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PROSPECTUS SUPPLEMENT Filed Pursuant to Rules 424(b)(3)
To Prospectus dated March 16, 1999 Registration No. 333-60053
Nasdaq Stock Market Trading Symbol--BOSS
27,893,549 Shares of Common Stock
Building One Services Corporation has prepared this prospectus supplement to
restate the prospectus dated March 16, 1999. This prospectus supplement is
referred to herein as the "prospectus" because it supersedes the prospectus
dated March 16, 1999 and the prospectus supplement dated March 26, 1999.
With this prospectus, we are offering and issuing shares of our common stock
from time to time in connection with the acquisition of other businesses. We
may structure the acquisition of businesses as:
. a merger with Building One Services or a subsidiary of Building One
Services;
. a purchase of all of the stock of the other business; or
. a purchase of the assets of the other business.
We will negotiate the price and other terms of the acquisition with the
owners of the businesses that are acquired. We will not pay underwriting
discounts or commissions, although fees may be paid to persons who bring
specific acquisitions to our attention. Any person receiving such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933.
Building One Services Corporation provides services that are necessary for
the operation and maintenance of buildings. The services that we currently
provide include mechanical and electrical installation and maintenance
services and janitorial and maintenance management services. We began our
business in February 1997 and have grown both internally and through the
acquisition of other businesses. Since our formation, we have acquired 37
businesses offering a variety of facilities services. As of May 14, 1999,
21,693,105 shares of Building One Services Corporation common stock are
outstanding.
See "Risk Factors" beginning on page 5 for certain information that you
should consider before accepting stock as part of the purchase price for our
acquisition of your business.
Building One Services Corporation
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
202/261-6000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. It is illegal for any person to tell
you otherwise.
The date of this Prospectus is May 17, 1999
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TABLE OF CONTENTS
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Page
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Where You Can Find More Information...................................... 2
Prospectus Summary....................................................... 4
Recent Developments...................................................... 4
Risk Factors............................................................. 5
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Introduction to Selected Financial Data.................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 33
Executive Compensation................................................... 36
Certain Relationships and Related Party Transactions..................... 40
Principal Stockholders................................................... 41
Description of Capital Stock............................................. 42
Plan of Distribution..................................................... 44
Restrictions on Resale................................................... 44
Legal Matters............................................................ 45
Experts.................................................................. 45
Index to Financial Statements............................................ i
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and, for a set fee, copy any of the
other information we file at the following SEC public reference facilities:
. 450 Fifth Street, N.W.
Washington, DC 20549
. Seven World Trade Center
Suite 1300
New York, New York 10048
. Citicorp Center
Suite 1400
500 West Madison Avenue
Chicago, Illinois 60661
Please call the SEC at 800/SEC-0330 for further information on these public
reference facilities. Our SEC filings are also available to the public over
the Internet at the SEC's web site (http://www.sec.gov).
The SEC allows us to "incorporate by reference" the information in documents
that we file with them. This means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information in
documents that we file later with the SEC will automatically update and
supersede this information.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, until our next annual meeting of
stockholders:
. Annual Report on Form 10-K for the year ended December 31, 1998; and
. Current Reports on Form 8-K dated February 10, 1999, February 18, 1999,
March 23, 1999 and April 9, 1999.
. Quarterly Report on Form 10-Q for the interim period ended March 31,
1999.
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You may request a copy of these filings, at no charge, by writing or
telephoning us at the following address:
Building One Services Corporation
800 Connecticut Avenue, N.W., Suite 1111
Washington, DC 20006
202/261-6000
In making your investment decision, you should rely only on the information
provided in this prospectus or on any information incorporated by reference.
We have not authorized anyone else to provide you with different information.
In addition, you should not assume that the information in this prospectus or
any other document is accurate as of any date other than the date on the front
of those documents.
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PROSPECTUS SUMMARY
The Company
Building One Services Corporation is a leading provider of integrated
facilities services in the United States. We provide many of the services and
related products necessary for the routine maintenance and operation of
commercial and industrial buildings. Our Building One Mechanical and Electrical
Group provides mechanical and electrical systems installation and maintenance
services and our Building One Service Solutions Group provides janitorial and
maintenance management services. Based on pro forma revenues, we believe that
our company is the second largest provider of mechanical and electrical
contracting and maintenance services in the United States and the largest
provider of janitorial and maintenance management services to the retail
industry in the United States. On a pro forma basis for the year ended December
31, 1998, our revenues were $1,467.3 million.
Since our initial public offering in December 1997 and through May 11, 1999,
we have grown primarily through acquisitions, having acquired 37 companies that
have average revenues of approximately $41 million and an average operating
history of 22 years. We currently have 128 locations that provide facilities
services to over 8,800 commercial, industrial and institutional customers in 48
states. The presidents of our operating companies have an average of over 25
years of experience in the facilities services industry. The businesses that we
have acquired have demonstrated strong internal growth.
Our goal is to become the preeminent single-source provider of facilities
services in the United States. To achieve this goal, we intend to capitalize on
favorable industry dynamics such as the trend by our customers to outsource
significant portions of facilities services requirements to third-party
providers and the trend of building managers to seek a single-source provider
of facilities services. In addition, we believe that the recent combination of
our mechanical and electrical groups will further enhance our ability to offer
combined services to existing customers and to attract new clients seeking to
reduce the number of vendors with which they do business. We believe our highly
skilled workforce, rigorous hiring and training programs, breadth of service
offerings, geographic coverage and reputation provide us with a competitive
advantage in achieving our goal.
Recent Developments
Tender Offer. On May 11, 1999, we announced our purchase from stockholders of
24,618,856 shares of our common stock at a price of $22.50 per share for cash
and 881,144 shares of our common stock underlying options at a price in cash of
$22.50 per share less the exercise price per share of the options. We spent an
aggregate of $560.1 million to pay for the shares using approximately
$120 million of available cash, the net proceeds of $195.5 million from the
sale in a private placement of an aggregate of $200 million of our principal
amount of 10 1/2% senior subordinated notes and $100 million from the sale to
Boss Investment LLC, an affiliate of Apollo Management, L.P., of our 7 1/2%
convertible subordinated debentures and borrowings of $144.6 million under a
credit facility.
In connection with our sale of the convertible subordinated debentures to
Boss Investment, we have increased the size of our Board of Directors to ten
persons and, effective April 30, 1999, have appointed three designees of Boss
Investment, Andrew Africk, Michael Gross and Brooks Newmark, to the Board.
Effective April 30, 1999, Thomas Heule and David Ledecky resigned from the
Board.
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RISK FACTORS
Before you accept our stock as part of the purchase price for our
acquisition of your company, you should be aware that such an investment is
subject to various risks, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this prospectus before you decide to purchase shares of our common
stock.
This prospectus contains some forward-looking statements. Forward-looking
statements give our current expectations or forecasts of future events. You
can identify these statements by the fact that they do not relate strictly to
historical or current facts. They use words like "believe," "may," "will,"
"expect," "intend," "plan," "anticipate," "estimate" or "continue" and other
words and terms of similar meaning. In particular, these include statements
relating to future actions, our tender offer, our acquisition program, the
integration of acquired businesses, our growth in revenues and earnings, our
achievement of operating efficiencies, the trading of our stock and our plans
with respect to potential new products or services. From time to time, we also
may provide oral or written forward-looking statements in other materials.
Any or all of our forward-looking statements in this prospectus or in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned below will be important in determining
our future results. Consequently, no forward-looking statement can be
guaranteed. Actual results could differ significantly.
Risk Factors Related to Our Financing Arrangements
We have a high level of debt on our balance sheet as a result of the tender
offer.
We borrowed approximately $455.0 million and used cash in
the amount of $120.0 million to finance the tender offer
and its related fees and expenses to date. We now have
approximately $492.0 million of outstanding debt. This
debt level and our use of our cash have the following
consequences:
. we have used a significant portion of our cash;
. a substantial portion of our cash flow will be used to
pay interest expense on our debt, which will reduce the
funds that would otherwise be available to us for our
operations, capital expenditures and future business
opportunities and will require us to borrow under our
new revolving credit agreement which provides for
borrowings of $225.0 million, of which approximately
$158.0 million is available as of May 13, 1999;
. a substantial decrease in our net operating cash flows
or an increase in our expenses could make it difficult
for us to meet our debt service requirements and force
us to modify our operations;
. we may have more debt than our competitors, which may
place us at a competitive disadvantage; and
. our high level of debt may make us more vulnerable in a
downturn in our business or the economy in general.
We are subject to restrictive debt covenants that may limit our flexibility in
operating our business.
The credit facility and the indentures governing the
senior subordinated notes and the convertible subordinated
debentures we issued to finance our tender offer contain a
number of significant covenants that will impose
restrictions on us and our subsidiaries. These covenants
include restrictions on:
. indebtedness;
. liens;
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. voluntary prepayments of the senior subordinated notes
and other indebtedness;
. amendments of organizational, corporate and other
documents;
. mergers, acquisitions and dispositions of assets;
. sale-leaseback transactions, capital lease payments and
maintenance of material properties;
. dividends and other payments in respect of capital
stock;
. advances, credit extensions, capital contributions,
investments and capital expenditures;
. transactions with affiliates and formation of
subsidiaries and joint ventures;
. changes in business; and
. entry into a change of control without offering to
redeem the senior subordinated notes.
In addition, we are required to comply with financial
covenants with respect to the amount of our debt as
compared to our earnings before interest expense, taxes,
depreciation and amortization expense ("EBITDA") and the
amount of our EBITDA as compared to our interest expense.
Our indebtedness under the credit facility and the senior
subordinated notes is guaranteed by each of our
subsidiaries and our indebtedness under the credit
facility is secured by a first priority lien on
substantially all of our properties and assets and those
of our subsidiaries, now owned or acquired later. If we
should be unable to borrow under our revolving credit
facility due to a default, we would be left without
sufficient liquidity.
We are subject to restrictive debt covenants that may restrict our ability to
make acquisitions.
We have financed, and intend to continue to finance, most
of our acquisitions with a combination of cash and shares
of our common stock. We have approximately $158.0 million
available under our revolving credit facility to use for
acquisitions and general corporate purposes, including
working capital requirements and contingent payments that
are required by certain acquisition agreements with
respect to previously completed acquisitions. We have paid
approximately $23.5 million in cash to date relating to
such contingent payments. We expect that the remaining
cash portion of such contingent payments will be
approximately $33.5 million in 1999. The ability to borrow
funds under the revolving credit facility is subject to
various conditions, such as continued compliance with the
financial covenants, maximum individual and aggregate
purchase price requirements for acquisitions, adequate
remaining availability under the facility and the nature
of the particular business to be acquired. The restrictive
covenants contained in the indentures relating to the
senior subordinated notes and the convertible subordinated
debentures may also limit our ability to make future
acquisitions. Depending on the pace of our acquisitions,
we may need additional debt or equity financing in order
to continue to acquire businesses. Such financing may not
be available if and when additional cash is needed or it
may not be available on terms that we think are
acceptable. If we do not have sufficient cash to pay the
cash consideration for acquisitions, or cannot otherwise
finance acquisitions, we will be unable meet our
acquisition objectives.
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Boss Investment LLC, together with our management, could significantly
influence the election of directors and other matters that require the
approval of our stockholders.
As of May 14, 1999, our directors, executive officers and
Boss Investment owned beneficially approximately 39.4% of
our outstanding shares of common stock. In addition, many
of the officers of our subsidiaries received our shares of
common stock in connection with the sales of their
businesses to us and generally continue to own at least
50% of such shares.
The terms of the convertible subordinated debentures that
we have issued to Boss Investment provide certain voting
rights to the holders of the convertible subordinated
debentures, subject to the adoption of amendments to our
restated certificate of incorporation. We have agreed to
seek stockholder approval at our next annual meeting of an
amendment to our restated certificate of incorporation
which would authorize the holders of the convertible
subordinated debentures to vote together with the holders
of our common stock on all of the matters submitted to our
stockholders for a vote. In addition, we have agreed to
seek stockholder approval of an amendment to our restated
certificate of incorporation which would authorize the
holders of the convertible subordinated debentures to
elect three of our ten directors. Assuming adoption of the
amendment to the restated certificate of incorporation,
the holders of the convertible subordinated debentures
will be entitled to cast the number of votes that they
would be entitled to cast if they converted the
convertible subordinated debentures into shares of our
common stock. Based upon a conversion price of $22.50 per
share and assuming all of the interest on the convertible
subordinated debentures is paid in cash, Boss Investment
would have the right to cast 4,444,444 votes, or votes
equivalent to approximately 17% of our outstanding shares
of common stock.
If the amendments to our restated certificate of
incorporation are not adopted within specified time
periods, the conversion price will be reduced by up to a
maximum reduction of $4.00, which would increase the
voting power of Boss Investment.
Our directors, executive officers, officers of our
subsidiaries and Boss Investment, if acting together, may
be able to significantly influence the election of
directors and other matters requiring the approval of our
stockholders. See "Principal Stockholders." If we default
on any of our indebtedness or materially breach our
agreement with Boss Investment, Boss Investment has the
right, among other remedies available to a holder of
indebtedness, to elect a majority of our directors,
subject to our prior right to cure any default or breach.
Boss Investment has certain rights over our operations.
Under our agreement with Boss Investment, we are precluded
from entering into various types of transactions or making
certain changes in our capital structure, board size or
management without the consent of Boss Investment. In
addition, Boss Investment has the right to acquire 50% of
the shares of our common stock or convertible securities
that we offer to sell in a private placement. Finally,
Boss Investment and any other holders of the convertible
subordinated debentures have certain rights to require us
to register the shares of common stock that they acquire
upon conversion of the convertible subordinated debentures
for sale under the Securities Act.
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Risks Related to Our Shares
The per share price of our common stock could be adversely affected by sales
of substantial amounts of our common stock or the perception of such likely
sales.
The price of a share of our common stock may be adversely
affected by sales of substantial amounts of our shares of
common stock or by the perception that such sales could
occur. Such sales, or the perception of such sales, could
occur as a result of the following factors.
First, a number of our shares will become freely tradable
when contractual restrictions expire. As of May 14, 1999,
approximately 7,508,357 shares of our 21,693,105
outstanding shares of common stock were subject to
contractual restrictions on resale primarily under the
terms of acquisition agreements we entered into in
connection with our acquisitions of businesses. These
restrictions expire at various times, generally one to two
years from the date of our acquisition. Sales of a large
number of such shares at the same time, or the possibility
that such sales will occur at the time that the
contractual restrictions expire, could adversely affect
the price of our shares of common stock.
The price of our shares may also be adversely affected by
certain registration rights that we have provided to Boss
Investment and to two holders of warrants that are
exercisable for our shares at an exercise price of $20.00
per share. Under our agreement with Boss Investment, Boss
Investment and any other holders of the convertible
subordinated debentures, have the right to require us to
register shares of common stock that they acquire upon
conversion of such notes for resale under the Securities
Act. The convertible subordinated debentures are
convertible into shares of our common stock at an initial
conversion price of $22.50 per share plus all accrued and
unpaid interest. Assuming Boss Investment converts the
principal amount of the notes and assuming we pay all
interest in cash, Boss Investment has the right to acquire
upon conversion 4,444,444 shares of our common stock or
approximately 17% of our currently outstanding shares of
common stock. We will adjust the conversion price if,
among other things, we issue shares of our common stock at
a price below $22.50 per share or the then fair market
value of the common stock.
Jonathan J. Ledecky, our chairman of the Board, and
Friedman, Billings, Ramsey & Co., Inc. ("FBR") have
warrants for 1,950,000 and 1,130,000 shares of our common
stock, respectively, which they acquired at the time of
our initial public offering. Jonathan J. Ledecky and FBR
have the right to require us to register for sale the
shares they acquire upon the exercise of those warrants.
If Jonathan J. Ledecky and FBR determine to sell their
shares at the same time, that could adversely affect the
price of our shares.
The availability of a significant number of shares for
issuance under our benefit plans could also affect the
price of our shares. As of May 13, 1999, we had
outstanding options for the purchase of approximately
3,463,678 shares of our common stock and a stock purchase
plan that provides for the issuance of up to
1,000,000 shares of our common stock.
Our stock price could be volatile.
The reduction in the number of our outstanding shares
could cause our stock price to be more volatile. In
addition, the trading price of our common stock could be
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subject to significant fluctuations in response to
activities of our competitors, variations in quarterly
operating results, changes in market conditions and other
events or factors. The market price of our common stock
could also be adversely affected by confusion or
uncertainty as to the pace of our acquisitions, our
ability to integrate effectively different sectors of the
facilities services industry and the difficulty for
securities analysts and investors to analyze our financial
and operational performance when we operate in more than
one sector of the facilities services industry. Moreover,
the volatility of the stock market could adversely affect
the market price of our common stock and our ability to
raise equity in the public markets.
We may not be able to make acquisitions if we cannot issue shares of our
common stock as part of the consideration.
The owners of potential target companies may be unwilling
to accept shares of our common stock if our stock price is
volatile or trades at lower values. We may be unwilling to
issue shares of our common stock as part of the
consideration to the businesses that we want to acquire if
we believe the market price is unreasonably low.
We have not paid any dividends.
We have not paid any dividends on our common stock to date
and the payment of dividends in the future is restricted
by the terms of our financing arrangements. See "Dividend
Policy."
The Board of Directors plans to propose an amendment to our restated
certificate of incorporation to authorize series preferred stock, which may
adversely affect stockholders in the future.
The Board of Directors plans to propose an amendment to
our restated certificate of incorporation that, if adopted
at our 1999 annual meeting of stockholders by a majority
of the holders of the outstanding shares of our common
stock, will authorize 11,000,000 shares of series
preferred stock. The Board would have the authority to
issue additional shares of this authorized preferred stock
in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any
unissued shares of preferred stock. The issuance of
additional series of preferred stock may adversely affect
the voting and dividend rights, rights upon liquidation
and other rights of the holders of common stock. In the
event it is issued, the preferred stock could be utilized,
under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of our company.
Although we have no present intention to issue any shares
of preferred stock, there can be no assurance that we will
not do so in the future.
Risks Relating to Our Operations
A downturn in commercial and industrial construction could hurt our business.
Approximately 57% of our pro forma revenues in 1998 and
the revenues of the businesses we acquired involved the
installation of mechanical and electrical systems in newly
constructed commercial and industrial buildings. Our
ability to maintain or increase our revenues from new
installation services depends on the levels of new
construction starts in the geographic areas where we
operate. Since the construction industry is cyclical, our
revenues from year to year may fluctuate.
The level of new construction starts is affected by local
economic conditions, changes in interest rates and other
related factors. A downturn in levels of new construction
would have a material adverse effect on our business.
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Our mechanical and electrical installation services are
subject to the seasonal variations in operations and
demands that affect the construction business.
Specifically, the demand for construction services may be
lower during the winter months as a result of inclement
weather conditions. Accordingly, our revenues and
operating results may be lower in the first quarter.
Adverse changes in economic conditions can adversely affect our business.
Our success will depend upon the economic conditions in
the geographic areas in which a substantial number of our
operating companies are located. In addition, our success
will depend upon occupancy levels at office buildings for
which we do business. Higher vacancy rates could have a
material adverse effect on, among other sectors of the
facilities services industry, janitorial and maintenance
management services.
Fixed price contracts with our customers could expose us to losses if our
estimates of project costs are too low.
A substantial portion of our mechanical and electrical
installation contracts are "fixed price" contracts. The
terms of these contracts require us to guarantee the price
of the services we provide and assume the risk that our
costs to perform the services and provide the materials
will be greater than anticipated.
Our profitability in this market is therefore dependent on
our ability to accurately predict the costs associated
with our services. These costs may be affected by a
variety of factors, some of which may be beyond our
control. If we are unable to accurately predict the costs
of fixed price contracts, certain projects could have
lower margins than anticipated, which could have a
material adverse effect on our business.
Our short operating history may make it difficult to evaluate our future
prospects.
Since our initial public offering in December 1997 and
through May 11, 1999, we have acquired 37 businesses.
Therefore, our combined company has a short history of
generating revenues which may make it difficult to
evaluate our future prospects.
Our ability to generate revenues and earnings in the
future will be dependent upon, among other factors:
. the operating results of the businesses we have
acquired;
. the operating results of any future businesses we
acquire; and
. the successful integration and consolidation of those
businesses.
The integration of our acquired businesses may result in substantial costs,
delays or other problems.
We may not be able to successfully integrate our
acquisitions without substantial costs, delays or other
problems. We will have to continue to expend substantial
managerial, operating, financial and other resources to
integrate our businesses. The costs of such integration
could have an adverse effect on short-term operating
results.
The integration of newly-acquired businesses may also lead
to diversion of our management team away from other
ongoing business concerns. In addition, the rapid pace of
our acquisitions of other businesses may adversely affect
our efforts to integrate acquisitions and manage those
acquisitions profitably. We may seek to recruit additional
managers to supplement the incumbent management of the
acquired businesses, but we may not have the ability to
recruit additional candidates with the necessary skills.
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Risks Related to Our Acquisition Strategy
Our growth strategy will be impacted by our ability to acquire additional
businesses.
Our business strategy depends, in part, upon our ability
to compete in the facilities services industry by
expanding into new markets and our ability to broaden the
services we provide by identifying and acquiring other
businesses. We may not be able to identify, attract or
acquire additional businesses. In addition, certain
acquisitions may require the approval of Boss Investment.
We may also be unable to make appropriate acquisitions
because of competition for the acquisition. In pursuing
acquisitions, we compete against other facilities services
providers, some of which are larger than we are and have
greater financial and other resources than we have. We
compete for potential acquisitions based on a number of
factors, including price, terms and conditions, size and
ability to offer cash, stock or other forms of
consideration. In addition, the negotiation of potential
acquisitions may require members of management to divert
their time and resources away from our operations.
Once we acquire a business, we are faced with certain
additional risks, including:
. the possibility that it will be difficult to integrate
the operations into our other operations;
. the possibility that we have acquired substantial
undisclosed liabilities;
. the risks of entering markets or offering services for
which we have no prior experience; and
. the potential loss of customers or employees as a
result of changes in management.
We may not be successful in overcoming these risks.
Investors cannot evaluate the merits of future acquisitions.
Because in most cases we do not seek, and are not required
to seek, stockholder approval of acquisitions, investors
will have no basis on which to evaluate the possible
merits or risks of any future acquisitions. Although our
management and our attorneys and accountants evaluate the
risks of any particular business that we may acquire, we
may be unable to discover all of its risks.
The accounting rules relating to acquisitions result in reductions in our net
income.
When we buy businesses and account for them under the
purchase method of accounting we must account for the
amount by which our purchase price exceeds the fair value
of the net assets of the acquired business as an asset
identified as goodwill. After the acquisition, we must
reduce our net income each quarter by a portion of that
goodwill. We are currently unable to use the pooling-of-
interests method of accounting, which does not result in
goodwill, because of the repurchase of our common stock in
the tender offer.
The consolidation of our industry may adversely affect our acquisition
program.
Many of our acquisitions are subject to the requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, which could adversely affect the pace of our
acquisitions in one or more sectors of the facilities
services industry. Under the Hart-Scott-Rodino Act, we may
be required to divest a portion of our then-existing
operations or those of the acquired business, which may
render a given acquisition disadvantageous. In addition,
if we acquire businesses in regulated industries, we would
be subject to regulatory requirements. Such regulatory
requirements could limit our flexibility in growing and
operating our businesses.
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We believe that the facilities services industry will
continue to undergo considerable consolidation and changes
during the next several years. Such consolidation could
increase the competition we face to acquire facilities
services businesses and increase the prices we must pay
for the businesses that we acquire.
In response to such consolidation, we consider from time
to time additional strategies to enhance stockholder
value. One such strategy that we pursued is the tender
offer. Other strategies include, among others, strategic
alliances and joint ventures, purchase, sale and merger
transactions with other large companies and other similar
transactions. In considering any of these strategies, we
evaluate the consequences of such strategies, including,
among other things, the potential for high levels of debt
that would result from such a transaction, the tax effects
of the transaction and the accounting consequences of the
transaction. In addition, such strategies could have
various other significant consequences, including changes
in management, control or operational or acquisition
strategies. In view of the completed tender offer, we may
determine not to pursue any of these strategies, but, if
any of these are pursued, they may not be completed
successfully.
There may be potential adverse tax consequences in acquisitions.
As a general rule, federal and state tax laws and
regulations have a significant impact upon the structuring
of acquisitions. We will evaluate the possible tax
consequences of any acquisition of a business and will try
to structure the acquisition so as to achieve the most
favorable tax treatment to our business, the acquisition
candidate and our respective stockholders.
Nonetheless, the Internal Revenue Service or the
appropriate state tax authorities may not agree with our
tax treatment of an acquisition. If the IRS or state tax
authorities recharacterize our tax treatment of an
acquisition, our company, the acquisition candidate and/or
our stockholders may suffer adverse tax consequences.
Risks from Competition
Our business is highly competitive, which could cause us to lower our prices,
resulting in reduced revenues and profit margins.
We face a competitive environment in the market for
facilities services. We compete against both large
national and international organizations providing a wide
variety of facilities services to their customers and
numerous smaller companies providing a single service or
fewer services in limited geographic areas.
Other types of companies are also beginning to offer
facilities services. For example, property management
companies and real estate investment trusts (REITS) are
beginning to offer facilities services for the properties
that they own or manage. Also, large heating, ventilation
and air conditioning manufacturers, such as Carrier
Corporation and Honeywell, Inc., and some public
utilities, are active in certain sectors of the facilities
services industry.
Barriers to entry to the markets for certain facilities
services, such as janitorial services, are low, and we
compete against numerous small service providers, many of
which may have more experience in and knowledge of the
local market for such services. Such smaller service
providers may also have lower overhead cost structures and
may be able to provide their services at lower rates than
we can.
12
<PAGE>
In these same markets, we face large competitors that
offer multiple services and that are willing to accept
lower profit margins in order to capture market share. In
addition, we face competition from both large and small
companies that offer only one of the services that we
offer and may face competition in the future from
companies that enter the markets that we are in.
In some geographic regions, we may not be eligible to
compete for certain contracts if our employees are not
subject to collective bargaining arrangements. As a result
of this requirement, we may lose customers or have
difficulty acquiring new customers.
We may have trouble hiring the employees we need and our employment needs may
increase our costs.
Our ability to increase productivity and profitability
will depend upon our ability to recruit, train and retain
large numbers of hourly wage and skilled employees
necessary to meet our service requirements. Competition
for such employees has led to increased wage levels and
employee turnover. Inability to recruit, train and retain
such employees at competitive wage rates could increase
our operating costs.
In addition, many companies that require skilled
employees, such as mechanical and electrical installation
and maintenance and heating, ventilation and air
conditioning companies, are currently experiencing
shortages of qualified employees. We may not be able to
maintain an adequate labor force necessary to efficiently
operate our business. Also, our labor expenses may
increase as a result of a shortage in the supply of hourly
wage or skilled employees. As a result, we may have to
curtail our planned growth and margins may decline.
Although fewer than 10% of our employees are members of
unions, many sectors of the facilities services industry
involve unionized employees. Union activity at our
companies may be disruptive to our business and may
increase our costs. To the extent any of our union
contracts expire or we acquire businesses that are
unionized, we may be required to renegotiate union
contracts in an environment of increasing wage rates. We
may not be able to renegotiate union contracts on terms
favorable to us or without experiencing a work stoppage.
Other Business Risks
We depend on subcontractors to perform a majority of our janitorial services,
which reduces our ability to directly control our workforce and the quality of
services that we provide.
We depend, in part, on subcontractors to provide
janitorial services to our customers. Such reliance
reduces our ability to directly control both our workforce
and the quality of services that we provide. We may not be
able to control our subcontractors and the quality of
services they provide.
Many of our contracts may be terminated on short notice.
Many of our janitorial services contracts have termination
clauses permitting the customer to cancel the contract on
30 to 90 days' notice. While we maintain long-standing
relationships with many of our customers, we may not be
able to keep customers if they exercise their rights to
terminate their contracts prior to expiration.
13
<PAGE>
We may have potential environmental liabilities.
The nature of the facilities services industry often
involves the transport, storage, use and disposal of
cleaning solvents, lubricants, chemicals, gasoline,
refrigerants, and other hazardous materials by employees.
Such activities are subject to stringent and changing
federal, state and local regulation and present the
potential for liability for the actions of our employees
in handling such materials. In addition, the exposure of
any employees to these materials may give rise to claims
by employees against us. Compliance with governmental
regulations or liability related to hazardous materials
may have a material adverse effect on our business.
We are subject to government regulation.
Due to the nature of the facilities services industry, our
operations are subject to a variety of federal, state,
county and municipal laws, regulations and licensing
requirements, including labor, employment, immigration,
health and safety, consumer protection and environmental
regulations. If we fail to comply with applicable
regulations, we may be subject to substantial fines or
revocation of our licenses.
Changes in such laws, regulations and licensing
requirements may constrain our ability to provide services
to customers or increase the costs of such services. In
addition, competitive pricing conditions in the industry
may constrain our ability to adjust our billing rates to
reflect any such increased costs.
The Year 2000 issue could disrupt our business and adversely affect our
financial condition.
The Year 2000 issue refers to a number of date-related
problems that may affect information technology and non-
information technology systems, including codes embedded
in chips and other hardware devices. These problems
include systems that identify a year by two digits and not
four so that a date using "00" would be recognized as the
year "1900" rather than "2000." This could result in
system failures, miscalculations or errors causing
disruptions of operations or other business problems,
including, among others, a temporary inability to process
transactions, send invoices or engage in normal business
activities. The Year 2000 issue is a significant issue for
most, if not all companies, with far reaching
implications, some of which cannot be anticipated or
predicted with any degree of certainty.
We expect to complete our evaluation of our potential Year
2000 exposure and to complete the development of a plan to
address Year 2000 issues during the second quarter of
1999. If we are unable to address these issues, our
business may be negatively impacted. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 Issue" for a detailed discussion
of the Year 2000 issue.
If we were to lose key members of our management, our business would suffer.
Our success depends principally upon the efforts of our
executive management team, the presidents of our operating
companies and certain other members of the senior
management of the businesses we have acquired or will
acquire in the future. The loss of a substantial portion
of such management could have a material adverse effect on
the company.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table shows the high and low sales prices of our common stock,
which has been traded on the Nasdaq Stock Market since November 26, 1997. It
has been traded under the symbol "BOSS" since September 1998.
High Low
------ ------
Fiscal Year 1997
Fourth Quarter..................................... $ 21 1/2 $20.00
Fiscal Year 1998
First Quarter...................................... $ 25 7/8 $ 18 3/8
Second Quarter..................................... $ 25 15/16 $ 9 3/4
Third Quarter...................................... $ 24 1/2 $ 11 1/2
Fourth Quarter..................................... $ 22 1/2 $ 7 7/8
Fiscal Year 1999
First Quarter...................................... $21.00 $ 15 1/2
Second Quarter through May 14, 1999................ $ 20 3/8 $ 13 9/16
The closing sale price of our common stock on the Nasdaq Stock Market was
$14 5/16 per share on May 14, 1999. As of May 14, 1999, there were 21,693,105
shares of our existing common stock outstanding and 1,609 holders of record.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future because we would like to keep any earnings to finance the expansion of
our business, including for acquisitions, and for general corporate purposes.
Any payment of future dividends will be at the discretion of your Board of
Directors and will depend upon, among other things, our earnings, financial
condition, capital requirements and debt levels. Furthermore, the terms of the
indebtedness that we have incurred in connection with the tender offer limit
our payment of dividends to you.
15
<PAGE>
INTRODUCTION TO
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the balance sheet data at December 31, 1997 and 1998 (except pro
forma combined amounts) have been derived from our audited financial
statements which are included elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 1994 and 1995 and the balance
sheet data at December 31, 1994, 1995 and 1996 have been derived from our
unaudited financial statements, which are not included elsewhere in this
prospectus. Our consolidated financial statements give retroactive effect to
the three business combinations accounted for under the pooling-of-interests
method during the year ended December 31, 1998 and include the results of the
businesses acquired in business combinations accounted for under the purchase
method from their respective acquisition dates. The financial statements for
periods prior to the fiscal year ended December 31, 1998 reflect only the
operating results of the three business combinations accounted for under the
pooling-of-interests method of accounting.
The statement of operations data for the three months ended March 31, 1999
and 1998 have been derived from unaudited interim consolidated financial
statements of the Company. The unaudited interim consolidated financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal adjustments, necessary for a fair presentation of
the financial position and results of operations for the periods presented.
The unaudited pro forma combined financial data gives effect to:
. our purchase in the tender offer of 25.5 million shares of common stock,
consisting of 24,618,856 million shares at a price of $22.50 per share
and 881,144 shares underlying stock options at a price of $22.50 per
share less the exercise price for the purchase of employee stock options
for an aggregate purchase price of $560.1 million;
. the financing of the tender offer from the proceeds of the sale of the
senior subordinated notes and the convertible subordinated debentures,
borrowings under a new credit facility and our available cash.
. the 26 acquisitions completed during the year ended December 31, 1998
which were accounted for under the purchase method of accounting (the
"1998 Acquisitions") and the acquisitions completed after December 31,
1998 (the "1999 Acquisitions"), in each case as if they had been
acquired on January 1, 1998; and
The selected unaudited pro forma combined financial data are not necessarily
indicative of operating results or financial position that would have been
achieved had the events described above been consummated and should not be
construed as representative of future operating results or financial position.
The selected financial data should be read in conjunction with the unaudited
pro forma combined financial statements and our consolidated financial
statements, included elsewhere in this prospectus.
16
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------
1998
1994 1995 1996 1997 1998 Pro Forma
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues.......... $ 45,106 $ 57,287 $ 63,202 $ 70,101 $ 809,601 $1,467,336
Cost of revenues.. 37,634 48,783 53,664 58,857 636,225 1,174,347
--------- --------- --------- --------- ---------- ----------
Gross profit...... 7,472 8,504 9,538 11,244 173,376 292,989
Selling, general
and
administrative... 6,635 8,468 8,803 11,776 100,539 168,865
Goodwill
amortization..... -- -- -- -- 7,653 13,425
--------- --------- --------- --------- ---------- ----------
Operating income
(loss)........... 837 36 735 (532) 65,184 110,699
Other (income)
expense
Interest
income......... (41) -- -- (2,056) (19,373) --
Interest
expense........ 329 239 224 208 1,054 43,892
Other income,
net (1)........ (43) (8) 83 (221) (80) (3,635)
--------- --------- --------- --------- ---------- ----------
Income (loss)
before income
taxes............ 592 (195) 428 1,537 83,583 70,442
Provision
(benefit) for
income taxes..... (5) 13 94 36,120 33,157
--------- --------- --------- --------- ---------- ----------
Net income
(loss)........... $ 592 $ (190) $ 415 $ 1,443 $ 47,463 $ 37,285
========= ========= ========= ========= ========== ==========
Net income (loss)
per share--
Basic............ $ 0.48 $ (0.15) $ 0.32 $ 0.25 $ 1.19 $ 1.73
========= ========= ========= ========= ========== ==========
Net income (loss)
per share--
Diluted.......... $ 0.44 $ (0.15) $ 0.30 $ 0.25 $ 1.16 $ 1.58
========= ========= ========= ========= ========== ==========
Weighted average
shares
outstanding--
Basic............ 1,238,444 1,238,444 1,290,724 5,683,464 39,908,364 21,578,216
========= ========= ========= ========= ========== ==========
Weighted average
shares
Outstanding--
Diluted.......... 1,353,560 1,238,444 1,405,840 5,865,550 40,928,452 26,604,814
========= ========= ========= ========= ========== ==========
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------
Pro Forma Pro Forma
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues.......... $ 54,610 $ 350,842 $ 336,111 $ 373,258
Cost of revenues.. 44,233 280,692 275,515 298,940
----------- ----------- ----------- -----------
Gross profit...... 10,377 70,150 60,596 74,318
Selling, general
and
administrative... 7,918 42,714 39,397 45,702
Goodwill
amortization..... 324 3,469 3,308 3,654
----------- ----------- ----------- -----------
Operating income
(loss)........... 2,135 23,967 17,891 24,962
Other (income)
expense
Interest
income......... (6,656) (2,508) -- (17)
Interest
expense........ 99 96 10,973 10,829
Other income,
net (1)........ (111) (281) (2,326) (497)
----------- ----------- ----------- -----------
Income (loss)
before income
taxes............ 8,803 26,660 9,244 14,647
Provision
(benefit) for
income taxes..... 3,722 11,927 4,872 7,196
----------- ----------- ----------- -----------
Net income
(loss)........... $ 5,081 $ 14,733 $ 4,372 $ 7,451
=========== =========== =========== ===========
Net income (loss)
per share--
Basic............ $ 0.15 $ 0.32 $ 0.20 $ 0.34
=========== =========== =========== ===========
Net income (loss)
per share--
Diluted.......... $ 0.15 $ 0.31 $ 0.21 $ 0.31
=========== =========== =========== ===========
Weighted average
shares
outstanding--
Basic............ 32,987,273 45,973,455 21,578,216 21,910,397
=========== =========== =========== ===========
Weighted average
shares
Outstanding--
Diluted.......... 34,075,876 47,740,958 26,405,533 27,997,422
=========== =========== =========== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of December 31, March 31,
------------------------------------- -------------------
1999 Pro
1994 1995 1996 1997 1998 1999 Forma(2)
----- ----- ----- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....... $ 300 $ (30) $ 67 $528,235 $ 307,390 $ 251,969 $ 89,815
Total assets.......... 8,063 8,132 9,629 539,159 1,043,922 1,162,120 1,019,485
Long term debt, net of
current maturities.... 1,734 1,589 1,890 1,679 3,287 4,783 425,275
Stockholders'
equity................ 1,496 1,299 1,578 529,480 837,537 894,338 333,692
</TABLE>
- ----
(1) Other income, net consists primarily of realized gains on the sale of
marketable securities, dividend income on certain investments and gains on
the sale of equipment.
