalents, end of year $ 5,719,352
===========
</TABLE>
See accompanying notes.
Page 6
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies
Nature of business - The Company is a management company located in North
Carolina for its wholly-owned subsidiary, Watson Electrical Construction
Co. The subsidiary is an electrical contractor primarily operating in North
and South Carolina and Virginia. The Company provides credit in the normal
course of business to its customers. The Company performs ongoing credit
evaluations of its customers. Credit losses, when realized, have been
within the range of the Company's expectations and, historically, have not
been significant.
A summary of the Company's significant accounting policies follows:
Basis of accounting - 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 statement date is the portion of the
total contract price that the cost expended to date bears to the
anticipated final total cost, based on current estimates of cost to
complete. It is not related to the progress billings to customers.
However, at the time a loss on a contract becomes known, the entire amount
of the estimated ultimate loss is recognized in the financial statements.
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 requiring the revision become
known.
Contract costs include direct material, direct labor and benefits,
subcontract costs and allocations of indirect construction costs. Indirect
construction cost is computed based on the uniform capitalization rules of
the "Tax Reform Act of 1986." The difference between actual expenditures
for indirect construction cost and the amount allocated is charged to
operations for the current year.
Contracts which are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress in
excess of billings (underbillings) is classified as a current asset.
Amounts billed in excess of revenue earned (overbillings) are classified as
current liabilities.
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 require more than one year.
Inventories - The Company values its inventories at lower of cost or
market. Cost is computed using a moving average.
- -continued- Page 7
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Significant Accounting Policies - continued
Cash and cash equivalents - The Company considers all cash and other highly
liquid investments with maturities of three months or less at the date of
acquisition, to be "cash and cash equivalents."
Cash deposits at banks exceeded federally insured limits at March 31, 1996
by $5,382,400.
Income taxes - Financial statements and tax reporting are prepared using
the percentage-of-completion method of accounting with contracts considered
closed when they are substantially complete. For income tax reporting, the
Tax Reform Act of 1986 requires that all contracts be reported 100%
percentage-of-completion except for residential contracts which are
reported 70% percentage-of-completion (the remaining 30% profit is
recognized upon completion of the contract).
Property and equipment - Property and equipment is stated at cost and
depreciation is computed using accelerated methods over the assets
estimated useful lives. Maintenance and repairs are charged to income as
incurred; major renewals and improvements are capitalized. The major
components of property and equipment are:
<TABLE>
<CAPTION>
Description Years
----------------------------------------- -------------
<S> <C>
Vehicles 3 - 4
Tools 3
Furniture, fixtures and office equipment 6 - 10
Equipment 4 - 8
Leasehold improvements Term of lease
</TABLE>
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Note 2 - Related Party Transactions
The Company leases a building, garage and parking lot on Hood Street, the
home office property on Ward Boulevard and two condominiums from W.E. and
Catherine Boyette, stockholders. The Company paid $85,849 in rental
expense on these properties for the year ended March 31, 1996.
- - continued - Page 8
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 2 - Related Party Transactions - continued
The Company also leases from WEB Properties, Inc. (a corporation wholly
owned by W. E. Boyette) properties used as division offices of the Company.
Total rentals paid for the year ending March 31, 1996 on these properties
were $382,125. See Note 5 for additional details.
Note 3 - Contracts in Progress
Contract amounts, accumulated costs, estimated earnings and the related
billings to date on contracts in progress at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Contract Contract
Revenue Costs
------------ ------------
<S> <C> <C>
Total contract activity $128,783,561 $117,033,586
Less earnings and costs recorded in prior years (40,339,630) (38,316,382)
------------ ------------
Earnings and costs for the period ended
March 31, 1996 88,443,931 78,717,204
Less current year earnings and costs of
contracts completed during the period (47,706,460) (41,109,224)
Earnings and costs recorded in a previous
period still in progress at March 31, 1996 12,246,818 11,390,267
------------ ------------
Totals - Jobs in Progress at March 31, 1996 52,984,289 48,998,247
============ ============
Amounts earned on jobs in progress at
March 31, 1996 52,984,289
Progress billings on jobs in progress at
March 31, 1996 (55,132,530)
------------
(2,148,241)
============
Represented by:
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,665,161
Less amounts billed in excess of costs and
estimated earnings on uncompleted contracts (4,813,402)
-----------
(2,148,241)
===========
</TABLE>
- - continued - Page 9
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 4 - Income Taxes
The Company files a consolidated federal income tax return with its
subsidiary, Watson Electrical Construction Co. The current year provision
(benefit) for income tax is:
Current $ 1,737,413
Deferred (398,000)
-----------
Total 1,339,413
===========
Current income taxes are stated at statutory rates as determined by tax
reporting methods. Deferred income taxes result from timing differences in
the recognition of revenue and expenses for tax and financial statement
purposes. Timing differences include recognition of income on long term
contracts, accruals on earned vacation benefits, postretirement benefits
and recognition of expense on supplemental compensation agreements. The
measurements of deferred tax assets and liabilities is based on provisions
of the enacted tax law; the effects of the future changes in tax laws or
rates are not considered. The components of the net deferred tax asset at
March 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred assets $1,020,000
Deferred tax liabilities 0
Valuation allowance 0
---------
1,020,000
=========
The net deferred tax asset at March 31, 1996
is reflected in the balance sheet as follows:
Current deferred tax asset $224,000
Long term deferred tax asset 796,000
---------
1,020,000
=========
</TABLE>
Income tax returns have been audited by the Internal Revenue Service
through fiscal year ending March 31, 1990.
Note 5 - Lease Agreements
The Company leases substantially all of the land and buildings used in
operations from related parties (see Note 2). The leases are generally for
a period of five years and classified as operating leases. The Company is
responsible for executory costs.
- - continued - Page 10
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 5 - Lease Agreements (continued)
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
3-31-97 $ 551,163
3-31-98 542,633
3-31-99 156,960
Thereafter 0
---------
1,250,756
=========
</TABLE>
Note 6 - Notes Payable and Credit Arrangements
The Company and its subsidiary entered into a revolving line of credit in
August 1992, renewed through August 1996 with its bank for an amount not to
exceed $2,500,000. The line of credit bears interest at bank prime (8.25%
at March 31, 1996) and is payable monthly. The credit line is unsecured
and is guaranteed by Mr. & Mrs. W.E. Boyette and WEB Properties, Inc. In
addition, the Companies are required to assign the proceeds of life
insurance on the life of W.E. Boyette in the amount of $1,250,000. The line
of credit agreement contains covenants which, among others, requires that
certain financial ratios be maintained. At March 31, 1996 the Company was
in compliance with these requirements.