(2) Does not give effect to an estimated $57 million of contingent cash earn-
out payments expected to be made in 1999 in connection with previously
consummated acquisitions.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with our audited
consolidated financial statements for the years ended December 31, 1996, 1997
and 1998 and our unaudited consolidated financial statements for the periods
ended March 31, 1998 and 1999, and the related notes thereto, included
elsewhere in this prospectus.
Founded in February 1997, Building One Services Corporation is a leading
provider of facilities services in the United States. We completed our initial
public offering in December 1997, raising net proceeds of approximately $527
million. To date, we have used the proceeds to make our acquisitions, to
purchase our outstanding shares of common stock and to fund our operations.
On May 11, 1999 we completed the repurchase of 24,618,856 shares of our
common stock at $22.50 per share for cash and 881,144 shares of common stock
underlying stock options at $22.50 per share less the exercise price of the
options. Total funds utilized for the repurchase, excluding associated fees,
totaled $560.1 million, which were obtained from our available cash, the net
proceeds of $195.5 million from the issuance of $200 million of 10 1/2% senior
subordinated notes, $100 million from the issuance of 7 1/2% convertible
subordinated debentures to Boss Investment, LLC, an affiliate of Apollo
Management, L.P., and borrowings under a credit facility.
As a result of our acquisition program, our financial condition and results
of operations have changed dramatically from our inception and initial public
offering in December 1997 to March 31, 1999. We completed 37 business
combinations since our inception. Thirty-four of these business combinations
have been accounted for under the purchase method of accounting and three of
these business combinations consummated during the second quarter of fiscal
1998 have been accounted for under the pooling-of-interests method of
accounting. Our consolidated financial statements give retroactive effect to
the three business combinations accounted for under the pooling-of-interests
method and include the results of the companies acquired in business
combinations accounted for under the purchase method from their respective
acquisition dates. Due to our growth through acquisitions, comparisons of the
historical results of our operations have been and will continue to be
affected by the addition of acquired businesses. Increases in the various
revenues and expense components of our results are, to a large degree, due to
growth from acquisitions. Neither the magnitude nor the source of such changes
is necessarily indicative of changes that will occur in the future.
Our revenues are recognized as services for maintenance and service
contracts are performed. Additionally, we utilize the "percentage-of-
completion" method of accounting for installation contracts. Under this
method, revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions
are determined.
We believe that we have and will continue to realize savings from the
consolidation of our insurance and bonding programs, consolidation of certain
back office functions for some of our operations and volume purchase discounts
from vendors of commodity services and materials and service vehicles. These
savings may be partially offset by costs associated with our corporate
operations and costs of integrating acquired businesses.
Results of Operations
Three months ended March 31, 1999 compared to the three months ended
March 31, 1998
Revenues. Consolidated revenues for the three months ended March 31, 1999
increased $296.2 million, or 542.5%, to $350.8 million from $54.6 million for
the three months ended March 31, 1998. This increase was primarily a result of
our acquisition of the companies acquired and accounted for under the purchase
method of accounting, which have been included since their respective dates of
acquisition, and to a much lesser extent an increase in the revenues of the
companies acquired and accounted for under the pooling-of-interests method of
accounting.
19
<PAGE>
Gross profit. Gross profit for the three months ended March 31, 1999
increased $59.8 million, or 576.0%, to $70.2 million from $10.4 million for
the three months ended March 31, 1998. This increase was primarily a result of
the acquisition of the companies acquired and accounted for under the purchase
method of accounting and to a much lesser extent an increase in gross profit
of the companies acquired and accounted for under the pooling-of-interests
method of accounting. Gross profit as a percentage of revenues ("gross
margin") increased to 20.0% for the three months ended March 31, 1999 from
19.0% for the three months ended March 31, 1998. This increase in the gross
margin was attributable to the higher gross margins of the companies acquired
and accounted for under the purchase method of accounting.
Selling, general and administrative. Selling general and administrative
expenses for the three months ended March 31, 1999 increased $34.8 million, or
440.5%, to $42.7 million from $7.9 million for the three months ended
March 31, 1998. This increase was primarily attributable to the selling,
general and administrative expenses of the companies acquired and accounted
for under the purchase method of accounting, and the general and
administrative costs of our corporate activities. Selling, general and
administrative expenses as a percentage of revenues decreased to 12.2% for the
three months ended March 31, 1999 from 14.5% for the three months ended
March 31, 1998.
Goodwill amortization. Goodwill amortization for the three months ended
March 31, 1999 increased $3.2 million, or 970.7%, to $3.5 million from
$0.3 million for the three months ended March 31, 1998. This increase was a
result of the acquisition of the companies acquired and accounted for under
the purchase method of accounting during 1998 and the three months ended
during March 31, 1999.
Other income, net. Other income, net for the three months ended March 31,
1999 decreased $4.0 million, or 59.7%, to $2.7 million from other income of
$6.7 million for the three months ended March 31, 1998. This decrease was
primarily attributable to the use of cash from our initial public offering to
acquire the companies acquired and accounted for under the purchase method of
accounting.
Provision for income taxes. The provision for income taxes for the three
months ended March 31, 1999 increased to $11.9 million from $3.7 million for
the three months ended March 31, 1998, reflecting an effective tax rate of
44.7% and 42.3% respectively. The increase in the effective rate was primarily
attributable to the increase in income generated from entities which were
subject to C corporation taxes, versus companies acquired under the pooling-
of-interests method which had elected to be treated as subchapter
S corporations for tax purposes prior to their being acquired by us.
Additionally, the 44.7% effective rate reflects the non-deductibility of
goodwill amortization associated with certain acquisitions.
Year ended December 31, 1998 Compared to the Year ended December 31, 1997
Revenues. Consolidated revenues for the year ended December 31, 1998
increased by $739.5 million, or 1054.9%, to $809.6 million from $70.1 million
for the year ended December 31, 1997. This increase was a result of our
acquisition of the 26 companies accounted for under the purchase method of
accounting during the year ended December 31, 1998, which have been included
since their respective dates of acquisition. For the year ended December 31,
1998, approximately 66%, 14% and 20% of our revenues were derived from
electrical installation and maintenance services, mechanical installation and
maintenance services and janitorial and maintenance management services,
respectively.
Gross profit. Gross profit for the year ended December 31, 1998 increased by
$162.1 million, or 1441.9%, to $173.4 million from $11.2 million for the year
ended December 31, 1997. This increase was primarily a result of the
acquisition of the companies accounted for under the purchase method of
accounting and, to a much lesser extent, the increased gross profit of the
companies accounted for under the pooling-of-interests method. Gross margin
increased to 21.4% for the year ended December 31, 1998, from 16.0% for the
year ended December 31, 1997. This increase in the gross margin was primarily
attributable to the higher gross margins of the companies acquired and
accounted for under the purchase method of accounting.
20
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 increased by
$88.0 million, or 747.2%, to $99.8 million from $11.8 million for the year
ended December 31, 1997. This increase was primarily attributable to the
selling, general and administrative expenses of the companies accounted for
under the purchase method of accounting, and the general and administrative
costs of our corporate activities. Selling, general and administrative
expenses as a percentage of revenues decreased to 12.3% for the year ended
December 31, 1998 from 16.8% for the year ended December 31, 1997.
Goodwill amortization. Goodwill amortization increased by $7.7 million for
the year ended December 31, 1998 as result of the goodwill recorded in
conjunction with the companies accounted for under the purchase method of
accounting.
Non-recurring acquisition costs. Non-recurring acquisition costs of $0.8
million consists of costs incurred in conjunction with the business
combinations accounted for under the pooling-of-interests method. These costs
include legal and accounting fees, broker fees and other costs directly
attributable to the business combination.
Other income, net. Other income, net for the year ended December 31, 1998
increased by $16.3 million from $2.1 million for the year ended December 31,
1997 to income of $18.4 million for the year ended December 31, 1998. This
increase is primarily attributable to the interest income of $19.4 million
generated from the investment of the proceeds raised in our initial public
offering in December 1997.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1998 increased to $36.0 million, reflecting an effective
tax rate of 43.2% from an effective tax rate of 6.1% for the year ended
December 31, 1997. The increase in the effective rate was primarily
attributable to the increase in income generated from entities which were
subject to C corporation taxes, versus the companies accounted for under the
pooling-of-interests method, which had elected to be treated as subchapter S
corporations for tax purposes prior to our acquisition of them. Additionally,
the 43.2% effective rate reflects the non-deductibility of goodwill
amortization associated with the majority of our acquisitions.
Year ended December 31, 1997 Compared to the Year ended December 31, 1996
Revenues. Consolidated revenues for the year ended December 31, 1997
increased by $6.9 million, or 10.9%, to $70.1 million from $63.2 million for
the year ended December 31, 1996. This increase was attributable to an
increase in the janitorial and maintenance management services provided by the
companies we acquired in transactions accounted for under the pooling-of-
interests method. These companies had an increase in revenue as a result of
their expansion into new geographic markets and further penetration of their
existing markets.
Gross profit. Gross profit for the year ended December 31, 1997 increased by
$1.7 million, or 17.9%, to $11.2 million from $9.5 million for the year ended
December 31, 1996. Gross profit as a percentage of revenues increased to 16.0%
for the year ended December 31, 1997 from 15.1% for the year ended December
31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 increased by $3.0
million, or 33.8%, to $11.8 million from $8.8 million for the year ended
December 31, 1996 as a result of the increases in the expenses of the
janitorial and maintenance management services companies we acquired in
transactions accounted for under the pooling-of-interests method as they
increased their staff to support the increase in revenues. Selling, general
and administrative expenses as a percentage of revenues increased to 16.8% for
the year ended December 31, 1997 from 13.9% for the year ended December 31,
1996.
Other income, net. Other income, net for the year ended December 31, 1997
increased by $2.4 million, or 773.9%, to income of $2.1 million from expense
of $0.3 million for the year ended December 31, 1996. This increase is
primarily attributable to the interest income generated from the investment of
the proceeds we raised in our initial public offering in November 1997.
21
<PAGE>
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1997 increased to $0.1 million, reflecting an effective tax
rate of 6.1%, as compared to a tax rate of 3.0% for the year ended December
31,1996. The increase in the effective rate is primarily attributable to the
increase in income generated from entities subject to C Corporation income
taxes.
Liquidity and Capital Resources
During the three months ended March 31, 1999, net cash provided by operating
activities was approximately $11.7 million. Net cash used in investing
activities for the three months ended was $50.9 million, which primarily
consisted of $45.3 million used for acquisitions. Net cash provided by
financing activities for the three months ended March 31, 1999 was
$0.4 million, which consisted primarily of net proceeds on short-term debt of
$0.3 million, net proceeds on long-term debt of $0.5 million, and $0.8 million
of distributions to minority partners of a 50% owned entity.
During the year ended December 31, 1998, net cash provided by operating
activities was approximately $32.1 million. Net cash used in investing
activities for the year ended December 31, 1998 was $242.3 million which
primarily consisted of $231.6 million of cash used in acquisitions, net of
cash acquired. Net cash used in financing activities for the year ended
December 31, 1998 was approximately $105.6 million, which consisted primarily
of payments on short-term and long-term debt of $67.3 million and $41.8
million of cash used to repurchase 2,990,000 shares of our common stock at an
average price of $13.99 per share. These shares were repurchased in accordance
with a stock repurchase program covering 3,100,000 shares which was announced
on August 24, 1998. The number of shares repurchased was determined based upon
the number of shares issued in connection with acquisitions accounted for
under the purchase method of accounting.
We acquired eight businesses during the three months ended March 31, 1999.
Aggregate consideration for these acquisitions consisted of 1,002,507 shares
of common stock and $48,782 in cash.
In conjunction with the acquisitions consummated during the three months
ended March 31, 1999 and during the year ended 1998, we have entered into
contingent consideration agreements of up to an estimated $148.6 million in
cash and shares of common stock based upon the performance of certain of the
businesses acquired. As of May 14, 1999, $59 million of this contingent
consideration has been earned, of which $23.5 million has been paid in cash.
We expect that approximately $52 million of additional contingent
consideration will become payable in 1999, of which approximately $34 million
will be payable in cash.
As previously discussed, on May 11, 1999, we completed the repurchase of
24,618,856 shares of our common stock at $22.50 per share for cash and
881,144 shares of common stock underlying stock options at $22.50 per share
less the exercise price per share of the options. Total funds utilized for the
purchase totaled $560.1 million, which were obtained from our available cash,
the net proceeds of $195.5 million from the issuance of $200 million of 10
1/2% senior subordinated notes, $100 million from the issuance of 7 1/2%
convertible subordinated debentures to Boss Investment, LLC, an affiliate of
Apollo Management, L.P., and borrowings under a new credit facility.
Interest on the senior subordinated notes in the amount of 10 1/2% will be
paid semi-annually on May 1 and November 1 of each year and the notes will
mature on May 1, 2009. The senior subordinated notes are unsecured and
guaranteed by our subsidiaries and rank junior to the term loan and the credit
facility.
We can redeem the senior subordinated notes, in whole or in part, at any
time on or after May 1, 2002, at specified redemption prices, plus accrued
interest. At any time (which may be more than once) before May 1, 2002, we are
able to redeem up to 35% of the outstanding senior subordinated notes with
money raised in one or more equity offerings under certain circumstances. Upon
a change of control of the company, the holders of the senior subordinated
notes will have the right to sell the notes to us at 101% of the face amount
plus accrued interest.
22
<PAGE>
Additionally, the indenture governing the senior subordinated notes contains
certain covenants that restrict, among other things, our ability to incur
indebtedness, pay dividends or repurchase capital stock, incur liens, sell or
otherwise dispose of a substantial portion of our assets or merge or
consolidate with another entity.
The convertible subordinated debentures will mature on May 1, 2012 and
provide for interest payments at a rate of 7.5% to be paid in additional
convertible subordinated debentures or cash, at our election, for the first
five years after their issuance, and in cash thereafter. The holders of a
majority of the outstanding principal amount of the convertible subordinated
debentures, however, will have the right to require the payment of interest in
cash after the third and through the fifth anniversary of the issuance of the
convertible subordinated debentures. In addition, the provisions of the credit
facility and the indenture for the senior subordinated notes limit our ability
to pay cash interest payments.
The convertible subordinated debentures are convertible into shares of our
common stock at an initial conversion price of $22.50 per share plus all
accrued and unpaid interest. Assuming conversion of the principal amount of
the convertible subordinated debentures and assuming all of the interest is
paid in cash, Boss Investment will have the right to acquire upon conversion
4,444,444 shares or 17% of the shares outstanding as of May 14, 1999. If the
convertible subordinated debentures are converted prior to the fifth
anniversary of their issuance, the amount converted into shares will include
additional interest that would have accrued or been paid from the date of
conversion through the fifth anniversary of the issuance of the convertible
subordinated debentures. However, unless the conversion is in connection with
a change of control, the additional interest will not exceed a total of 30
months of interest. We will adjust the conversion price under certain
circumstances, including the issuance of shares at a price below the
conversion price of the convertible subordinated debentures or below the then
fair market value of a share.
The indenture for the convertible subordinated debentures limits our
ability, among other things, to incur additional indebtedness, pay dividends,
repurchase securities or repay certain other indebtedness. We have agreed to
seek stockholder approval of amendments to our restated certificate of
incorporation that would authorize the holders of the convertible subordinated
debentures to vote together with the holders of shares on all of the matters
submitted to stockholders for a vote and to elect three of our directors
(or, if the Board has more than ten directors, no less than 30% of the
directors). The holders of the convertible subordinated debentures will be
entitled to cast the number of votes that they would be entitled to cast if
they had converted the convertible subordinated debentures into shares. If
this amendment is not enacted by July 25, 1999, the interest rate on the
convertible subordinated debentures will increase to 12 1/2%, but will revert
back to 7 1/2% after the amendment is enacted.
The credit facility consists of the $125 million term loan which has been
incurred to finance part of the purchase price for the shares in the tender
offer and a $225 million revolving credit facility, in each case maturing five
years after the date of the borrowing. The credit facility provides for
certain mandatory repayments of the outstanding indebtedness. As of May 14,
1999, we had $158 million of availability under the credit facility.
The credit facility bears interest at the sum of the (i) applicable margin
and (ii) at the option of the company, either the "base rate" or the
"eurodollar rate" (as defined in the credit facility). The base rate will be
the higher of (i) the rate that Bankers Trust Company announces from time to
time as its prime lending rate, as in effect from time to time, and (ii) 1/2
of 1% in excess of the overnight federal funds rate. The applicable margin
will be a percentage per annum equal to (i) in the case of term loans
maintained as (x) base rate loans, 2.00%, and (y) eurodollar rate loans,
3.00%, and (ii) in the case of revolving loans maintained as (x) base rate
loans, 1.50%, and (y) eurodollar rate loans, 2.50%, in each case subject to
step-downs to be determined based on certain levels of financial performance.
The company must also pay a commitment fee in the amount of 0.50% per year on
the daily average unused portion of the credit facility, subject to step-downs
based upon financial performance. In addition, the commitment fee percentage
will be increased by 0.25% at all times that the total unutilized commitments
under the revolving credit facility exceed 75% of the sum of (x) the total
revolving commitment then in effect plus (y) the aggregate outstanding
principal amount of the term loan. The credit facility will provide for
certain mandatory repayments of the outstanding indebtedness.
23
<PAGE>
The credit facility includes a number of significant covenants that impose
restrictions on us and our subsidiaries. These covenants include, among
others, restrictions on our ability to incur additional indebtedness and pay
the interest on Boss Investment's convertible subordinated debentures in cash,
and restrictions on mergers, acquisitions and the disposition of assets, sale
and leaseback transactions and capital lease payments, dividends and other
distributions and voluntary prepayments of indebtedness. In addition, we are
required to comply with financial covenants with respect to minimum interest
coverage and maximum leverage ratios.
We need funds for general corporate purposes, including to pay interest on
the senior subordinated notes, the convertible subordinated debentures and the
credit facility, to pay contingent consideration required by the terms of
certain acquisition agreements and to make future acquisitions and capital
expenditures. We anticipate that our cash flow from operations and borrowings
available under our credit facility will be sufficient to meet these liquidity
requirements over the next twelve months.
Year 2000 Issue
The Year 2000 issue refers to a number of date-related problems that may
affect information technology and non-information technology systems,
including codes embedded in chips and other hardware devices. The problems
include systems that identify a year by two digits and not four, so that a
date using "00" would be recognized as the year "1900" rather than "2000."
This could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among others,
a temporary inability to process transactions, send invoices or engage in
normal business activities. The Year 2000 issue is a significant issue for
most, if not all companies, with far reaching implications, some of which
cannot be anticipated or predicted with any degree of certainty.
State of Readiness--Since our initial public offering in December 1997, we
have acquired 37 companies offering mechanical, electrical and janitorial
services. The due diligence relating to the Year 2000 issue that was performed
on these companies did not reveal any significant internal operating systems
issues. In addition, such due diligence revealed that most of the acquired
companies have identified their respective Year 2000 issues, but are in
different phases of assessment and remediation. Accordingly, we are currently
in the process of conducting a comprehensive survey to be completed by
management of our operating subsidiaries to ensure that our operating
subsidiaries are adequately addressing, or have adequately addressed, the Year
2000 issue.
The survey mentioned above is expected to cover the following areas:
. our information technology and operating systems, including job-costing,
billing, payroll and accounting systems;
. our non-information technology systems, such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology;
. the systems of our major vendors, insofar as they relate to our
business; and
. the systems of our major customers for which we have performed
installation and maintenance services.
This survey is expected to be completed during the second quarter of 1999.
Costs Related to the Year 2000 Issue--As part of the survey mentioned above,
we will be requesting an estimate from each operating subsidiary of the
material historical and estimated costs of assessment and remediation.
Accordingly, such costs, including, among other things, the costs of
assessment, software upgrade fees, hardware changes and general implementation
of a Year 2000 action plan, are not known at this time. The projected effort
for the majority of the systems is expected to include sending letters to
substantially all of our significant hardware, software and other equipment
vendors, third-party providers and other material service providers requesting
detailed, written information relating to Year 2000 compliance and, where
necessary, upgrades to recent vendor software releases that are fully Year
2000 compliant.
24
<PAGE>
We are also embarking on an initiative to develop standard information
systems for use throughout the organization for its overall information needs
that will be free of any Year 2000 limitations. However, no assurances can be
made that such systems will be in place prior to the Year 2000.
Contingency Plan--Until we complete the survey described above, we will not
be able to develop our most likely worst case Year 2000 scenarios. We intend
to complete our determination of worst case scenarios after we have received
and analyzed responses to the survey and to all of the inquiries we have made
to our vendors.
Risks Related to the Year 2000 Issue--Although our Year 2000 efforts are
intended to minimize the adverse effects of the Year 2000 issue on our
business and operations, the actual effects of the issue cannot be known until
the date-related problems are triggered. Due to the fact that our operations
are primarily service oriented and are not heavily dependent on complex
information systems, we believe that non-information technology systems (i.e.
embedded technology such as microcontrollers) do not represent a significant
area of risk relative to Year 2000 readiness. In addition, our operations do
not include capital intensive equipment with embedded microcontrollers.
However, our failure or the failure of our major vendors and customers to
adequately address their respective Year 2000 issues generally in a timely
manner (insofar as they relate to our business) could result in, among other
things, our inability to obtain equipment that we are obligated to install in
a timely manner, reductions in the quality of materials used in our business,
reductions, delays or cancellations of customer projects, delays in payments
by customers for services performed or a general inability to record, track
and consummate business transactions. Any or all of these events could have a
material adverse effect on our business, results of operations and financial
condition.
25
<PAGE>
BUSINESS
The Company
When the company was founded in February 1997, its goal was to identify one
or more fragmented industries that were attractive consolidation
opportunities. In January 1998, we decided to focus our consolidation efforts
exclusively on the facilities services industry. Facilities services companies
provide many of the services and related products necessary for the routine
operation and maintenance of a commercial and industrial building.
Historically, the facilities services industry consisted primarily of
privately-held or family-owned businesses. Most of these privately-held and
family-owned operations operated from day-to-day with no real market or
business plan and did not have access to capital markets to finance expansion
and adequate training and incentive programs. We realized that we could add
value by acquiring many of these companies and marketing their services on a
nationwide basis. In September 1998, we changed our name from Consolidation
Capital Corporation to Building One Services Corporation in order to better
describe our business.
Within less than two years, we have become a leader in the facilities
services industry. Our Building One Mechanical and Electrical Group provides
mechanical and electrical systems installation and maintenance services and
our Building One Service Solutions Group provides janitorial and maintenance
management services. Since our formation, we have grown primarily through
acquisitions, having acquired 37 companies with average revenues of
approximately $41 million. We have acquired 29 businesses specializing in
providing either mechanical or electrical installation, maintenance and/or
specialty services and eight businesses specializing in providing janitorial
and maintenance management services. We currently have 128 locations and
provide facilities services to over 8,800 commercial and industrial customers
in 48 states.
Our goal is to become the preeminent single-source provider of facilities
services in the United States. To achieve this goal, we intend to capitalize
on favorable industry dynamics such as the trend by our customers to outsource
significant portions of facilities services requirements to third-party
providers and the trend of building managers to seek a single-source provider
of facilities services. In addition, the recent combination of our mechanical
and electrical groups will further enhance our ability to offer combined
services to existing customers and to attract new customers seeking to reduce
the number of vendors with which they do business. We believe our highly
skilled workforce, hiring and training programs, breadth of service offerings,
geographic coverage and reputation provide us with a competitive advantage in
achieving our goal.
Industry Background
Facilities services companies provide many products and services needed for
the operation and maintenance of a building including:
<TABLE>
<S> <C>
.Janitorial and maintenance management .Engineering
.Mechanical installation and maintenance .Parking facility management
.Electrical installation and maintenance .Security systems and management
.Data communications cabling .Grounds keeping and landscaping
.Lighting equipment and maintenance .Pest control
.Building automation and controls .General equipment maintenance
.Energy management
</TABLE>
The facilities services industry is highly fragmented with a small number of
firms providing multi-service product offerings on a multi-location basis.
According to industry data, no single source provider holds more than a 2%
market share. Electrical, mechanical and janitorial services represent more
than 75% of the revenues in the facilities services industry. The markets are
substantial and highly fragmented with a small number of multi-location
regional or national operators and a large number of relatively small,
independent, businesses serving discrete local markets with limited service
offerings.
26
<PAGE>
Since 1990, revenues in the facilities services industry have increased at a
compounded annual growth rate of approximately 5.2%. Industry experts foresee
this growth rate continuing through 2001. Each market segment within the
facilities services industry has its own specific dynamics and competitive
environment and, as a result, has different projected growth rates. In
general, the primary drivers of industry growth include:
.vendor consolidation;
.decreasing metropolitan vacancy rates;
.increased outsourcing of non-core functions by corporations;
.customer interest in relief from labor force issues;
.the need to upgrade and invest in infrastructure; and
.to a lesser extent, revival of construction activity in suburban areas and
smaller cities.
We believe that there has been a significant trend toward outsourcing
business services, including facilities services, over the last several years.
This increase in outsourcing will impact all three of the sectors in which we
do business. According to the Outsourcing Institute, approximately 80% of
United States companies outsource some aspect of their business services.
Spending on outsourcing services increased approximately 100% from 1992
through 1996 and we believe this trend will continue. The Outsourcing
Institute estimates that the demand for outsourcing services will grow at an
estimated compounded annual growth rate of 20% through the year 2000.
Outsourcing allows companies to, among other things, focus on their core
competencies, reduce operating expenses, share risk management responsibility
and access technical expertise not available internally.
The Mechanical and Electrical Services Industry
Mechanical and electrical services are a vital part of new construction,
repairs and remodeling projects. Virtually all domestic construction, repairs
and remodeling projects generate demand for these contracting trades.
According to the 1992 U.S. Census data, these two industries had combined
revenues of $97.2 billion, an increase from $35.3 billion in 1977,
representing a compounded annual growth rate of approximately 7%.
Additionally, the chart below shows historical and projected industry data
(dollars in billions) for the key sectors of the industry.
<TABLE>
<CAPTION>
5
year
Industry Sector 1993 1994 1995 1996 1997 1998E CAGR
--------------- ------ ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Construction Expenditures....... $478.6 $519.5 $538.1 $583.6 $618.2 $646.0 6.2%
Commercial...................... 152.2 160.5 176.8 189.8 205.5 208.4 6.5
Plumbing, HVAC.................. 54.7 59.7 61.5 66.9 70.8 74.4 6.3
Electrical...................... 39.7 43.2 44.6 48.5 51.3 53.8 6.3
</TABLE>
- --------
Source: Census of Manufacturers, Dept. of Commerce, Company Data and
Industry Estimates.
Both the mechanical and electrical contracting industries are highly
fragmented and mature. In 1992, the Census of Construction Industries,
Plumbing, Heating, Air Conditioning and Electrical Work reported 54,022
electrical contractors and 75,395 HVAC/plumbing establishments. Of those
companies, 87,167 companies, or 67%, generated annual revenues of $1 million
or less. These industries are highly competitive construction trades and have
low barriers to entry.
Fragmentation within the industry should provide Building One with a
sufficient number of acquisition candidates. Both the mechanical and the
electrical industries are in the early stages of consolidation.
The Janitorial and Maintenance Management Services Industry
According to industry experts, the United States
commercial/industrial/institutional building cleaning and maintenance services
industry comprises more than 56,000 services with over $50 billion in
revenues.
27
<PAGE>
Approximately $20 billion of this is outsourced to companies such as Building
One. This market is expected to grow at a projected rate of 6.6% annually
between 1996 and 2000, reaching $65 billion by the turn of the century.
Approximately $17 billion of this is in janitorial services, with the
remainder divided up among other services, including hard floor and carpet
care, upholstery, fabric and partition cleaning, elevator and escalator care,
ceiling tile cleaning, light maintenance, and disinfecting and pest control.
We believe that the janitorial and maintenance management services industry
is highly fragmented. In a 1992 study, industry experts estimated that only
eight companies had annual revenues greater than $100 million servicing the
janitorial and maintenance management industry, with the four largest
companies comprising about 10% of industry revenues. More than 21,000 of these
companies had revenues of less than $100,000.
Our Services
We offer a broad range of mechanical and electrical installation,
maintenance and specialty services and janitorial and maintenance management
services.
Mechanical and Electrical Services. Through the Building One Mechanical and
Electrical Group, we offer a broad range of mechanical and electrical design,
installation and maintenance services for industrial, commercial, retail and
institutional customers. We currently offer, among others, the following
mechanical and electrical services:
.lighting and power systems;
.HVAC systems;
.plumbing and industrial process piping systems;
.evaluation and testing of system performance;
.building access, security systems, and fire protection systems;
.fiber optic and data cabling;
.telecommunications equipment and systems;
.fire protection, building access and surveillance systems;
.building automation and temperature systems;
.manufacturing process controls and instrumentation; and
.technical facilities management.
We believe that we are the second largest provider of mechanical and
electrical contracting and maintenance services in the United States based on
pro forma revenues. Our 29 operating companies offering mechanical and
electrical services operate with 83 branch locations serving over 30 states.
The 1998 pro forma revenues of these businesses were approximately $1.3
billion. The presidents of these 29 companies have an average of approximately
27 years of experience in mechanical and electrical services.
We believe that the fragmented nature of this industry provides significant
opportunities to consolidate mechanical and electrical installation,
maintenance and specialty service businesses. In addition, we believe that the
majority of owners in this industry have limited access to adequate capital
for modernization, training and expansion and limited opportunities for
liquidity of ownership interests in their business. Many of these businesses
are faced with increased competition from larger entities with greater
financial resources, resulting in part from the deregulation of the United
States gas and electric utility industries. Because of these opportunities,
several publicly traded consolidators, in addition to our company, have
emerged in the mechanical and electrical installation, maintenance and
specialty service industry.
28
<PAGE>
We plan to continue to expand our market presence and grow through strategic
acquisitions, partnerships with other service providers, and internal growth.
We expect to selectively acquire businesses with strong cash flows, strategic
locations and value-added service offerings. For example, because we have
fewer mechanical operating companies, we intend to acquire businesses that
provide mechanical services in areas where we already provide electrical
services to further enhance our cross-selling opportunities.
In addition, we believe that there are growth opportunities in the
electrical maintenance and specialized services portion of the business. We
are increasing the amount and proportion of revenues represented by such
services. Electrical maintenance services generate a recurring revenue stream
that is less susceptible to downswings in the economy than the more cyclical
new installation market. Specialized services require specific skills and
equipment and provide higher margins than general electrical installation and
maintenance services.
Joint Delivery of Mechanical and Electrical Services. We recently combined
our mechanical and electrical services groups into the Building One Mechanical
and Electrical Group. Under this combination, regional managers are
responsible for both mechanical and electrical operations. Our mechanical and
electrical companies generally serve the same customers and markets, which
provides us with the opportunity to "cross-sell" our mechanical and electrical
services. Cross-selling occurs when one of our companies sells another of our
company's services to existing customers.
In addition, our Building One Mechanical and Electrical Group intends to
continue growing the proportion of work we complete on a "design-build" basis.
Design-build is an approach to installation projects in which the contractor
is given full or partial responsibility for the design specifications of the
installation. Design-build is an alternative to the traditional "plan and
spec" model, in which the contractor is required to build to the exact
specifications of the architect and engineer. We believe that design-build is
the superior model because it allows the contractor to use past experience to
install the project at the least cost to the customer. Our ability to offer
integrated mechanical and electrical services is a strong competitive
advantage when competing for design-build projects.
Janitorial and Maintenance Management Services. Our Building One Service
Solutions Group offers a full range of janitorial and maintenance management
services. A number of these services are often provided for a customer under a
contractual arrangement on a regional or national basis. The customers of this
group are retail chain stores, grocery stores, office buildings, industrial
plants, banks, department stores, warehouses, educational and health
facilities, restaurants and airport terminals throughout the United States.
The services provided by this group include:
.floor and carpet cleaning and maintenance;
.floor stripping and refinishing;
.chemical supply and equipment management;
.window, wall and structural cleaning and maintenance;
.restroom and other area sanitation;
.duct cleaning;
.furniture polishing; and
.exterior window, wall, sidewalk, and parking lot cleaning and maintenance.
We believe that our Building One Service Solutions Group is the largest
provider of janitorial and maintenance management services to the retail
sector in the United States based on revenues. Our eight companies offer these
services in 48 states. The pro forma revenues of these companies in 1998 were
$195 million. The presidents of these eight companies have an average of 17
years of experience in janitorial maintenance and management services.
29
<PAGE>
We believe there is significant growth potential for our Building One
Service Solutions Group as a result of the trend toward outsourcing non-core
business functions. We offer programs and systems that free the customer to
focus on its core business activity while the support services are managed in
an efficient, cost-effective manner. We believe that our management expertise,
our menu of services and new technologies will contribute to growth in this
group.
To provide seamless integrated services to our broad customer base, our
Building One Service Solutions Group selects, manages and integrates services
provided by our local companies and third parties to our customers. We often
administer the back office functions for the third party and ensure the
quality of the service performed. We also relieve our customers from the
burden of finding and supervising the contractor or in-house labor to provide
service.
We intend to increase our market presence by increasing the number of
national customers we service, first in the retail market and then in other
markets. Through strategic partnerships and subcontracting relationships, we
will add depth to our broad geographic coverage. We also may add new services
to our menu of janitorial and maintenance management services.
30
<PAGE>
The following chart identifies the companies we have acquired since our
formation:
<TABLE>
<CAPTION>
Service Year
Name Segment Date Acquired Geographic Coverage Founded
- ------------------------ ---------- ------------- ------------------------------- -------
<S> <C> <C> <C> <C>
Service Management,
USA. .................. Janitorial 02/04/98 National 1994
Garfield Electric
Company................ Electrical 03/11/98 Ohio, Indiana, Kentucky 1972
Indecon, Inc. .......... Electrical 03/11/98 Ohio, Indiana, Kentucky 1989
Riviera Electric
Construction Company,
Inc. ................... Electrical 03/11/98 Colorado 1982
SKC Electric Inc. ...... Electrical 03/11/98 Kansas & Missouri 1980
Town & Country Electric
Inc.................... Electrical 03/11/98 Midwest Region 1972
Tri-City Electrical
Contractors, Inc. ..... Electrical 03/11/98 Florida 1958
Wilson Electric Company,
Inc. .................. Electrical 03/11/98 Arizona 1988
Walker Engineering,
Inc. .................. Electrical 03/25/98 Texas 1981
Crest International,
LLC ................... Janitorial 04/01/98 Wisconsin 1995
United Service
Solutions, Inc. ....... Janitorial 04/27/98 National 1997
Taylor Electric, Inc. .. Electrical 05/22/98 Utah & Nevada 1978
G.S. Group, Inc. ....... Mechanical 05/22/98 National 1986
Perimeter Maintenance
Corporation............ Janitorial 05/31/98 Southeast Region 1985
Spann Building
Maintenance Company.... Janitorial 05/31/98 Midwest Region 1959
Colorado, Oregon,
National Network Electrical 06/15/98 California, South Dakota 1990
Services, Inc. ........
Riviera Electric of
California, Inc. ...... Electrical 06/17/98 California 1995
Regency Electric Electrical 06/24/98 Southeast & Eastern Regions 1979
Company, Inc. ..........
The Lewis Companies..... Electrical 06/29/98 Southwest Region 1979
Chambers Electronic
Communications, LLC ... Electrical 07/01/98 Arizona 1969
McIntosh Mechanical,
Inc. .................. Mechanical 08/03/98 South Carolina & Georgia 1982
Ivey Mechanical, Inc. .. Mechanical 09/02/98 South & Southeast Regions 1947
Tri-M Corporation &
Affiliates............. Electrical 09/03/98 Northeast Region 1964
Robinson Mechanical,
Inc. .................. Mechanical 09/14/98 Colorado 1978
Watson Electrical
Construction Co. and
Welcon Management
Company................ Electrical 11/02/98 North Carolina & Virginia 1935
Boxberger, Inc. ........ Janitorial 11/06/98 Southeast Region 1989
Flor-Shin, Inc. ........ Janitorial 11/06/98 Southeast Region 1982
R.J. Miguel Services,
Inc. .................. Janitorial 12/04/98 New England (except for Maine) 1986
Gamewell Mechanical,
LP..................... Mechanical 12/14/98 North, South Carolina, Virginia 1966
Potter Electric
Company................ Electrical 01/01/99 Nevada 1969
Beltline................ Mechanical 02/09/99 Texas 1987
Sanders Bros., Inc. .... Mechanical 03/24/99 Southeast 1955
DFW Mechanical Services, Mechanical 03/26/99 Texas 1981
Inc. ...................
American Air Company,
Inc. .................. Mechanical 03/26/99 California 1973
Advent Electric Company,
Inc. .................. Electrical 03/29/99 Tennessee 1978
Omni Mechanical
Services............... Mechanical 03/30/99 Oklahoma 1986
Hunt Electric, Inc...... Electrical 03/31/99 Utah 1986
</TABLE>
31
<PAGE>
Competitive Strengths
We believe several factors give us a competitive advantage in the facilities
services industry, including our:
Leading Market Position. With 1998 pro forma revenues of approximately $1.5
billion, we are a leading provider of integrated facilities services in the
United States. We believe that we are the number one or two provider of
facilities services in each of the top 15 cities in which we operate. Our size
gives us the critical mass necessary to compete for larger contracts and to
exercise significant purchasing power. The average revenues of our acquired
companies are approximately $41 million, which we believe to be the highest
among our competitors. With this size comes enhanced infrastructure, more
experienced management teams, better management information systems and
improved brand recognition.
Premier Operating Capabilities. We believe our operating capabilities are
among the best in the industry. Our superior technical and engineering
expertise, optimal materials management practices and higher human resource
utilization provide us significant competitive advantages. For example, our
technical and engineering expertise allows us to participate in "design-build"
projects where we work with the client to develop optimal specifications and
configurations of systems and then perform the installation, which frequently
leads to recurring maintenance work. As part of an installation, we typically
prefabricate significant portions of the project at an alternative site and
drop ship materials in specific sequences, thereby optimizing materials
management and minimizing the amount of time specialized employees spend on
the job site.
Diversified Business Mix. We believe that our diversified customer base,
broad geographic presence and comprehensive service offerings provide a high
degree of stability to our revenues and cash flow and will enable us to grow
quickly and better meet our customers' needs. Such diversification reduces our
vulnerability to financial weakness of particular customers, industries or
geographic regions. Furthermore, on a pro forma basis for 1998, approximately
43% of our revenue came from higher-margin maintenance and repair business,
which is generally recurring in nature.
National Scale and Service Capability. We have become a leading national
single-source provider of facilities services through our acquisition of 37
businesses with 128 locations that provide services in 48 states. This network
enables us to effectively service national and regional customers who are
increasingly purchasing facilities services on a consolidated basis. Some of
our larger customers include Dow Chemical, Wal-Mart, Kmart, MarMaxx, State
Farm Insurance and Federal Express.
Superior Employee Training. We believe that our commitment to the
recruitment, training and retention of a highly skilled workforce results in
higher quality service for our customers and increased productivity and
profitability for our company.
Focused Acquisition Strategy. We have developed significant expertise in
identifying and effecting acquisitions within the facilities services
industry. We will continue to selectively pursue well-managed, profitable
businesses with established market positions, which will allow us to expand
our service offerings in existing markets or penetrate new attractive high-
growth markets.
Experienced Management Team. The presidents of our operating companies
average over 25 years experience in the facilities services industry. In
addition, we have developed an experienced group of operating managers who
have established strong reputations in their local markets. In addition,
subject to stockholder approval, we intend to adopt both a new equity-based
incentive plan, which will authorize the company to grant equity-based awards
of 1.5 million shares of our common stock to senior members of management, as
well as a stock performance incentive plan, which will authorize the company
to grant to selected members of senior management of our company and our
operating companies awards covering up to a maximum of 1.5 million shares of
our common stock depending upon the level of the company's market price.
32
<PAGE>
Business Strategies
Our objective is to become the premier, national single-source provider of
facilities services in the United States. We expect to achieve our objective
by improving operations and expanding our business through internal growth and
selective acquisitions.
Operating Strategy
. Implement "Best of Class" Practices. We believe that opportunities exist
to achieve operating efficiencies and cost savings through the adoption
of a "best of class" operating program. We will continue to implement on
a company-wide basis the best business practices used by our operating
companies in areas such as installation and service methods, project
cost estimation, manpower utilization, recruiting and training programs,
safety and risk management programs, marketing strategies and sales
techniques and sales training materials.
. Develop Brand Recognition. We intend to create a brand name for Building
One that suggests superior quality, consistency and reliability. We
believe that developing brand recognition will enhance our ability to
secure regional and national contracts.
. Leverage Purchasing Power. We have begun, and will continue, to use our
growing purchasing power to obtain favorable prices and discounts on
products and services such as insurance, employee benefits, bonding,
service vehicles, commodity materials, legal support, real estate
services and banking and financial services.
Growth Strategy
. Exploit Industry Trends. We intend to further broaden the services we
currently offer by acquiring businesses that provide specialized
services that we want to offer to our customers. This will allow us to
become a single-source provider for all of our customers' mechanical,
electrical and janitorial needs. We believe that becoming a single-
source provider will allow us to take advantage of the recent industry
trends of vendor consolidation and increased outsourcing of facilities
services.
. Leverage Customer Relationships. We intend to use our strong customer
relationships to expand the services we provide to those customers. Our
operating companies that provide mechanical and electrical services
generally provide services to the same markets and customers. Therefore,
we believe that significant opportunities exist to cross-sell our
mechanical and electrical services to existing customers. In addition,
relationships with our janitorial customers have enabled us to cross-
sell our mechanical and electrical services.
. Enter New Geographic Markets. We intend to selectively pursue
acquisitions in geographic areas where we do not currently operate in
order to further enhance our ability to service our clients on a
nationwide basis.
. Expand Within Existing Markets. We intend to selectively pursue
additional acquisitions in areas where we already operate to expand
market penetration and the range of services offered. For example, we
have fewer mechanical than electrical businesses and intend to acquire
businesses that provide mechanical services in areas where we already
provide electrical services to further enhance our cross-selling
opportunities.
Customers
We have a diverse customer base, with no single customer accounting for more
than 3% of our pro forma revenues for 1998. We provide superior customer
service and maintain strict quality controls across geographic areas. The
consistency of our service offerings across geographic areas and product lines
helps to build long-term
33
<PAGE>
client relationships and provides opportunities to cross-sell services. Some
of our larger customers include Dow Chemical, Wal-Mart, Kmart, MarMaxx, State
Farm Insurance and Federal Express. We intend to continue to build and
maintain relationships with our customers by providing consistent, high-
quality service.
Competition
The facilities services industry is highly competitive. There are large
national and multi-national organizations providing a wide variety of
facilities services to their customers. Large competitors offering multiple
services may be willing to accept lower profit margins in order to capture
market share.
We also compete with numerous smaller service providers, many of whom may
provide fewer services in limited geographic areas. These providers may have
more experience in and knowledge of the local market for such services. Such
smaller service providers may also have lower overhead costs, enabling them to
provide their services at lower rates than we can. As a result of this
competition, we may lose customers or have difficulty acquiring new customers.
Barriers to entry to the markets for certain facilities services, such as
janitorial services, are low. As a result, new competitors, including property
management companies, are beginning to enter the facilities services business.
The existing and new sources of competition place pressures on the pricing of
facilities services, which may cause our revenues or margins to decline.
As the industry undergoes continuing consolidation, we expect to face
significant competition in seeking to buy other facilities services
businesses. Therefore, we may have to pay higher prices for those businesses
we acquire in the future.
Backlog
As of March 31, 1999 we had backlog of orders believed to be firm of $772.3
million.
Employees
As of March 26, 1999, we employed more than 15,000 people. Fewer than 10% of
our employees are members of labor unions. We have satisfactory employee
relationships.
Properties
As of March 26, 1999, we operated 129 facilities, including corporate
facilities, in various states. Of these facilities, 117 are leased and 12 are
owned. The facilities are used for warehouse and office purposes, or a
combination of these functions. We are expanding our facilities at four of our
local companies as a result of the expansion of these companies in recent
years. At this time, we believe that our facilities are suitable for our
purposes, and that they have adequate capacity for our present and anticipated
needs.
Legal Proceedings
We are party to litigation that arises from the normal course of business.
Management believes that none of these actions will have a material adverse
effect on our financial condition, results of operations or cash flows.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table lists the individuals who currently are the directors
and executive officers of our company. Under the financing agreement with Boss
Investment, Messrs. Africk, Gross and Newmark were appointed to the Board of
Directors on April 30, 1999. Effective April 30, 1999 David Ledecky and Thomas
Heule resigned from the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- -----------------------------------------------------------------
<S> <C> <C>
Jonathan J. Ledecky..... 41 Chairman of the Board
Joseph M. Ivey.......... 40 President and Chief Executive Officer; Director
F. Traynor Beck......... 43 Executive Vice President, General Counsel and Secretary
Timothy C. Clayton...... 44 Executive Vice President, Chief Financial Officer and Treasurer
William P. Love, Jr. ... 39 President--Building One Electrical and Mechanical Group; Director
Michael Sullivan........ 51 Chairman--Building One Service Solutions Group
Andrew Africk........... 32 Director
Mary K. Bush............ 49 Director
Vincent W. Eades........ 38 Director
Michael Gross........... 37 Director
Brooks Newmark.......... 41 Director
W. Russell Ramsey....... 38 Director
M. Jude Reyes........... 42 Director
</TABLE>
- -------------------------
Jonathan J. Ledecky founded our company in February 1997 and serves as our
Chairman of the Board. He served as our Chief Executive Officer from November
25, 1997 through February 25, 1999. In October 1994, he founded U.S. Office
Products Company, a company that provides office products, office furniture
and office coffee and beverage services, and served as its Chairman of the
Board until June 10, 1998 and its Chief Executive Officer until November 5,
1997. Jonathan J. Ledecky currently serves as a director of USA Floral
Products, Inc., UniCapital Corporation, Aztec Technology Partners, Inc.,
School Specialty, Inc., Workflow Management, Inc., the Ledecky Foundation,
Navigant International, Inc. and MicroStrategy Incorporated. He is also the
general partner of Ironbound Partners, LLC, a private investment management
firm, and a director of the United States Chamber of Commerce. He is a
graduate of Harvard College and Harvard Business School.
Joseph M. Ivey has served as our President and Chief Executive Officer since
February 25, 1999 and has been a director of our company since October 8,
1998. From September 2, 1998 to February 25, 1999, Mr. Ivey served as the
President of the Building One Mechanical Group. Mr. Ivey has also served,
since October 1990, as the Chairman and Chief Executive Officer of Ivey
Mechanical Company, Inc., a mechanical services company that we acquired on
September 2, 1998. Mr. Ivey also serves as a director of 1st M&F Corp. Mr.
Ivey is a graduate of, and serves as a trustee of, Freed-Hardeman University.
F. Traynor Beck has served as Executive Vice President, General Counsel and
Secretary of our company since November 25, 1997. Between January 1988 and
November 25, 1997, Mr. Beck was associated with the law firm of Morgan, Lewis
and Bockius LLP, most recently as a partner since October 1994. Mr. Beck's
practice was focused on mergers, acquisitions and general corporate matters,
including consolidation transactions. Mr. Beck is a graduate of the University
of Pennsylvania, Oxford University and Stanford Law School.
Timothy C. Clayton has served as Executive Vice President, Chief Financial
Officer and Treasurer of our company since November 25, 1997. Between August
1976 and October 1997, Mr. Clayton was associated with Price Waterhouse LLP
(now PricewaterhouseCoopers LLP), most recently as a partner since July 1988.
In his capacity as a partner, Mr. Clayton focused his practice on, among
others, distribution, technology, financial
35
<PAGE>
services, business services and manufacturing industries and was responsible
for providing audit and business advisory services to clients active in
consolidating a variety of industries. Mr. Clayton is a graduate of Michigan
State University.
William P. Love, Jr. currently serves as the President of the Building One
Electrical and Mechanical Group and has been a director of our company since
March 11, 1998. From September 1980 to March 11, 1998, Mr. Love served as the
President and Chief Executive Officer of SKC Electric, Inc., an electrical
installation and maintenance services company that Mr. Love founded and that
has been a wholly owned subsidiary of our company since we acquired it on
March 11, 1998. Mr. Love is the director designee of the initial companies in
the electrical group pursuant to the agreements between our company and each
company within the founding group.
Michael Sullivan has served as the Chairman of the Building One Service
Solutions Group since November 1998. From 1980 to 1998, Mr. Sullivan served as
President and Chief Executive Officer of Sullivan Service Company, a contract
management firm that Mr. Sullivan founded and that has been a wholly owned
subsidiary of our company since we acquired it on April 27, 1998 from United
Service Solutions. In 1980, Mr. Sullivan founded SPC Contract Management,
which specializes in outsourcing cleaning services for the specialty retailer,
and was acquired by our company on April 27, 1998 from United Service
Solutions. From 1975 to 1980 he served as the President of Coastal Building
Maintenance, a contract cleaning company.
Andrew Africk has served as a director of the company since April 30, 1999.
Mr. Africk has been a principal of Apollo Advisors, L.P. (which, together with
its affiliates, acts as the managing general partner of several private
securities investment funds) and of Lion Advisors, L.P. (a financial advisor
to, and representative of institutional investors with respect to, securities
investments) for more than five years. Mr. Africk is also a director of
Continental Graphics Holdings, Inc. Mr. Africk is a director designee of Boss
Investment LLC pursuant to an agreement between our company and Boss
Investment.
Mary K. Bush has been a director of our company since September 15, 1998.
Ms. Bush has served as the President of Bush & Company, an international
financial consulting firm, since 1991. Prior to founding Bush & Company, she
served from 1989 to 1991 as Managing Director of the U.S. Federal Housing
Finance Board. Prior to that, she was Vice President--International Finance at
the Federal National Mortgage Association (Fannie Mae). From 1984 to 1988, she
served as U.S. Alternate Executive Director of the International Monetary
Fund. Ms. Bush serves on a number of boards of directors and advisory boards,
including Texaco, Inc., Mortgage Guaranty Insurance Corporation, a number of
Pioneer mutual funds, Novecon Management Company, Washington Mutual Investors
Fund, March of Dimes, Hoover Institution, Wilberforce University, the Folger
Shakespeare Library, Project 2000, Inc. and the Bretton Woods Committee.
Vincent W. Eades has been a director of our company since November 25, 1997.
Since May 20, 1998, Mr. Eades has served as the Chairman and Chief Executive
Officer of Powerride Motorsports, Inc., a company seeking to consolidate the
motorcycle and leisure sports dealership industry. Between May 1995 and May
20, 1998, he served as the Senior Vice President of Sales and Marketing for
Starbucks Coffee Co., Inc. From November 1985 through May 1995, Mr. Eades was
employed by Hallmark Cards, Inc., most recently as a General Manager.
Additionally, he serves as a director of USA Floral Products, Inc and
UniCapital Corporation.
Michael Gross has served as a director of the company since April 30, 1999.
Mr. Gross is one of the founding principals of Apollo Advisors, L.P. and of
Lion Advisors, L.P. Mr. Gross is also a director of Alliance Imaging, Inc.,
Allied Waste Industries, Inc., Breuners Home Furnishings, Inc., Converse,
Inc., Florsheim Group, Inc., United Rentals, Inc., Saks Incorporated and SMT
Health Services Inc. Mr. Gross is a director designee of Boss Investment LLC
pursuant to an agreement between our company and Boss Investment.
Brooks Newmark has served as a director of the company since April 30, 1999.
Mr. Newmark is a principal of Apollo Advisors, L.P. Mr. Newmark has been
associated with Apollo for more than five years and is Vice President of
Apollo Management (U.K.) L.L.C. Mr. Newmark is a director designee of Boss
Investment LLC pursuant to an agreement between our company and Boss
Investment.
36
<PAGE>
W. Russell Ramsey has been a director of our company since November 25,
1997. Mr. Ramsey is President, co-founder and a director of Friedman,
Billings, Ramsey Group, Inc., a holding company engaged in brokerage,
investment banking, corporate finance and asset management activities in the
Washington, DC area. He has served as President of Friedman, Billings, Ramsey
Group, Inc. and its predecessors since co-founding the company in 1989. Mr.
Ramsey holds a B.A. from the George Washington University and is a director
designee of Friedman, Billings, Ramsey & Co., Inc., a wholly owned indirect
subsidiary of Friedman, Billings, Ramsey Group, Inc., pursuant to an agreement
with our company.
M. Jude Reyes has been a director of our company since November 25, 1997.
Mr. Reyes has served as Chairman and President of Premium Distributors of
Virginia, L.L.C., a beverage distributor, since 1992. Between 1989 and 1992,
he served as President and Chairman of Harbor Distributing Company in Los
Angeles, California. He is also a director and investor in three other
beverage distributors and two wholesale food service distributors. Mr. Reyes
is a director designee of Friedman, Billings, Ramsey & Co., Inc pursuant to an
agreement with us.
Committees of the Board of Directors
Your Board of Directors has established an Audit Committee, a Compensation
Committee and a Nominating Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to
conduct the annual audit of our books and records, reviewing the proposed
scope of such audit and approving the audit fees to be paid, reviewing our
accounting and financial controls with the independent public accountants and
our financial and accounting staff and reviewing and approving transactions
between us and our directors, officers and affiliates. Messrs. Eades, Ramsey,
Reyes, Africk and Newmark currently serve as the members of the Audit
Committee. The Audit Committee held two meetings (including telephonic
meetings) and acted by unanimous consent on several occasions in fiscal 1998.
The Compensation Committee reviews our compensation plans to ensure that
they meet corporate objectives. The Compensation Committee's responsibilities
also include administering the 1997 Long-Term Incentive Plan, the 1998 Long-
Term Incentive Plan and the Section 162(m) Bonus Plan, including selecting the
officers and salaried employees to whom awards will be granted. Messrs. Eades,
Reyes, Africk and Newmark, who are independent directors, currently serve as
the members of the Compensation Committee. The Compensation Committee acted
one time by unanimous consent in fiscal 1998.
The Nominating Committee recommends to the Board of Directors the slate of
nominees of directors to be elected by the shareholders and any directors to
be elected by the Board to fill vacancies and the directors to be selected for
membership to the various Board committees. Jonathan J. Ledecky, Joseph M.
Ivey, F. Traynor Beck, Mary K. Bush and M. Jude Reyes currently serve as the
members of the Nominating Committee.
Director Compensation
Directors who do not receive compensation as officers, employees or
consultants of our company are entitled to receive an annual retainer fee of
$25,000. In addition, pursuant to our 1997 Non-Employee Directors' Stock Plan,
each director who is not an employee automatically receives an initial grant
of an option to purchase 20,000 shares of our common stock on the date that
person is first elected to your Board of Directors. Such directors also
receive an automatic annual grant of an option to purchase 5,000 shares. The
exercise price of each option is equal to the fair market value on the date of
grant of one share of our common stock. In connection with the negotiation of
our agreement with Boss Investment in December 1998, Messrs. Eades, Reyes and
Heule, members of the special committee to the Board of Directors, received
$19,500 each.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning the cash
and non-cash compensation earned by or awarded to the persons who were our
executive officers during 1998. Our company's predecessor was organized in
February 1997, with David Ledecky as its sole employee. We employed the
remaining executive officers listed in the table as of November 25, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- Awards
Annual Securities
Compensation Underlying
Name and Principal Fiscal Salary Options/SARS All Other
Position Year ($)(1) Bonus (#)(2) Compensation
- ------------------ ------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jonathan J. Ledecky..... 1998 $750,000 $ 42,500 -- --
Chief Executive Officer
and 1997 125,000 -- -- --
Chairman of the
Board(3)
Timothy C. Clayton...... 1998 $300,000 175,000 -- $110,295(4)
Executive Vice
President, 1997 223,000 -- 500,000 25,000
Chief Financial Officer
and Treasurer
F. Traynor Beck......... 1998 $300,000 175,000 -- 4,800(5)
Executive Vice
President, 1997 223,000 -- 500,000 --
General Counsel and
Secretary
David Ledecky........... 1998 $300,000 100,000 -- 4,800(5)
Executive Vice
President and 1997 327,994(7) -- 500,000 --
Chief Administrative
Officer, Director(6)
</TABLE>
- --------
(1) The 1997 figures include bonus payments of $200,000 for Timothy C.
Clayton, F. Traynor Beck and David Ledecky, which were guaranteed for the
first year of employment pursuant to their employment agreements, declared
in December 1997 and paid in January 1998.
(2) Represents options granted in 1997 with respect to our common stock, each
option to vest ratably on November 25, 1998, 1999, 2000 and 2001, unless
accelerated under certain conditions. The vesting of the options was
accelerated in connection with our recent tender offer. To the extent that
we did not acquire 50% of the shares underlying an option in the tender
offer, such option is now immediately exercisable with respect to those
shares and will be exercisable with respect to up to 125,000 shares
beginning on November 25, 2000 and with respect to the remaining 125,000
shares beginning on November 25, 2001.
(3) On February 25, 1999, our company appointed Joseph M. Ivey as President
and Chief Executive Officer. Jonathan J. Ledecky currently serves as
Chairman of the Board.
(4) Represents a $4,800 contribution to Timothy C. Clayton's 401(k) plan and
$105,495, the discounted value of the benefit to Mr. Clayton of the
premium paid by the company during 1998 for a split-dollar insurance
policy under which the company is entitled to a refund of the premiums
paid by it to the insurer at the time Mr. Clayton becomes the owner of the
policy at the earlier of the end of 22 years or death.
(5) Represents our company's matching contribution to F. Traynor Beck's 401(k)
plan.
(6) On April 30, 1999, David Ledecky was terminated without cause as an
Executive Vice President and Chief Administrative Officer and resigned
from the Board of Directors.
(7) Includes payments made to David Ledecky by our predecessor.
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<PAGE>
Employment Agreements
Jonathan J. Ledecky. On November 25, 1997, we entered into an employment
agreement with Jonathan J. Ledecky. The agreement has a one-year term which
was automatically renewed for a successive one-year term pursuant to its terms
and is automatically renewable for successive one-year terms unless either
Jonathan J. Ledecky or our company gives notice of non-renewal at least 90
days prior to the end of the term. Non-renewal of the contract is the
equivalent of termination without "cause" (as defined in the employment
agreement). The agreement provides for an annual salary of $750,000 and a
discretionary bonus in an amount equal to up to 100% of his base salary. If we
terminate the agreement other than for "cause" (as defined in the employment
agreement), Jonathan J. Ledecky is entitled to receive an amount equal to
twice his base salary plus an amount equal to the bonus he received in the
prior year. The agreement prohibits Jonathan J. Ledecky from competing with us
during the term of his employment and for a period of one year thereafter. The
agreement also provides for certain executive perquisites.
Joseph M. Ivey. Effective February 25, 1999, we entered into an employment
agreement with Joseph M. Ivey, our President and Chief Executive Officer and a
company director. The agreement has a two-year term and is automatically
renewable on the same terms for one-year terms thereafter, unless either we or
Mr. Ivey give notice of non-renewal at least six months prior to the end of
the term. According to the terms of the agreement, Mr. Ivey is obligated to
devote his full business time, attention and efforts to his duties as
President and Chief Executive Officer. The agreement provides for an annual
salary of $400,000 and a discretionary bonus in an amount equal to up to 150%
of his base salary. Pursuant to the agreement, Mr. Ivey received a grant of an
option to purchase 250,000 shares of common stock. The employment agreement
provides that the option vests ratably on the first, second, third and fourth
anniversaries of the date of the grant, unless accelerated upon a "change in
control" (as defined in the 1998 Long-Term Inventive Plan) or upon termination
of Mr. Ivey without "cause" (as defined in the employment agreement). The
vesting of the option was accelerated in connection with our recent tender
offer. Mr. Ivey's option is now exercisable with respect to 125,000 shares and
will be exercisable with respect to 62,500 shares beginning on November 25,
2000 and with respect to an additional 62,500 shares beginning on November 25,
2001. If we terminate the agreement other than for "cause," Mr. Ivey will be
entitled to receive an amount equal to twice his base salary plus the amount
of bonus he received in the prior year and to participate in pension,
insurance and other benefit programs on terms which are identical to those of
our other senior executive officers. Mr. Ivey's employment agreement prohibits
him from competing with us during the term of his employment and, depending on
the nature of his termination, for a period of up to two years thereafter. The
agreement also provides for certain executive perquisites.
F. Traynor Beck, Timothy C. Clayton and David Ledecky. On November 25, 1997,
we entered into employment agreements with F. Traynor Beck, Timothy C. Clayton
and David Ledecky, the terms of which are substantially identical. Each of the
agreements has a two-year term and is automatically renewable for one-year
terms thereafter, unless either the employee or we give notice of non-renewal
at least six months prior to the end of the term. According to the terms of
the agreements, each is obligated to devote his full business time, attention
and efforts to his duties under the agreement. Each of the agreements provides
for an annual salary of $300,000, a guaranteed bonus of $200,000 for the first
year of the term and a discretionary bonus in an amount equal to up to 100% of
his base salary for each year thereafter. On November 25, 1997, each of these
executive officers received a grant of an option to purchase 500,000 shares of
common stock at an exercise price equal to our initial public offering price
per share ($20.00). The employment agreements provide that the options vest
ratably on the first, second, third and fourth anniversaries of the date of
grant, unless accelerated upon a "change in control" (as defined in the
employment agreement) or upon the termination of the employee without "cause"
(as defined in the employment agreement). The vesting of the options was
accelerated in connection with our recent tender offer. To the extent that we
do not acquire 50% of the shares underlying each such option in the tender
offer, such option, except as discussed below, is now exercisable with respect
to those shares and will be exercisable with respect to up to 125,000 shares
beginning on November 25, 2000 and with respect to the remaining 125,000
shares beginning on November 25, 2001. If we terminate the agreement other
than for "cause," the executive officer will be entitled to receive an amount
equal to twice his base salary plus the amount of the bonus he received in the
prior year. The agreements generally prohibit the executive officer from
competing with us during
39
<PAGE>
the term of his employment and for a period of one year thereafter. The
agreements also provide for certain executive benefits and perquisites. The
salaries for Messrs. Beck and Clayton were increased to $330,000 in March
1999. We have entered into an agreement with David Ledecky relating to the
termination without cause of his employment as executive vice president and
chief administrative officer of the company and his resignation as a director
of the company effective on April 30, 1999. We paid David Ledecky an amount in
accordance with the termination without cause provisions of his employment
agreement. In addition, in exchange for his waiver of certain contractual
rights, his agreement to accept certain continuing obligations and the
forfeiture and cancellation of all of David Ledecky's remaining options, we
paid David Ledecky $306,512.50 pursuant to the terms of the termination
agreement.
William P. Love, Jr. On March 11, 1998, we entered into an employment
agreement with William P. Love, Jr., who is a director of our Company and, as
of February 25, 1999, became the President of the Building One Mechanical and
Electrical Group. The agreement has a two-year term and may be extended
according to terms upon which we and Mr. Love mutually agree. The agreement
provides for an annual salary of $200,000 (which was increased to $300,000
upon Mr. Love becoming President of the Building One Mechanical and Electrical
Group) and a performance-based incentive bonus. This bonus is payable in cash,
stock options or other non-cash awards. The compensation committee of your
Board of Directors determines the form of the bonus each year during the term
of the agreement, beginning on January 1, 1999. If we terminate the agreement
other than for "cause" (as defined in the employment agreement), Mr. Love will
receive his base salary and group health benefits in effect at that time for
either one year from the date of termination; or the remaining length of time
under the term of the agreement, whichever is longer. Mr. Love's employment
agreement also prohibits him from competing with us during the term of his
employment and, depending on the nature of his termination of employment, for
a period of up to two years from the date of termination.
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<PAGE>
Year-End Values of Options
The following table sets forth certain information concerning the exercise
and year-end values of options relating to our executive officers for 1998.
Aggregated Option/SARs Exercised in 1998 and Option/SAR Values at end of 1998
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-money
Unexercised Options/SARs
Shares Options/SARs at End of 1998
Acquired on Value at End of 1998 (Exercisable/
Exercise Realized (Exercisable/ Unexercisable)
Name (# of shares) ($)(1) Unexercisable)(#) ($)(2)
- -------------------- ------------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
Jonathan J.
Ledecky............ -- -- -- --
Timothy C. Clayton.. -- -- 125,000/375,000 $109,375/$328,125
F. Traynor Beck..... -- -- 125,000/375,000 109,375/ 328,125
David Ledecky....... -- -- 125,000/375,000 109,375/ 328,125
</TABLE>
- --------
(1) The "value realized" represents the difference between the base (or
exercise) price of the option shares and the market price of the option
shares on the date the option was exercised. The value realized was
determined without considering any taxes which may have been owned.
(2) "In-the-money" options are options whose base (or exercise) price was less
than the market price of our common stock at December 31, 1998. The value
of such options is calculated assuming a stock price of $20 7/8, which was
the closing price of our common stock on the Nasdaq Stock Market on
December 31, 1998.
41
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Set forth below is a description of certain transactions and relationships
between us and our officers, directors and principal stockholders.
Jonathan J. Ledecky, our Chairman and founder, is the brother of David
Ledecky, our former Executive Vice President, Chief Administrative Officer and
a former director.
Joseph M. Ivey, our President and Chief Executive Officer and a director, is
an officer and stockholder of two corporations which lease real property and
an airplane to Ivey Mechanical Company, one of our mechanical subsidiaries.
The leases provide for lease payments in the aggregate amount of $8,200 per
month, or $98,400 annually. In addition, our company pays a fee based upon the
use of the airplane. In 1998, our company paid $43,120 in usage fees for the
airplane.
W. Russell Ramsey, a director, is President and a principal stockholder of
Friedman, Billings, Ramsey Group, Inc. Friedman, Billings, Ramsey & Co., Inc.,
a wholly owned indirect subsidiary of Friedman, Billings, Ramsey Group, Inc.,
rendered investment banking services to us in connection with our initial
public offering. In 1998, Friedman, Billings, Ramsey & Co., Inc. acted as a
financial advisor to our company in connection with our consideration of
various strategic alternatives which ultimately led to our recently completed
issuer tender offer. Friedman, Billings, Ramsey & Co., Inc. has received a fee
of $3.5 million in connection with our tender offer.
On March 11, 1998, we completed the acquisition of SKC Electric, Inc. SKC
Electric, Inc. leases office, warehouse and storage space from SKC Properties,
L.L.C., a principal member of which is William P. Love, Jr. Mr. Love is one of
the former owners of SKC, Inc., a director, and the President of the Building
One Mechanical and Electrical Group. The lease provides for lease payments in
the amount of $8,095 per month, or $97,140 annually.
Effective April 30, 1999, Messrs. Africk, Gross and Newmark were appointed
to the Board of Directors pursuant to the agreements that our company entered
into with Boss Investment. Boss Investment received fees of $2.5 million in
connection with its agreement to acquire an aggregate principal amount of
$100 million of our 7 1/2% convertible subordinated debentures. In addition,
Boss Investment was reimbursed for its fees and expenses incurred in
connection with its transaction with our company.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of May 14, 1999 by:
. each person (or group of affiliated persons) we know to be the
beneficial owner of more than five percent of the outstanding shares of
our common stock;
. each director;
. each executive officer named in the Summary Compensation Table; and
. all of our current directors and executive officers as a group.
Each of these stockholders possesses sole voting and investment power with
respect to the shares listed, unless otherwise noted.
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of Common
Beneficial Stock
Name and Address of Beneficial Owner Ownership Owned
- ------------------------------------ ---------- ----------
<S> <C> <C>
Directors and Executive Officers:
Jonathan J. Ledecky.................................... 2,983,559(1) 12.6 %
David Ledecky.......................................... -- --
F. Traynor Beck........................................ 166,729(2) *
Timothy C. Clayton..................................... 252,000(3) 1.2 %
Joseph M. Ivey......................................... 675,985(4) 3.0 %
Andrew Africk.......................................... --(5) --
Mary K. Bush........................................... -- --
Vincent W. Eades....................................... 19,527(6) *
Michael Gross.......................................... --(5) --
William P. Love, Jr. .................................. 212,991(7) *
Brooks Newmark......................................... --(5) --
W. Russell Ramsey...................................... 1,352,393(8) 5.9 %
M. Jude Reyes.......................................... 15,738(9) *
All current directors and executive
officers as a group (12 persons) ................... 5,678,922 22.4 %
Holders of 5% or more of our common stock:
Boss Investment LLC.................................... 4,444,444(10) 17.0 %
</TABLE>
- --------
*Less than one percent
(1) This includes 1,950,000 shares underlying a warrant issued to Jonathan J.
Ledecky in connection with our initial public offering. We have agreed
that, at Jonathan J. Ledecky's request, we will file a registration
statement under the Securities Act of 1933, as amended, for an offering of
the shares underlying the warrant during a ten-year period beginning on
November 25, 1997. In addition, we have agreed to give Jonathan J. Ledecky
the right to request that we include the shares underlying the warrant on
a registration statement filed by us during a twelve-year period beginning
on November 25, 1997. Mr. Ledecky's address is: c/o Building One Services
Corporation, 800 Connecticut Ave., N.W., Suite 1111 Washington, DC 20006.
(2) This figure reflects shares which may be acquired upon the exercise of
options that are exercisable.
(3) This figure includes 250,000 shares which may be acquired upon the
exercise of options that are exercisable.
(4) This figure includes 300,000 shares held in the Joseph M. Ivey, Jr.
Annuity Trust, of which Mr. Ivey is the trustee, 125,000 shares which may
be acquired upon the exercise of options that are exercisable and 173,547
shares held by Ivey National Corporation (the principal stockholder of
which is Mr. Ivey's father), of which Mr. Ivey disclaims beneficial
ownership beyond his pecuniary interest.
43
<PAGE>
(5) Beneficial ownership is disclaimed as to the shares of common stock
beneficially owned by Boss Investment. The director is a principal of
Apollo Advisors, L.P., an affiliate of Boss Investment. See note (10)
below.
(6) This figure represents shares which may be acquired upon the exercise of
options that are exercisable.
(7) This figure includes 72,465 shares owned by Mr. Love's wife and 1,200
shares owned by trusts established for the benefit of his children. Mr.
Love serves as one of four trustees of the SKC Electric, Inc. Profit
Sharing Plan. The number of shares shown as beneficially owned by Mr. Love
excludes shares that may be deemed to be beneficially owned by that plan.
(8) This figure includes 7,632 shares which may be acquired upon the exercise
of options that are exercisable, 202,604 shares owned by FBR Asset
Investment Corporation, of which Mr. Ramsey is an officer, director and
indirect shareholder, and 1,130,000 shares underlying a warrant owned by
Friedman, Billings, Ramsey & Co., Inc., of which Mr. Ramsey is an officer,
director and shareholder. In addition, we have agreed to give Friedman,
Billings, Ramsey & Co., Inc. the right to request that we include the
shares underlying the warrant on a registration statement filed by us with
the Securities and Exchange Commission during a twelve-year period
beginning on November 25, 1997.
(9) This figure includes 7,632 shares which may be acquired upon the exercise
of options that are exercisable.
(10) Boss Investment will be dissolved and will distribute the 7 1/2%
convertible subordinated debentures to its members, resulting in direct
beneficial ownership by Apollo Investment Fund IV, L.P. of $94.9 million
of the convertible subordinated debentures, which are currently
convertible into 4,218,222 shares, and Apollo Overseas Partners IV, L.P.
of $5.1 million of convertible subordinated debentures, which are
currently convertible into 226,222 shares. The general partner of these
entities, Apollo Advisors IV, L.P., is affiliated with Apollo
Management, L.P.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We currently have 250,500,000 shares of authorized capital stock. As of May
14, 1999, there were 21,693,105 shares outstanding. The following description
of our capital stock is only a summary. As a summary, it is not complete and
is subject to the detailed provisions of, and is qualified in its entirety by
reference to, our restated certificate of incorporation, our amended and
restated bylaws and the applicable provisions of Delaware General Corporation
Law.
Common Stock
Our common stockholders of record are entitled to one vote for each share
held on all matters submitted to a vote of the stockholders. Cumulative voting
is not permitted under our restated certificate of incorporation. Our common
stockholders are entitled to receive proportionately any dividends that your
Board of Directors declares out of legally available funds.
If we liquidate or dissolve our business, common stockholders will share
proportionately in the assets remaining after we pay our creditors and any
preferred stockholders. Common stockholders are not entitled to preemptive
rights to subscribe for additional shares of capital stock and have no right
to convert their shares into any other securities. In addition, no redemption
or sinking fund provisions are applicable to our common stock. All of the
outstanding shares of our common stock (and shares offered) are fully paid and
nonassessable.