Notes payable at March 31 consist of the following:
<TABLE>
<S> <C>
Revolving line of credit from
NationsBank (see above) $ 0
Combined notes to individual; interest rate of 7%,
monthly payments of $17,412 including interest; notes
maturing August 2003, secured by the stock of Welcon
Management Co. and Watson Electrical Construction Co. 1,196,481
Term notes to bank and equipment dealer due in aggregate
monthly installments of $4,489, maturing through November
1997, interest ranging from 0% to 6.75%, collateralized
by Company vehicle 51,343
Note to stockholder, interest rate of 10%; monthly payments
of $10,000 beginning May 1995; due on or before
December 31, 1996, unsecured 92,774
----------
Total notes payable 1,340,598
Less current maturities 261,237
----------
Long term portion 1,079,361
==========
</TABLE>
- - continued - Page 11
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 6 - Notes Payable (continued)
<TABLE>
<S> <C>
Aggregate maturities of notes payable at
March 31, 1996 are as follows:
3-31-97 $ 261,237
3-31-98 150,798
3-31-99 148,654
3-31-00 159,400
3-31-01 170,923
Thereafter 449,586
----------
Total 1,340,598
==========
</TABLE>
Note 7 - Pension And Retirement Plans
The Companies sponsored a noncontributory defined benefit plan which was
terminated on November 30, 1994; final closure of the plan was completed in
September 1996. The benefit obligation was settled by one of the following
options elected by each participant: (1) purchasing annuity contracts, (2)
lump sum payment, or (3) rolling over the benefit obligation to an
IRA/qualified retirement plan. Active participants could elect to roll
over the benefit obligation to the Companies' newly sponsored 401(k)
retirement plan. The Company received a refund in the amount of $216,346
for all contributions made to the plan after June 15, 1994.
In place of the defined benefit plan described above, the Companies
sponsored a defined contribution pension plan (401k) effective for the year
beginning April 1, 1994. The plan covers all employees who have attained
age 21 and perform at least 1,000 hours of service per year. For the year
ended March 31, 1996, the Companies matched 50% of the first 2% of
compensation each participant elected to contribute. The total amount
contributed for the year ending March 31, 1996 was $270,680.
Note 8 - Supplemental Compensation
The Company's subsidiary has adopted a supplemental compensation benefit
plan for selected management employees effective April 1983. The Company
makes discretionary contributions based on eligible participants' earnings.
Interest earnings on participants' reserve balances are accrued at a fixed
rate and expensed annually. Benefits are paid to employees upon retirement
and attaining age 55 or as death benefits. Benefits are generally paid
monthly over a period of ten years. The Company has procured life
insurance policies on its employees to aid in meeting its obligations under
this agreement. Any proceeds from such policies shall be treated as
general assets of the Company and do not represent the vested, secured or
preferred interest of participants or beneficiaries; and the Company has no
obligation to continue the life insurance in force.
- - continued - Page 12
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 8 - Supplemental Compensation (continued)
For the year ended March 31, 1996, the Company made a discretionary
contribution of up to 10% of eligible participants' earnings. Total
supplemental compensation expense for 1996 was $199,577. Current and long
term maturities of supplemental payments are as follows:
<TABLE>
<CAPTION>
Short Long
Term Term
-------- ----------
<S> <C> <C>
Retirees and beneficiaries $43,759 $ 171,445
Active employees 0 1,068,095
------- ----------
Total 43,759 1,239,540
======= ==========
</TABLE>
Note 9 - Post Retirement Medical Benefits
The Company sponsors a postretirement health care plan covering qualified
retirees. As of March 31, 1996 the plan was effectively terminated and
eligible participants were limited to those with twenty-five years of
service as of January 1, 1994 or fifteen years of service after their
reaching age 40. The plan is unfunded and paid through its operating
capital.
The following table sets forth the plan's funded status reconciled with the
amount shown on the balance sheet at March 31, 1996:
Accumulated postretirement benefit obligations:
Current retirees $ 836,000
Current employees eligible for immediate benefits -
Current employees eligible for future benefits -
Plan assets at fair value -
----------
Accumulated postretirement obligation in excess
of plan assets 836,000
Unrecognized net gain -
Prior service cost not yet recognized -
Unrecognized transition obligation -
----------
Accrued postretirement benefit cost $ 836,000
==========
Net periodic postretirement benefit cost included
the following components for the year ended
March 31, 1996:
Service cost - benefits attributable to service
during the year $ -
Interest on accumulated postretirement
benefit obligation 64,525
Recognition of transition obligation 890,000
Experience (gains) and losses (68,525)
---------
Net periodic postretirement benefit cost $ 886,000
=========
For measurement purposes, a 5% annual rate of increase in per capita
health care costs of covered benefits was assumed. The weighted average
discount rate used in estimating the accumulated postretirement
obligation was 7.25%.
Note 10 - Litigation
The Company is a party to a small number of legal proceedings as a
defendant or plaintiff in the ordinary course of its business but does not
regard the net result of such proceedings as having a material adverse
effect on the financial position of the Company.
- - continued - Page 13
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 11 - Supplemental Disclosures to Cash Flow Statement
Cash paid during the year for:
Interest $ 139,597
Income taxes 1,222,955
Note 12 - Backlog
At March 31, 1996 the Company had the following backlog (gross revenue)
from signed contracts:
Backlog of work remaining on contracts in progress
at March 31, 1996 $ 50,541,705
Note 13 - Change in Accounting Principal for Postretirement Benefits
Effective April 1, 1995 the Company has adopted Statement of Financial
Standards No. 106 "Employers' Accounting For Postretirement Benefits Other
Than Pensions". The change was adopted as required by generally accepted
accounting principals. SFAS No. 106 requires postretirement benefits
provided by the Company to be expensed during the applicable employment
period of eligible participants. Before adoption of SFAS No. 106 the
Company expensed health care benefits provided to eligible participants as
the benefits were paid. See Note 9 for additional information regarding
postretirement benefits. As a result of the adoption of SFAS No. 106, the
Company has expensed in these financial statements the cumulative effect of
this change in accounting principle for postretirement benefits. A schedule
of the cumulative adjustment is as follows:
Cumulative liability of postretirement
benefit through 4/1/95 $ 890,000
Less: Deferred tax (344,000)
---------
Net cumulative effect of change in
accounting principle $ 546,000
=========
Page 14
<PAGE>
Audited Financial Statements
Welcon Management Co.
and Subsidiary
Year ended March 31, 1997
with Report of Independent Auditors
<PAGE>
Welcon Management Co.
Audited Financial Statements
Year Ended March 31, 1997
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 1
AUDITED FINANCIAL STATEMENTS
Consolidated balance sheet 2-3
Consolidated statement of income 4
Consolidated statement of retained earnings 5
Consolidated statement of cash flows 6
Notes to the financial statements 7-14
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Welcon Management Co.
Wilson, North Carolina
We have audited the accompanying consolidated balance sheet of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31,
1997, and the related consolidated statements of income, retained earnings, 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31, 1997
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
Bunch & Company, LLP
Rocky Mount, North Carolina
May 1, 1997
(Except for Note 9, as to which the date is July 13, 1999)
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1997
<TABLE>
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 1,563,024
Temporary cash investments 4,740,000
Accounts receivable 15,087,053
Accounts receivable-other 1,060,730
Inventories - merchandise 1,847,823
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,951,697
Prepaid expenses 174,563
Deferred income tax benefit 267,000
-----------
Total current assets 28,691,890
-----------
Property and Equipment
Property and equipment 8,390,610
Less accumulated depreciation 6,628,092
-----------
Net property and equipment 1,762,518
-----------
Other Assets
Deferred income tax benefit 908,000
Other assets 613,668
-----------
Total other assets 1,521,668
-----------
Total Assets $31,976,076
===========
</TABLE>
See accompanying notes.
Page 2
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1997
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current Liabilities
Current portion of notes payable $ 566,700
Accounts payable 9,098,750
Accrued expenses 3,005,925
Income taxes payable 444,442
Reserve for supplemental compensation 34,332
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,208,326
-----------
Total current liabilities 17,358,475
-----------
Long Term Liabilities
Notes payable, less current maturities 1,045,735
Reserve for supplemental compensation 1,537,949
Accrued postretirement benefit 782,000
-----------
Total long term liabilities 3,365,684
-----------
Total liabilities 20,724,159
-----------
Stockholders' Equity
Common stock, $1 par value; authorized 100,000 shares;
issued and outstanding 15,000 shares 15,000
Capital contributed in excess of par 135,000
Retained earnings 11,101,917
-----------
Total stockholders' equity 11,251,917
-----------
Total Liabilities and Stockholders' Equity $31,976,076
===========
</TABLE>
See accompanying notes.
Page 3
<PAGE>
Welcon Management Co.
Consolidated Statement of Income
Year Ended March 31, 1997
<TABLE>
<S> <C>
CONSTRUCTION INCOME $94,697,392
JOB COSTS 81,083,882
-----------
Gross profit 13,613,510
GENERAL AND ADMINISTRATIVE EXPENSES 8,303,624
-----------
Income from operations 5,309,886
-----------
OTHER INCOME (EXPENSE)
Interest income, net of interest expense 101,531
Other income 50,994
-----------
Net other income 152,525
-----------
Income before income taxes 5,462,411
PROVISION FOR INCOME TAX 2,137,369
-----------
NET INCOME $ 3,325,042
===========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
Welcon Management Co.
Consolidated Statement of Retained Earnings
Year Ended March 31, 1997
<TABLE>
<S> <C>
Retained earnings - beginning $ 7,776,875
Net income 3,325,042
-----------
Retained earnings - ending $11,101,917
===========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
Welcon Management Co.
Consolidated Statement of Cash Flows
Year Ended March 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 3,325,042
-----------
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 922,780
Deferred income taxes (155,000)
Gain on disposal of property (4,560)
Changes in operating assets and liabilities:
Accounts receivable (1,824,808)
Inventories (93,157)
Cost in excess of billings (1,286,536)
Prepaid expenses (943)
Accounts payable 869,109
Accrued liabilities 657,912
Billings in excess of costs (605,076)
Income taxes payable (249,771)
Supplemental compensation reserve 288,982
Accrued postretirement benefit (54,000)
-----------
Total adjustments (1,535,068)
-----------
Net cash provided by operating activities 1,789,974
-----------
Cash flow from investing activities
Cash proceeds from sale of property 12,943
Cash payments for purchase of property (1,429,637)
Net cash value life insurance increase (61,441)
-----------
Net cash used by investing activities (1,478,135)
-----------
Cash flow from financing activities
Proceeds from issuance of short term debt 510,000
Principal payments on long-term debt (238,167)
-----------
Net cash provided by financing activities 271,833
-----------
Net increase in cash and equivalents 583,672
Cash and equivalents, beginning of year 5,719,352
-----------
Cash and equivalents, end of year $ 6,303,024
===========
</TABLE>
See accompanying notes.
Page 6
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies
Nature of business - The Company is a management company located in North
Carolina for its wholly-owned subsidiary, Watson Electrical Construction
Co. The subsidiary is an electrical contractor primarily operating in North
and South Carolina and Virginia. The Company provides credit in the normal
course of business to its customers. The Company performs ongoing credit
evaluations of its customers. Credit losses, when realized, have been
within the range of the Company's expectations and, historically, have not
been significant.
A summary of the Company's significant accounting policies follows:
Basis Of Accounting - 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 statement date is the portion of the
total contract price that the cost expended to date bears to the
anticipated final total cost, based on current estimates of cost to
complete. It is not related to the progress billings to customers.
However, at the time a loss on a contract becomes known, the entire amount
of the estimated ultimate loss is recognized in the financial statements.
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 requiring the revision become
known.
Contract costs include direct material, direct labor and benefits,
subcontract costs and allocations of indirect construction costs. Indirect
construction cost is computed based on the uniform capitalization rules of
the "Tax Reform Act of 1986." The difference between actual expenditures
for indirect construction cost and the amount allocated is charged to
operations for the current year.
Contracts which are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress in
excess of billings (underbillings) is classified as a current asset.
Amounts billed in excess of revenue earned (overbillings) are classified as
current liabilities.
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 require more than one year.
Inventories - Inventories consist of construction materials and supplies
that have not been charged to specific contracts and are stated at the
lower of cost or market. Cost is computed using a moving average.
- -continued- Page 7
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Significant Accounting Policies - continued
Cash and cash equivalents - The Company considers all cash and other highly
liquid investments with maturities of three months or less at the date of
acquisition, to be "cash and cash equivalents."
Cash deposits at banks exceeded federally insured limits at March 31, 1997
by $6,638,900.
Income taxes - Financial statements and tax reporting are prepared using
the percentage-of-completion method of accounting with contracts considered
closed when they are substantially complete. For income tax reporting, the
Tax Reform Act of 1986 requires that all contracts be reported 100%
percentage-of-completion except for residential contracts which are
reported 70% percentage-of-completion (the remaining 30% profit is
recognized upon completion of the contract).