Delaware Anti-takeover Law and Certain Provisions of our Restated Certificate
of Incorporation
We are subject, as a Delaware corporation, to Section 203 of the Delaware
General Corporation Law. Section 203 generally prohibits a publicly-held
Delaware corporation from engaging in a "business combination" transaction
with any "interested stockholder" for a period of three years following the
date of the transaction on which the person became an "interested
stockholder." For purposes of Section 203, an "interested stockholder" is a
person who, together with their affiliates and associates, owns 15% or more of
a company's voting stock. A "business combination" includes a merger, asset
sale or other such transaction that results in a financial benefit to the
interested stockholder. Section 203 is subject to certain exceptions, such as
transactions done with the approval of your Board of Directors and of the
holders of at least a majority of the outstanding shares of voting stock that
is not owned by the "interested stockholder."
Section 203 is designed to have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium over the market
price for the shares of our common stock.
Our restated certificate of incorporation permits us to eliminate the
personal liability of our directors to us or you, the stockholders, for
monetary damages for a breach of the director's fiduciary duty. However, we
may not eliminate a director's personal liability for the following:
. for breach of the director's duty of loyalty;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. for certain unlawful dividends and stock repurchases; or
. for any transaction from which the director derived an improper personal
benefit.
The effect of this provision is to eliminate our rights and the rights of our
stockholders (through stockholder derivative suits brought on our behalf) to
recover monetary damages against a director for breach of fiduciary duty
except as described in the four situations above. If the Delaware General
Corporation Law is later amended to authorize the further elimination or
limitation of the liability of a director, then the liability of our directors
shall be eliminated or limited to the fullest extent of the amended Delaware
law.
45
<PAGE>
Convertible Subordinated Notes
On April 30, 1999, Boss Investment acquired an 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 at an initial
conversion price of $22.50 per $1,000 principal amount. The conversion price
is subject to customary antidilution adjustments and to the possible reduction
of the conversion price, as discussed below. 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.
Subject to obtaining stockholder approval of an amendment to our restated
certificate of incorporation, holders of the convertible subordinated
debentures will be entitled to elect as a class three directors to our Board
of Directors (or if the Board has more than ten directors, no less than 30% of
the Board) and otherwise to vote on an as converted basis with the common
stock on all matters submitted to the holders of common stock. We have agreed
to seek stockholder approval of the amendment to our restated certificate of
incorporation by July 25, 1999.
If stockholder approval of the amendment is not obtained by July 25, 1999,
the interest rate on the convertible subordinated debentures will increase to
12 1/2% per annum until such approval is obtained. In addition, if approval is
not obtained by October 24, 1999, the conversion price will be permanently
reduced by $1.00 and will be further permanently reduced by $1.00 every 90
days thereafter if stockholder approval of the amendment is not obtained
during such 90 day period, subject to a maximum reduction of the conversion
price of $4.00.
In 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.
We are required to nominate for election to the Board of Directors at our
1999 annual meeting (and if the amendment to the restated certificate of
incorporation is not so adopted, at each annual meeting thereafter) three
persons designated by Boss Investment.
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;
46
<PAGE>
. 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.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
PLAN OF DISTRIBUTION
We will offer and issue our common stock from time to time in connection
with our acquisition of other businesses, assets or securities. We expect that
the terms of the acquisitions involving the issuances of securities covered by
this prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses, assets or securities that we will
acquire. We will not pay underwriting discounts or commission, although we may
pay a finder's fee from time to time with respect to specific mergers or
acquisitions. Any person receiving such fees may be deemed to be an
underwriter within the meaning of the Securities Act.
RESTRICTIONS ON RESALE
Affiliates of entities that we acquire who do not become affiliates of our
company may not resell common stock registered under the registration
statement to which this prospectus relates except:
. pursuant to an effective registration statement under the Securities Act
covering such shares; or
. in compliance with Rule 145 under the Securities Act or another
applicable exemption from the registration requirements of the
Securities Act.
Generally, Rule 145 permits such affiliates to sell such shares immediately
following the acquisition in compliance with certain volume limitations and
manner of sale requirements in Rule 144 under the Securities Act. Under Rule
144, sales by such affiliates during any three-month period cannot exceed the
greater of:
. 1% of the shares of our common stock outstanding; or
. the average weekly reported volume of trading of such shares of common
stock on all national securities exchanges during the four calendar
weeks preceding the proposed sale.
These restrictions will cease to apply under most other circumstances if the
affiliate has held the common stock for at least one year, provided that the
person or entity is not then an affiliate of our company. Individuals who are
not affiliates of the entity being acquired and do not become affiliates of
our company will not be subject to resale restrictions under Rule 145 and,
unless otherwise contractually restricted, may resell common stock immediately
following the acquisition without an effective registration statement under
the Securities Act. The ability of affiliates to resell shares of the common
stock under Rule 145 will be subject to our having satisfied our Exchange Act
reporting requirements for specified periods prior to the time of sale.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Washington, DC has passed upon the validity of
our shares of common stock offered hereby.
EXPERTS
The historical financial statements included in this prospectus, except as
they relate to the unaudited interim periods, have been audited by various
independent accountants. The companies and periods covered by these audits are
indicated in the individual accountants' reports. Such financial statements
have been so included in reliance on the reports of the various independent
accountants given on the authority of such firms as experts in auditing and
accounting.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BUILDING ONE SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements..................................................... F-1
Unaudited Pro Forma Combined Balance Sheet...................... F-2
Unaudited Pro Forma Combined Statement of Operations............ F-3
Notes to Unaudited Pro Forma Combined Financial Statements...... F-4
BUILDING ONE SERVICES CORPORATION
Reports of Independent Accountants.............................. F-7
Consolidated Balance Sheet ..................................... F-10
Consolidated Statement of Operations............................ F-11
Consolidated Statement of Stockholders' Equity.................. F-12
Consolidated Statement of Cash Flows............................ F-13
Notes to Consolidated Financial Statements...................... F-15
SERVICE MANAGEMENT USA, INC.
Report of Independent Accountants............................... F-30
Combined Balance Sheet.......................................... F-31
Combined Statement of Operations................................ F-32
Combined Statement of Stockholder's Equity...................... F-33
Combined Statement of Cash Flows................................ F-34
Notes to Combined Financial Statements.......................... F-35
TRI-CITY ELECTRICAL CONTRACTORS, INC.
Independent Auditors' Report.................................... F-40
Consolidated Balance Sheets..................................... F-41
Consolidated Statements of Operations........................... F-42
Consolidated Statements of Stockholders' Equity................. F-43
Consolidated Statements of Cash Flows........................... F-44
Notes to Consolidated Financial Statements...................... F-46
WILSON ELECTRIC COMPANY, INC.
Report of Independent Accountants............................... F-54
Balance Sheet................................................... F-55
Statements of Income and Retained Earnings...................... F-56
Statements of Cash Flows........................................ F-57
Notes to Financial Statements................................... F-58
SKC ELECTRIC, INC. AND AFFILIATE
Report of Independent Accountants............................... F-63
Combined Balance Sheet.......................................... F-64
Statement of Income............................................. F-65
Statement of Cash Flows......................................... F-66
Notes to Financial Statements................................... F-68
RIVERA ELECTRIC CONSTRUCTION CO.
Independent Accountants' Report................................. F-75
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Balance Sheets............................................... F-76
Statements of Income......................................... F-77
Statements of Changes in Stockholders' Equity................ F-78
Statements of Cash Flows..................................... F-79
Notes to Financial Statements................................ F-80
TOWN & COUNTRY ELECTRIC INC.
Report of Independent Certified Public Accountants........... F-85
Balance Sheets............................................... F-86
Statements of Earnings....................................... F-88
Statement of Stockholders' Equity............................ F-89
Statements of Cash Flows..................................... F-90
Notes to Financial Statements................................ F-91
GARFIELD ELECTRIC COMPANY
Report of Independent Certified Public Accountants........... F-96
Balance Sheet................................................ F-97
Statements of Earnings....................................... F-98
Statements of Stockholders' Equity........................... F-99
Statements of Cash Flows..................................... F-100
Notes to Financial Statements................................ F-101
INDECON, INC.
Report of Independent Certified Public Accountants........... F-106
Balance Sheet................................................ F-107
Statements of Earnings....................................... F-108
Statements of Stockholders' Equity........................... F-109
Statements of Cash Flows..................................... F-110
Notes to Financial Statements................................ F-111
TAYLOR ELECTRIC, INC.
Report of Independent Certified Public Accountants........... F-116
Balance Sheet................................................ F-117
Statement of Earnings and Retained Earnings.................. F-118
Statement of Cash Flows...................................... F-119
Notes to Financial Statements................................ F-120
REGENCY ELECTRIC COMPANY, INC.
Independent Auditor's Report................................. F-123
Consolidated Balance Sheets.................................. F-124
Consolidated Statements of Income............................ F-125
Consolidated Statements of Changes in Stockholder's Equity... F-126
Consolidated Statements of Cash Flows........................ F-127
Notes to Consolidated Financial Statements................... F-128
</TABLE>
ii
<PAGE>
BUILDING ONE SERVICES CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share)
The financial statements of Building One Services Corporation (the
"Company") included in the following unaudited pro forma combined financial
statements represent the consolidated financial statements of the Company,
which are included elsewhere in this Prospectus. The unaudited pro forma
financial statements give effect to the following: (i) the purchase of
25,500,000 shares of common stock (24,618,856 shares at a price of $22.50 per
share and 881,144 shares at a price of $22.50 per share less the exercise
price for outstanding employee stock options) (the "Share Repurchase"), (ii)
the offering of $200,000 of senior subordinated notes, $100,000 of convertible
subordinated debentures and borrowings of $125,000 under a new credit facility
(the "New Borrowings") necessary to finance the Share Repurchase and (iii)
seven acquisitions completed subsequent to December 31, 1998 through March 29,
1999 (the "1999 Acquisitions").
The following unaudited pro forma combined balance sheet of the Company
gives effect to the Share Repurchase and the New Borrowings as if they had
been consummated as of March 31, 1999.
The unaudited pro forma combined statements of operations give effect to (i)
the Share Repurchase, (ii) the New Borrowings (iii) the 26 acquisitions
completed during the year ended December 31, 1998 which were accounted for
under the purchase method of accounting ("1998 Acquisitions") and (iv) the
1999 Acquisitions as if they had been consummated on January 1, 1998.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data does not purport to represent what the
Company's consolidated financial position and results of operations would
actually have been if such transactions in fact had occurred on the assumed
dates and are not necessarily representative of our Company's consolidated
financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
F-1
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Building One
Services Tender Pro Forma
Corporation Offer Combined
------------ --------- ----------
<S> <C> <C> <C>
ASSETS (A)
Current assets:
Cash and cash equivalents............. $ 174,273 $(563,127)(i) $ 9,638
398,492 (ii)
Accounts receivable, net.............. 276,981 276,981
Cost and estimated earnings in excess
of billings on uncompleted
contracts............................ 39,931 39,931
Prepaid expenses and other current
assets............................... 19,252 19,252
---------- --------- ----------
Total current assets................ 510,437 (164,635) 345,802
Property and equipment, net............ 47,541 47,541
Intangible assets, net................. 596,460 596,460
Other assets........................... 7,682 22,000 (ii) 29,682
---------- --------- ----------
Total assets........................ $1,162,120 $(142,635) $1,019,485
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................... $ 5,068 $ $ 5,068
Accounts payable...................... 81,882 81,882
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ 66,672 66,672
Income taxes payable.................. 11,875 (2,481)(i) 9,394
Accrued compensation.................. 32,338 32,338
Accrued liabilities................... 60,633 60,633
---------- --------- ----------
Total current liabilities........... 258,468 (2,481) 255,987
Long-term debt, net of discount........ 4,783 420,492 (ii) 425,275
Other liabilities...................... 4,531 4,531
---------- --------- ----------
Total liabilities................... 267,782 418,011 685,793
Stockholders' equity:
Common stock.......................... 46 (24)(i) 22
Additional paid-in capital............ 874,299 (600,804)(i) 273,495
Treasury stock........................ (41,832) 41,832 (i)
Retained earnings..................... 61,988 (1,650)(i) 60,338
Accumulated other comprehensive
income (loss)........................ (163) (163)
---------- --------- ----------
Total stockholders' equity ......... 894,338 (560,646) 333,692
---------- --------- ----------
Total liabilities and stockholders'
equity............................. $1,162,120 $(142,635) $1,019,485
========== ========= ==========
</TABLE>
F-2
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1998
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Building
One
Services 1998 1999 Pro Forma Pro Forma
Corporation Purchases Acquisitions Adjustments Combined
----------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 809,601 $502,663 $155,072 $ $1,467,336
Cost of revenues........ 636,225 411,042 127,080 1,174,347
---------- -------- -------- -------- ----------
Gross profit........... 173,376 91,621 27,992 292,989
Selling, general and
administrative
expenses............... 99,771 71,905 20,546 (23,357)(A) 168,865
Goodwill amortization... 7,653 237 5,535 (B) 13,425
Non-recurring pooling
costs.................. 768 (768)(C)
---------- -------- -------- -------- ----------
Operating income....... 65,184 19,479 7,446 18,590 110,699
Other (income) expense:
Interest expense....... 1,054 1,835 441 40,562 (D) 43,892
Interest income........ (19,373) (1,852) (78) 21,303 (E)
Other, net............. (80) (1,455) (150) (1,950)(F) (3,635)
---------- -------- -------- -------- ----------
Income before provision
for income taxes....... 83,583 20,951 7,233 (41,325) 70,442
Provision for income
taxes.................. 36,120 6,550 793 (10,306)(G) 33,157
---------- -------- -------- -------- ----------
Net income.............. $ 47,463 $ 14,401 $ 6,440 $(31,019) $ 37,285
========== ======== ======== ======== ==========
Net income per share--
Basic.................. $ 1.19 $ 1.73
========== ==========
Net income per share--
Diluted................ $ 1.16 $ 1.58
========== ==========
Weighted average shares
outstanding--Basic..... 39,908,364 21,578,216
========== ==========
Weighted average shares
outstanding--Diluted... 40,928,452 26,604,814
========== ==========
</TABLE>
F-3
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 1999
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Building
One
Services 1999 Pro Forma Pro Forma
Corporation Acquisitions Adjustments Combined
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues.................. $ 350,842 $22,416 $ $ 373,258
Cost of revenues.......... 280,692 18,248 298,940
---------- ------- ------- ----------
Gross profit............. 70,150 4,168 74,318
Selling, general and
administrative expenses.. 42,714 3,622 (634)(A) 45,702
Goodwill amortization..... 3,469 185 (B) 3,654
---------- ------- ------- ----------
Operating income......... 23,967 546 449 24,962
Other (income) expense:
Interest expense......... 96 14 10,719 (D) 10,829
Interest income.......... (2,508) (17) 2,508 (E) (17)
Other, net............... (281) (216) (497)
---------- ------- ------- ----------
Income before provision
for income taxes......... 26,660 765 (12,778) 14,647
Provision for income
taxes.................... 11,927 231 (4,962)(G) 7,196
---------- ------- ------- ----------
Net income................ $ 14,733 $ 534 $(7,816) $ 7,451
========== ======= ======= ==========
Net income per share--
Basic.................... $ 0.32 $ 0.34
========== ==========
Net income per share--
Diluted.................. $ 0.31 $ 0.31
========== ==========
Weighted average shares
outstanding--Basic....... 45,973,455 21,910,397
========== ==========
Weighted average shares
outstanding--Diluted..... 47,740,958 27,997,422
========== ==========
</TABLE>
F-4
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 1998
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Building
One
Services 1998 1999 Pro Forma Pro Forma
Corporation Purchases Acquisitions Adjustments Combined
----------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 54,610 $248,222 $33,279 $ $ 336,111
Cost of revenues........ 44,233 204,421 26,861 275,515
---------- -------- ------- --------- -----------
Gross profit........... 10,377 43,801 6,418 60,596
Selling, general and
administrative
expenses............... 7,918 30,025 5,192 (3,738)(A) 39,397
Goodwill amortization... 324 172 2,812 (B) 3,308
---------- -------- ------- --------- -----------
Operating income....... 2,135 13,604 1,226 926 17,891
Other (income) expense:
Interest expense....... 99 1,259 100 9,515 (D) 10,973
Interest income........ (6,656) (767) (22) 7,445 (E)
Other, net............. (111) (1,400) (2) (813)(F) (2,326)
---------- -------- ------- --------- -----------
Income before provision
for income taxes....... 8,803 14,512 1,150 (15,221) 9,244
Provision for income
taxes.................. 3,722 2,167 119 (1,136)(G) 4,872
---------- -------- ------- --------- -----------
Net income.............. $ 5,081 $ 12,345 $ 1,031 $ (14,085) $ 4,372
========== ======== ======= ========= ===========
Net income per share--
Basic.................. $ 0.15 $ 0.20
========== ===========
Net income per share--
Diluted................ $ 0.15 $ 0.21
========== ===========
Weighted average shares
outstanding--Basic..... 32,987,273 21,578,216
========== ===========
Weighted average shares
outstanding--Diluted... 34,075,876 26,405,533
========== ===========
</TABLE>
F-5
<PAGE>
Notes to Unaudited Pro Forma Financial Statements
(dollars in thousands, except share and per share data)
Note 1--Unaudited Pro Forma Balance Sheet Adjustments
(A) (i) Adjustment to reflect the use of cash to repurchase 25,500,000 shares
of common stock, consisting of 24,618,856 shares at a price of $22.50 per
share and 881,144 shares at a price of $22.50 per share less the exercise
price for outstanding employee stock options exercised, including
applicable transaction fees of $25,000.
As a result of our allowing for the exchange of approximately 881,144
employee stock options in the Share Repurchase, compensation expense is
recorded to the extent that the option holder exercises the stock option for
the net cash payments made upon exercise. We estimate that the compensation
expense related to the option shares purchased in the Share Repurchase will
approximate $2,751 after the exchange of the employee stock options. For
purposes of the pro forma balance sheet, we have reflected the after-tax
compensation expense of $1,650 ($2,751 before the benefit from income taxes)
as a reduction to retained earnings. Additionally, income taxes payable has
been decreased by approximately $2,482 to reflect the expected income tax
benefit and additional paid-in capital has been increased by $4,132. We have
not included these items as compensation expense in the unaudited pro forma
statement of operations because they are of a non-recurring nature and are
directly related to the Share Repurchase.
(ii) Adjustments to reflect the offering of $200,000 senior subordinated
notes (less discount of $4,508), $100,000 of convertible subordinated
debentures and $125,000 of borrowings under a new credit facility, necessary
to finance the Share Repurchase and the 1999 Acquisitions. Additionally,
adjustment reflects approximately $22,000 of debt issue costs which will be
capitalized and amortized over the life of the debt.
F-6
<PAGE>
Notes to Unaudited Pro Forma Financial Statements--(Continued)
(dollars in thousands)
Note 2--Unaudited Pro Forma Statements of Operations Adjustments
(A) Adjustment to reflect the modifications in salaries, bonuses and benefits
to owners of the 1998 Purchases, and the 1999 Acquisitions to which they
have agreed prospectively.
(B) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the 1998 Purchases and
the 1999 Acquisitions for the periods prior to the date of acquisition.
The goodwill is being amortized over an estimated life of 40 years.
(C) Adjustment to reflect the reduction in one-time non-recurring acquisition
costs related to pooling-of-interests business combinations. These costs
consist of legal, accounting and broker fees.
(D) Adjustment to reflect the incremental increase in interest expense
associated with the senior subordinated notes, including amortization of
associated discount, the convertible subordinated debentures, borrowings
under the new credit facility, including unused commitment fees, and
interest associated with other secured debt.
(E) Adjustment to eliminate interest income relating to the cash consideration
used in the acquisition of the 1998 Purchases, the 1999 Acquisitions and
cash used in the Share Repurchase.
(F) Adjustment to reflect the elimination of minority interest associated with
the acquisition of the remaining 50% interest of a currently 50%-owned
business by our Company.
(G) Adjustment to reflect the incremental provision for federal and state
income taxes assuming a combined federal and state statutory rate of
approximately 40% and the non-deductibility of certain goodwill
amortization
F-7
<PAGE>
Notes to Unaudited Pro Forma Financial Statements--(Continued)
(dollars in thousands, except share and per share data)
Note 3--Shares Used To Compute Earnings Per Share
Basic pro forma earnings per share is calculated based upon the shares
outstanding subsequent to the repurchase of 24,618,856 shares.
Diluted earnings per share is calculated based upon the weighted average
shares outstanding, the incremental shares assuming the convertible
subordinated debentures convert into shares and the dilution attributable to
options and warrants outstanding subsequent to the Share Repurchase.
The weighted average shares outstanding used to calculate pro forma earnings
per share for the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ended Three months ended
December
31, March 31,
----------- -----------------------
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Basic earnings per share:
Net income................................ $ 37,285 $ 4,372 $ 7,451
Pro forma weighted average shares
outstanding -- Basic..................... 21,578,216 21,578,216 21,910,397
----------- ----------- -----------
Net income per share -- Basic............. $ 1.73 $ 0.20 $ 0.34
=========== =========== ===========
Diluted earnings per share:
Net income ............................... $ 37,285 $ 4,372 $ 7,451
Plus: Interest expense on 7.5% convertible
subordinated debentures and related
amortization expense on debt issue costs
net of applicable income taxes........... 4,788 1,197 1,197
----------- ----------- -----------
Net income on an as if converted basis.... 42,073 5,569 8,648
----------- ----------- -----------
Pro forma weighted average shares
outstanding -- Basic..................... 21,578,216 21,578,216 21,910,397
Dilution attributable to options and
warrants................................. 278,942 372,477 152,158
Dilution attributable to contigently
issuable shares.......................... 303,212 10,396 1,490,423
Convertible subordinated debentures, on an
as if converted basis.................... 4,444,444 4,444,444 4,444,444
----------- ----------- -----------
Pro forma weighted average shares
outstanding -- Diluted................... 26,604,814 26,405,533 27,997,422
----------- ----------- -----------
Net income per share -- Diluted............ $ 1.58 $ 0.21 $ 0.31
=========== =========== ===========
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Building One Services Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Building One
Services Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain wholly-owned subsidiaries, which
statements reflect total assets of $4.0 million at December 31, 1997 and total
revenues of $28.5 million and $11.1 million for the years ended December 31,
1997 and 1996, respectively. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for those wholly-owned
subsidiaries, is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 1999, except for Note 3, which is as of March 23, 1999
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Perimeter Maintenance Corporation
Atlanta, Georgia
We have audited the balance sheet of Perimeter Maintenance Corporation (an S
Corporation) as of December 31, 1997 (not presented separately herein), and
the related statements of operations, retained earnings, and cash flows for
the year ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Perimeter Maintenance
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Frazier & Deeter, LLC
---------------------------
Frazier & Deeter, LLC
Atlanta, Georgia
February 19, 1998
F-10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Crest International, LLC
Green Bay, Wisconsin
We have audited the balance sheet of Crest International, LLC (a Wisconsin
limited liability company) as of December 31, 1997 (not presented separately
herein), and the related statements of income, accumulated deficit and cash
flows for the years ended December 31, 1997 and 1996 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crest International, LLC
as of December 31, 1997, and the results of its operations and cash flows for
the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ Shinners, Hucovski & Company, S.C.
----------------------------------------
Shinners, Hucovski & Company, S.C.
Green Bay, Wisconsin
February 17, 1998
F-11
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
-------------------- -----------
1998 1997 1999
---------- -------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................... $ 213,096 $528,972 $ 174,273
Marketable securities....................... 2,697 --
Accounts receivable, less allowance for
doubtful accounts of $1,991, $104 and
$2,079 (unaudited), respectively........... 246,623 5,193 276,981
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... 25,441 -- 39,931
Prepaid expenses and other current assets... 14,411 2,065 19,252
---------- -------- -----------
Total current assets....................... 502,268 536,230 510,437
Property and equipment, net.................. 38,967 2,593 47,541
Intangible assets, net....................... 496,381 152 596,460
Other assets................................. 6,306 184 7,682
---------- -------- -----------
Total assets............................... $1,043,922 $539,159 $ 1,162,120
========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 2,167 $ 1,553 $ 5,068
Accounts payable............................ 75,029 1,800 81,882
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... 58,773 -- 66,672
Accrued compensation........................ 27,737 2,237 11,875
Income taxes payable........................ 6,125 298 32,338
Accrued liabilities--other.................. 25,047 2,107 60,633
---------- -------- -----------
Total current liabilities.................. 194,878 7,995 258,468
Long-term debt............................... 3,287 1,679 4,783
Other liabilities............................ 8,220 5 4,531
---------- -------- -----------
Total liabilities.......................... 206,385 9,679 267,782
---------- -------- -----------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value, 250,000,000
shares authorized, 45,258,946, 31,440,724
and 46,307,373 (unaudited) shares
outstanding, respectively.................. 45 31 46
Convertible Non-Voting Common Stock, $.001
par, 500,000 shares authorized, issued and
outstanding at December 31, 1997........... -- 1
Additional paid-in capital.................. 832,514 529,441 874,299
Treasury stock.............................. (41,832) -- (41,832)
Retained earnings........................... 47,255 7 61,988
Accumulated other comprehensive income
(loss)..................................... (445) -- (163)
---------- -------- -----------
Total stockholders' equity................. 837,537 529,480 894,338
---------- -------- -----------
Total liabilities and stockholders'
equity.................................... $1,043,922 $539,159 $ 1,162,120
========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the
For the Years Ended December Three Months
31, Ended March 31,
-------------------------------- ----------------------
1998 1997 1996 1999 1998
---------- --------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 809,601 $ 70,101 $ 63,202 $ 350,842 $ 54,610
Cost of revenues........ 636,225 58,857 53,664 280,692 44,233
---------- --------- --------- ---------- ----------
Gross profit.......... 173,376 11,244 9,538 70,150 10,377
Selling, general and
administrative
expenses............... 99,771 11,776 8,803 42,714 7,918
Goodwill amortization... 7,653 -- -- 3,469 324
Non-recurring
acquisition costs...... 768 -- --
---------- --------- --------- ---------- ----------
Operating income
(loss)............... 65,184 (532) 735 23,967 2,135
Other (income)
expense:
Interest income....... (19,373) (2,056) -- (2,508) (6,656)
Interest expense...... 1,054 208 224 96 99
Other, net............ (80) (221) 83 (281) (111)
---------- --------- --------- ---------- ----------
Income before taxes..... 83,583 1,537 428 26,660 8,803
Provision for income
taxes.................. 36,120 94 13 11,927 3,722
---------- --------- --------- ---------- ----------
Net income.............. $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
========== ========= ========= ========== ==========
Net income per share--
Basic.................. $ 1.19 $ 0.25 $ 0.32 $ 0.32 $ 0.15
========== ========= ========= ========== ==========
Net income per share--
Diluted................ $ 1.16 $ 0.25 $ 0.30 $ 0.31 $ 0.15
========== ========= ========= ========== ==========
Weighted average shares
outstanding--Basic..... 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
========== ========= ========= ========== ==========
Weighted average shares
outstanding--Diluted... 40,928,452 5,865,550 1,405,840 47,740,958 34,075,876
========== ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-Voting Common
Common Stock Stock
------------------- ------------------
Accumulated
Additional Other Total Total
Shares Shares Paid-in- Treasury Retained Comprehensive Stockholders' Comprehensive
Outstanding Amount Outstanding Amount Capital Stock Earnings Loss Equity Income
----------- ------ ----------- ------ ---------- --------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ 1,238,444 $ 1 $ 1,199 $ $ $ $ 1,200
Transactions of
Pooled
Companies:
Distributions
paid............ (140) (140)
Common stock
issued.......... 52,280 103 103
Net income....... 415 415 $ 415
-------
Total
comprehensive
income.......... $ 415
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1996........ 1,290,724 1 1,577 1,578
Transactions of
Pooled
Companies:
Distributions
paid............ (831) (831)
Capital
contribution.... 2,300,000 2 124 126
Common stock
issued.......... 27,850,000 28 500,000 1 527,135 527,164
Net income....... 1,436 7 1,443 $ 1,443
-------
Total
comprehensive
income.......... $ 1,443
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1997........ 31,440,724 31 500,000 1 529,441 7 529,480
Transactions of
Pooled
Companies:
Distributions
paid............ (628) (628)
Stock issued upon
exercise of
options......... 123,046 216 216
Issuance of
common stock for
acquisitions.... 16,144,711 16 302,855 302,871
Stock issued
under employee
stock purchase
plan............ 40,465 415 415
Purchase of
treasury stock.. (2,990,000) (3) (41,832) (41,835)
Unrealized loss
on marketable
securities --
net of tax...... (445) (445) $ (445)
Conversion of
non-voting
common stock.... 500,000 1 (500,000) (1)
Net income....... 215 47,248 47,463 47,463
-------
Total
comprehensive
income.......... $47,018
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, December
31, 1998 ....... 45,258,946 $45 -- $-- $832,514 $ (41,832) $47,255 $(445) $837,537
Unaudited Data:
Stock issued
upon exercise
of options..... 16,926 83 83
Issuance of
common stock
for
acquisitions... 1,002,507 1 15,166 15,167
Stock issued
under employee
stock purchase
plan........... 28,994 435 435
Contingently
Issuable
Shares......... 26,101 26,101
Unrealized gain
on marketable
securities--net
of tax......... 282 282 $ 282
Net income...... 14,733 14,733 14,733
-------
Total
comprehensive
income......... $15,015
---------- --- -------- ---- -------- --------- ------- ----- -------- =======
Balance, March
31, 1999
(unaudited)..... 46,307,373 $46 $874,299 $(41,832) $61,988 $(163) $894,338
========== === ======== ==== ======== ========= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
For the Years Ended December 31, March 31,
--------------------------------------------------------
1998 1997 1996 1999 1998
----------- ----------- ------------------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization....... 13,242 945 926 6,117 802
Gain (loss) on sale
of equipment....... 37 (52) 1 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable....... (38,035) (36) (511) (8,692) (10,601)
Costs and
estimated
earnings in
excess of
billings......... 3,200 -- -- (8,403) 2,405
Prepaid expenses
and other current
assets........... (2,721) (1,319) (27) (1,178) (951)
Billings in excess
of costs and
estimated
earnings......... 2,049 -- -- 1,781 5,552
Accounts payable.. 1,193 (505) 486 152 2,546
Accrued
liabilities...... 7,044 2,254 69 7,825 2,993
Changes in other
assets............. (1,398) 3 39 (659) (523)
----------- ----------- -------- --------- ---------
Net cash
provided by
operating
activities..... 32,074 2,733 1,398 11,676 7,304
----------- ----------- -------- --------- ---------
Cash flows from
investing activities:
Cash paid for
acquisitions, net of
cash acquired........ (231,602) -- -- (45,271) (111,840)
Purchases of property
and equipment........ (11,289) (699) (703) (5,632) (1,206)
Proceeds on sale of
equipment............ 790 387 18 90 617
Other................. (218) (7) (6) (98) 304
----------- ----------- -------- --------- ---------
Net cash used in
investing
activities..... (242,319) (319) (691) (50,911) (112,125)
----------- ----------- -------- --------- ---------
Cash flows from
financing activities:
Proceeds from initial
public offering,
net.................. -- 527,164 -- -- --
Proceeds from issuance
of common stock...... -- -- 103 -- --
Net proceeds
(payments) on short-
term debt............ (38,783) 145 (140) 261 (54)
Payments on long-term
debt................. (28,535) (349) (830) (688) (996)
Proceeds on long-term
debt................. 3,519 -- 398 1,163 1,570
Payment of dividends.. (628) (831) (140) (842) --
Purchase of treasury
stock................ (41,835) -- -- -- --
Proceeds from issuance
of stock options
exercised............ 216 -- -- 83 --
Proceeds from issuance
of stock under
employee stock
purchase plan........ 415 -- -- 435 --
Contributions by
founding
stockholder.......... -- 126 -- -- --
----------- ----------- -------- --------- ---------
Net cash
provided by
(used in)
financing
activities..... (105,631) 526,255 (609) 412 520
----------- ----------- -------- --------- ---------
Net increase in cash and
cash equivalents....... (315,876) 528,669 98 (38,823) (104,301)
Cash and cash
equivalents, beginning
of period.............. 528,972 303 205 213,096 528,972
----------- ----------- -------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 213,096 $ 528,972 $ 303 $ 174,273 $ 424,671
=========== =========== ======== ========= =========
Supplemental cash ^ow
information:
Cash paid for
interest.............. $ 882 $ 290 $ 357
Cash paid for income
taxes................. 34,395 -- --
</TABLE>
F-15
<PAGE>
BUILDING ONE SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(Dollars in thousands)
The Company issued common stock and cash in connection with certain business
combinations during the year ended December 31, 1998. The fair values of the
assets acquired and liabilities assumed at the dates of acquisition are as
follows:
<TABLE>
<CAPTION>
For the
Year Ended Three Months
December 31, Ended March 31,
------------ -----------------
1998 1999 1998
------------ ------- --------
<S> <C> <C> <C>
Accounts receivable............................ $202,515 $21,665 $ 73,351
Inventories.................................... 2,626 541 1,022
Costs and earnings in excess of billings....... 31,085 6,087 10,426
Prepaid expenses and other current assets...... 12,248 343 3,660
Property and equipment......................... 33,080 5,685 11,520
Intangible assets.............................. 502,470 46,714 175,132
Other assets................................... 7,745 2,575 2,526
Short-term debt................................ (29,594) (2,180) (7,113)
Accounts payable............................... (72,805) (6,700) (19,103)
Accrued liabilities............................ (49,020) (7,124) (14,052)
Billings in excess of costs and estimated
earnings...................................... (56,912) (6,119) (22,425)
Long-term debt................................. (41,287) (1,049) (2,909)
Other long-term liabilities.................... (7,678) -- (2,801)
-------- ------- --------
Net assets acquired........................ $534,473 $60,438 $209,234
======== ======= ========
These acquisitions were funded as follows:
Common stock, 16,144,711, 1,002,507 and
5,088,049 shares, respectively ............. $302,871 $15,167 $ 97,394
Cash, net of cash acquired................... 231,602 45,271 111,840
-------- ------- --------
$534,473 $60,438 $209,234
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1--BUSINESS AND ORGANIZATION
Building One Services Corporation ("Building One" or the "Company") is
consolidating the facilities services industry with the intent to become a
national single-source provider of facilities services. Currently the Company
provides electrical installation and maintenance services, mechanical
installation and maintenance services and janitorial and maintenance
management services throughout the United States.
The Company was incorporated in September 1997 under the name of
Consolidation Capital Corporation and completed an initial public offering
("IPO") of its Common Stock in December 1997, selling 27,850,000 shares of
Common Stock and 500,000 shares of Convertible Non-Voting Common Stock and
raising net proceeds of approximately $527,000. During 1998, the Company
changed its name to Building One Services Corporation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of Building One, and
the companies acquired in business combinations accounted for under the
purchase method (the "Purchased Companies") from their respective acquisition
dates and give retroactive effect to the results of the companies acquired in
business combinations accounted for under the pooling-of-interests method (the
"Pooled Companies") for all periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company utilizes the percentage-of-completion method of accounting for
the recognition of revenues and costs of all significant installation
contracts. Revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs. Selling and
administrative expenses are expensed as incurred. Changes in job performance,
job conditions, estimated profitability and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Maintenance and other service revenues are recognized as the
services are performed.
Non-Recurring Acquisition Costs
Non-recurring acquisition costs consist of costs incurred in conjunction
with the business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, broker fees and other
costs directly attributable to the business combination.
F-17
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. The Company's temporary cash investments
consist of readily marketable, investment grade financial instruments of a
nature which should reduce risk of loss. Concentration of credit risk with
respect to trade receivables results from these amounts generally not being
collateralized. However, the Company is entitled to payment for work performed
and often has certain lien rights in that work. Additionally, management
continually monitors the financial condition of its customers to reduce risk
of loss.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and debt approximate fair value. The Company's
cash equivalents are comprised of readily marketable, interest-bearing,
investment grade securities.
Marketable Securities
Marketable securities consist of investments in equity securities and are
classified as available for sale. The unrealized gains and losses, net of
applicable income taxes, are reported as an increase or decrease to
stockholders' equity. Realized gains and losses are included in other income.
The cost of securities sold is based on the specific identification method.
Property and Equipment
Property and equipment are stated at cost and depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from three to seven years for equipment, vehicles, and furniture and fixtures
and 30 years for buildings. Leasehold improvements and capital leases are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. No impairment has been recognized
through December 31, 1998.
Intangible Assets
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Goodwill is being amortized on a
straight-line basis over 40 years which is the estimated period benefited. The
recoverability of the unamortized balance of goodwill is assessed on an
ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net book value. If at such time these assessments indicate that
the future undiscounted cash flows from operations are not sufficient to
recover the net book value, the goodwill balance is adjusted to its fair
value. No such adjustments have been recognized through December 31, 1998.