Property And Equipment - Property and equipment is stated at cost and
depreciation is computed using accelerated methods over the assets
estimated useful lives. Maintenance and repairs are charged to income as
incurred; major renewals and improvements are capitalized. The major
components of property and equipment are:
<TABLE>
<CAPTION>
Description Years
--------------------- -------------
<S> <C>
Vehicles 3 - 4
Tools 3
Furniture, fixtures and office equipment 6 - 10
Equipment 4 - 8
Leasehold improvements Term of lease
</TABLE>
Use Of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
NOTE 2 - Related Party Transactions
The Company leases a building, garage and parking lot on Hood Street, the
home office property on Ward Boulevard and two condominiums from W.E. and
Catherine Boyette, stockholders. The Company paid $96,669 in rental
expense on these properties for the year ended March 31, 1997.
- -continued- Page 8
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 2 - Related Party Transactions - continued
The Company also leases from WEB Properties, Inc. (a corporation wholly
owned by W. E. Boyette) properties used as division offices of the Company.
Total rentals paid for the year ending March 31, 1997 on these properties
were $412,791. See Note 5 for additional details.
NOTE 3 - Contracts in Progress
Contract amounts, accumulated costs, estimated earnings and the related
billings to date on contracts in progress at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Contract Contract
Revenue Costs
------------- -------------
<S> <C> <C>
Total contract activity $147,702,454 $130,102,844
Less earnings and costs recorded in prior years (53,005,062) (49,018,962)
------------ ------------
Earnings and costs for the period ended
March 31, 1997 94,697,392 81,083,882
Less current year earnings and costs of
contracts completed during the period (57,667,342) (46,639,807)
Earnings and costs recorded in a previous
period still in progress at March 31, 1997 20,168,892 18,877,875
------------ ------------
Totals - Jobs in Progress at March 31, 1997 57,198,942 53,321,950
============ ============
Amounts earned on jobs in progress at
March 31, 1997 57,198,942
Less anticipated losses in excess of revenues earned (112,542)
Progress billings on jobs in progress at
March 31, 1997 (57,343,029)
------------
(256,629)
============
Represented by:
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,951,697
Less amounts billed in excess of costs and
estimated earnings on uncompleted contracts (4,208,326)
------------
(256,629)
============
</TABLE>
- -continued- Page 9
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 4 - Income Taxes
The Company files a consolidated federal income tax return with
its subsidiary, Watson Electrical Construction Co. The current year
provision (benefit) for income tax is:
<TABLE>
<S> <C>
Current $ 2,292,369
Deferred (155,000)
-----------
Total 2,137,369
===========
</TABLE>
Current income taxes are stated at statutory rates as determined by tax
reporting methods. Deferred income taxes result from timing differences in
the recognition of revenue and expenses for tax and financial statement
purposes. Timing differences include recognition of income on long term
contracts, accruals on earned vacation benefits, postretirement benefits
and recognition of expense on supplemental compensation agreements. The
measurements of deferred tax assets and liabilities is based on provisions
of the enacted tax law; the effects of the future changes in tax laws or
rates are not considered. The components of the net deferred tax asset at
March 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred assets $ 1,175,000
Deferred tax liabilities 0
Valuation allowance 0
-----------
1,175,000
===========
The net deferred tax asset at March 31, 1997
is reflected in the balance sheet as follows:
Current deferred tax asset $ 267,000
Long term deferred tax asset 908,000
-----------
1,175,000
===========
</TABLE>
Income tax returns have been audited by the Internal Revenue Service
through fiscal year ending March 31, 1990.
Note 5 - Lease Agreements
The Company leases substantially all of the land and buildings used in
operations from related parties (see Note 2). The leases are generally for
a period of five years and classified as operating leases. The Company is
responsible for executory costs.
- -continued- Page 10
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 5 - Lease Agreements (continued)
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
3-31-98 $ 588,728
3-31-99 168,495
Thereafter 0
-----------
757,223
===========
</TABLE>
Note 6 - Notes Payable And Credit Arrangements
The Company and its subsidiary entered into a revolving line of credit in
August 1996 with its bank for an amount not to exceed $3,000,000. The line
of credit bears interest at LIBOR plus 2.5% and is payable monthly. The
credit line is unsecured and is guaranteed by WEB Properties, Inc. The
line of credit agreement contains covenants which, among others, requires
that certain financial ratios be maintained. At March 31, 1997 the Company
was in compliance with these requirements.
Notes payable at March 31 consist of the following:
<TABLE>
<S> <C>
Revolving line of credit from
NationsBank (see above) $ 0
Combined notes to individual; interest rate of 7%,
monthly payments of $17,412 including interest; notes
maturing August 2003, secured by the stock of Welcon
Management Co. and Watson Electrical Construction Co. 1,112,435
Note to stockholder, interest rate of 9%; interest payable
yearly on March 31; due on or before March 14, 1999,
unsecured 500,000
-----------
Total notes payable 1,612,435
Less current maturities 566,700
-----------
Long term portion 1,045,735
===========
</TABLE>
- -continued- Page 11
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 6 - Notes Payable (continued)
<TABLE>
<CAPTION>
Aggregate maturities of notes payable at
March 31, 1997 are as follows:
<S> <C>
3-31-98 $ 566,700
3-31-99 71,522
3-31-00 76,692
3-31-01 82,236
3-31-02 88,181
Thereafter 727,104
----------
Total $1,612,435
==========
</TABLE>
Note 7 - Pension And Retirement Plans
The Companies sponsored a noncontributory defined benefit plan which was
terminated on November 30, 1994; final closure of the plan was completed in
September 1996. The benefit obligation was settled by one of the following
options elected by each participant: (1) purchasing annuity contracts, (2)
lump sum payment, or (3) rolling over the benefit obligation to an
IRA/qualified retirement plan. Active participants could elect to roll
over the benefit obligation to the Companies' newly sponsored 401(k)
retirement plan.
In place of the defined benefit plan described above, the Companies
sponsored a defined contribution pension plan (401k) effective for the year
beginning April 1, 1994. The plan covers all employees who have attained
age 21 and perform at least 1,000 hours of service per year. For the year
ended March 31, 1997, the Companies matched 50% of the first 4% of
compensation each participant elected to contribute. In addition, for the
1996 calendar year, the Companies made an additional match of 50% of the
employee's contribution up to 4% of compensation for each participant who
completed at least 1000 hours of service during the 1996 plan year and was
employed on December 31, 1996. The total amount contributed for the year
ending March 31, 1997 was $586,353.
Note 8 - Supplemental Compensation
The Company's subsidiary has adopted a supplemental compensation benefit
plan for selected management employees effective April 1983. The Company
makes discretionary contributions based on eligible participants' earnings.