Income Taxes
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted
F-18
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Certain companies acquired in pooling-of-interests transactions
elected to be taxed as subchapter S corporations and, accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by Building One.
Stock-Based Compensation
Building One measures compensation expense for its stock-based employee
compensation plans and warrants granted to employees using the intrinsic value
method and has provided in Note 14 the pro forma disclosures of the effect on
reported net income (loss) and net income (loss) per share as if the fair
value-based method had been applied in measuring compensation expense.
Net Income Per Share
Basic net income per share is determined by dividing net income by the
weighted average number of common shares outstanding during the periods.
Diluted net income per share reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock at the beginning of the period.
Segment Data
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments in annual and interim
financial statements. Operating segments are determined consistent with the
way management organizes and evaluates financial information internally for
making decisions and assessing performance. It also requires related
disclosures about products, geographic areas, and major customers. The Company
adopted SFAS No. 131 for the year ended December 31, 1998.
Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. Building One's
other comprehensive income is attributed to adjustments related to marketable
securities available for sale. The amount included in 1998 other comprehensive
income represents an adjustment for unrealized losses on these marketable
securities totaling $742 ($445 after tax).
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1999 and 1998, as presented in the accompanying unaudited interim
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
NOTE 3--TENDER OFFER PLAN
On February 7, 1999, the Company's Board of Directors approved a plan to
purchase 24,365,891 shares of its outstanding Common Stock at $25.00 per share
for cash. On March 23, 1999, the Company announced that it is modifying the
tender offer to repurchase 25,500,000 shares and reduce the price to $22.50
per share (the "Tender Offer"). The Tender Offer replaces the recapitalization
plan announced by the Company on December 23, 1998 (the "Recapitalization
Plan") under which the Company had intended to, among other things, repurchase
approximately 34.5 million shares of the Company's Common Stock. The Company
plans to finance the Tender Offer through the use of the Company's cash, the
planned issuance of $200,000 of senior
F-19
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
subordinated notes, the investment of $100,000 in exchange for convertible
subordinated debentures by Boss Investment LLC, an affiliate of Apollo
Management, L.P. and borrowings under a new credit facility.
As a result of the announcement of the Recapitalization Plan and as required
by generally accepted accounting principles, the Company has restated its
consolidated financial statements for all periods to account for two
acquisitions originally accounted for under the pooling of interests method of
accounting to the purchase method of accounting. Additionally, the restatement
of these two business combinations as purchase transactions gave rise to
approximately $51,000 of goodwill.
One of the Company's directors is President and a principal stockholder of
Friedman, Billings, Ramsey Group, Inc. ("FBR"). In connection with the
aforementioned transactions, FBR acted as a financial advisor to the Company
and received a fee of $500. Additionally, FBR will receive a fee of up to
$3,000, contingent upon the completion of the Tender Offer.
NOTE 4--BUSINESS COMBINATIONS
Pooling-of-Interests Method
During 1998, the Company issued 1,405,840 shares of Common Stock to acquire
three companies in business combinations accounted for under the pooling-of-
interests method. The Company's consolidated financial statements give
retroactive effect to the acquisitions of the Pooled Companies for all periods
presented.
The following presents the separate results, in each of the periods
presented, of Building One (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the
dates on which they were acquired:
<TABLE>
<CAPTION>
Building Pooled
One Companies Combined
-------- --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1998
Revenues........................................ $782,878 $26,723 $809,601
Net income...................................... $ 47,248 $ 215 $ 47,463
For the year ended December 31, 1997
Revenues........................................ $ -- $70,101 $ 70,101
Net income...................................... $ 7 $ 1,436 $ 1,443
For the year ended December 31, 1996
Revenues........................................ $ -- $63,202 $ 63,202
Net income...................................... $ -- $ 415 $ 415
For the three months ended March 31, 1998
(unaudited)
Revenues........................................ $ 37,497 $17,113 $ 54,610
Net income...................................... $ 5,263 $ (182) $ 5,081
</TABLE>
Purchase Method
During the year ended December 31, 1998, the Company completed 26 business
combinations that were accounted for under the purchase method of accounting.
The consolidated financial statements and related notes to consolidated
financial statements include the results of these acquired entities from their
respective dates of acquisition. The aggregate consideration paid for these
acquisitions consisted of 16,144,711 shares of the Company's Common Stock,
403,389 options assumed at an exercise price below fair market value, $259,021
in cash and the assumption of approximately $33,847 in debt which was paid at
closing. These amounts do not include contingent consideration of up to
approximately $135,945 in cash and in shares of Common Stock of the Company
based upon the performance of the various acquisitions through 2001. The
Company will record such contingent consideration as additional purchase price
when earned.
F-20
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $502,470. Allocation of
purchase price to the assets acquired and liabilities assumed has been
initially assigned and recorded based on preliminary estimates of fair value
and may be revised as additional information becomes available. However, the
Company does not expect any significant adjustments to the purchase price
allocations or amount of goodwill at December 31, 1998. For purposes of
computing the estimated purchase price for accounting purposes the value of
the shares on certain acquisitions was determined in consideration of
restrictions on the sale and transferability of the shares issued. The shares
generally will be subject to the following restrictions on resale: up to one-
third of the shares may be resold twelve months after their date of
acquisition, the first one-third and an additional one-third may be resold
beginning eighteen months after their date of acquisition and the first two-
thirds and the remaining one-third may be resold beginning twenty-four months
after their date of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the years ended December 31, 1998 and 1997, respectively, as if
all of the Purchased Companies had been acquired as of January 1, 1997. The
pro forma results of operations reflect certain pro forma adjustments
primarily related to goodwill amortization and compensation adjustments for
shareholders.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Revenues............................................... $1,312,264 $1,144,457
Net income............................................. $ 64,396 $ 39,185
Net income per share-basic............................. $ 1.34 $ 1.09
Net income per share-diluted........................... $ 1.31 $ 1.08
</TABLE>
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisitions occurred as of January 1, 1997 or the results that may occur
in the future.
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
------------------
1998 1997 1996
------ ---- ----
<S> <C> <C> <C>
Balance at beginning of period............................ $ 104 $136 $120
Allowance amounts of acquired companies................... 1,680 -- --
Additions to costs and expenses........................... 732 5 16
Write-offs................................................ (525) (37) --
------ ---- ----
Balance at end of period.................................. $1,991 $104 $136
====== ==== ====
</TABLE>
F-21
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 6--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31, March 31,
1998 1999
------------ -----------
Costs incurred on uncompleted contracts............ $ 842,203 $ 974,123
Estimated earnings................................. 156,546 176,770
----------- -----------
998,749 1,150,893
Less: Billings to date............................. (1,032,081) (1,177,634)
----------- -----------
$ (33,332) $ (26,741)
=========== ===========
Included in the accompanying balance sheet under the following captions:
December 31, March 31,
1998 1999
------------ -----------
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 25,441 $ 39,931
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (58,773) (66,672)
----------- -----------
$ (33,332) $ (26,741)
=========== ===========
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
----------------
1998 1997
-------- ------
Equipment......................................... $ 15,645 $3,160
Office furniture and equipment.................... 10,146 1,029
Autos and trucks.................................. 10,464 593
Buildings and improvements........................ 9,126 1,107
Land.............................................. 1,259 53
-------- ------
46,640 5,942
Less: Accumulated depreciation.................... (7,673) (3,349)
-------- ------
$ 38,967 $2,593
======== ======
Depreciation expense for years 1998, 1997 and 1996 was $5,522, $1,284 and
$1,268, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, March
---------------- 31,
1998 1997 1999
-------- ------ --------
Goodwill.......................................... $502,470 $ 151 $605,993
Non-compete agreements............................ 1,046 835 1,084
Other............................................. 585 64 562
-------- ------ --------
504,101 1,050 607,639
Less: Accumulated amortization.................... (7,720) (898) (11,178)
-------- ------ --------
Net intangible assets........................... $496,381 $ 152 $596,461
======== ====== ========
F-22
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Amortization expense for years 1998, 1997 and 1996 was $7,720, $141 and $177,
respectively.
NOTE 9--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Credit facilities with banks, interest ranging from prime to
prime plus 1% (average rate of 8% at December 31, 1998)..... $ 61 $1,133
Payable to Pooled Company stockholder........................ -- 151
Current maturities of long-term debt......................... 2,106 269
------ ------
Total short-term debt...................................... $2,167 $1,553
====== ======
Long-Term Debt
Long-term debt consists of the following:
<CAPTION>
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Notes payable to banks with average interest rates ranging
from 7.0% - 9.5%............................................ $2,549 $1,112
Notes payable, interest rates ranging from 7.0% - 10.0%
secured by certain assets of the Company.................... 2,234 768
Capital lease obligations.................................... 552 46
Other........................................................ 58 22
------ ------
5,393 1,948
Less: Current portion........................................ (2,106) (269)
------ ------
Total long-term debt......................................... $3,287 $1,679
====== ======
</TABLE>
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1999............................................................... $2,106
2000............................................................... 1,800
2001............................................................... 888
2002............................................................... 357
2003............................................................... 131
Thereafter......................................................... 111
------
$5,393
======
</TABLE>
F-23
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 10--INCOME TAXES
The components of income tax expense are comprised as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1998 1997 1996
-------- ------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal................................................ $ 31,388 $ 83 $ 5
State.................................................. 5,144 11 2
-------- ----- ----
$ 36,532 $ 94 $ 7
-------- ----- ----
Deferred income taxes:
Federal................................................ (360) -- 4
State.................................................. (52) -- 2
-------- ----- ----
(412) -- 6
-------- ----- ----
Total tax expense....................................... $ 36,120 $ 94 $ 13
======== ===== ====
</TABLE>
The deferred tax assets and liabilities reflected on the balance sheet
relate primarily to the following:
<TABLE>
<CAPTION>
December
31,
------------
1998 1997
------ ----
<S> <C> <C>
Deferred tax assets (liabilities):
Reserves and accrued liabilities............................... $3,755 $219
Cash to accrual conversion..................................... (675)
Property and equipment......................................... (234)
Other.......................................................... (661)
Deferred gain on marketable securities......................... (945)
------ ----
Net deferred tax asset.......................................... $1,240 $219
====== ====
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate............................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit............ 3.6 0.6 1.0
Nondeductible goodwill amortization....................... 3.4
Subchapter S corporation income not subject to corporate
level taxation........................................... (.1) (30.8) (28.8)
Other..................................................... 1.3 2.3 (3.2)
---- ----- -----
Effective income tax rate................................. 43.2% 6.1% 3.0%
==== ===== =====
</TABLE>
Certain of the Pooled Companies were organized as subchapter S corporations
prior to being acquired by the Company and, as a result, the federal tax on
their income was the responsibility of their individual stockholders.
Accordingly, the Pooled Companies provided no federal income tax expense prior
to these acquisitions by the Company. The following unaudited pro forma income
tax information is presented as if the Pooled Companies had been subject to
applicable federal and state income taxes for 1997 and 1996:
F-24
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Year Ended
December
31,
-----------
1997 1996
------ ----
<S> <C> <C>
Net income as reported............................................. $1,537 $428
Pro forma income tax provision..................................... 615 171
------ ----
Pro forma net income............................................... $ 922 $257
====== ====
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases various office facilities and equipment under
noncancelable lease agreements which expire at various dates. Future minimum
lease payments under noncancelable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999....................................................... $353 $10,733
2000....................................................... 193 9,089
2001....................................................... 42 7,576
2002....................................................... 24 6,077
2003....................................................... 9 4,936
Thereafter................................................. -- 9,789
---- -------
Total minimum lease payments............................... 621 $48,200
==== =======
Less: Amounts representing interest........................ 69
----
Present value of net minimum lease payments................ $552
====
</TABLE>
Rent expense for all operating leases for 1998, 1997 and 1996 was $7,614,
$339 and $514, respectively. Certain of the above leases are for equipment or
facilities which are owned by stockholder-employees. Total rent expense paid
to these affiliates totaled $954 in 1998.
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this
litigation will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
NOTE 12--SEGMENT REPORTING
The Company has three reportable segments: electrical, mechanical and
janitorial. The electrical segment offers a single source for designing,
installing, maintaining and upgrading a facility's electrical systems. The
mechanical segment provides one source for all of a facility's mechanical,
HVAC and plumbing needs. The janitorial segment provides a wide variety of
facility cleaning and maintenance services nationwide.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income and on Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA").
F-25
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The Company's reportable segments are strategic business units that offer
different products and services. Intersegment transactions are accounted for
as if they were to third parties, that is, at current market prices. All of
the Company's revenues are derived from domestic sources. Each of the acquired
companies were acquired as a unit, and the management at the time of the
acquisition was retained.
<TABLE>
<CAPTION>
Consolidating
Electrical Janitorial Mechanical Corporate Entries Consolidated
---------- ---------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 1998 $534,419 $159,912 $115,665 $ -- $(395)(1) $ 809,601
1997 -- 70,101 -- -- -- 70,101
1996 -- 63,202 -- -- -- 63,202
Operating income (loss) 1998 52,197 10,882 10,181 (8,076) -- 65,184
1997 -- (532) -- -- -- (532)
1996 -- 735 -- -- -- 735
EBITDA 1998 60,221 14,660 11,571 (8,026) -- 78,426
1997 -- 413 -- -- -- 413
1996 -- 1,661 -- -- -- 1,661
Total assets 1998 598,852 121,660 162,369 161,041 -- 1,043,922
1997 -- 10,094 -- 529,065 -- 539,159
1996 -- 9,629 -- -- -- 9,629
Working capital 1998 116,569 12,071 21,407 157,343 -- 307,390
1997 -- 958 -- 527,277 -- 528,235
1996 -- 67 -- -- -- 67
</TABLE>
- --------
(1) Elimination of Intersegment Revenues
A reconciliation of consolidated operating income to total consolidated
income before taxes, and of consolidated EBITDA to consolidated income before
taxes for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Operating income (loss):
Total segment operating income....................... $65,184 $ (532) $ 735
Interest income (expense), net....................... 18,399 2,069 (307)
------- ------ ------
Consolidated income before taxes................... $83,583 $1,537 $ 428
======= ====== ======
EBITDA:
Total segment EBITDA................................. $78,426 $ 413 $1,661
Depreciation and amortization........................ (13,242) (945) (926)
Interest income (expense), net....................... 18,399 2,069 (307)
------- ------ ------
Consolidated income before taxes................... $83,583 $1,537 $ 428
======= ====== ======
</TABLE>
F-26
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Effective January 1, 1999, the Company changed the structure of its internal
organization and as a result the Electrical and Mechanical segments have been
combined into one reportable segment.
Mechanical
and Electrical Janitorial Corporate Consolidated
-------------- ---------- --------- ------------
Revenues
Three months ended:
March 31, 1999............... $296,632 $ 54,210 $ -- $ 350,842
March 31, 1998............... 31,970 22,640 -- 54,610
Operating income (loss)
Three months ended:
March 31, 1999............... 23,849 3,320 (3,202) 23,967
March 31, 1998............... 2,630 145 (640) 2,135
EBITDA
Three months ended:
March 31, 1999............... 28,597 4,661 (3,174) 30,084
March 31, 1998............... 3,156 421 (640) 2,937
Total assets
March 31, 1999............... 857,722 126,301 178,097 1,162,120
March 31, 1998............... 274,362 27,773 418,446 720,581
Working capital
March 31, 1999............... 163,901 12,435 75,633 251,969
March 31, 1998............... 34,281 546 412,020 446,847
A reconciliation of consolidated EBITDA to consolidated income before taxes
is as follows:
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
EBITDA:
Total segment EBITDA..................................... $ 30,084 $ 2,937
Depreciation and amortization............................ (6,117) (802)
Other income, net........................................ 2,693 6,668
--------- --------
Consolidated income before income taxes................ $ 26,660 $ 8,803
========= ========
NOTE 13--STOCKHOLDERS' EQUITY
Common Stock
On November 25, 1997, the Company effected a one-for-1.918159 reverse stock
split of the Company's Common Stock. Accordingly, all share data reflected in
these financial statements have been retroactively restated.
Ledecky Brothers L.L.C. ("LLC"), a limited liability corporation formed in
February 1997, merged with and into the Company in September 1997 (the
"Merger") to facilitate the public offering of shares of common stock. The
sole member of LLC received 2,300,000 shares of Common Stock of the Company in
connection with the Merger in exchange for his 100% ownership interest in LLC.
The sole member made contributions to LLC from time to time to fund expenses
in the aggregate amount of $126. These contributions were included in common
stock and additional paid-in capital.
F-27
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The Company completed its IPO in December 1997, selling 27,850,000 shares of
Common Stock and 500,000 shares of Convertible Non-Voting Common Stock at
$20.00 per share and raising net proceeds of approximately $527,000. Proceeds
from the IPO, net of underwriting fees and other stock issuance costs, were
included in common stock and additional paid-in capital.
During 1998, the Company repurchased 2,990,000 shares of its common stock
for $41,835. These shares were repurchased in accordance with a stock
repurchase program covering 3,100,000 shares which was determined based upon
the number of shares issued in connection with acquisitions accounted for
under the purchase method of accounting.
Convertible Non-Voting Common Stock
In connection with the IPO, the Company sold 500,000 shares of Convertible
Non-Voting Common Stock to FBR, the representative of the underwriters in the
Company's IPO, for $20 per share. On November 25, 1998 these 500,000 shares
were converted to 500,000 shares of Common Stock.
Warrants
The Company has 1,130,000 shares of Common Stock reserved for issuance upon
exercise of warrants issued to FBR. The warrants have an exercise price per
share equal to the IPO price. These warrants become exercisable on the first
anniversary and will expire on the fifth anniversary of the IPO. FBR has the
right, as of November 25, 1998, to require the Company to register such shares
for sale.
Additionally, 1,950,000 shares of Common Stock have been reserved for
issuance upon the exercise of warrants issued to Jonathan Ledecky at the time
of the IPO. These warrants are exercisable for a period of ten years at an
exercise price equal to the IPO price. The Company has agreed that, at
Jonathan Ledecky's request, it will register the shares underlying his
warrants for a ten-year period following the IPO. In addition, the Company has
agreed to give Jonathan Ledecky the right to request that the Company include
the shares underlying his warrants on a registration statement filed by the
Company during a twelve-year period following the IPO.
NOTE 14--STOCK PURCHASE AND AWARD PLANS
Long-Term Incentive Plan
The Company's Board of Directors adopted, and the Company's stockholders
approved a 1997 Long-Term Incentive Plan and a 1998 Long-Term Incentive Plan
(collectively, the "Incentive Plans"). The terms of the option awards under
these Incentive Plans are established by the compensation committee of the
Company's Board of Directors. The maximum number of shares that may be issued
under the Incentive Plans is equal to 14% of the number of shares of Common
Stock outstanding from time to time.
Options under the Incentive Plans generally vest 25% each on the first four
anniversaries of the date of grant and expire on the tenth anniversary of the
grant date. In the event of a change in control of the Company prior to normal
vesting, all options not already exercisable will become fully vested and
exercisable.
1997 Non-Employee Directors' Stock Plan
The Company's Board of Directors adopted, and the Company's stockholders
approved, the 1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"),
which provides for the automatic grant to each non-
F-28
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
employee director of an option to purchase 20,000 shares on the date that such
person commences services as a director. Thereafter, each non-employee
director will be entitled to receive, on the day after each annual meeting of
the Company's stockholders, an option to purchase 5,000 shares of Common
Stock. A maximum of 300,000 shares of Common Stock may be issued under the
Directors' Plan. Options granted under the Directors' Plan have an exercise
price per share equal to the fair market value of a share at the date of grant
of the options and expire at the earlier of 10 years from the date of grant or
90 days after termination of service as a director. Options vest and become
exercisable ratably as to 50% of the shares underlying the option on the first
and second anniversaries of the date of grant, subject to acceleration by the
Board. In the event of a change in control of the Company prior to normal
vesting, all options not already exercisable will become fully vested and
exercisable.
1997 Employee Stock Purchase Plan
The Company adopted, and the Company's stockholders approved, the 1997
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits
eligible employees of the Company and its subsidiaries (generally all full-
time employees who have completed one year of service) to purchase shares of
Common Stock at a discount. Employees who elect to participate will have
amounts withheld through payroll deduction during purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to
purchase stock at a price equal to 85% of the market price at the beginning of
the period or the end of the period, whichever is lower. Stock purchased under
the Purchase Plan will be subject to a one-year holding period. The Company
has reserved 1,000,000 shares of Common Stock for issuance under the Purchase
Plan.
Accounting for Stock Based Compensation
A summary of option and warrant transactions follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ---------------------------
Options Options
and Weighted Average and Weighted Average
Warrants Exercise Price Warrants Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996................... -- -- -- --
Granted............... 3,510,000 $20.00 1,950,000 $20.00
--------- ------ --------- ------
Balance at December 31,
1997................... 3,510,000 $20.00 1,950,000 $20.00
Granted............... 2,544,846 17.91 863,389 13.07
Exercised............. (7,930) 4.84 (7,930) 4.84
Canceled.............. (25,613) 22.27 -- --
--------- ------ --------- ------
Balance at December 31,
1998................... 6,021,303 $19.12 2,805,459 $17.91
========= ====== ========= ======
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------------------------------------------------
Weighted Average
Range of Exercise Prices Options Remaining Weighted Average Options Weighted Average
----------------- and Warrants Contractual Life Exercise Price and Warrants Exercise Price
------------ ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$4.84--$4.84 395,459 9.5 years $ 4.84 395,459 $ 4.84
$8.38--$8.38 15,278 9.8 $ 8.38 -- --
$12.75--$18.38 745,438 9.8 $15.22 -- --
$19.25--$25.25 4,865,128 9.1 $21.55 2,410,000 $20.29
-------------- --------- ---- ------ --------- ------
$ 4.84--$25.25 6,021,303 9.2 $19.12 2,805,459 $17.91
============== ========= ==== ====== ========= ======
</TABLE>
F-29
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Had compensation expense for the Company's stock-based compensation plans
and warrants issued to employees been determined based on the fair value at
the grant dates, the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Year
Ended December
31,
---------------
1998 1997
------- -------
<S> <C> <C>
Net income (loss):
As reported................................................. $47,463 $ 1,443
Pro forma................................................... $37,381 $(5,782)
Net income (loss) per share--Basic:
As reported................................................. $ 1.19 $ 0.25
Pro forma................................................... $ 0.94 $ (1.02)
Net income (loss) per share--Diluted:
As reported................................................. $ 1.16 $ 0.25
Pro forma................................................... $ 0.91 $ (1.02)
</TABLE>
The weighted average fair value of options and warrants granted in 1998 and
1997 was $13.38 and $7.46, respectively. The fair value of options and
warrants granted (which is amortized to expense over the option vesting period
in determining the pro forma impact) is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
------- -----------------
Options Options Warrants
------- ------- --------
<S> <C> <C> <C>
Expected life of option............................. 5 years 5 years 2 years
Risk-free interest rate............................. 5.3% 5.76% 5.69%
Expected volatility................................. 63.7% 45.0% 45.0%
</TABLE>
Other Employee Benefit Plans
Several of the Company's subsidiaries have defined contribution benefit
plans, such as 401(k) retirement plans, which allow eligible employees to make
contributions. Additionally, several of the subsidiaries also provide company
matching contributions up to specified levels. Company contribution expense to
these plans was $2,880 for the year ended December 31, 1998.
F-30
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data of the
Company:
<TABLE>
<CAPTION>
1998 Quarters
--------------------------------------------
First Second Third Fourth Total
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $54,610 $171,661 $252,324 $331,006 $809,601
Gross profit.................... $10,377 $ 36,662 $ 55,238 $ 71,099 $173,376
Operating income................ $ 2,135 $ 12,485 $ 22,519 $ 28,045 $ 65,184
Net income...................... $ 5,081 $ 10,046 $ 15,164 $ 17,172 $ 47,463
Net income per share--Basic..... $ 0.15 $ 0.26 $ 0.35 $ 0.38 $ 1.19
Net income per share--Diluted
(1)............................. $ 0.15 $ 0.25 $ 0.34 $ 0.38 $ 1.16
<CAPTION>
1997 Quarters
--------------------------------------------
First Second Third Fourth Total
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $17,479 $ 17,393 $ 17,538 $ 17,691 $ 70,101
Gross profit.................... $ 2,807 $ 2,759 $ 2,732 $ 2,946 $ 11,244
Operating income (loss)......... $ 259 $ 426 $ 390 $ (1,607) $ (532)
Net income...................... $ 210 $ 434 $ 299 $ 500 $ 1,443
Net income per share--Basic
(1)............................ $ 0.10 $ 0.12 $ 0.08 $ 0.04 $ 0.25
Net income per share--Diluted
(1)............................ $ 0.09 $ 0.12 $ 0.08 $ 0.04 $ 0.25
</TABLE>
- --------
(1) The arithmetic total of the individual quarterly net income per share
amounts does not reconcile to the annual amount of net income per share
due to the timing of net income in relation to the issuance of common
shares during the course of the year.
F-31
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 16--NET EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share," which became
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 requires presentation of basic and diluted earnings per
share ("EPS") and restatement of EPS data for all prior periods. Basic EPS
includes no dilution and is computed by dividing net income by the Company's
weighted average shares of Common Stock outstanding. Diluted EPS is computed
by dividing net income by the Company's weighted average shares of Common
Stock outstanding and dilutive Common Stock equivalents. The following table
reconciles the numerators and denominators of the basic and diluted EPS
computations for the three years ended December 31, 1998, 1997 and 1996, and
for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
For the
For the Year Ended December 31, Three Months Ended March 31,
--------------------------------- -----------------------------
1998 1997 1996 1999 1998
----------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Basic earnings per
share:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Weighted average
shares outstanding--
Basic................ 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
----------- ---------- ---------- -------------- --------------
Net income per share--
Basic................ $ 1.19 $ 0.25 $ 0.32 $ 0.32 $ 0.15
=========== ========== ========== ============== ==============
Diluted earnings per
share:
Net income............ $ 47,463 $ 1,443 $ 415 $ 14,733 $ 5,081
Weighted average
shares outstanding--
Basic................ 39,908,364 5,683,464 1,290,724 45,973,455 32,987,273
Convertible Non-Voting
Common Stock......... 373,973 49,315 -- -- 500,000
Common Stock
equivalents from
stock options and
warrants............. 342,903 132,771 115,116 277,080 578,207
Contingently issuable
shares............... 303,212 -- -- 1,490,423 10,396
----------- ---------- ---------- -------------- --------------
Total weighted average
shares outstanding--
Diluted.............. 40,928,452 5,865,550 1,405,840 47,740,958 34,075,876
----------- ---------- ---------- -------------- --------------
Net income per share--
Diluted.............. $ 1.16 $ 0.25 $ 0.30 $ 0.31 $ 0.15
=========== ========== ========== ============== ==============
</TABLE>
Outstanding stock options to purchase 1,945,439 and 5,974,775 shares of
Common Stock as of December 31, 1998 and March 31, 1999, respectively, were
not included in the computation of diluted shares per share because the
options' exercise prices were greater than the average market price of the
Common Stock during the period.
NOTE 17--SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1998 and through May 13, 1999, the Company
completed three business combinations in the electrical installation and
maintenance services business and five business combinations in the mechanical
installation and maintenance services business for total consideration of
$47,527 in cash and 1,002,507 shares of Common Stock, excluding professional
fees. Additionally, there is the potential for the payment of up to an
additional $11,600 in cash and shares of Common Stock in connection with
contingent consideration agreements.
As of May 13, 1999, the Company has also entered into letters of intent to
acquire eight companies for total consideration of $52,650 in cash and shares
of Common Stock.
F-32
<PAGE>
BUILDING ONE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
On May 11, 1999 the Company completed its plan to repurchase 25,500,000
shares of common stock for $560,127 (24,618,856 shares at a price of $22.50
per share and 881,144 shares of common stock underlying stock options at
$22.50 per share less the exercise price per share of the options). The
Company financed the repurchase through available cash, the offering of
$200,000 of senior subordinated notes (less discount of $4,508), an investment
by Boss Investment LLC, an affiliate of Apollo Management L.P., of 7 1/2%
$100,000 convertible subordinated debentures and borrowings under a new credit
facility.
The following unaudited pro forma results of operations give effect to the
Tender Offer, including the financing of the Tender Offer, acquisitions
completed during the year ended December 31, 1998 and the three months ended
March 31, 1999 as if they had been consummated on January 1, 1998, and the
effects of certain other pro forma adjustments to the historical financial
statements.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues................................................ $ 373,258 $ 336,111
Cost of revenues........................................ 298,940 275,515
---------- ----------
Gross profit........................................ 74,318 60,596
Selling, general and administrative expenses............ 45,702 39,397
Goodwill amortization................................... 3,654 3,308
---------- ----------
Operating income.................................... 24,962 17,891
Other (income) expense:
Interest income....................................... (17)
Interest expense...................................... 10,829 10,973
Other, net............................................ (497) (2,326)
---------- ----------
Income before taxes..................................... 14,647 9,244
Provision for income taxes.............................. 7,196 4,872
---------- ----------
Net income.............................................. $ 7,451 $ 4,372
========== ==========
Net income per Common Share--Basic...................... $ 0.34 $ 0.20
========== ==========
Net income per Common Share--Diluted.................... 0.31 0.21
========== ==========
Weighted average shares outstanding--Basic.............. 21,910,397 21,578,216
========== ==========
Weighted average shares outstanding--Diluted............ 27,997,422 26,405,533
========== ==========
</TABLE>
Net income per Common Share--Basic is calculated based upon the weighted
average shares outstanding assuming the repurchase of 24,618,856 shares
occured as of January 1, 1998. Net income per Common Share--Diluted is
calculated based upon net income adjusted for a reduction in interest expense
assuming conversion of the convertible subordinated debentures in the amount
of $4,788, and weighted average shares outstanding adjusted for the conversion
of the convertible subordinated debentures into 4,444,444 shares of common
stock plus the dilution attributable to options and warrants and contingently
issuable shares.
The pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the Tender Offer and the acquisitions occurred as of January 1, 1998 or the
results that may occur in the future.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Service Management USA, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of Service
Management USA, Inc. and its affiliates (the "Company") at December 31, 1996
and 1997 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 19, 1998
F-34
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 425 $ 4
Marketable securities............................................ 36 128
Accounts receivable, net of an allowance for doubtful accounts of
$295 and $333, respectively..................................... 1,614 4,044
Other receivable................................................. 46 88
Related party receivable......................................... 169
Employee receivables............................................. 5 75
Prepaid expenses................................................. 92 59
------ ------
Total current assets......................................... 2,218 4,567
Property and equipment, net...................................... 1,159 2,333
Deposits......................................................... 26 27
Intangibles...................................................... 167 202
------ ------
Total assets................................................. $3,570 $7,129
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Bank line of credit.............................................. $ $1,250
Current maturities, long-term debt............................... 165 373
Current obligations, capital leases.............................. 43
Accounts payable................................................. 954 1,738
Accrued liabilities.............................................. 452 503
Federal payroll tax payable...................................... 341
Income taxes payable............................................. 19 53
------ ------
Total current liabilities.................................... 1,974 3,917
Long-term debt................................................... 94 730
Capital lease obligations........................................ 100
------ ------
Total liabilities............................................ 2,168 4,647
Commitments
Stockholder's equity:
Common stock, Service Management USA, Inc., $1 par value, 1,000
shares authorized, issued and outstanding..................... 1 1
Common stock, Diversified Management Services USA, Inc., no par
value, 200 shares authorized, issued and outstanding.......... 152 152
Interstate Building Services, LLC.............................. 27
Additional paid-in capital..................................... 110 110
Retained earnings.............................................. 1,139 2,192
------ ------
Total stockholder's equity................................... 1,402 2,482
------ ------
Total liabilities and stockholder's equity................... $3,570 $7,129
====== ======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-35
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenues........................................... $4,964 $12,074 $26,266
Cost of revenues................................... 3,650 8,735 19,856
------ ------- -------
Gross profit................................... 1,314 3,339 6,410
Selling, general and administrative expenses....... 617 2,169 3,832
------ ------- -------
Operating income............................... 697 1,170 2,578
Other (income) expense:
Interest expense................................. 2 4 53
Realized and unrealized (gains) losses on trading
securities...................................... 40 (64) 6
------ ------- -------
Income before income taxes......................... 655 1,230 2,519
Provision for state income taxes................... 19 52
------ ------- -------
Net income......................................... $ 655 $ 1,211 $ 2,467
====== ======= =======
Unaudited pro forma information (see Note 2):
Income before provision for income taxes......... $ 655 $ 1,230 $ 2,519
Provision for income taxes....................... 262 492 1,008
------ ------- -------
Pro forma net income............................. $ 393 $ 738 $ 1,511
====== ======= =======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-36
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In- Retained Stockholder's
Service Diversified Interstate LLC Capital Earnings Equity
------- ----------- -------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ 1 $ 42 $ 316 $ 359
Net income............ 655 655
Dividends............. (186) (186)
--- ---- --- ---- ------- -------
Balance, December 31,
1995................... 1 42 785 828
Issuance of common
stock, Diversified
Management Services
USA, Inc............. 152 152
Capital contribution.. 68 68
Net income............ 1,211 1,211
Dividends............. (857) (857)
--- ---- --- ---- ------- -------
Balance, December 31,
1996................... 1 152 110 1,139 1,402
Capital contribution.. 27 27
Net income............ 2,467 2,467
Dividends............. (1,312) (1,312)
Distribution of cer-
tain equipment to
stockholder.......... (102) (102)
--- ---- --- ---- ------- -------
Balance, December 31,
1997 .................. $ 1 $152 $27 $110 $ 2,192 $ 2,482
=== ==== === ==== ======= =======
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-37
<PAGE>
SERVICE MANAGEMENT USA, INC.
COMBINED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 655 $ 1,211 $ 2,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchases of marketable trading securities.......... (104) (173)
Proceeds from sale of marketable trading securi-
ties............................................... 175 74
Provision for doubtful accounts..................... 98 197 233
Depreciation and amortization....................... 24 245 709
Loss on write-off of assets......................... 21
Unrealized/realized (gain) loss of marketable
trading securities................................. 40 (64) 6
Changes in operating assets and liabilities:
Accounts receivable................................ (346) (1,224) (2,873)
Prepaid expenses and other current assets.......... (2) (129) (126)
Accounts payable and accrued liabilities........... 138 1,468 494
Income taxes payable............................... 19 34
----- ------- -------
Net cash provided by operating activities......... 607 1,815 845
----- ------- -------
Cash flow from investing activities:
Purchases of equipment.............................. (222) (1,017) (1,835)
Purchase of contract rights......................... (70)
----- ------- -------
Net cash used in investing activities............. (222) (1,017) (1,905)
----- ------- -------
Cash flow from financing activities:
Proceeds from bank line of credit................... 1,250
Principal payments on long-term debt................ (14) (76) (512)
Proceeds from long-term debt........................ 25 148 1,356
Payments on capital lease obligations............... (18) (143)
Proceeds from issuance of common stock.............. 152
Proceeds from stockholder contribution.............. 68
Dividends to stockholder............................ (186) (857) (1,312)
----- ------- -------
Net cash used in financing activities............. (175) (583) 639
----- ------- -------
Net increase (decrease) in cash and cash equivalents.. 210 215 (421)
Cash and cash equivalents, beginning of year.......... -- 210 425
----- ------- -------
Cash and cash equivalents, end of year................ $ 210 $ 425 $ 4
===== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2 $ 4 $
Supplemental disclosure of non-cash transactions:
Marketable securities exchanged for accounts
receivable......................................... $ 84
Capital lease obligations........................... $ 162
Purchase of net assets of Diversified for Note
Payable............................................ 175
Distribution of certain equipment to stockholder.... $ 102
Contribution of certain equipment................... 27
</TABLE>
The accompanying notes are an
integral part of these combined financial statements.
F-38
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1--BUSINESS AND ORGANIZATION
Service Management USA, Inc., and its affiliated entities provide contract
facility management and janitorial services to commercial establishments
located throughout the United States.
The accompanying financial statements represent the financial position,
operating results and cash flows of Service Management USA, Inc., and its
subsidiary Interstate Building Services, LLC, and Diversified Management
Services USA, Inc., collectively "Service Management" or the "Company", which
have been presented on a combined basis due to common ownership and common
management. All intercompany activity and balances have been eliminated.
Service Management USA, Inc. was incorporated in October 1994. Prior to
incorporation, the entity was operated as a sole proprietorship. Diversified
Management Services USA, Inc. was incorporated in November 1996 via the
purchase of the net assets of an operating business. Interstate Building
Services, LLC was formed in October of 1997.
On February 6, 1998, all of the issued and outstanding common stock of
Service Management USA, Inc., Diversified Management Services USA, Inc. and
ownership interest in Interstate Building Services, LLC was acquired by
Consolidation Capital Corporation ("CCC") for $9,000 in cash and 142,857
shares of CCC common stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are performed.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the date
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are depreciated using straight-line and accelerated
methods over their estimated useful lives ranging from three to seven years.
Intangibles
Intangible assets consist of amounts allocated to customer contracts
purchased and are being amortized straight-line basis over a period of five
years, which is deemed to be the estimated period benefited. Accumulated
amortization was $6 and $45 at December 31, 1996 and 1997 respectively.
F-39
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Marketable Securities
The Company's marketable securities consist of investments in certain
equities and mutual funds and are classified as trading. Accordingly, any
realized or unrealized gains and losses are recorded in the period incurred.
As of ended December 31, 1997, the net unrealized loss for these investments
was $5.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of short-term and long-term debt
approximates fair value as the interest rates approximate market rates for
debt with similar terms and average maturities.
Income Taxes
The Company has elected to be treated as a cash basis S-Corporation for
federal income tax purposes and accordingly, any liabilities for income taxes
are the direct responsibility of the stockholder. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements. The Company is subject to income and franchise taxes in certain
states, which has been appropriately reflected in the financial statements.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities primarily related to accounts
receivable and accounts payable. At December 31, 1997, the Company's net
assets for financial reporting purposes exceeds the tax basis by approximately
$2,453.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables
are not collateralized and, accordingly, the Company performs on-going credit
evaluations to reduce the risk of loss.
During 1996 revenues derived from one customer were approximately 45.0% of
total revenues. At December 31, 1996, the accounts receivable balance for this
customer was $469. During 1997 revenues derived from three customers were
approximately 17.5%, 14.3%, and 11.1%, respectively, of total revenues. At
December 31, 1997, the accounts receivable balances for these customers were
$1,178, $603 and $305, respectively.
F-40
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and Write- at end
of Period Expenses offs of Period
---------- ---------- ------ ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995........ $ 0 $ 98 $ 0 $ 98
Year ended December 31, 1996........ $ 98 $197 $ 0 $295
Year ended December 31, 1997........ $295 $233 $(195) $333
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Cleaning equipment........................................... $1,096 $2,581
Automobiles.................................................. 230 356
Computer equipment........................................... 58 108
Office equipment............................................. 25 93
Furniture and fixtures....................................... 8 26
------ ------
1,417 3,164
Accumulated depreciation..................................... (258) (831)
------ ------
$1,159 $2,333
====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $24, $223 and $586, respectively.
NOTE 5--CREDIT FACILITIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Equipment term note, payable in monthly installments of $25
including interest at 7.7%, through January, 2001............ $ $ 809
Equipment term note, payable in monthly installments of $6
including interest at 7.7%, through December, 2000........... 187
Note payable, due in monthly installments of $13.............. 55
Notes payable, vehicles, various monthly payments including
interest at rates ranging from 8% to 18%, maturing at various
dates from December 1997 through 2001........................ 122 52
Note payable, issued in connection with the purchase of net
assets for Diversified Management Services USA, Inc., monthly
principal payments of $20 beginning December 1, 1996,
interest of 8%............................................... 137
Current maturities............................................ (165) (373)
----- -----
$ 94 $ 730
===== =====
</TABLE>
F-41
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE 5--CREDIT FACILITIES (Continued)
Principal payments required under long-term debt obligations are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 373
1999.................................................................. 345
2000.................................................................. 370
2001.................................................................. 15
------
$1,103
======
</TABLE>
Line of Credit
In April 1997, the Company obtained a revolving line of credit for
borrowings of up to $1,000. The line of credit, which expires on April 30,
1998, bears interest at LIBOR plus 2% (7.49% at December 31, 1997), and is
limited to 80% of eligible trade accounts receivable.
Additionally, in December 1997 an additional $250 facility was obtained with
a maturity of two months at an interest rate of LIBOR plus 2%. This line of
credit was paid in January, 1998.
Equipment Facility
In April 1997, the Company obtained an equipment facility which provides for
the Company to borrow up to $1,500 under term notes until April 30, 1998. As
of December 1997, approximately $1,000 had been utilized under this facility
to purchase equipment. These $1,000 term notes bear interest at 7.7% and
require 36 monthly installments of principal and interest of approximately
$31.
Both the line of credit and the equipment notes contain, among other
provisions, maintenance of certain financial covenants and ratios including
tangible net worth and cash flow coverage, restrictions on dividends and
indebtedness, and are collateralized by the majority of the Company's assets,
and are personally guaranteed by the stockholder and spouse. The Company was
in violation of certain debt covenants as of December 31, 1997 for which
appropriate waivers were obtained.
NOTE 6--COMMITMENTS
Lease Commitments
In January 1998, the Company began leasing its primary office facility from
a company owned by the Company's stockholder. The lease agreement requires
monthly payments of approximately $8, escalating 3.5% annually through 2002.
The Company also leases office space in various states on a month-to-month
basis. Rent expense under these lease arrangements for December 31, 1995, 1996
and 1997 were $16, $28 and $15, respectively.
Additionally, in November 30, 1996, the Company acquired approximately $162
of equipment under leases qualifying as capital in connection with the
purchase of Diversified Management Services USA, Inc. The balance on these
capital lease obligations were paid in full in fiscal 1997.
F-42
<PAGE>
SERVICE MANAGEMENT USA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
NOTE 6--COMMITMENTS (Continued)
Guarantee
The Company's stockholder has obtained a mortgage of $1,280 in connection
with the acquisition of a building. Service Management USA, Inc. is a
guarantor of this obligation. Under the terms of the transaction with CCC (see
Note 1), Service Management USA, Inc. was released from this guarantee.
NOTE 7--EMPLOYEE BENEFIT PLAN
In November 1997, the Company established a profit sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code. Virtually all
employees are eligible to participate in the plan. Employees can contribute up
to 15% of their gross salary to the plan, and the Company makes matching
contributions of up to 3%. The Company recorded matching contributions of $8
for the year ended December 31, 1997.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Tri-City Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Tri-City
Electrical Contractors, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-City
Electrical Contractors, Inc. as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Orlando, Florida
February 16, 1998
F-44
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 2,734,000 $ 1,333,571
Certificates of deposit............................ 46,101 --
Accounts receivable (note 2)....................... 13,423,658 16,873,473
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3)................. 1,116,186 2,401,919
Inventories........................................ 287,136 379,543
Prepaid expenses................................... 588,310 831,859
Deferred income taxes (note 6)..................... 443,972 --
Refundable income taxes............................ 1,276 658,698
------------ -----------
Total current assets............................... 18,640,639 22,479,063
------------ -----------
Property, plant and equipment, at cost (note 5):
Leasehold improvements............................. 1,012,292 1,098,838
Autos, trucks and trailers......................... 1,681,540 1,618,478
Office furniture and equipment..................... 1,932,148 2,543,219
Shop tools and equipment........................... 1,065,898 860,513
Capitalized equipment leases (notes 5 and 13)...... 712,596 705,758
------------ -----------
6,404,474 6,826,806
Less accumulated depreciation and amortization..... (3,841,367) (4,313,431)
------------ -----------
Net property, plant and equipment.................. 2,563,107 2,513,375
------------ -----------
Other assets:
Advances to stockholders (note 9).................. 550,768 607,168
Other ............................................. 66,141 230,553
Advances to joint venture partner (note 12)........ 60,000 --
------------ -----------
676,909 837,721
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable (note 4)............................. $ 2,530 $ 30
Current maturities of long-term debt and
capitalized lease obligations (note 5)............ 490,374 237,544
Accounts payable................................... 3,630,900 5,414,432
Accrued salaries and wages......................... 1,332,014 1,527,555
Accrued expenses................................... 1,708,451 1,406,199
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 3)................. 4,375,530 7,045,641
Due to stockholders................................ 155,253 --
------------ -----------
Total current liabilities.......................... 11,695,052 15,631,401
Long-term debt and capitalized lease obligations,
less current maturities (note 5)................... 556,139 252,238
Deferred income taxes (note 6)...................... 45,025 --
------------ -----------
Total liabilities.................................. 12,296,216 15,883,639
------------ -----------
Minority interest in joint ventures (note 12)....... 184,072 135,832
------------ -----------
Stockholders' equity:
Common stock, 10,000 shares authorized, issued and
outstanding, at $1 par value...................... 10,000 10,000
Additional paid-in capital......................... 111,827 111,827
Retained earnings.................................. 9,278,540 9,688,861
------------ -----------
Total stockholders' equity......................... 9,400,367 9,810,688
Commitments and contingencies (notes 7 and 9).......
------------ -----------
$ 21,880,655 $25,830,159
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned............... $71,977,018 $63,852,151 $79,492,578
Cost of revenues earned................ 63,321,626 51,904,661 63,550,836
----------- ----------- -----------
Gross profit......................... 8,655,392 11,947,490 15,941,742
Selling, general and administrative
expenses.............................. 6,994,448 9,017,708 8,986,018
Depreciation expense................... 949,800 944,325 939,103
----------- ----------- -----------
Income from operations............... 711,144 1,985,457 6,016,621
----------- ----------- -----------
Other income (expense):
Interest income....................... 66,979 67,318 168,039
Interest expense...................... (223,389) (196,604) (52,983)
Other income (expense), net........... 477,561 (50,455) (25,576)
----------- ----------- -----------
Other income (expense), net.......... 321,151 (179,741) 89,480
----------- ----------- -----------
Income before income taxes........... 1,032,295 1,805,716 6,106,101
Income tax expense (note 6)............ 487,252 679,856 461,879
----------- ----------- -----------
Net income before minority interest.. 545,043 1,125,860 5,644,222
Minority interest in joint venture
income (note 12)...................... (71,419) (104,584) (134,535)
----------- ----------- -----------
Net income .......................... $ 473,624 $ 1,021,276 $ 5,509,687
=========== =========== ===========
Unaudited pro forma information (Note
1):
Income before income taxes............. $ 6,106,101
Pro forma provision for income taxes... 2,442,440
-----------
Pro forma net income (unaudited)....... $ 3,663,661
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained stockholders'
Stock capital earnings equity
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995...... $10,000 $111,827 $ 7,783,640 $ 7,905,467
Net income....................... -- -- 473,624 473,624
------- -------- ----------- -----------
Balances at December 31, 1995.... 10,000 111,827 8,257,264 8,379,091
Net income....................... -- -- 1,021,276 1,021,276
------- -------- ----------- -----------
Balances at December 31, 1996.... 10,000 111,827 9,278,540 9,400,367
Net income....................... -- -- 5,509,687 5,509,687
Distributions to stockholders.... -- -- (5,099,366) (5,099,366)
------- -------- ----------- -----------
Balances at December 31, 1997.... $10,000 $111,827 $ 9,688,861 $ 9,810,688
======= ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 473,624 $ 1,021,276 $ 5,509,687
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss (gain) on sale of property, plant
and equipment......................... (47,561) (62,346) 29,982
Depreciation........................... 949,800 944,325 939,103
Deferred tax (benefit) expense......... (1,047,291) 6,132 461,879
Minority interest in net income........ 71,419 104,584 134,535
Cash provided by (used for) changes in:
Accounts receivable................... (48,982) 1,111,307 (3,449,815)
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................ 298,752 1,006,354 (1,285,733)
Inventories........................... 3,939 (53,420) (92,407)
Prepaid expenses...................... (38,111) (468,671) (243,549)
Refundable income taxes............... 488,931 (1,276) (657,422)
Due to (from) stockholders............ (55,907) 189,645 (211,653)
Other assets.......................... 180,633 338,065 (164,412)
Accounts payable...................... (857,493) (1,050,987) 1,783,532
Accrued expenses...................... 69,004 1,448,411 (169,644)
Income tax payable.................... 1,309,269 (1,309,269) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ (794,451) (31,711) 2,670,111
---------- ----------- -----------
Net cash provided by operating
activities........................... 955,575 3,192,419 5,254,194
---------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................. (1,296,299) (624,426) (959,179)
Redemption of certificate of deposit... 42,465 223,074 46,101
Proceeds from sale of property, plant
and equipment......................... 122,827 142,711 39,827
Repayment from (payments to) joint
venture partner....................... (50,000) -- (122,775)
---------- ----------- -----------
Net cash used in investing
activities........................... (1,181,007) (258,641) (996,026)
---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on long-term debt..... (867,966) (1,781,913) (556,731)
Proceeds from equipment notes payable.... 1,375,137 127,913 --
Proceeds from installment note payable... -- 500,000 --
Proceeds from sale-leaseback back of
assets.................................. -- 734,013 --
Proceeds from (repayment of)
notes payable........................... 249,180 (1,081,500) (2,500)
Distributions to shareholders............ -- -- (5,099,366)
---------- ----------- ----------
Net cash provided by (used in)
financing activities.................. 756,351 (1,501,487) (5,658,597)
---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents...................... 530,919 1,432,291 (1,400,429)
Cash and cash equivalents at beginning of
year..................................... 770,790 1,301,709 2,734,000
---------- ----------- ----------
Cash and cash equivalents at end of year.. $1,301,709 $ 2,734,000 $1,333,571
========== =========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest............................... $ 223,389 $ 196,604 $ 52,983
========== =========== ==========
Income taxes........................... $ 225,274 $ 1,984,369 $ 720,355
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Tri-City Electrical Contractors, Inc. (the Company) is an electrical
contractor engaged in designing and installing electrical systems in the
commercial, industrial and residential construction markets. The Company is
headquartered in Altamonte Springs, Florida and operates branch locations in
Pompano Beach, Tampa and Fort Myers, Florida. The Company conducts all of its
business within the state of Florida.
As further described in Note 14, the Company entered into a Letter of Intent
with Consolidation Capital Corporation for the potential sale of the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
B&S Diversified, Inc. and B&S Diversified, Inc. #2. B&S Diversified, Inc. and
B&S Diversified, Inc. #2 are joint ventures in which the Company has a 75%
interest as to profits and losses. All significant intercompany transactions
between the entities have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both
readily convertible into known amounts of cash and are so near their maturity
that they present insignificant risk of changes in value because of changes in
interest rates. For purposes of the statement of cash flows, the Company
considers such investments with a maturity of three months or less to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
(e) Income Taxes
Until December 31, 1996, the Company followed the asset and liability method
in which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Effective January 1, 1997, the Company's stockholders elected to be taxed
under the provisions of sub-chapter S of the Internal Revenue Code. Under
these provisions, the stockholders will include in their individual income tax
returns their pro rata shares of the Company's revenue and expenses.
The unaudited pro forma federal and state income tax information included in
the Statements of Operations is presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", as if
the Company had been subject to federal and state income taxes as a C
corporation rather than under the provisions of a sub-chapter S corporation
for 1997.
(f) Contract Revenue Recognition and Contract Costs
Contract revenues are recognized on the percentage-of-completion method.
Under this method, the percentage of completion of each job is the portion of
the costs incurred to date compared to current estimates of total cost. This
percentage is applied to the total contract price to determine the amounts of
revenue earned on fixed price contracts. Revenues from cost plus contracts are
recognized on the basis of costs incurred during the period plus the fee
earned. At the time a loss on a contract becomes known, the entire amount of
the estimated loss is recorded. The Company does not recognize any gross
profit amounts related to change order work performed until such time as those
change orders have been approved by the customer.
F-50
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Organization and Summary of Significant Accounting Policies--(Continued)
Contract costs include all direct and indirect costs related to job
performance. Selling, general and administrative costs are charged to expense
as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents contract billings in excess of revenues
recognized.
(g) Depreciation and Amortization
Depreciation and amortization is provided in amounts sufficient to allocate
the cost of depreciable or amortizable assets to operations over their
estimated service lives using the straight-line method for financial statement
reporting purposes. The straight-line, declining balance, Accelerated Cost
Recovery System and Modified Accelerated Cost Recovery System methods are used
for income tax reporting.
The estimated service lives for financial reporting purposes are generally
as follows:
<TABLE>
<S> <C>
Leasehold improvements......................................... 3-15 years
Autos, trucks and trailers..................................... 5 years
Office furniture and equipment................................. 3-10 years
Shop tools and equipment....................................... 5 years
</TABLE>
(h) Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform with the 1997 presentation.
(i) Significant Group Concentration of Credit Risk
As of December 31, 1997 and 1996, substantially all of the Company's
receivables are obligations of companies in the construction business. The
Company does not require collateral or other security on most of these
accounts. The credit risk on these accounts is controlled through credit
approvals, lien rights and payment bonds issued on behalf of general
contractors, limits and monitoring procedures.
(j) Use of Estimates
In conformity with generally accepted accounting principles, management of
the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of these consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates (see note 3).
(k) Financial Instruments
Balance Sheet Financial Instruments--The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, certificates of
deposit, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for the Company's
notes payable and long-term debt approximate fair value because the
instruments are variable rate notes which reprice frequently.
F-51
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Organization and Summary of Significant Accounting Policies--(Continued)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(2) Accounts Receivable
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts including retentions........... $ 1,329,411 $ 1,356,146
Contracts in progress:
Current billings................................. 8,325,388 10,649,975
Retentions....................................... 3,681,338 5,069,366
Other.............................................. 97,621 162,399
----------- -----------
13,433,758 17,237,886
Less allowance for doubtful accounts............... (10,100) (364,413)
----------- -----------
$13,423,658 $16,873,473
=========== ===========
</TABLE>
The provisions for doubtful accounts of $113,100, $10,000 and $354,313 have
been included in selling, general and administrative expenses in the
accompanying consolidated 1995, 1996 and 1997 statements of operations,
respectively.
(3) Contracts in Progress
Contracts in progress are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $71,670,443 $73,320,138
Estimated earnings................................. 9,327,198 11,651,629
----------- -----------
80,997,641 84,971,767
Less billings to date.............................. 84,256,985 89,615,489
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
F-52
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Contracts in Progress--(Continued)
Included in the consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 1,116,186 $ 2,401,919
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (4,375,530) (7,045,641)
----------- -----------
$(3,259,344) $(4,643,722)
=========== ===========
</TABLE>
As of December 31, 1995, 1996 and 1997, the Company had unapproved change
orders of approximately $3,284,000, $3,162,000 and $3,163,000, respectively,
which are recorded without profit recognition as a component of contract
revenue in the accompanying consolidated statements of operations.
(4) Notes Payable
The Company has lines of credit arrangements with two banks under which it
may borrow, on an unsecured basis, up to an aggregate of $3,000,000 as of
December 31, 1997, with interest that approximates the banks' prime rate (8
1/2% at December 31, 1997). As of December 31, 1997, the Company also has a
line of credit arrangement with one bank under which it can borrow up to an
additional $1,000,000 with interest that approximates the bank's prime rate
plus 1% (8 1/2% at December 31, 1997, the total balances outstanding under
these lines of credit were $2,530 and $30 at December 31, 1996 and 1997,
respectively.
These note agreements each contain a provision restricting the payment of
dividends and transfer of ownership of the Company without the prior written
consent of the lenders. Written consent of the lenders was obtained by the
Company subsequent to December 31, 1997.
(5) Long-term Debt and Capitalized Lease Obligations
Long-term debt and capitalized lease obligations are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
---------- --------
<S> <C> <C>
Capitalized equipment lease obligations, related to
certain vehicles and equipment, payable in 26 to 51
equal monthly principal installments plus interest at
the commercial paper rate plus .9% maturing on
various dates through February, 2001................. $ 734,013 $489,782
Installment note payable to a bank with original
balance of $500,000 payable in 24 equal monthly
installments of $20,833 with interest at bank's prime
rate plus 1/2% (8 1/4% at December 31, 1996). The
balance of the note payable was repaid during 1997... 312,500 --
---------- --------
1,046,513 489,782
Less current maturities.............................. 490,374 237,544
---------- --------
$ 556,139 $252,238
========== ========
</TABLE>
F-53
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Long-term Debt and Capitalized Lease Obligations--(Continued)
Maturities of and capitalized lease obligations for years ending after
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $237,932
1999................................................................ 198,097
2000................................................................ 51,910
2001................................................................ 1,843
--------
$489,782
========
</TABLE>
(6) Income Taxes
The provision for income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1996 1997
----------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 1,310,717 $575,502 $ --
State...................................... 223,826 98,222 --
----------- -------- --------
1,534,543 673,724 --
----------- -------- --------
Deferred:
Federal.................................... (891,740) 5,235 415,690
State...................................... (155,551) 897 46,189
----------- -------- --------
(1,047,291) 6,132 461,879
----------- -------- --------
Total income tax expense..................... $ 487,252 $679,856 $461,879
=========== ======== ========
</TABLE>
The tax effect of temporary differences between the income tax basis of
assets and liabilities and the financial statement reporting amounts which
result in the recognition of deferred tax assets and liabilities as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Deferred tax assets:
Bad debts................................................ $ 3,434
Accrued losses on long-term construction contracts....... 503
Workers' compensation self insurance reserves............ 380,387
Deferred compensation.................................... 128,727
Reserve for loss contracts............................... 84,520
Tax reported asset sale-gains............................ 8,059
---------
Total deferred tax assets.............................. 605,630
---------
Deferred tax liabilities:
Deferred profit on contracts............................. (153,599)
Depreciation............................................. (19,362)
Other.................................................... (33,722)
---------
Total deferred tax liabilities......................... (206,683)
---------
Net deferred tax assets................................ $ 398,947
=========
</TABLE>
F-54
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Income Taxes--(Continued)
Presented in the accompanying consolidated balance sheet as of December 31,
1996:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Current assets............................................ $443,972
Noncurrent liabilities.................................... (45,025)
--------
$398,947
========
</TABLE>
No valuation allowance has been recognized in the accompanying consolidated
financial statements for the deferred tax assets as of December 31, 1996 or
1995 because the Company has sufficient taxable income within the statutory
carryback periods.
Effective January 1, 1997, the Company elected, by consent of its
stockholders, to be taxed under the provisions of subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal or
state corporate income taxes on its taxable income. Instead, the stockholders
include in their individual income tax return the Company's taxable income or
loss.
The Company incurred an income tax liability associated with built-in gains
at the time of the conversion to "S" corporation status. Built-in gains
represent the excess of the fair market value of the S corporation's assets at
the effective date of the S corporation election over the aggregate adjusted
tax basis of those assets at that date. Taxes associated with the built-in
gains were charged to operations during the year ended December 31, 1997.
The balances of deferred tax assets and liabilities as of December 31, 1996,
net of the tax associated with the built-in gains referred to above, were also
charged to operations during the year ended December 31, 1997 resulting in the
1997 provision for income taxes.
The actual expense for 1995 and 1996 differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
income before income taxes) as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Computer "expected" tax expense........................ $350,980 $613,978
Nondeductible expenses................................. 17,309 39,867
State income taxes, net of federal tax effect.......... 45,062 63,291
Settlement of investment in partnerships at amounts
different than accrued................................ 86,220 --
Computed taxes attributable to minority interest
portion of income before taxes........................ (24,282) (35,559)
Other, net............................................. 11,963 (1,721)
-------- --------
$487,252 $679,856
======== ========
</TABLE>
(7) Leases
The Company leases their Pompano Beach and Fort Myers facilities from third
parties. The remainder of the facilities are leased from a related party, as
more fully described in note 9. These leases have been classified as operating
leases.
F-55
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Leases--(Continued)
The Company also leases a portion of their fleet vehicles for a period of
five years from acquisition of the vehicles. These leases are cancelable after
one year and, accordingly, are classified as operating leases.
The following is a schedule of future minimum lease payments required under
operating leases, including those with related parties as more fully described
in note 9, that have initial or remaining noncancelable lease terms in excess
of one year at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $863,214
1999.............................................................. 523,419
2000.............................................................. 410,068
2001.............................................................. 269,205
2002 and thereafter............................................... 83,487
----------
$2,149,393
==========
</TABLE>
Rental expense for operating leases was $474,668, $683,594 and $902,239 for
the years ended December 31, 1995, 1996 and 1997, respectively.
(8) 401(K) Employees' Profit Sharing Plan
The Company has a 401(K) profit sharing plan under which voluntary employee
contributions are permissible from eligible employees who elect to participate
in the plan. The Company's contribution is determined annually by the Board of
Directors. Contributions made by the Company were $23,263, $104,888 and
$116,768 for the years ended December 31, 1995, 1996, and 1997, respectively.
(9) Related Party Transactions
The Company leases its Altamonte Springs and Tampa facilities from its
principal shareholder. The Altamonte Springs lease agreement requires base
monthly payments of $30,509. For each year after the first year, the lease
payment will be upwardly adjusted by the greater of the increase in the
Consumer Price Index or three percent. The lease requires the Company to
provide insurance, repairs and maintenance, and taxes on the leased property.
The lease expires in 1998. The Tampa lease agreement requires monthly payments
of $3,000 and expires in 1999.
The Company is guarantor of two loans in the name of the principal
stockholder to finance the Company's Altamonte Springs and Tampa facilities.
The total amount borrowed under the two loan agreements was $1,274,000. The
principal amounts of the loans outstanding at December 31, 1996 and 1997 were
$823,600 and $732,150, respectively.
Amounts due from a trust in the name of its principal stockholder at
December 31, 1996 and 1997, were $550,768 and $607,168, respectively. These
amounts are included in advances from stockholders on the accompanying
consolidated balance sheets and arise from the Company paying expenses on
behalf of the trust.
F-56
<PAGE>
TRI-CITY ELECTRICAL CONTRACTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Backlog
The following is a reconciliation of backlog work to be performed under
signed contracts in existence at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
(millions)
----------
<S> <C>
Balance, December 31, 1996........................................ $ 37.0
Contract adjustments and new contracts............................ 117.1
Less: Contract revenue earned, 1997............................... 79.5
------
Balance, December 31, 1997........................................ $ 74.6
======
</TABLE>
In addition, between January 1 and January 31, 1998, the Company entered
into additional contracts totaling approximately $8.3 million.
(11) Environmental Remediation
During 1993, the Company incurred costs for remediation in connection with
efforts to clean up a petroleum product contamination at its Altamonte
Springs, Florida facilities. The Company applied for and received approval for
reimbursement of $302,890 under the Florida Petroleum Liability Insurance and
Restoration program. As of December 31, 1996 and 1997, $222,299 of the total
approved reimbursement has been collected and $80,591 remains outstanding and
is included in accounts receivable in the accompanying consolidated balance
sheet.
(12) Minority Interest
The Company is party to two joint ventures with B&S Diversified, Inc., in
connection with two specified contracts. The venture agreements provide for
sharing of profits at 75% to the Company and 25% to the joint venture partner.
All transactions related to the ventures have been consolidated in the
accompanying consolidated financial statements and all significant
intercompany balances have been eliminated.
(13) Sale-Leaseback Transactions
On December 31, 1996 the Company completed a transaction wherein seventy-
five of the vehicles the Company had owned with a net book value of $712,596
at the date of the transaction, were sold to a leasing company for the sum of
$734,013 resulting in a gain of $21,417.
The Company immediately entered into individual lease agreements for each of
the vehicles with terms ranging from twenty-six to fifty-one months and with
interest accruing at .9% over the commercial paper rate (5.8% at December 31,
1997) payable monthly on the outstanding unamortized cost of the leased asset.
The gain realized on the transaction is to be amortized over the respective
lease terms for each of the individual vehicles.
(14) Subsequent Event
Subsequent to December 31, 1997, the stockholders of the Company entered
into an agreement to sell their shares of the Company to Consolidation Capital
Corporation ("CCC"), a public company, for cash and shares of CCC common
stock. Simultaneous with the transaction, the Company will become a C-
corporation and its income will be taxed at the corporate level (as it was in
1996 and prior years) rather than be included in the income tax returns of the
stockholders.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Wilson Electric Company, Inc.
We have audited the accompanying balance sheet of Wilson Electric Company,
Inc. as of November 30, 1995, 1996 and 1997, and the related statements of
income and retained earnings, and cash flows for each of the three years in
the period ended November 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilson Electric Company,
Inc. as of November 30, 1995, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended November
30, 1997, in conformity with generally accepted accounting principles.
/s/ Barry and Moore, P.C.
Barry and Moore, P.C.
Phoenix, Arizona
January 30, 1998
F-58
<PAGE>
WILSON ELECTRIC COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
November 30,
------------------------------------- February
1995 1996 1997 28, 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................... $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 20,193
Contracts receivable
(Notes 3 and 5)......... 8,542,419 11,308,641 14,085,329 11,665,106
Costs and estimated earn-
ings in excess of bill-
ings on uncompleted con-
tracts (Note 4)......... 565,702 1,225,288 1,301,651 2,916,870
Notes receivable......... 37,975 -- 59,824 57,410
Deferred income taxes
(Note 11)............... -- -- 115,760 115,760
Prepaid expenses and
other current assets.... 13,579 105,835 57,866 242,137
----------- ----------- ----------- -----------
Total current assets... 10,917,627 16,025,230 16,662,215 15,017,476
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
(Note 5)
Equipment................ 161,328 223,263 340,632 376,251
Automobiles & trucks..... 474,589 521,007 564,579 566,054
Office equipment......... 60,834 97,093 126,525 154,512
Furniture................ 7,904 16,318 23,630 23,630
Computer equipment &
software................ 130,015 138,923 415,226 445,590
Leasehold Improvements... -- -- 15,090 --
----------- ----------- ----------- -----------
834,670 996,604 1,485,682 1,566,037
Less accumulated depre-
ciation............... (430,028) (562,403) (781,312) (851,119)
----------- ----------- ----------- -----------
Property and equipment,
net................... 404,642 434,201 704,370 714,918
SHW JOINT VENTURE, (Note
10)....................... 468,408 422,641 -- --
OTHER ASSETS............... 19,651 23,227 136,160 977,346
GOODWILL, (net of $13,500,
$10,500 and $7,500 of am-
ortization) (Note 9)...... 16,500 13,500 10,500 9,750
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......... $ 2,242,295 $ 4,875,340 $ 4,588,823 $ 3,936,028
Billings in excess of
costs and estimated
earnings on
uncompleted contracts
(Note 4)................ 2,312,092 3,211,141 3,401,706 2,320,983
Accrued liabilities...... 292,637 468,575 428,838 463,965
Accrued payroll and re-
lated taxes............. 2,785,396 2,348,590 2,914,098 1,868,262
Accrued contribution to
Employee Stock Ownership
Plan (Note 6)........... 665,410 1,358,147 536,299 1,558,757
Note Payable ((Notes 5
and 6).................. -- -- 183,333 1,100,000
Employee Stock Ownership
Plan note payable
(Note 6)................ 149,625 2,000,000 -- --
Less--Accrued
contribution included
above................. (149,625) (1,358,147) -- --
----------- ----------- ----------- -----------
Total current
liabilities......... 8,297,830 12,903,646 12,053,097 11,247,995
----------- ----------- ----------- -----------
COMMITMENTS (Notes 5
and 7).................... -- -- --
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par
value; authorized
1,000,000 shares, issued
and outstanding 10,000.. 10,000 10,000 10,000 10,000
Additional paid-in capi-
tal..................... 265,950 265,950 265,950 265,950
Retained earnings........ 3,253,048 4,381,056 5,184,198 5,195,545
Employee Stock Ownership
Plan note payable (Note
6)...................... (149,625) (2,000,000) -- --
Accrued contribution in-
cluded in current lia-
bilities................ 149,625 1,358,147 -- --
----------- ----------- ----------- -----------
Total stockholders'
equity.............. 3,528,998 4,015,153 5,460,148 5,471,495
----------- ----------- ----------- -----------
$11,826,828 $16,918,799 $17,513,245 $16,719,490
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-59
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the three months
For the years ended November 30, ended February 28,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES....... $ 40,279,206 $ 49,790,214 $ 71,008,958 $ 15,436,341 $ 17,243,732
COST OF CONTRACT
REVENUES............... (29,935,382) (37,729,341) (59,036,426) (12,719,276) (14,568,353)
------------ ------------ ------------ ------------ ------------
GROSS PROFIT............ 10,343,824 12,060,873 11,972,532 2,717,065 2,675,379
------------ ------------ ------------ ------------ ------------
EXPENSES:
General and
administrative
expenses ............ 6,317,716 7,281,252 8,093,230 1,385,359 1,654,772
ESOP contribution
(Note 6)............. 1,981,828 2,957,797 2,421,164 656,114 1,014,546
------------ ------------ ------------ ------------ ------------
Total expenses...... 8,299,544 10,239,049 10,514,394 2,041,473 2,669,318
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS.. 2,044,280 1,821,824 1,458,138 675,592 6,061
OTHER INCOME (EXPENSE):
Interest income....... 20,919 89,593 157,634 96,703 90,040
Interest expense...... (4,439) (82,404) (109,581) (38,952) (13,122)
Other income
(expense)............ 6,235 101,820 (78,548) 36,558 17,143
------------ ------------ ------------ ------------ ------------
Net other income
(expense).......... 22,715 109,009 (30,495) 94,309 94,061
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES.................. 2,066,995 1,930,833 1,427,643 769,901 100,122
PROVISION FOR INCOME
TAXES (Note 11)........ (811,730) (802,825) (624,501) (212,500) (88,775)
------------ ------------ ------------ ------------ ------------
NET INCOME.............. 1,255,265 1,128,008 803,142 557,401 11,347
RETAINED EARNINGS,
Beginning of year...... 1,997,783 3,253,048 4,381,056 4,381,056 5,184,198
------------ ------------ ------------ ------------ ------------
RETAINED EARNINGS, End
of year................ $ 3,253,048 $ 4,381,056 $ 5,184,198 4,938,457 5,195,545
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE>
WILSON ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months
For the years ended November 30, ended February 28,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........... $ 1,255,265 $ 1,128,008 $ 803,142 $ 557,401 $ 11,347
----------- ----------- ----------- ----------- -----------
Adjustments to
reconcile net income
to net cash provided
by (used for)
operations--
Depreciation and
amortization...... 104,364 154,621 232,324 42,944 71,307
(Gain) Loss on sale
of assets......... 12,780 (1,447) 2,255 -- --
SHW Joint Venture
(income) loss..... -- (96,733) 80,641 -- --
(Increase) decrease
in:
Contracts
receivable........ (1,108,920) (2,766,221) (2,776,688) 65,155 2,420,223
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts......... 64,168 (659,586) (76,363) (289,265) (1,615,219)
Notes receivable... 14,275 37,975 (59,824) (50,000) 2,414
Prepaid expenses... 20,695 (92,256) 47,969 93,449 (184,271)
Other assets....... (5,325) (3,651) (113,008) (496,352) (841,186)
Deferred Income
Taxes............. -- -- (115,760) -- --
Increase (decrease)
in:
Accounts payable... (933,811) 2,633,045 (286,517) (122,397) (652,795)
Billings in excess
of costs and
estimated earnings
on uncompleted
contracts......... 1,403,358 899,049 190,565 336,567 (1,080,723)
Accrued
liabilities....... (180,580) 175,938 (39,737) 14,076 35,127
Accrued payroll and
related taxes..... 1,149,901 (436,806) 565,508 (205,815) (1,045,836)
Accrued pension
contribution...... (1,101,364) 692,737 (821,848) (1,663,021) 1,022,458
----------- ----------- ----------- ----------- -----------
Net adjustments to
reconcile net income
to net cash (used
for) provided by
operations.......... (560,459) 536,665 (3,170,483) (2,274,659) (1,868,501)
----------- ----------- ----------- ----------- -----------
Net cash (used
for) provided by
operating
activities...... 694,806 1,664,673 (2,367,341) (1,717,258) (1,857,154)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of
equipment........... (243,149) (181,509) (502,423) (80,201) (81,105)
Distribution from SHW
Joint Venture....... -- 142,500 342,000 -- --
Proceeds on sale of
equipment........... 8,093 1,850 750 -- --
Loan to ESOP......... -- -- (2,000,000) (2,000,000) --
Repayments of loan to
ESOP................ -- -- 2,000,000 2,000,000 --
----------- ----------- ----------- ----------- -----------
Net cash flows
used for
investing
activities...... (235,056) (37,159) (159,673) (80,201) (81,105)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings........... -- -- 2,000,000 2,000,000 1,100,000
Repayment of
borrowings.......... -- -- (1,816,667) (333,333) (183,333)
----------- ----------- ----------- ----------- -----------
Net cash flows
provided by
financing
activities........ -- -- 183,333 1,666,667 916,667
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH............... 459,750 1,627,514 (2,343,681) (130,792) (1,021,592)
CASH AND CASH
EQUIVALENTS, Beginning
of year............... 1,298,202 1,757,952 3,385,466 3,385,466 1,041,785
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, End of
year.................. $ 1,757,952 $ 3,385,466 $ 1,041,785 $ 3,254,674 $ 20,193
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1995, 1996 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Wilson Electric Company, Inc. (the "Company") was incorporated on May 24,
1988 and performs electrical contracting services throughout Arizona. The
significant accounting policies of the Company are as follows:
Cash and Cash Equivalents--
Cash equivalents consist of investments in highly liquid investments with
maturities of three months or less, and at November 30, 1996 and 1997,
included restricted cash of $184,330 and $770,297, respectively.
Revenue and Cost Recognition--
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the actual costs incurred to date compared to
estimated total cost for each contract. Revenue recognition commences only
after contract progress reaches a state where experience is sufficient to
estimate a profit on the contract. At the time a loss on a contract becomes
known, the entire amount of the estimated loss is recognized.