Interest earnings on participants' reserve balances are accrued at a fixed
rate and expensed annually. Benefits are paid to employees upon retirement
and attaining age 55 or as death benefits. Benefits are generally paid
monthly over a period of ten years. The Company has procured life
insurance policies on its employees to aid in meeting its obligations under
this agreement. Any proceeds from such policies shall be treated as
general assets of the Company and do not represent the vested, secured or
preferred interest of participants or beneficiaries; and the Company has no
obligation to continue the life insurance in force.
- -continued- Page 12
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 8 - Supplemental Compensation (continued)
For the year ended March 31, 1997, the Company made a discretionary
contribution of up to 20% of eligible participants' earnings. Total
supplemental compensation expense for 1997 was $354,265. Current and long
term maturities of supplemental payments are as follows:
<TABLE>
<CAPTION>
Short Long
Term Term
---- ----
<S> <C> <C>
Retirees and beneficiaries $34,332 $ 137,111
Active employees 0 1,400,838
------- ----------
Total 34,332 1,537,949
======= ==========
</TABLE>
Note 9 - Post Retirement Medical Benefits
The Company sponsors a postretirement health care plan covering qualified
retirees. As of March 31, 1996 the plan was effectively terminated and
eligible participants were limited to those with twenty-five years of
service as of January 1, 1994 or fifteen years of service after their
reaching age 40. The plan is unfunded and paid through its operating
capital.
The following table sets forth the plan's funded status reconciled with the
amount shown on the balance sheet at March 31, 1997:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligations:
Current retirees $ 782,000
Current employees eligible for immediate benefits -
Current employees eligible for future benefits -
Plan assets at fair value -
---------
Accumulated postretirement obligation in excess
of plan assets 782,000
Unrecognized net gain -
Prior service cost not yet recognized -
Unrecognized transition obligation -
---------
Accrued postretirement benefit cost $ 782,000
=========
Net periodic postretirement benefit cost included
the following components for the year ended March 31, 1997:
Service cost-benefits attributable to service during the year $ -
Interest on accumulated postretirement benefit obligation 60,610
Recognition of transition obligation -
Experience (gains) and losses (64,610)
---------
Net periodic postretirement benefit cost $ (4,000)
=========
</TABLE>
For measurement purposes, a 5% annual rate of increase in per capita health care
costs of covered benefits was assumed. The weighted average discount rate used
in estimating the accumulated postretirement obligation was 7.25%.
Note 10 - Litigation
The Company is a party to a small number of legal proceedings as a
defendant or plaintiff in the ordinary course of its business but does not
regard the net result of such proceedings as having a material adverse
effect on the financial position of the Company.
- -continued- Page 13
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 11 - Supplemental Disclosures to Cash Flow Statement
<TABLE>
<S> <C>
Cash paid during the year for:
Interest $ 87,519
Income taxes 3,615,427
</TABLE>
NOTE 12 - Backlog
At March 31, 1997 the Company had the following backlog (gross revenue)
from signed contracts:
<TABLE>
<S> <C>
Backlog of work remaining on contracts in progress
at March 31, 1997 $ 60,522,494
</TABLE>
Page 14
<PAGE>
Audited Financial Statements
Welcon Management Co.
and Subsidiary
Year ended March 31, 1998
with Report of Independent Auditors
<PAGE>
Welcon Management Co.
Audited Financial Statements
Year Ended March 31, 1998
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 1
AUDITED FINANCIAL STATEMENTS
Consolidated balance sheet 2-3
Consolidated statement of income 4
Consolidated statement of retained earnings 5
Consolidated statement of cash flows 6
Notes to the financial statements 7-14
</TABLE>
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Welcon Management Co.
Wilson, North Carolina
We have audited the accompanying consolidated balance sheet of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31,
1998, and the related consolidated statements of income, retained earnings, 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Welcon Management
Co. and its subsidiary, Watson Electrical Construction Co., as of March 31, 1998
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
Bunch & Company
Rocky Mount, North Carolina
May 1, 1998
(Except for Note 9, as to which the date is July 13, 1999)
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1998
<TABLE>
<S> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,280,593
Temporary cash investments 6,200,000
Accounts receivable 19,496,838
Accounts receivable-other 166,907
Inventories - merchandise 1,980,919
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,506,273
Prepaid expenses 107,374
Deferred income tax benefit 271,000
-----------
Total current assets 34,009,904
-----------
Property and Equipment
Property and equipment 9,812,725
Less accumulated depreciation 7,350,930
-----------
Net property and equipment 2,461,795
-----------
Other Assets
Deferred income tax benefit 948,000
Other assets 672,985
-----------
Total other assets 1,620,985
-----------
Total Assets $38,092,684
===========
</TABLE>
See accompanying notes.
Page 2
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
March 31, 1998
Liabilities and Stockholders' Equity
<TABLE>
<S> <C>
Current Liabilities
Current portion of notes payable $ 71,522
Accounts payable 9,209,687
Accrued expenses 3,289,842
Income taxes payable 574,710
Reserve for supplemental compensation 41,791
Billings in excess of costs and estimated earnings
on uncompleted contracts 5,741,050
-----------
Total current liabilities 18,928,602
-----------
Long Term Liabilities
Notes payable, less current maturities 1,474,213
Reserve for supplemental compensation 1,743,535
Accrued postretirement benefits 728,000
-----------
Total long term liabilities 3,945,748
-----------
Total liabilities 22,874,350
-----------
Stockholders' Equity
Common stock, $1 par value; authorized 100,000 shares;
issued and outstanding 15,000 shares 15,000
Capital contributed in excess of par 135,000
Retained earnings 15,068,334
-----------
Total stockholders' equity 15,218,334
-----------
Total Liabilities and Stockholders' Equity $38,092,684
===========
</TABLE>
See accompanying notes.
Page 3
<PAGE>
Welcon Management Co.
Consolidated Statement of Income
Year Ended March 31, 1998
<TABLE>
<S> <C>
CONSTRUCTION INCOME $109,517,879
JOB COSTS 93,805,217
------------
Gross profit 15,712,662
GENERAL AND ADMINISTRATIVE EXPENSES 9,496,023
------------
Income from operations 6,216,639
------------
OTHER INCOME (EXPENSE)
Interest income, net of interest expense 228,536
Other income 73,620
------------
Net other income 302,156
------------
Income before income taxes 6,518,795
PROVISION FOR INCOME TAX 2,552,378
------------
NET INCOME $ 3,966,417
============
</TABLE>
See accompanying notes.
Page 4
<PAGE>
Welcon Management Co.
Consolidated Statement of Retained Earnings
Year Ended March 31, 1998
<TABLE>
<S> <C>
Retained earnings - beginning $11,101,917
Net income 3,966,417
----------------
Retained earnings - ending $15,068,334
================
</TABLE>
See accompanying notes.