Contract costs include all direct material, labor and employee benefit costs
and indirect costs related to contract performance, such as indirect labor,
equipment rentals, insurance and tools. Selling and most general and
administrative costs are charged to expense as incurred. Changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and revenues, and are recognized in the period in which the
revisions are determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
Depreciation--
Property and equipment are carried at cost. Depreciation of property and
equipment is determined using straight-line and accelerated methods of
depreciation for financial statement purposes at rates based on the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures......................................... 5-10 years
Computer equipment and software................................ 3- 5 years
Shop equipment................................................. 3- 5 years
Automotive equipment........................................... 3- 5 years
</TABLE>
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repair are charged to expense as incurred.
Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-62
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(Continued)
Advertising Expense--
The Company expenses advertising costs as incurred. Advertising expenses
were $61,438, $96,441 and $127,303 in 1995, 1996 and 1997, respectively.
Unaudited Interim Financial Statements--
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustment, necessary for a fair
presentation of the financial position of the Company at February 28, 1998,
and the results of its operations and its cash flows for the three months
ended February 28, 1997 and February 28, 1998, as presented in the
accompanying unaudited interim financial statements.
(2) SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes paid................ $ 921,180 $ 876,819 $ 752,833
Interest paid.................... $ 4,439 $ 82,404 $ 84,581
(3) CONTRACTS RECEIVABLE:
Contracts receivable consist of the following:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Completed contracts.............. $ 1,873,011 $ 897,193 $ 779,037
Contracts in progress............ 5,065,980 8,632,012 10,698,107
Unbilled completed contracts..... 56,668 152,600 143,000
Retainages....................... 1,556,760 1,636,836 2,475,185
Less: Allowance for doubtful
accounts........................ (10,000) (10,000) (10,000)
------------ ------------ ------------
$ 8,542,419 $11,308,641 $14,085,329
============ ============ ============
(4) CONTRACTS IN PROCESS:
Information with respect to contracts in process follows:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expenditures on uncompleted
contracts....................... $18,300,419 $22,081,105 $50,660,947
Estimated earnings thereon....... 4,095,848 3,920,520 6,378,912
------------ ------------ ------------
22,396,267 26,001,625 57,039,859
Less billings applicable
thereto......................... 24,142,657 27,987,478 59,139,914
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
Included in the accompanying balance sheet under the following captions:
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... $ 565,702 $ 1,225,288 $ 1,301,651
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... (2,312,092) (3,211,141) (3,401,706)
------------ ------------ ------------
$ (1,746,390) $ (1,985,853) $ (2,100,055)
============ ============ ============
</TABLE>
F-63
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(5) NOTE PAYABLE AND LINE OF CREDIT:
As of November 30, 1995, 1996 and 1997, the Company had a line of credit
with Norwest Bank in the amount of $2,500,000, $3,000,000 and $4,000,000,
respectively. Interest was 9.75%, 9.25% and 8.50% at November 30, 1995, 1996
and 1997, respectively. The collateral for the line of credit is a first lien
position on all accounts and contracts receivable, inventory, equipment,
vehicles, furniture and fixtures. There were no borrowings against this line
at November 30, 1995, 1996 and 1997, respectively.
The agreement requires the Company to maintain certain ratios and minimums.
In January, 1997, the Company borrowed $2,000,000 and then loaned the
proceeds to the Employee Stock Ownership Plan. The loan is payable in minimum
monthly payments of $83,333, together with interest at the prime rate.
(6) EMPLOYEE STOCK OWNERSHIP PLAN:
Effective December 1, 1992 the Company established an employee stock
ownership Plan (ESOP) covering substantially all of its employees. Company
contributions to the Plan are determined annually by management.
During fiscal year 1994, the ESOP used the proceeds of a loan guaranteed by
the Company to purchase 1,900 shares of the Company's common stock for
$2,280,000. The loan was paid in full during the fiscal year 1995.
During fiscal year 1996, the ESOP purchased 2,500 shares of the Company's
common stock for $3,500,000. The ESOP made cash payments totaling $1,500,000
and issued $2,000,000 of notes due November 1, 1997.
In January, 1997, the Company borrowed $2,000,000 and loaned the funds to
the ESOP for the repayment of its $2,000,000 of notes. During the year ended
November 30, 1997, the Company accrued contributions to the ESOP sufficient to
allocate the remaining shares, and accordingly reduced the loan to the ESOP to
zero.
Generally accepted accounting principles require the following:
1) For loans made to the ESOP by someone other than the Company (a direct
loan), the loan balance is reported as a liability and a deduction in the
stockholders' equity section of the Company. At November 30, 1996, the loan
to the ESOP was a direct loan, as the loan was payable to the selling
shareholders.
2) For loans made to the ESOP by the Company, the Company does not report a
loan receivable from the ESOP. Instead, the loan receivable is reported as
a deduction in the stockholder's equity section and is reduced to the
extent accrued Company contributions to the ESOP releases shares.
Information with respect to the allocation of common shares is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Allocated........................................... 4,900.0 5,971.4 7,400.0
Committed to be released............................ -- 1,428.6 0.0
------- ------- -------
Total............................................. 4,900.0 7,400.0 7,400.0
======= ======= =======
</TABLE>
F-64
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(6) EMPLOYEE STOCK OWNERSHIP PLAN:--(Continued)
The fair values for shares allocated and committed to be released is based
upon the latest appraisal available.
During the years ended November 30, 1995, 1996 and 1997, contributions
charged to expense amounted to $1,981,828, $2,957,797 and $2,421,164,
respectively. In addition, in 1995 and 1996, the Company paid interest of
$81,734 and $65,338, respectively, on the ESOP's notes payable.
(7) COMMITMENTS:
The Company leases its offices, warehouse facilities and vehicles under
operating leases.
Minimum annual rental commitments are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
1996.............................................. $250,907 $ -- $ --
1997.............................................. 191,618 307,994 --
1998.............................................. 109,734 138,318 309,421
1999.............................................. -- 61,857 143,360
2000.............................................. -- 45,356 131,081
2001.............................................. -- 25,256 116,934
Thereafter........................................ -- -- 38,915
-------- -------- --------
$552,259 $578,781 $739,711
======== ======== ========
</TABLE>
(8) RELATED PARTY TRANSACTIONS:
The Company leased office space from one of its shareholders for $6,249 per
month. This lease expired on December 31, 1996, and is on a month-to-month
basis.
The Company performs contracting activities with a company which is owned by
an employee. Total revenue for the years ended November 30, 1995, 1996 and
1997 were $291,806, $137,027 and $0, respectively. Amounts included in
Accounts Receivable from such activities at November 30, 1996 and 1995, were
$131,528 and $42,654, respectively. There were no amounts included in Accounts
Receivable at November 30, 1997.
(9) GOODWILL:
During 1993, the Company acquired assets and assumed leases and contracts-
in-process of Adkins Cabling Systems (Adkins). The amount assigned to goodwill
represents the excess of the amount paid over the fair value of assets
received, and is being amortized over eight years which is the term of related
employment and non-competition agreements with the sole Adkins shareholder.
(10) SHW JOINT VENTURE:
The Company had a minority interest in a general partnership joint venture
formed to construct a freeway management system. Related costs included in the
Company's contract revenue earned and cost of revenues earned were $80,000,
$7,000 and $0 for the years ended November 30, 1995, 1996 and 1997. The
investment was accounted on the equity method of accounting wherein the
Company recognized it's share of the joint ventures net assets.
The joint venture was completed in 1997.
F-65
<PAGE>
WILSON ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1995, 1996 and 1997
(11) INCOME TAXES:
Deferred income taxes arise because of timing differences between financial
and income tax reporting.
At November 30, 1997, the only significant timing difference relates to
accrued vacation pay, that is not tax deductible unless paid within 2 1/2
months after year-end. The provision for income taxes for 1997 differed from
the amount computed by applying the statutory income tax rates because of non-
deductible expenses.
F-66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
SKC Electric, Inc. and Affiliate
In our opinion, the accompanying combined balance sheet at December 31, 1997
and 1996, and the related combined statements of income and of cash flows for
the years ended December 31, 1997 and 1996 and the three months ended December
31, 1995 of SKC Electric, Inc. and Affiliate, and the consolidated statements
of income and of cash flows of Lovecor, Inc. and subsidiaries for the year
ended September 30, 1995, present fairly, in all material respects, the
financial position of SKC Electric, Inc. and Affiliate, at December 31, 1997
and 1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, for the three months ended December
31, 1995, and for the year ended September 30, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 17, 1998
F-67
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 719,316 $1,686,037
Accounts receivable:
Contracts........................................... 4,688,121 5,161,512
Other............................................... 75,761 138,708
Costs and estimated earnings in excess of billings.... 125,597 134,759
Materials............................................. 85,438 161,338
Deferred income taxes................................. -- 150,000
---------- ----------
Total current assets.............................. 5,694,233 7,432,354
Property and equipment................................ 251,363 553,957
Receivable--related party............................. 250,000 250,000
Other assets.......................................... 131,375 131,790
---------- ----------
$6,326,971 $8,368,101
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 3,495 $ 196,490
Accounts payable...................................... 963,534 1,414,869
Due to stockholders................................... 3,101 --
Billings in excess of costs and estimated earnings.... 1,555,592 1,652,288
Accrued expenses...................................... 545,450 825,818
Accrued ESOP liability................................ 350,000 --
Accrued income taxes.................................. 105,000 1,195,900
---------- ----------
Total current liabilities......................... 3,526,172 5,285,365
---------- ----------
Long-term debt, less current portion.................... -- 982,449
ESOP common stock purchase obligation (Note 8).......... -- 3,000,000
Unearned ESOP common stock (Note 8)..................... -- (1,178,939)
Commitments and contingencies (Notes 7 and 10)..........
STOCKHOLDERS' EQUITY (Note 9)
Common stock:
SKC Electric, Inc., $.01 par value, 100,000 shares
authorized, 63,491 issued and outstanding at December
31, 1997; no par value, 1,000 shares authorized,
100 shares issued and outstanding at December 31,
1996................................................. 10,000 635
SKCE, Inc., $10 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding...... 10,000 10,000
Additional paid-in capital............................ 15,000 --
Retained earnings..................................... 2,765,799 268,591
---------- ----------
Total stockholders' equity........................ 2,800,799 279,226
---------- ----------
$6,326,971 $8,368,101
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliate--
Consolidated Combined
------------- ---------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from
construction and
service contracts...... $11,261,874 $3,012,185 $16,811,224 $23,482,722
Costs from construction
and service contracts.. 8,556,644 2,205,404 12,565,452 16,970,948
----------- ---------- ----------- -----------
Gross profit............ 2,705,230 806,781 4,245,772 6,511,774
Selling, general and
administrative
expenses............... 1,900,327 426,680 2,906,523 4,199,645
----------- ---------- ----------- -----------
Operating income........ 804,903 380,101 1,339,249 2,312,129
Other income............ 25,853 6,459 60,322 38,381
----------- ---------- ----------- -----------
Income before income
taxes.................. 830,756 386,560 1,399,571 2,350,510
Provision for income
tax.................... 277,984 -- -- 1,150,000
----------- ---------- ----------- -----------
Net income.............. $ 552,772 $ 386,560 $ 1,399,571 $ 1,200,510
=========== ========== =========== ===========
Unaudited pro forma
information:
Income before provision
for income taxes...... $ 386,560 $ 1,399,571 $ 2,350,510
Provision for income
taxes................. 150,758 545,833 916,582
---------- ----------- -----------
Pro forma net income... $ 235,802 $ 853,738 $ 1,433,928
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliated--
Consolidated Combined
------------- ----------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income............... $ 552,772 $ 386,560 $ 1,399,571 $1,200,510
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation............ 70,750 18,165 75,534 124,339
Provision for doubtful
accounts............... -- -- -- 161,127
Gain on sale of fixed
assets................. -- -- (540) 3,502
Deferred income taxes... (305,000) -- -- (150,000)
ESOP compensation
expense................ -- -- -- 270,648
(Increase) decrease in
assets:
Accounts receivable--
contracts.............. (637,735) (169,078) (1,900,371) (634,518)
Accounts receivable--
other.................. 4,064 4,904 (50,820) (62,947)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts.............. 31,226 (3,322) (63,236) (9,162)
Materials............... 49,572 (18,751) (47,260) (75,900)
Other assets............ (251,135) 362 (77,810) (415)
Increase (decrease) in
liabilities:
Accounts payable........ 238,944 654,921 658,374 451,335
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. (370,863) (238,685) 394,852 96,696
Accrued expenses and
ESOP liability......... 239,104 (320,693) 721,457 (69,632)
Accrued income taxes.... 106,724 (254,087) (68,397) 1,090,900
--------- --------- ----------- ----------
Net cash provided (used)
by operating
activities.............. (271,577) 60,296 1,041,354 2,396,483
Cash flows used by
investing activities
Capital expenditures.... (102,108) (18,416) (97,711) (431,610)
Proceeds from
disposition of fixed
assets................. -- -- 540 1,175
--------- --------- ----------- ----------
Net cash used by
investing activities.... (102,108) (18,416) (97,171) (430,435)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Lovecor, Inc. SKC Electric, Inc. and Affiliate--
Consolidated Combined
------------- ---------------------------------------
For the For the three For the For the
year ended months ended year ended year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows used by
financing activities
Distributions to
stockholders.......... (3,633) -- (654,172) (799,342)
Principal payments on
long-term debt........ (30,288) (5,063) (29,453) (199,985)
Borrowings to finance
ESOP.................. -- -- -- 1,375,429
Loan to ESOP........... -- -- -- (1,375,429)
--------- -------- --------- -----------
Net cash used by
financing activities... (33,921) (5,063) (683,625) (999,327)
Net increase (decrease)
in cash and cash
equivalents............ (407,606) 36,817 260,558 966,721
Cash and cash
equivalents--beginning
of period.............. 829,547 421,941 458,758 719,316
--------- -------- --------- -----------
Cash and cash
equivalents--end of
period................. $ 421,941 $458,758 $ 719,316 $ 1,686,037
========= ======== ========= ===========
Income taxes paid....... $ 469,994 $ -- $ 68,397 $ 210,400
========= ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Company's activities and operating cycle
SKC Electric, Inc., its subsidiary, Cramar Electric, Inc., and its
affiliate, SKCE, Inc. (the Company) are electrical specialty contractors and
electrical service companies operating primarily in the commercial markets in
Kansas and Missouri. The Company is headquartered in Lenexa, Kansas, and
operates branch offices in Branson and Columbia, Missouri. During 1996, the
Company acquired an exclusive franchise for TEGG services which provides
preventive maintenance contracts for end user facilities located throughout
the same geographic areas. The stock of Cramar Electric, Inc. was acquired in
September 1997 for approximately $35,000 and will allow the Company to enter
the residential and multifamily construction market.
The length of the Company's construction contracts varies but is typically
less than one year. Therefore, the contract-related assets and liabilities are
classified as current. Other items in the balance sheet are classified as
current or noncurrent depending on whether their realization and liquidation
period extend beyond one year.
The Company grants credit, generally without collateral, but is usually
eligible for filing a contractor's lien against the property on which work was
performed. Most of the Company's contracts are in the Kansas and Missouri
regions. Consequently, the Company's ability to collect the amounts due from
customers is affected by the economic fluctuations in these geographic areas.
During 1997, approximately 17% of the Company's revenues were from one
customer.
Principles of combination and consolidation
The combined financial statements include the consolidated accounts of SKC
Electric, Inc. and its subsidiary, Cramar Electric, Inc., combined with its
affiliate, SKCE, Inc. all of which are under common control and management and
stock ownership effective October 1, 1995. Prior to October 1, 1995, SKC
Electric, Inc. and its affiliate were owned by a separate corporation,
Lovecor, Inc., which had the same stock ownership as SKC Electric, Inc. and
its affiliate. Immediately following the close of business on September 30,
1995, the consolidated group was terminated as a result of the tax-free spin
off of SKC Communications, Inc. (now SKCE, Inc.) and the subsequent tax-free
merger of Lovecor, Inc. into SKC Electric, Inc.
The fiscal year of the Company was September 30 prior to October 1, 1995, at
which time a December 31 year end was adopted. All significant intercompany
transactions and balances have been eliminated from the combined and
consolidated financial statements.
Revenue and cost recognition
The Company utilizes the percentage-of-completion method of accounting for
the recognition of revenues and costs of all significant construction
contracts. Revenues are recognized according to the ratio of costs incurred to
estimated total contract costs. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions
are determined.
Balances billed but not paid pursuant to retainage provisions under
provisions under construction contracts generally become due upon completion
of the contracts and acceptance by the customers.
Revenue earned on specific contracts in excess of billings and billings in
excess of revenue earned are shown as current assets and liabilities,
respectively, in the accompanying balance sheet. Revenues from service
contracts and maintenance work are recognized when earned.
F-72
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Summary of significant accounting policies--(Continued)
Direct costs on construction contracts include all direct material,
equipment, subcontractor, and labor costs. Where costs such as tools, travel,
licenses and fees, and utilities can be charged to a specific job, the Company
also considers these direct costs. Certain indirect costs for both
construction and service contracts are allocated to jobs based on an overhead
burden rate developed by the Company. This rate is based on the relationship
between these indirect costs and labor expense incurred on the contracts.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
Property and equipment and depreciation
Property and equipment is stated at cost. Expenditures for renewals and
betterments are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Upon sale or retirement, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss is included in or charged against income.
Income taxes
During the period October 1, 1994 through September 30, 1995, Lovecor, Inc.
was a C corporation and used the liability method of accounting for income
taxes. Deferred income taxes are recorded to reflect the tax consequences of
future years of differences between the basis of assets and liabilities for
income tax and financial reporting purposes.
For the period October 1, 1995 to December 31, 1996, the companies'
stockholders elected S corporation status under the Internal Revenue Code,
thereby consenting to include the income or losses in their individual tax
returns. At the time of the election, the Company was subject to a potential
built-in gains tax based on the gross profit recognized on uncompleted
contracts determined on a percentage-of-completion method. This tax totaling
$105,000 was accrued at September 30, 1995 and subsequently paid. There is no
provision for income taxes reflected in the financial statements during the
period the companies elected S Corporation status.
Subsequent to December 31, 1996, SKC Electric, Inc. terminated its S
Corporation status and began using the liability method of accounting for
income taxes. At this time, SKC Electric, Inc. was required to change its
method of accounting for tax purposes from the completed contract method to
the percentage-of-completion method.
The unaudited pro forma information included in the Statement of Income is
presented as if the Company had been subject to federal and state income taxes
for all periods presented.
Materials
Materials consist of electrical supplies used on the contracts or for
service work. The materials are valued at the lower of original cost or net
realizable value. A residual value remains for materials used but not consumed
on the jobs.
Use of estimates
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from these estimates.
F-73
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Summary of significant accounting policies--(Continued)
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be a cash equivalent.
2. Contract receivables
The contract receivables consist of the following:
December 31,
---------------------
1996 1997
---------- ----------
Current............................................... $4,108,444 $4,679,185
Retainage............................................. 579,677 622,327
Less allowance for doubtful accounts.................. -- (140,000)
---------- ----------
$4,688,121 $5,161,512
========== ==========
At December 31, 1996, the Company considered the receivables to be fully
collectible; therefore, no allowance for doubtful accounts was recorded.
Retainages are due upon completion of the contracts and all are expected to be
collected in the next 12 months.
3. Costs and estimated earnings on uncompleted contracts
December 31,
-------------------------
1996 1997
----------- ------------
Costs incurred on uncompleted contracts............ $ 4,901,213 $ 9,916,098
Estimated earnings................................. 798,890 4,033,573
----------- ------------
5,700,103 13,949,671
Less--Billings to date............................. (7,130,098) (15,467,200)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 125,597 $ 134,759
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (1,555,592) (1,652,288)
----------- ------------
$(1,429,995) $ (1,517,529)
=========== ============
F-74
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and equipment
The property and equipment balance consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Office furniture......................................... $ 51,123 $ 53,452
Computers................................................ 304,600 384,772
Communication equipment.................................. 22,650 35,515
Construction equipment................................... 235,954 358,264
Trucks and vehicles...................................... 378,061 384,398
Leasehold improvements................................... -- 151,226
--------- ----------
992,388 1,367,627
Less--Accumulated depreciation........................... (741,025) (813,670)
--------- ----------
$ 251,363 $ 553,957
========= ==========
</TABLE>
5. Notes payable and long-term debt
The Company has a line of credit agreement with a bank with a borrowing
limit of $500,000 which matures April 30, 1998. The interest rate is prime and
is payable monthly. This line of credit is collateralized by the Company's
contract receivables, materials, fixed assets and personal guaranties of the
stockholders. There were no outstanding borrowings under this agreement as of
December 31, 1996 or 1997.
In 1997, the Company entered into an agreement with a bank for a $1,375,429
term loan which was used to finance the purchase by the SKC Electric, Inc.
Employee Stock Ownership Plan of 30% of the shares of the Company's common
stock from the majority shareholder. The term loan provides for interest
payable quarterly at the prime rate, which was 8.5% at December 31, 1997, and
annual payments of $196,490 due each December 31 with the balance due December
31, 2001. The term loan is secured by unallocated ESOP stock pledged as
collateral. The balance outstanding at December 31, 1997 was $1,178,939, of
which $196,490 was the current portion of the term loan.
The Company had other long-term debt comprised of obligations under notes
payable on vehicles and other assets due to various financial institutions
with interest rates ranging from 6% to 10% outstanding at December 31, 1996.
These obligations were repaid in 1997.
6. Income taxes
Income tax expense (benefit) consisted of the following components:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
September 30, December 31,
1995 1997
------------- -------------
<S> <C> <C>
Current
Federal........................................ $ 472,984 $1,085,000
State.......................................... 110,000 215,000
--------- ----------
582,984 1,300,000
Deferred
Federal........................................ (252,700) (125,000)
State.......................................... (52,300) (25,000)
--------- ----------
(305,000) (150,000)
--------- ----------
Total........................................ $ 277,984 $1,150,000
========= ==========
</TABLE>
F-75
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income taxes--(Continued)
The difference between the effective tax rate and the federal statutory
income tax rate (34%) is:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
September 30, December 31,
1995 1997
------------- ------------
<S> <C> <C>
Statutory federal income tax provision............ $ 282,457 $ 799,173
State taxes net of federal benefit................ 38,082 125,400
Contract accounting method change................. -- 202,675
Other, net........................................ (42,555) 22,752
--------- ----------
$ 277,984 $1,150,000
========= ==========
</TABLE>
The Company's deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Allowance for doubtful accounts................................. $ 54,600
Employee compensation........................................... 54,686
Other expenses.................................................. 40,714
--------
$150,000
========
</TABLE>
7. Commitments and related party transactions
The Company was a guarantor on a personal loan of the stockholders in the
amount of $109,000 at December 31, 1996 and had given a security interest in
its accounts receivables and materials as collateral on that debt. Such
guarantee no longer exists at December 31, 1997.
The Company received advances from a stockholder totaling $3,101 at December
31, 1996.
During 1995, SKC Electric, Inc. loaned $250,000 to an unrelated corporation.
The loan is secured by a second mortgage on a commercial building. During
1996, the majority shareholder of SKC Electric, Inc. acquired the stock of the
corporation which owned the building collateralizing the loan. SKC Electric,
Inc.'s security position remains the same following the acquisition. The loan
is non-interest bearing and has no stated maturity date.
In December 1996, the Company entered into an operating lease agreement with
a company that is owned by the shareholders for the lease of new office and
warehouse space. The lease is for five years and expires December 2001. The
agreement calls for monthly payments of $8,095. No expense was incurred on
this lease during the year ended December 31, 1996, and $97,140 was expensed
during the year ended December 31, 1997. Future minimum lease payments total
$97,140 for each of the next 5 years. Management believes that the rental
expense under this lease is equivalent to that which could have been
experienced in an unrelated arms-length transaction.
The Company is party to an operating lease agreement for its former office
and warehouse space with an unrelated third party. The lease is for five
years, expiring March 1998. Lease expense under this agreement was $46,150,
$11,544, $42,355 and $46,177 for the periods ended September 30, 1995,
December 31, 1995, December 31, 1996, and December 31, 1997, respectively. The
facility in Branson, Missouri is leased under an operating lease agreement
with an unrelated third party. The lease is for two years, expiring in August
1996,
F-76
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
with an additional two year option which the Company exercised. Lease expense
under this agreement was $13,750, $2,850, $14,452 and $15,365 for the periods
ended September 30, 1995, December 31, 1995, December 31, 1996, and December
31, 1997, respectively. In June 1997, the Company entered into a two year
operating lease with an unrelated third party for a new facility. Future
minimum lease payments under these leases will be $22,944 and $7,750 for the
years ending December 31, 1998 and 1999.
8. Employee benefit plans
The Company has a defined contribution employee benefit plan which includes
a qualified profit sharing plan funded through a trust. As a part of the
profit sharing plan, the Company offers a salary deferral program under
Section 401 of the Internal Revenue Code. Under this plan, the Company matches
certain contributions of the eligible participants. In addition, the Company's
annual discretionary contribution, if any, is determined by the Board of
Directors and may be any amount not in excess of 15% of the total
participant's compensation and not to exceed $30,000 for any individual
participant. The Company's expense under this plan totaled $217,051, $3,506,
$30,613 and $31,019, for the periods ended September 30, 1995, December 31,
1995, December 31, 1996, and December 31, 1997, respectively.
The Company also contributes to a Voluntary Employee Beneficiary Association
(VEBA) established under 501(c)(9) of the Internal Revenue Code. The VEBA,
which is a trust, provides various health and welfare benefits to the members,
which are the employees of the Company. Contributions are determined as a
percentage of payroll. The Company contributed $401,153, $111,432, $555,114
and $1,043,211 to the VEBA for the periods ended September 30, 1995, December
31, 1995, December 31, 1996 and December 31, 1997, respectively.
On December 24, 1996, the Company formed the SKC Electric, Inc. Employee
Stock Ownership Plan (ESOP). Management prefunded the ESOP with the maximum
allowable contribution, which for 1996 totaled approximately $350,000. This
amount was accrued by the Company in December of 1996 when it was authorized
by the Company's Board of Directors. During 1996, the ESOP did not acquire any
common stock of the Company.
On September 30, 1997, the Company borrowed $1,375,429 and loaned this
amount to the ESOP (see Note 5). The ESOP used this amount together with the
Company's $350,000 cash contribution to purchase 30% of the SKC Electric,
Inc.'s common stock from the majority stockholder at appraised value. Of the
19,047 shares of common stock purchased, 3,727 were allocated to participant
accounts representing the contribution for 1996. For 1997, management
contributed $196,496 representing 2,189 shares. For the year ended December
31, 1997, the Company recognized $270,648 of expense representing compensation
expense for the year based on the estimated average fair value of the 2,189
shares.
The Company has recorded a $3,000,000 ESOP common stock purchase obligation
on the combined balance sheet at December 31, 1997 representing the estimated
fair value of the 19,047 shares held by the ESOP which are puttable to SKC
Electric, Inc. by the participants upon distribution. Unearned ESOP common
stock represents the historical cost of shares for which compensation expense
has not been accrued at December 31, 1997.
On January 30, 1998, The Company announced a business combination in which
all of the common stock of the Company would be acquired. If consummated, this
transaction could result in a termination of the ESOP and all remaining
unallocated shares held by the ESOP could be allocated to participant
accounts. The Company would repay the outstanding balance on the term loan and
recognize compensation expense in 1998 representing the transaction value of
remaining common shares allocated at that time.
F-77
<PAGE>
SKC ELECTRIC, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' equity
Subsequent to December 31, 1996, SKC Electric Inc.'s Board of Directors
increased the number of authorized shares to 100,000 with a par value of $.01.
In addition, the Company split the 100 shares outstanding into 63,491 shares
which remain issued and outstanding at December 31, 1997.
The changes in the capital stock, additional paid-in capital and retained
earnings balances are summarized as follows:
<TABLE>
<CAPTION>
Common Additional
stock paid-in Retained
combined capital earnings
--------- ---------- -----------
<S> <C> <C> <C>
Balance, September 30, 1994............. $ 634,913 $ -- $ 481,155
Net income.............................. -- -- 552,772
--------- -------- -----------
Balance, September 30, 1995............. 634,913 -- 1,033,927
Lovecor, Inc. merger into SKC Electric,
Inc.................................... (614,913) 15,000 599,913
Net income.............................. -- -- 386,560
--------- -------- -----------
Balance, December 31, 1995.............. 20,000 15,000 2,020,400
Net income.............................. -- -- 1,399,571
Stockholder distributions............... -- -- (654,172)
--------- -------- -----------
Balance, December 31, 1996.............. 20,000 15,000 2,765,799
Net income.............................. -- -- 1,200,510
SKC Electric, Inc. stock split.......... (9,365) 9,365 --
Other--ESOP compensation................ -- 74,158 --
ESOP common stock purchase obligation... -- (98,523) (2,901,477)
Stockholder distributions............... -- -- (796,241)
--------- -------- -----------
Balance, December 31, 1997.............. $ 10,635 $ -- $ 268,591
========= ======== ===========
</TABLE>
10. Contingencies
During the year ended December 31, 1996, the National Labor Relations Board
and International Brotherhood of Electrical Workers Local Union, Local No.
124, brought suit against the Company alleging unfair hiring practices and
threatening or terminating employees due to their union affiliation. In March
1997, an out-of-court settlement was reached. The settlement calls for the
Company to pay to the union $155,000, which was accrued in the fourth quarter
of calendar 1996, and paid in 1997.
The Company has legal matters pending which arose in the ordinary course of
business. It is management's opinion that these legal matters will not result
in liabilities that would have a material adverse effect on the Company's
financial position or results of operations.
F-78
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Riviera Electric Construction Co.
Englewood, Colorado
We have audited the accompanying balance sheets of RIVIERA ELECTRIC
CONSTRUCTION CO. as of December 31, 1997 and 1996, and the related statements
of income, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RIVIERA ELECTRIC
CONSTRUCTION CO. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Baird, Kurtz & Dobson
Baird, Kurtz & Dobson
Denver, Colorado
February 18, 1998
F-79
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
December 31,
ASSETS -----------------------
1996 1997
----------- -----------
CURRENT ASSETS
Cash......................................... $ 103,182 $ 295,184
----------- -----------
Receivables:
Contracts.................................... 6,910,281 7,093,367
Retainage.................................... 1,711,153 1,611,347
Unbilled on completed contracts.............. 284,859 495,611
Related parties.............................. 102,006 40,170
Other........................................ 14,280 112,998
----------- -----------
9,022,579 9,353,493
Less allowance for uncollectible accounts.... 8,000 65,000
----------- -----------
9,014,579 9,288,493
----------- -----------
Prepaid expenses............................. 5,774 30,026
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts........... 457,293 189,818
----------- -----------
Total current assets........................ 9,580,828 9,803,521
----------- -----------
PROPERTY AND EQUIPMENT, At Cost
Land......................................... 106,500 106,500
Buildings and improvements................... 1,217,928 1,217,928
Leasehold improvements....................... 124,356 163,646
Automobiles and trucks....................... 401,528 423,729
Office furniture and equipment............... 466,038 592,419
Tools and equipment.......................... 277,386 290,480
----------- -----------
2,593,736 2,794,702
Less accumulated depreciation and
amortization................................ 974,532 1,186,294
----------- -----------
1,619,204 1,608,408
----------- -----------
DEPOSITS AND OTHER ASSETS..................... 116,598 246,294
----------- -----------
$11,316,630 $11,658,223
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, stockholder................... $ 790,000 $ 415,000
Notes payable................................ 1,000,000 990,000
Current maturities of long-term debt......... 118,665 119,230
Accounts payable............................. 2,546,410 3,589,392
Accrued expenses............................. 1,073,852 1,554,276
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 2,289,817 1,088,368
----------- -----------
Total current liabilities................... 7,818,744 7,756,266
----------- -----------
LONG-TERM DEBT................................ 638,216 522,577
----------- -----------
NOTES PAYABLE--STOCKHOLDERS................... -- 2,275,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares
authorized, issued and outstanding,
1997--320,200 shares, 1996--310,200 shares.. 1,233,764 1,350,988
Retained earnings (deficit).................. 1,625,906 (246,608)
----------- -----------
2,859,670 1,104,380
----------- -----------
$11,316,630 $11,658,223
=========== ===========
See Notes to Financial Statements
F-80
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Contract revenues..................... $29,464,580 $30,879,445 $31,845,921
Service revenues...................... 3,005,879 4,955,771 5,203,331
----------- ----------- -----------
32,470,459 35,835,216 37,049,252
----------- ----------- -----------
DIRECT COSTS OF REVENUES EARNED
Contract costs........................ 26,164,454 27,462,760 27,051,842
Service costs......................... 2,682,071 4,226,942 4,555,202
----------- ----------- -----------
28,846,525 31,689,702 31,607,044
----------- ----------- -----------
GROSS PROFIT........................... 3,623,934 4,145,514 5,442,208
INDIRECT SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES............... 2,666,836 2,883,829 3,999,543
----------- ----------- -----------
INCOME FROM OPERATIONS................. 957,098 1,261,685 1,442,665
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense...................... (170,552) (257,402) (228,751)
Interest income....................... 269 8,161 283
Other, net............................ 55,561 24,195 119,218
----------- ----------- -----------
(114,722) (225,046) (109,250)
----------- ----------- -----------
NET INCOME............................. $ 842,376 $ 1,036,639 $1,333,415
=========== =========== ===========
UNAUDITED PRO FORMA INFORMATION (SEE
NOTE 1)
Income before provision for income
taxes................................ $ 842,376 $ 1,036,639 $1,333,415
Provision for income taxes............ 314,206 386,666 497,364
----------- ----------- -----------
PRO FORMA NET INCOME (unaudited)....... $ 528,170 $ 649,973 $ 836,051
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-81
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
-------------------
Retained
Earnings
Shares Dollars (Deficit) Total
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994......... 377,800 $1,485,880 $2,045,212 $3,531,092
Net income........................ -- -- 842,376 842,376
Stockholders' distributions....... -- -- (1,734,539) (1,734,539)
Issuance of common stock.......... 3,000 18,750 -- 18,750
Redemption of common stock........ (73,600) (289,616) (173,825) (463,441)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995......... 307,200 1,215,014 979,224 2,194,238
Net income........................ -- -- 1,036,639 1,036,639
Stockholders' distributions....... -- -- (389,957) (389,957)
Issuance of common stock.......... 3,000 18,750 -- 18,750
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996......... 310,200 1,233,764 1,625,906 2,859,670
Net income........................ -- -- 1,333,415 1,333,415
Stockholders' distributions....... -- -- (3,164,999) (3,164,999)
Issuance of common stock ......... 25,200 212,224 -- 212,224
Redemption of common stock........ (15,200) (95,000) (40,930) (135,930)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997......... 320,200 $1,350,988 $ (246,608) $1,104,380
======= ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-82
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 842,376 $ 1,036,639 $1,333,415
Items not requiring (providing) cash:
Depreciation and amortization.......... 119,040 169,157 212,632
Loss from partnership.................. 21,222 -- --
Income from joint venture.............. (9,722) -- --
Loss from sale of property and
equipment............................. 4,925 17,701 380
Changes in:
Receivables............................ 245,664 (3,580,164) (348,834)
Related party receivables.............. (324,128) 327,461 74,920
Other current assets................... (2,679) 14,609 (24,252)
Costs and estimated earnings in excess
of billings on uncompleted contracts.. (25,442) (196,050) 267,475
Other assets........................... 62,246 -- --
Accounts payable....................... (1,552,104) 1,192,347 1,042,982
Accrued expenses....................... (164,219) (9,565) 480,424
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 423,796 1,562,081 (1,201,449)
Related party payables................. 255,118 (255,118) --
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. (103,907) 279,098 1,837,693
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.... (720,411) (385,106) (202,316)
Proceeds from sales of property and
equipment............................. 8,101 1,700 100
Investments in joint ventures and other
assets................................ (12,500) (46,523) (129,696)
Cash provided for note receivable...... (100,000) -- --
Payments received on note receivable... 30,000 -- --
----------- ----------- ----------
Net cash used in investing
activities........................... (794,810) (429,929) (331,912)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of
credit................................ 1,480,000 (250,000) (10,000)
Payments on long-term debt............. (69,806) (457,066) (115,074)
Proceeds from notes payable--
stockholders.......................... 462,000 435,000 --
Repayments on notes payable--
stockholders.......................... -- -- (375,000)
Proceeds from long-term borrowings..... -- 680,983 --
Issuance of common stock for cash...... 18,750 18,750 212,224
Distributions to stockholders.......... (1,734,539) (389,957) (889,999)
Distribution of cash for spinoff....... (51,620) -- --
Redemption of Common Stock............. -- -- (135,930)
----------- ----------- ----------
Net cash (used in) provided by
financing activities................. 104,785 37,710 (1,313,779)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH............. (793,932) (113,121) 192,002
CASH, BEGINNING OF PERIOD............... 1,010,235 216,303 103,182
----------- ----------- ----------
CASH, END OF PERIOD..................... $ 216,303 $ 103,182 $ 295,184
=========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-83
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is engaged in the construction of electrical systems for
industrial and commercial buildings. The Companies' operations are
predominately in Colorado. The Company grants credit to its customers which
are primarily commercial general contractors in Colorado.