Page 5
<PAGE>
Welcon Management Co.
Consolidated Statement of Cash Flows
Year Ended March 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 3,966,417
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,145,078
Deferred income taxes (44,000)
Gain on disposal of property (29,756)
Changes in operating assets and liabilities:
Accounts receivable (3,515,962)
Inventories (133,096)
Cost in excess of billings 445,424
Prepaid expenses 67,189
Accounts payable 110,937
Accrued liabilities 283,915
Billings in excess of costs 1,532,724
Income taxes payable 130,268
Supplemental compensation reserve 213,045
Accrued postretirement benefits (54,000)
-----------
Total adjustments 151,766
-----------
Net cash provided by operating activities 4,118,183
-----------
Cash flow from investing activities
Cash proceeds from sale of property 39,076
Cash payments for purchase of property (1,848,116)
Net cash value life insurance increase (64,874)
-----------
Net cash used by investing activities (1,873,914)
-----------
Cash flow from financing activities
Proceeds from issuance of long term debt 500,000
Principal payments on long-term debt (566,700)
-----------
Net cash used by financing activities (66,700)
-----------
Net increase in cash and equivalents 2,177,569
Cash and equivalents, beginning of year 6,303,024
-----------
Cash and equivalents, end of year $ 8,480,593
===========
</TABLE>
See accompanying notes.
Page 6
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies
Nature of business - The Company is a management company located in North
Carolina for its wholly-owned subsidiary, Watson Electrical Construction
Co. The subsidiary is an electrical contractor primarily operating in North
and South Carolina and Virginia. The Company provides credit in the normal
course of business to its customers. The Company performs ongoing credit
evaluations of its customers. Credit losses, when realized, have been
within the range of the Company's expectations and, historically, have not
been significant.
A summary of the Company's significant accounting policies follows:
Basis of Accounting - 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 statement date is the portion of the
total contract price that the cost expended to date bears to the
anticipated final total cost, based on current estimates of cost to
complete. It is not related to the progress billings to customers.
However, at the time a loss on a contract becomes known, the entire amount
of the estimated ultimate loss is recognized in the financial statements.
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 requiring the revision become
known.
Contract costs include direct material, direct labor and benefits,
subcontract costs and allocations of indirect construction costs. Indirect
construction cost is computed based on the uniform capitalization rules of
the "Tax Reform Act of 1986." The difference between actual expenditures
for indirect construction cost and the amount allocated is charged to
operations for the current year.
Contracts which are substantially complete are considered closed for
financial statement purposes. Revenue earned on contracts in progress in
excess of billings (underbillings) is classified as a current asset.
Amounts billed in excess of revenue earned (overbillings) are classified as
current liabilities.
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 require more than one year.
Inventories - Inventories consist of construction materials and supplies
that have not been charged to specific contracts and are stated at the
lower of cost or market. Cost is computed using a moving average.
- -continued- Page 7
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 1 - Significant Accounting Policies - continued
Cash and cash equivalents - The Company considers all cash and other highly
liquid investments with maturities of three months or less at the date of
acquisition, to be "cash and cash equivalents."
Cash deposits at banks exceeded federally insured limits at March 31, 1998
by $9,228,200.
Income taxes - Financial statements and tax reporting are prepared using
the percentage-of-completion method of accounting with contracts considered
closed when they are substantially complete. For income tax reporting, the
Tax Reform Act of 1986 requires that all contracts be reported 100%
percentage-of-completion except for residential contracts which are
reported 70% percentage-of-completion (the remaining 30% profit is
recognized upon completion of the contract).
Property And Equipment - Property and equipment is stated at cost and
depreciation is computed using accelerated methods over the assets
estimated useful lives. Maintenance and repairs are charged to income as
incurred; major renewals and improvements are capitalized. The major
components of property and equipment are:
<TABLE>
<CAPTION>
Description Years
----------------- -------------
<S> <C>
Vehicles 3 - 4
Tools 3
Furniture, fixtures and office equipment 6 - 10
Equipment 4 - 8
Leasehold improvements Term of lease
</TABLE>
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Note 2 - Related Party Transactions
The Company leases a building, garage and parking lot on Hood Street, the
home office property on Ward Boulevard and two condominiums from W.E. and
Catherine Boyette, stockholders. The Company paid $104,148 in rental
expense on these properties for the year ended March 31, 1998.
- -continued- Page 8
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 2 - Related Party Transactions - continued
The Company also leases from WEB Properties, Inc. (a corporation wholly
owned by W. E. Boyette) properties used as division offices of the Company.
Total rentals paid for the year ending March 31, 1998 on these properties
were $439,908. See Note 5 for additional details.
Note 3 - Contracts in Progress
Contract amounts, accumulated costs, estimated earnings and the related
billings to date on contracts in progress at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Contract Contract
Revenue Costs
------- -----
<S> <C> <C>
Total contract activity $166,604,279 $147,014,625
Less earnings and costs recorded in prior years (57,086,400) (53,209,408)
------------ ------------
Earnings and costs for the period ended
March 31, 1998 109,517,879 93,805,217
Less current year earnings and costs of
contracts completed during the period (60,821,934) (49,965,458)
Earnings and costs recorded in a previous
period still in progress at March 31, 1998 15,979,585 14,905,453
------------ ------------
Totals - Jobs in Progress at March 31, 1998 64,675,530 58,745,212
============ ============
Amounts earned on jobs in progress at
March 31, 1998 64,675,530
Less anticipated losses in excess of revenues earned (8,097)
Progress billings on jobs in progress at
March 31, 1998 (66,902,210)
------------
(2,234,777)
============
Represented by:
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,506,273
Less amounts billed in excess of costs and
estimated earnings on uncompleted contracts (5,741,050)
------------
(2,234,777)
============
</TABLE>
- -continued- Page 9
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 4 - Income Taxes
The Company files a consolidated federal income tax return with its
subsidiary, Watson Electrical Construction Co. The current year provision
(benefit) for income tax is:
<TABLE>
<S> <C>
Current $2,596,378
Deferred (44,000)
----------
Total 2,552,378
==========
</TABLE>
Current income taxes are stated at statutory rates as determined by tax
reporting methods. Deferred income taxes result from timing differences in
the recognition of revenue and expenses for tax and financial statement
purposes. Timing differences include recognition of income on long term
contracts, accruals on earned vacation benefits, postretirement benefits
and recognition of expense on supplemental compensation agreements. The
measurements of deferred tax assets and liabilities is based on provisions
of the enacted tax law; the effects of the future changes in tax laws or
rates are not considered. The components of the net deferred tax asset at
March 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred assets $1,219,000
Deferred tax liabilities 0
Valuation allowance 0
----------
1,219,000
==========
</TABLE>
The net deferred tax asset at March 31, 1998 is reflected in the balance
sheet as follows:
<TABLE>
<S> <C>
Current deferred tax asset $271,000
Long term deferred tax asset 948,000
----------
1,219,000
==========
</TABLE>
Income tax returns have been audited by the Internal Revenue Service
through fiscal year ending March 31, 1990.
Note 5 - Lease Agreements
The Company leases substantially all of the land and buildings used in
operations from related parties (see Note 2). The leases are generally for
a period of five years and classified as operating leases. The Company is
responsible for executory costs.
- -continued- Page 10
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 5 - Lease Agreements (continued)
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
3-31-99 $ 695,511
3-31-00 678,516
3-31-01 698,916
3-31-02 719,886
3-31-03 741,504
Thereafter --
---------
3,534,333
=========
</TABLE>
Note 6 - Notes Payable And Credit Arrangements
The Company and its subsidiary entered into a revolving line of credit in
August 1996 with its bank for an amount not to exceed $3,000,000. The line
of credit bears interest at LIBOR plus 1.75% (effective August 30, 1997,
prior rate of LIBOR plus 1.5%) and is payable monthly. The credit line is
unsecured and is guaranteed by WEB Properties, Inc. The line of credit
agreement contains covenants which, among others, requires that certain
financial ratios be maintained. At March 31, 1998 the Company was in
compliance with these requirements.
Notes payable at March 31 consist of the following:
<TABLE>
<S> <C>
Revolving line of credit from
NationsBank (see above) $ 0
Combined notes to individual; interest
rate of 7%, monthly payments of $17,412
including interest; notes maturing
August 2003, secured by the stock of
Welcon Management Co. and Watson
Electrical Construction Co. 1,045,735
Note to stockholder, interest rate of 9%;
interest payable yearly on March 31; due
on or before March 23, 2001, unsecured 500,000
----------
Total notes payable 1,545,735
Less current maturities 71,522
----------
Long term portion 1,474,213
==========
</TABLE>
- -continued- Page 11
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 6 - Notes Payable (continued)
Aggregate maturities of notes payable at
March 31, 1998 are as follows:
<TABLE>
<S> <C>
3-31-99 $ 71,522
3-31-00 76,692
3-31-01 582,236
3-31-02 88,181
3-31-03 94,556
Thereafter 632,548
----------
1,545,735
==========
</TABLE>
Note 7 - Pension and Retirement Plans
The Companies sponsored a defined contribution pension plan (401k)
effective for the year beginning April 1, 1994. The plan covers all
employees who have attained age 21 and perform at least 1,000 hours of
service per year. For the years ended March 31, 1998, the Companies
matched 50% of the first 4% of compensation each participant elected to
contribute. In addition, for the 1997 and 1996 calendar years, the
Companies made an additional match of 50% of the employee's contribution up
to 4% of compensation for each participant who completed at least 1000
hours of service during the respective plan years and was employed on
December 31 of the plan year. The total amount contributed for 1998 was
$669,392.
Note 8 - Supplemental Compensation
The Company's subsidiary has adopted a supplemental compensation benefit
plan for selected management employees effective April 1983. The Company
makes discretionary contributions based on eligible participants' earnings.
Interest earnings on participants' reserve balances are accrued at a fixed
rate and expensed annually. Benefits are paid to employees upon retirement
and attaining age 55 or as death benefits. Benefits are generally paid
monthly over a period of ten years. The Company has procured life
insurance policies on its employees to aid in meeting its obligations under
this agreement. Any proceeds from such policies shall be treated as
general assets of the Company and do not represent the vested, secured or
preferred interest of participants or beneficiaries; and the Company has no
obligation to continue the life insurance in force.
- -continued- Page 12
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 8 - Supplemental Compensation (continued)
For the year ended March 31, 1998, the Company made a discretionary
contribution of up to 10% of eligible participants' earnings. Total
supplemental compensation expense for 1998 was $264,578. Current and long
term maturities of supplemental payments are as follows:
<TABLE>
<CAPTION>
Short Long
Term Term
-------- ----------
<S> <C> <C>
Retirees and beneficiaries $41,791 $ 95,265
Active employees -0- 1,648,270
------- ----------
Total 41,791 1,743,535
======= ==========
</TABLE>
Note 9 - Post Retirement Medical Benefits
The Company sponsors a postretirement health care plan covering qualified
retirees. As of March 31, 1996 the plan was effectively terminated and
eligible participants were limited to those with twenty-five years of
service as of January 1, 1994 or fifteen years of service after their
reaching age 40. The plan is unfunded and paid through its operating
capital.
The following table sets forth the plan's funded status reconciled with the
amount shown on the balance sheet at March 31, 1998:
Accumulated postretirement benefit obligations:
Current retirees $ 728,000
Current employees eligible for immediate benefits -
Current employees eligible for future benefits -
Plan assets at fair value -
----------
Accumulated postretirement obligation in excess
of plan assets 728,000
Unrecognized net gain -
Prior service cost not yet recognized -
Unrecognized transition obligation -
----------
Accrued postretirement benefit cost $ 728,000
==========
Net periodic postretirement benefit cost included
in the following components for the year ended
March 31, 1998:
Service cost-benefits attributable to service
during the year $ -
Interest on accumulated postretirement benefit
obligation 56,695
Recognition of transition obligation -
Experience (gains) and losses (21,899)
----------
Net periodic postretirement benefit cost $ 34,796
==========
For measurement purposes, a 6% annual rate of increase in per capita
health care costs of covered benefits was assumed. The weighted average
discount rate used in estimating the accumulated postretirement
obligation was 7.25%.
Note 10 - Litigation
The Company is a party to a small number of legal proceedings as a
defendant or plaintiff in the ordinary course of its business but does not
regard the net result of such proceedings as having a material adverse
effect on the financial position of the Company.
- -continued-
Page 13
<PAGE>
Welcon Management Co.
Notes to the Financial Statements
Note 11 - Supplemental Disclosures to Cash Flow Statement
<TABLE>
<S> <C>
Cash paid during the year for:
Interest $ 113,750
Income taxes 1,591,318
</TABLE>
Note 12 - Backlog
At March 31, 1998 the Company had the following backlog (gross revenue)
from signed contracts:
<TABLE>
<S> <C>
Backlog of work remaining on
contracts in progress at March
31, 1998 $ 53,835,874
</TABLE>
Page 14
<PAGE>
Compiled Financial Statements
Welcon Management Co.
and Subsidiary
Six Months Ended September 30, 1998 and 1997
<PAGE>
To the Board of Directors
Welcon Management Co.
Wilson, North Carolina
We have compiled the accompanying consolidated balance sheets of Welcon
Management Co. and its subsidiary, Watson Electrical Construction Co., as of
September 30, 1998 and 1997, and the related consolidated statements of income,
retained earnings, and cash flows for the six months then ended, in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
Management has elected to omit substantially all of the disclosures required by
generally accepted accounting principles. If the omitted disclosures were
included, they might influence the user's conclusions about the Company's
financial position, results of operations, and cash flows. Accordingly, these
financial statements are not designed for those who are not informed about such
matters.
Bunch & Company, LLP
Rocky Mount, North Carolina
July 13, 1999
<PAGE>
Welcon Management Co.
and Subsidiary
Compiled Financial Statements
Six Months Ended September 30, 1998 and 1997
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
ACCOUNTANTS' REPORT 1
COMPILED FINANCIAL STATEMENTS (unaudited)
Consolidated balance sheets 2
Consolidated statements of income 4
Consolidated statements of retained earnings 5
Consolidated statements of cash flows 6
Notes to the financial statements 7
</TABLE>
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 8,495,112 $ 7,795,796
Accounts receivable 18,678,573 17,545,153
Accounts receivable-other 37,374 26,867
Inventories - merchandise 2,071,263 2,096,119
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,617,929 2,337,695
Prepaid expenses 131,649 120,663
Deferred income tax benefit 271,000 267,000
----------- -----------
Total current assets 33,302,900 30,189,293
----------- -----------
Property and Equipment
Property and equipment 10,687,847 9,282,787
Less accumulated depreciation 7,663,164 6,897,982
----------- -----------
Net property and equipment 3,024,683 2,384,805
----------- -----------
Other Assets
Deferred income tax benefit 948,000 908,000
Other assets 693,740 634,322
----------- -----------
Total other assets 1,641,740 1,542,322
----------- -----------
Total Assets $37,969,323 $34,116,420
=========== ===========
</TABLE>
See accountants' report and accompanying note.
Page 2
<PAGE>
Welcon Management Co.
Consolidated Balance Sheet
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of notes payable $ - $ 69,069
Accounts payable 9,483,357 8,852,431
Accrued expenses 1,385,394 1,057,411
Income taxes payable 0 627,718
Reserve for supplemental compensation 41,791 34,332
Billings in excess of costs and estimated earnings
on uncompleted contracts 6,512,794 5,324,015
----------- -----------
Total current liabilities 17,423,336 15,964,976
----------- -----------
Long Term Liabilities
Notes payable, less current maturities 0 1,510,598
Reserve for supplemental compensation 1,947,127 1,726,115
Accrued postretirement benefits 701,000 755,000
----------- -----------
Total long term liabilities 2,648,127 3,991,713
----------- -----------
Total liabilities 20,071,463 19,956,689
----------- -----------
Stockholders' Equity
Common stock, $1 par value; authorized 100,000 shares;
issued and outstanding 15,000 shares 15,000 15,000
Capital contributed in excess of par 135,000 135,000
Retained earnings 17,747,860 14,009,731
----------- -----------
Total stockholders' equity 17,897,860 14,159,731
----------- -----------
Total Liabilities and Stockholders' Equity $37,969,323 $34,116,420
=========== ===========
</TABLE>
See accountants' report and accompanying note.
Page 3
<PAGE>
Welcon Management Co.
Consolidated Statement of Income
Six Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CONSTRUCTION INCOME $54,220,565 $54,286,544
JOB COSTS 45,890,355 47,124,172
----------------- ---------------
Gross profit 8,330,210 7,162,372
GENERAL AND ADMINISTRATIVE EXPENSES 4,124,119 2,579,671
----------------- ---------------
Income from operations 4,206,091 4,582,701
----------------- ---------------
OTHER INCOME (EXPENSE)
Interest income, net of interest expense 158,535 100,868
Other income (expense) (4,450) 61,102
----------------- ---------------
Net other income 154,085 161,970
----------------- ---------------
Income before income taxes 4,360,176 4,744,671
PROVISION FOR INCOME TAX 1,680,650 1,836,857
----------------- ---------------
NET INCOME $ 2,679,526 $ 2,907,814
================= ===============
</TABLE>
See accountants' report and accompanying note.
Page 4
<PAGE>
Welcon Management Co.
Consolidated Statement of Retained Earnings
Six Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Retained earnings - beginning $15,068,334 $11,101,917
Net income 2,679,526 2,907,814
---------------- ----------------
Retained earnings - ending (unaudited) $17,747,860 $14,009,731
================ ================
</TABLE>
See accountants' report and accompanying note.
Page 5
<PAGE>
Welcon Management Co.
Consolidated Statement of Cash Flows
Six Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,679,526 $ 2,907,814
----------- -----------
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 590,998 483,997
Loss (gain) on disposal of property 17,382 (27,222)
Changes in operating assets and liabilities:
Accounts receivable 947,798 (1,424,237)
Inventories (90,344) (248,296)
Cost in excess of billings (111,656) 1,614,002
Prepaid expenses (24,275) 53,900
Accounts payable 273,670 (246,319)
Accrued liabilities (1,904,448) (1,948,514)
Billings in excess of costs 771,744 1,115,689
Income taxes payable (574,710) 183,276
Supplemental compensation reserve 203,592 188,166
Accrued postretirement benefits (27,000) (27,000)
----------- -----------
Total adjustments 72,751 (282,558)
----------- -----------
Net cash provided by operating activities 2,752,277 2,625,256
----------- -----------
Cash flow from investing activities
Cash proceeds from sale of property 115,850 37,702
Cash payments for purchase of property (1,287,118) (1,111,207)
Net cash value life insurance increase (20,755) (26,211)
----------- -----------
Net cash used by investing activities (1,192,023) (1,099,716)
----------- -----------
Cash flow from financing activities
Principal payments on long-term debt (1,545,735) (32,768)
----------- -----------
Net cash used by financing activities (1,545,735) (32,768)
----------- -----------
Net increase in cash and equivalents 14,519 1,492,772
Cash and equivalents, beginning of year 8,480,593 6,303,024
----------- -----------
Cash and equivalents, end of year $ 8,495,112 $ 7,795,796
=========== ===========
</TABLE>
See accountants' report and accompanying note
Page 6
<PAGE>
Welcon Management Co.
Note to the Financial Statements (unaudited)
Note 1. 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 September 30, 1998 and 1997 and the results of
operations, statement of retained earnings and cash flows for the six months
ended September 30, 1998 and 1997, as presented in the accompanying unaudited
interim financial statements information.
Page 7