The Company derives most of its revenues from guaranteed maximum price
contracts. The remainder of the contracts are fixed price contracts. The
length of the Company's contracts varies, but contracts are typically
completed in one year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues are recognized on the percentage of completion method, measured by
the percentage of costs incurred to date to estimated total costs for each
contract, commonly referred to as the cost-to-cost method.
Contract costs include all direct material and labor costs and certain
indirect costs related to contract performance such as supplies, tools,
supervisory salaries, and repairs. Selling, general, and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to costs and income which
are recognized in the period in which the revisions are determined. An amount
equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenue recognized.
Property and Equipment
Property and equipment are depreciated over the estimated useful lives of
each asset. Leasehold improvements are depreciated over the shorter of the
lease term or the estimated useful lives of the improvements. Annual
depreciation is primarily computed using declining balance methods.
Income Taxes
The Company, with its stockholders' consent, has elected to be taxed as an S
Corporation under the Internal Revenue Code. In lieu of corporate income
taxes, the stockholders of an S Corporation are taxed on their proportionate
share of the corporation's taxable income. Therefore, no provision for income
taxes has been included in these financial statements.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities primarily related to property
and equipment, and contracts in progress. At December 31, 1997, the Company's
net assets for financial reporting purposes exceeds the tax basis by
approximately $70,000.
F-84
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The unaudited pro forma income tax information included in the Statement of
Income is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the years presented.
NOTE 2: REORGANIZATION AND CORPORATE SEPARATION
As of April 1, 1995, the Company entered into an agreement with Riviera
Electric of California, Inc., a California corporation, to separate the
California division from the Colorado division of the Company. The Company
transferred the assets identified as related to California; and Riviera
Electric of California, Inc. agreed to assume all liabilities, debts,
contracts and obligations of the California division and to issue 460 shares
of common stock to the Company. The Company then exchanged the stock of
Riviera Electric of California, Inc. in exchange for 368 shares of its own
common stock of the Company. The Company's majority stockholder maintains a
controlling interest in Riviera Electric of California, Inc. This transaction
was reported as a transaction between entities under common control using the
historical cost basis of assets and liabilities. The assets net of liabilities
transferred to Riviera Electric of California, Inc. as of April 1, 1995 were
$463,441. The statements of income and cash flows for the year ended December
31, 1995, are reflected as if the transaction occurred January 1, 1995.
NOTE 3: COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts......... $ 16,086,014 $ 13,741,951
Estimated earnings.............................. 2,149,180 2,046,994
------------ ------------
18,235,194 15,788,945
Less billings to date........................... 20,067,718 16,687,495
------------ ------------
$ (1,832,524) $ (898,550)
============ ============
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............. $ 457,293 $ 189,818
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (2,289,817) (1,088,368)
------------ -----------
$ (1,832,524) $ (898,550)
============ ===========
</TABLE>
NOTE 4: JOINT VENTURE
Included in other assets at December 31, 1997, is an investment of $125,000
in a joint venture. The joint venture was formed to acquire land and to
develop condominium units on the property. As of December 31, 1997, the
venture had little activity.
F-85
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5: NOTES PAYABLE
An agreement with a bank provides for borrowing up to $1,800,000, due May 1,
1998, unsecured, with an assignment up to $500,000 of a life insurance policy
on the majority stockholder. The agreement bears interest at prime, 8.5
percent, at December 31, 1997. The average interest rate for the years ended
December 31, 1997, 1996 and 1995 was approximately 8.25, 8.5 and 9.0 percent
respectively. The loan requires a $50,000 compensating balance. The agreement
also contains working capital and debt restrictions. The loan is guaranteed by
the president and majority stockholder.
NOTE 6: LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Bank note payable (A)................................... $ 143,390 $ 103,430
Bank note payable (B)................................... 520,783 483,804
Bank note payable (C)................................... 72,913 40,826
Bank note payable (D)................................... 19,795 13,747
--------- ---------
756,881 641,807
Less current maturities................................. 118,665 119,230
--------- ---------
$ 638,216 $ 522,577
========= =========
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1997 are:
<TABLE>
<S> <C>
1998............................................................... $ 119,230
1999............................................................... 89,220
2000............................................................... 57,438
2001............................................................... 375,919
---------
$ 641,807
=========
</TABLE>
(A) Due July 15, 2000; payable $3,330 monthly plus accrued interest at prime
plus 1%, secured by a deed of trust on certain property.
(B) Due January 15, 2001; payable $3,082 monthly plus monthly interest at
prime plus 1%; remaining principal and interest due at maturity; secured by a
deed of trust on certain property and guaranteed by the majority stockholder
of the Company.
(C) Due February 1, 1999; payable $2,917 monthly plus accrued interest at
9.5%; secured by vehicles.
(D) Due October 1, 1999; payable in monthly installments of $678 including
interest at prime plus .5%; payment subject to change if the prime rate
changes; secured by a vehicle.
NOTE 7: COMMON STOCK
During 1997, the Company increased its common stock shares authorized from
50,000 to 1,000,000 and issued 199 shares of Common Stock to its stockholders
for each share then held by the stockholders. These actions are reflected in
the financial statements as if they happened at the earliest period presented.
F-86
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8: OPERATING LEASES
The Company has entered into noncancellable operating leases for facilities
and equipment expiring in various years through March, 2003. The Company also
leases several vehicles under operating leases which expire through October,
2000.
Future minimum lease payments at December 31, 1997, were:
<TABLE>
<S> <C>
1998............................................................... $440,565
1999............................................................... 252,056
2000............................................................... 159,080
2001............................................................... 61,982
2002............................................................... 59,220
Thereafter......................................................... 4,935
--------
Future minimum lease payments...................................... $977,838
========
</TABLE>
Rental expenses for all operating leases was $617,000, $517,800, and
$360,284, during 1997, 1996, and 1995, respectively.
NOTE 9: PROFIT SHARING PLANS
The Company has a 401(k) savings and retirement plan which covers all
eligible employees. The plan provides benefits based on earnings of each
participant. The plan allows the Company to make an additional discretionary
contribution. Participants' interests are 100% vested when they enter the
plan. For the years ended December 31, 1997, 1996, and 1995, the Company made
no additional discretionary contributions to the plan.
In December, 1996, the Company established a new profit sharing plan. In
September, 1997, the Company decided to make a $300,000 contribution to the
new plan for 1996. The Company has also approved a $300,000 contribution for
1997. During the year ended December 31, 1997, $600,000 has been recorded as
profit sharing expense.
NOTE 10: RELATED PARTY TRANSACTIONS
The Company performs various administrative functions, shares certain costs,
and pays certain bills, for a company related through common ownership (see
Note 2). During the years ended December 31, 1997 and 1996, this related
entity reimbursed the Company $241,727, and $193,559, respectively for
expenses the Company paid on behalf of this related entity. During the year
ended December 31, 1995, substantially all of the entity's operating expenses
were paid by the Company. As of December 31, 1997 and 1996 $10,302 and
$48,637, respectively, was owed to the Company by this related entity.
During 1995, the Company sold a partnership interest to the Company's
majority stockholder for $78,412. The Partnership billed the Company
$1,600,190 for services rendered during the year ended December 31, 1995. The
Company provided and was reimbursed for health insurance, miscellaneous tools
and other services to the partnership during 1995 in the amount of $74,156.
At December 31, 1997 and 1996, the Company had a note payable to its
majority stockholder of $265,000 and $643,000, and notes payable of $150,000
and $150,000 to other stockholders, respectively. The notes are unsecured, due
on demand, and bear interest at a bank's prime rate plus one percent. The
average interest rates for the years ended December 31, 1997, 1996 and 1995
were approximately 9.25, 9.5 and 10.0 percent respectively.
F-87
<PAGE>
RIVIERA ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10: RELATED PARTY TRANSACTIONS (continued)
In December 1997, distributions totaling $2,275,000 were made to
stockholders in the form of notes payable. The notes are unsecured, bear
interest at a bank's prime rate plus one percent, and are subordinated to the
Company's bank debt. Principal is due April 1, 1999. Interest expense for all
notes payable to stockholders was $54,548, $51,012 and $55,309, for the years
ended December 31, 1997, 1996, and 1995, respectively.
The Company maintains a $1 million life insurance policy on its president
and majority stockholder.
The Company rents various office equipment and employee lodging facilities
under operating leases with a director of the Company. The leases expire in
1998. Total lease expense paid for 1997, 1996, and 1995, was $74,952, $113,177
and $89,896, respectively.
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Those matters include the following:
Contracts in Process
The Company recognizes revenue on contracts under the percentage-of-
completion method, which involves estimates of total contract costs and the
percentage of a contract's completion. The methodology used is described as
part of Note 1.
Bonding and Regulations
The Company currently is involved in long-term construction contracts. As
part of these contracts, the Company must meet certain requirements and obtain
an appropriate level of bonding.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities
During 1995, the Company redeemed 368 shares of common stock in exchange for
460 shares of its affiliate with a fair value of $463,441. The transaction is
detailed at Note 2.
During 1997, the Company issued notes payable of $2,275,000 to stockholders
as distributions.
Additional Cash Payment Information
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest paid (net of amount capitalized)....... $222,686 $253,191 $170,728
</TABLE>
NOTE 13: SUBSEQUENT EVENT
In February 1998, the Company and its stockholders signed a letter of intent
to sell the Company. The Company's outstanding stock will be acquired by, and
the Company will be simultaneously merged into a wholly-owned subsidiary of
Consolidated Capital Corporation. If the transaction is completed, the
existing stockholders intend to purchase land and a building from the Company
and to contribute the $2,275,000 notes payable discussed in Note 10, to the
Company as additional paid-in capital.
F-88
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Town & Country Electric Inc.
We have audited the accompanying balance sheets of Town & Country Electric
Inc. (a Wisconsin corporation) as of December 31, 1997 and 1996, and the
related statements of earnings, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town & Country Electric
Inc. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Appleton, Wisconsin
February 6, 1998
F-89
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 253,462 $ 198,051
Contract receivables .............................. 9,331,072 10,604,699
Other receivables ................................. 23,302 267,662
----------- -----------
9,354,374 10,872,361
Inventories........................................ 260,872 294,829
Prepaid expenses................................... 98,298 112,656
Costs and estimated earnings in excess of billings
on contracts in progress.......................... 1,465,108 1,705,125
Deferred income tax................................ 378,800 349,400
----------- -----------
Total current assets............................. 11,810,914 13,532,422
PROPERTY AND EQUIPMENT--AT COST
Equipment.......................................... 1,261,582 1,431,590
Furniture and fixtures............................. 552,206 561,394
Computer equipment................................. 543,073 587,283
Vehicles........................................... 1,351,576 1,643,078
Leasehold improvements............................. 161,493 194,174
Building........................................... 161,124 162,357
----------- -----------
4,031,054 4,579,876
Less accumulated depreciation..................... 2,380,179 2,969,891
----------- -----------
1,650,875 1,609,985
Land............................................... 16,216 16,216
----------- -----------
1,667,091 1,626,201
OTHER ASSETS
Cash surrender value of life insurance............. 83,482 98,898
Goodwill........................................... 203,586 203,586
Less accumulated amortization..................... (18,098) (31,669)
----------- -----------
185,488 171,917
Investments........................................ 338 338
----------- -----------
269,308 271,153
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-90
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt................. $ 156,269 $ 320,644
Accounts payable..................................... 1,650,744 2,206,393
Accrued liabilities
Salaries, wages and vacation........................ 1,729,140 1,792,164
Property, payroll and other taxes................... 314,323 396,442
Profit sharing...................................... 340,049 407,824
Health and disability insurance..................... 67,605 58,597
Other............................................... 296,241 207,547
Income taxes........................................ 345,000 241,000
----------- -----------
3,092,358 3,103,574
Billings in excess of costs and estimated earnings on
contracts in progress............................... 579,683 1,265,955
----------- -----------
Total current liabilities.......................... 5,479,054 6,896,566
LONG-TERM DEBT, less current maturities................ 1,149,468 197,014
COMMITMENTS............................................ -- --
STOCKHOLDER'S EQUITY
Common stock
Class A--authorized 200,000 shares of $.005 par
value, issued and 47,307 and 48,461 shares at
December 31, 1996 and September 30, 1997,
respectively...................................... 236 242
Class B--authorized 400,000 shares of no par value,
issued 263,900 and 264,710 shares at December 31,
1996 and September 30, 1997, respectively......... 1,320 1,324
Additional paid-in capital........................... 461,396 515,944
----------- -----------
462,952 517,510
Retained earnings...................................... 6,655,839 7,818,686
----------- -----------
7,118,791 8,336,196
----------- -----------
$13,747,313 $15,429,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues earned................ $43,306,306 $51,219,799 $48,725,990
Cost of revenues earned................. 34,569,800 41,156,211 39,701,121
----------- ----------- -----------
Gross profit.......................... 8,736,506 10,063,588 9,024,869
General and administrative expenses..... 5,638,605 6,547,518 7,006,235
----------- ----------- -----------
Operating profit...................... 3,097,901 3,516,070 2,018,634
Other income (expense)
Interest expense...................... (206,474) (153,433) (74,988)
Miscellaneous income, net............. 58,303 106,915 113,446
----------- ----------- -----------
(148,171) (46,518) 38,458
----------- ----------- -----------
Earnings before income taxes........ 2,949,730 3,469,552 2,057,092
Provision for income taxes.............. 1,155,024 1,413,716 894,245
----------- ----------- -----------
NET EARNINGS............................ $ 1,794,706 $ 2,055,836 $ 1,162,847
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-92
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock issued
-------------------------------
Class A Class B
(Nonvoting) (Voting) Additional Total
--------------- --------------- paid-in Retained stockholders'
Shares Amount Shares Amount capital earnings equity
------- ------ ------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 54,880 $274 287,000 $1,466 $239,516 $3,464,716 $3,705,972
Retirement and
redemption of stock.... (14,140) (70) (29,020) (145) -- (656,964) (657,179)
Issuance of stock....... 2,000 10 4,000 (10) 97,360 -- 97,360
Net earnings............ -- -- -- -- -- 1,794,706 1,794,706
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1995................... 42,740 214 261,980 1,311 336,876 4,602,458 4,940,859
Retirement and
redemption of stock.... (134) (1) -- -- -- (2,455) (2,456)
Issuance of stock....... 4,701 23 1,920 9 124,520 -- 124,552
Net earnings............ -- -- -- -- -- 2,055,836 2,055,836
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1996................... 47,307 236 263,900 1,320 461,396 6,655,839 7,118,791
Retirement and
redemption of stock.... (48) -- -- -- (1,370) -- (1,370)
Issuance of stock....... 1,154 6 810 4 55,918 -- 55,928
Net earnings for the
year ended December 31,
1997................... -- -- -- -- -- 1,162,847 1,162,847
------- ---- ------- ------ -------- ---------- ----------
Balance December 31,
1997................... 48,413 $242 264,710 $1,324 $515,944 $7,818,686 $8,336,196
======= ==== ======= ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-93
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings........................... $ 1,794,706 $ 2,055,836 $ 1,162,847
Adjustments to reconcile net earnings
to net cash provided by operating
activities............................
Depreciation expense................... 517,363 647,192 690,665
Loss on sale of property and
equipment............................. 5,218 16,442 34
Amortization of goodwill............... -- 13,573 13,571
Decrease (increase) in accounts
receivable............................ 376,430 (1,992,514) (1,517,987)
Decrease (increase) in inventories..... (43,847) 8,118 (33,957)
Increase in prepaid expenses........... (47,717) (25,354) (14,358)
(Increase) decrease in costs and
estimated earnings in excess of
billings on contracts in progress..... 300,173 (304,357) (240,017)
Increase in deferred income taxes...... (96,000) (15,800) 29,400
Increase (decrease) in accounts
payable............................... (74,592) 127,869 555,649
Increase (decrease) in accrued
liabilities........................... 206,510 683,036 11,216
Decrease (increase) in billings in
excess of costs and estimated
earnings on contracts in progress..... (175,362) (123,360) 686,272
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,762,882 1,090,681 1,343,335
Cash flows from investing activities
Purchase of property and equipment..... (812,013) (971,003) (660,656)
Proceeds from sale of property and
equipment............................. 35,219 36,792 10,847
Increase in cash surrender value of
life insurance........................ (11,122) (13,371) (15,416)
Acquisition of assets of electrical
contractor............................ (203,586) -- --
----------- ----------- -----------
Net cash used in investing
activities.......................... (991,502) (947,582) (665,225)
Cash flows from financing activities
Proceeds from borrowings............... 2,420,770 199,253 2,486,646
Issuance of common stock............... 97,360 124,552 55,928
Payments on borrowings................. (2,702,418) (1,233,676) (3,274,725)
Retirement and redemption of stock..... (657,179) (2,456) (1,370)
----------- ----------- -----------
Net cash used in financing
activities.......................... (841,467) (912,327) (733,521)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ 929,913 (769,228) (55,411)
Cash and cash equivalents at beginning
of period.............................. 92,777 1,022,690 253,462
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 1,022,690 $ 253,462 $ 198,051
----------- ----------- -----------
Supplemental disclosures of cash flow
information
Cash paid during period for:
Interest............................... $ 204,017 $ 158,191 $ 72,207
Income taxes........................... 1,226,603 1,063,726 1,288,604
</TABLE>
The accompanying notes are an integral part of these statements.
F-94
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Town & Country Electric Inc. ("Company") is engaged in electrical
contracting for industrial, commercial, residential and institutional
customers. The majority of the contracts are in the midwestern United States.
On January 30, 1998, the Company entered into a Letter of Intent with
Consolidation Capital Corporation ("CCC") for the potential sale of the
Company to CCC.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies used in the
preparation of the financial statements follows.
1. Revenue and Cost Recognition
Revenues from fixed-price contracts are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. This method is used because
management believes costs to be the best available measure of progress on
these contracts. Contracts are considered completed when the work is
substantially complete and accepted. Revenues from time and material contracts
are recognized on the basis of costs incurred during the period plus fees
earned.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts, if material, are made in the period in which such
losses are determined. It is reasonably possible that changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and income, and are recognized in the period in which the
revisions are determined.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
3. Inventories
Inventories, consisting of electrical materials and supplies, are stated at
the lower of cost, determined on the first-in, first-out method, or market.
4. Property and Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized while replacements, maintenance and repairs which
do not improve or extend the lives of the respective assets are expensed
currently as incurred. Properties sold, or otherwise disposed of, are removed
from the property accounts, with gains or losses on disposal credited or
charged to the results of operations.
F-95
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
Depreciation is provided over the estimated useful lives of the respective
assets, using straight-line and accelerated methods, as follows:
<TABLE>
<S> <C>
Equipment....................................................... 7 years
Furniture and fixtures.......................................... 7 years
Computer equipment.............................................. 5 years
Vehicles........................................................ 5 years
Leasehold improvements.......................................... 15 years
Building........................................................ 19-39 years
</TABLE>
5. Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. The deferred taxes relate primarily to differences between the
financial and tax basis of accounts receivable, inventories, accrued vacation,
and other accrued liabilities. The deferred taxes represent the future tax
return consequences of those differences.
6. Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired
and is being amortized by the straight-line method over 15 years.
7. Financial Instruments
The carrying amount of financial instruments at December 31, 1997
approximates fair value.
NOTE B--CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at two financial institutions.
Accounts at each institution are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate to $98,051 at
December 31, 1997. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
NOTE C--CONTRACT RECEIVABLES
Contract receivables consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Contract receivables currently due............... $8,805,476 $ 9,732,792
Retention........................................ 649,302 997,407
---------- -----------
9,454,778 10,730,199
Less: Allowance for doubtful accounts............ (123,706) (125,500)
---------- -----------
$9,331,072 $10,604,699
========== ===========
</TABLE>
F-96
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE D--CONTRACTS IN PROCESS
Information relative to contracts in process at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Included in the balance sheet as:
Costs and estimated earnings in excess of
billings on contracts in progress............... $1,465,108 $1,705,125
Billings in excess of costs and estimated
earnings on contracts in progress............... (579,683) (1,265,955)
---------- ----------
$ 885,425 $ 439,170
========== ==========
</TABLE>
NOTE E--INDEBTEDNESS
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Note payable to bank, 7.75% interest, with land and a
building pledged as collateral. Payable in monthly
installments of $1,024, including interest, to December
1998................................................... $ 94,543 $ 89,949
Note payable to bank, 8.18% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $6,275, including interest, to January 1999......... 142,422 76,460
Note payable to bank, 8.45% interest, with vehicles
pledged as collateral. Payable in monthly installments
of $8,424, including interest, to January 2000......... -- 192,251
Note payable to bank, 8.15% interest, with a vehicle
pledged as collateral. Payable in monthly installments
of $1,765, including interest, to October 1998......... 38,370 19,656
Note payable to former shareholder for redemption of
stock, 6.46% interest, quarterly payments of $7,329
including interest, last payment due February 1998..... 35,472 7,324
Note payable to Dory Electric, Inc., 7.5% interest for
purchase of Dory Electric, Inc. Payable in one
installment of $80,000 made January 1996 and monthly
installments of $4,008, including interest, to January
2001................................................... 165,747 132,018
1996 Notes payable, paid off in 1997.................... 829,183 --
---------- --------
1,305,737 517,658
Less current maturities............................. 156,269 320,644
---------- --------
$1,149,468 $197,014
========== ========
</TABLE>
The aggregate maturities on long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................... $320,644
1999............................................................... 138,316
2000............................................................... 58,697
--------
$517,657
========
</TABLE>
F-97
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE E--INDEBTEDNESS--Continued
Revolving Line of Credit
The Company has available a $3,667,000 revolving line of credit with M&I
Bank Fox Valley of Appleton which runs through March 31, 2000. Under the terms
of the agreement the Company is required to make monthly interest payments at
prime less .25% (effectively 8.25% (effectively 8.25% at December 31, 1997).
The terms of the agreement contain various restrictive covenants including the
maintenance of certain levels of working capital and net worth, redemption of
stock and issuance of stock. The Company is in compliance with these covenants
as of December 31, 1997. At December 31, 1997, there was no outstanding
balance on the revolver note.
NOTE F--INCOME TAXES
The provision (credit) for income taxes for the years ended December 31,
1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current
Federal................................. $ 990,507 $1,112,556 $ 751,935
State................................... 260,517 316,960 171,710
Deferred.................................. (96,000) (15,800) (29,400)
---------- ---------- ---------
$1,155,024 $1,413,716 $ 894,245
========== ========== =========
</TABLE>
The reconciliation of statutory to actual tax provision is as follows for
the year ended December 31:
<TABLE>
<CAPTION>
1995 % 1996 % 1997 %
---------- ---- ---------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory
rate.................... $1,002,908 34.0% $1,179,648 34.0% $699,411 34.0%
State income taxes, net
of federal benefit...... 171,941 5.8 209,194 6.0 113,329 6.0
Other.................... (19,825) (0.6) 24,874 0.7 81,505 3.0
---------- ---- ---------- ---- -------- ----
Tax provision
recorded.............. $1,155,024 39.2% $1,413,716 40.7% $894,245 43.0%
========== ==== ========== ==== ======== ====
</TABLE>
The tax effect of items that comprise a significant portion of deferred tax
assets at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Vacation pay............................................... $198,966 $202,945
Accrued continued employment............................... 61,386 60,195
Allowance for bad debts.................................... 48,245 48,945
Other...................................................... 70,202 37,315
-------- --------
Total current deferred tax asset......................... 378,799 $349,400
======== ========
</TABLE>
F-98
<PAGE>
TOWN & COUNTRY ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company leases its home office building under an operating lease in
effect through July, 2004. During the term of the lease, the Company has the
option to purchase the building. The Company also leases other office space
and a vehicle under operating leases. Future minimum rental payments under
these leases consist of the following at December 31, 1996:
<TABLE>
<S> <C>
1998............................................................ $ 237,655
1999............................................................ 216,184
2000............................................................ 161,277
2001............................................................ 141,960
2002............................................................ 141,960
Thereafter........................................................ 223,720
----------
Total......................................................... $1,122,756
==========
</TABLE>
Total rent expense for all operating leases was $234,180, $197,202, and
$116,818 for the years ended December 31, 1997, 1996 and 1995, respectively.
In addition, the Company rents equipment as needed. The Company treats these
rents as contract costs.
NOTE H--PROFIT SHARING AND 401(K) PLAN
The Company has a profit sharing and 401(k) plan covering substantially all
employees, which includes the provisions of Section 401(k) of the Internal
Revenue Code. The Plan allows for tax deferred employee contributions.
Participants may make voluntary contributions of between 1% and 15% of their
annual compensation to the Plan. This contribution may be 100% matched by the
Company, up to a maximum of $950 per employee for the years ended December 31,
1997, 1996, and 1995. Matching and any additional Company contributions to the
Plan are determined annually by the Board of Directors. Company contributions
to the Plan for the years ended December 31, 1997, 1996 and 1995 amounted to
$380,488, $315,874, and $277,720, respectively.
Beginning in 1995, participants were allowed to elect that up to 33% of
their matching contribution could be allocated to purchase Company stock.
These amounts have been deposited with the asset custodian.
NOTE I--STOCK REDEMPTION AGREEMENT
The Company's Articles of Incorporation include provisions concerning the
purchase of a stockholder's stock by the Company when such stockholder is no
longer an employee or director of the Company. Under the terms of this
agreement, the price paid for the stock is to be the Company's appraised value
as of the end of the fiscal year immediately preceding the date of the
termination of the stockholder as an employee or director.
F-99
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Garfield Electric Company
We have audited the accompanying balance sheets of Garfield Electric Company
as of December 31, 1996 and 1997, and the related statements of earnings,
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garfield Electric Company
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-100
<PAGE>
GARFIELD ELECTRIC COMPANY
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31
--------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Cash........................................................... $ 3 $ 1
Accounts receivable:
Trade (including retainages of $55 and $67 in 1996 and
1997)....................................................... 971 1,664
Affiliates................................................... 297 158
Officer...................................................... 28 37
Allowance.................................................... (30) (30)
------ ------
1,266 1,829
Inventory...................................................... 42 54
Cost and estimated earnings in excess of billings on uncom-
pleted contracts.............................................. 615 1,211
Prepaid expenses............................................... 20 21
Deferred Federal income tax.................................... 6 37
------ ------
Total current assets....................................... 1,952 3,153
Equipment--net................................................. 328 294
Investment in affiliate........................................ -- 75
Deposits....................................................... 2 3
Cash surrender value of life insurance......................... 70 83
------ ------
Total assets............................................... $2,352 $3,608
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable--bank............................................ $ 474 $ 838
Current maturities of long-term debt........................... 5 15
Bank overdraft................................................. 141 218
Accounts payable:
Trade........................................................ 405 624
Affiliate.................................................... 20 21
Other........................................................ 7 7
------ ------
432 652
Billings in excess of costs and estimated earnings on uncom-
pleted contracts.............................................. 113 186
Accrued income taxes........................................... 156 228
Accrued expenses
Payroll and payroll taxes.................................... 118 181
Workers compensation......................................... 65 6
Dividends.................................................... 42 --
------ ------
Total accrued expenses..................................... 225 187
------ ------
Total current liabilities.................................. 1,546 2,324
Long-term debt obligations..................................... 2 18
STOCKHOLDERS' EQUITY
Common stock (5,000 shares authorized, 1,666 issued, with 933
shares outstanding in 1996 and 1997, without par value, at
aggregate stated value)..................................... 503 503
Retained earnings............................................ 496 958
Less 733 treasury shares at cost in 1996 and 1997............ (195) (195)
------ ------
Total stockholders' equity................................. 804 1,266
------ ------
Total liabilities and stockholders' equity................. $2,352 $3,608
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-101
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Contract revenue....................................... $11,792 $8,766 $10,826
Contract costs (net of affiliated company labor
transactions of $235, $505, and $472 for the years
ended December 31, 1995, 1996 and 1997................ 9,683 6,908 8,286
------- ------ -------
Gross profit....................................... 2,109 1,858 2,540
Selling and administrative expenses (net of affiliated
company reimbursement of $235, $488 and $360 for the
years ended December 31, 1995, 1996 and 1997.......... 1,325 1,394 1,593
Note receivable charge off............................. 564 -- 12
------- ------ -------
Total selling and administrative expense........... 1,889 1,394 1,605
------- ------ -------
Operating profit................................... 220 464 935
Other expense (income)
Interest expense..................................... 130 46 69
Interest income...................................... (16) -- --
Other................................................ -- 18 24
------- ------ -------
Earnings before income taxes....................... 106 400 842
Income taxes........................................... 27 185 319
------- ------ -------
Net earnings....................................... $ 79 $ 215 $ 523
======= ====== =======
Net earnings per share............................. $ 85 $ 230 $ 561
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-102
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Retained Treasury stockholders'
stock earnings stock equity
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995................. $503 $278 $(195) $ 586
Dividends, $36 per share................. -- (34) -- (34)
Net earnings............................. -- 79 -- 79
---- ---- ----- ------
Balance, December 31, 1995............... 503 323 (195) 631
Dividends, $45 per share................. -- (42) -- (42)
Net earnings............................. -- 215 -- 215
---- ---- ----- ------
Balance, December 31, 1996............... 503 496 (195) 804
Dividends, $65 per share................. -- (61) -- (61)
Net earnings............................. -- 523 -- 523
---- ---- ----- ------
Balance, December 31, 1997 $503 $958 $(195) $1,266
==== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-103
<PAGE>
GARFIELD ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31
------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings.............................................. $ 79 $ 215 $523
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Gain) on disposal of asset.............................. (5) (2) (4)
Deferred Federal income tax.............................. (1) (5) (31)
Depreciation and amortization............................ 102 101 144
Changes in assets and liabilities:
Accounts receivable..................................... (301) 815 (563)
Note receivable charge off.............................. 564 -- --
Inventory............................................... (7) 41 (12)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (487) 354 73
Cost and estimated earnings on uncompleted contracts in
excess of billings..................................... (78) (100) (596)
Prepaid expenses........................................ 16 (16) (2)
Accounts payable........................................ 222 (612) 220
Accrued income taxes.................................... 77 150 72
Accrued expenses........................................ 110 (33) (38)
----- ----- ----
Net cash provided by (used in) operating activities.... 291 908 (214)
Cash flows provided by (used in) investing activities:
Purchases of equipment.................................... (94) (214) (109)
Investment in Affiliate................................... -- -- (75)
Proceeds from disposal of equipment....................... 5 2 3
Increase in cash surrender value of life insurance........ (15) (16) (13)
Note receivable........................................... 59 -- --
----- ----- ----
Net cash used in investing activities.................. (45) (228) (194)
Cash flows provided by (used in) financing activities:
Dividends paid............................................ (33) (42) (61)
Proceeds (payment) of note payable........................ (502) (332) 26
Change in bank overdraft and line of credit............... 290 (305) 441
----- ----- ----
Net cash provided by (used in) financing activities.... (245) (679) 406
----- ----- ----
Net increase (decrease) in cash............................ 1 1 (2)
Cash at beginning of year.................................. 1 2 3
----- ----- ----
Cash at end of year........................................ $ 2 $ 3 $ 1
===== ===== ====
Supplemental disclosure of cash transactions:
Interest paid............................................. $ 130 $ 46 $ 69
===== ===== ====
Taxes paid................................................ $ 16 $ 39 $247
===== ===== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Company is a non-union electrical contractor performing services
primarily in the Midwest area of the United States. A summary of significant
accounting policies consistently applied in the preparation of the
accompanying financial statements follows:
1. Income Recognition
The accompanying financial statements have been prepared using the
percentage-of-completion method of accounting and, therefore, take into
account the cost, estimated earnings and revenue to date on contracts not yet
completed.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears in relation to the
anticipated final total cost, based on current estimates of cost to complete.
Actual results may vary from anticipated amounts.
Contract cost includes all direct labor and benefits, materials unique to or
installed in the project, subcontract costs, and allocated indirect
construction costs.
As long-term contracts extend over one or more years, revisions in estimates
of cost and earnings during the course of the work are reflected in the
accounting period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Inventory
Inventory is stated at the lower of cost or market; cost is determined using
the first-in, first-out method.
3. Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service
lives, approximately three to ten years, principally on accelerated methods.
4. Income Taxes
Deferred income taxes have been provided for timing differences primarily
relating to currently non-deductible state tax accruals which completely
reverse in the subsequent year.
Permanent differences result from officers life insurance expense and meals
and entertainment expense.
5. Major Customers
Approximately 36% of 1995 revenues were derived from two customers (20% and
16% respectively). Approximately 35% of 1996 revenues were derived from three
customers (13%, 11% and 11% respectively). Approximately 31% of 1997 revenues
were derived from two customers (20% and 11% respectively).
6. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
F-105
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(Continued)
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
7. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
8. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
9. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period. Weighted average common shares outstanding were
933 shares for all periods persented.
NOTE B--EQUIPMENT--LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
December 31
-------------
1996 1997
------ ------
<S> <C> <C>
Automobiles and trucks........................................ $ 393 $ 400
Equipment..................................................... 658 718
Fixtures...................................................... 114 115
------ ------
1,165 1,233
Accumulated depreciation...................................... 837 939
------ ------
$ 328 $ 294
====== ======
</TABLE>
Depreciation expense was $102, $101 and $144 for the years ended December
31, 1995, 1996 and 1997.
NOTE C--EMPLOYEE BENEFIT PLANS
The Company has a contributory profit-sharing plan covering all full time
employees. Contributions are made at the discretion of the Board of Directors.
Effective March 1, 1989, the plan was amended to include a 401(k) plan, to
which contributions may be made by the Corporation. Contributions to the plan
totaled $20 and $22, and $57 in December 31, 1995, 1996 and 1997.
F-106
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE D--LEASES
The Company occupies premises owned by related parties under month-to-month
leases at monthly rentals of approximately $4 in 1995, 1996, and 1997. Total
rental expense was $92, $89, and $139 for December 31, for 1995, 1996 and
1997.
NOTE E--DEBT
The Company has a $1,250 revolving credit note with interest at prime (8.75%
at December 31, 1997) plus .5% of which $474, and $838 are outstanding at
December 31, 1996, and 1997. The note is secured by inventory, equipment and
contract rights. This is guaranteed by stockholders of the company and there
are cross guarantees in place with Indecon, Inc. a related company.
Equipment obligations are payable in monthly installments of approximately
$1 including interest at December 31, 1997. This obligation matures in 2000.
NOTE F--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31
--------------
1996 1997
------ ------
<S> <C> <C>
Costs incurred on uncompleted contracts...................... $2,324 $3,934
Estimated earnings........................................... 761 1,268
------ ------
3,085 5,202
Less billings to date...................................... 2,583 4,177
------ ------
$ 502 $1,025
====== ======
Presented on the balance sheet as follows:
Costs and estimated earnings in excess of billings......... $ 615 $1,211
Billings in excess of costs and estimated earnings......... (113) (186)
------ ------
$ 502 $1,025
====== ======
</TABLE>
The backlog of contracts yet to be completed at December 31, 1997 includes
revenue, costs and gross profit of approximately $3,201, $2,235 and $966,
respectively.
F-107
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE G--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
Years Ended
December 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current................................................... $22 $134 $285
Deferred.................................................. (1) (5) (31)
State and local........................................... 6 56 65
--- ---- ----
$27 $185 $319
=== ==== ====
Components of effective income tax rate:
Federal:
Statutory rate............................................ 22% 34% 34%
Permanent differences..................................... (3) (1) --
Other..................................................... -- (1) --
State and local........................................... 6 14 8
--- ---- ----
Net effective income tax rate............................ 25% 46% 42%
=== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
December 31
-----------
1996 1997
----- -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual........................ $ 6 $ 32
</TABLE>
NOTE H--RELATED PARTIES
The Company receives a management fee from related companies as a
reimbursement of the cost of performance of administrative functions. This
amounted to approximately $235, $488 and $360 in December 31, 1995, 1996 and
1997 which has been reflected as a reduction of selling and administrative
expenses.
The Company and its related party, from time to time provide workers to each
other during peak labor needs. These charges are recorded at cost, including
benefits and related payroll taxes. The totals charged to the related party by
the Company for work performed by its workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively. The totals charged to the
Company for work performed by the related party's workers was $40, $34 and $5
for the years ended 1995, 1996 and 1997 respectively.
F-108
<PAGE>
GARFIELD ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE I--TREASURY STOCK
The Company has repurchased the shares of a former shareholder for a total
of $132. This amount is being repaid in twelve quarterly installments of
approximately $11 plus interest at 10%. The note is reflected in the financial
statements at $132 less payments made to date. The financial instrument is
recorded at cost which approximates fair value. As of December 31, 1997 all
payments have been made.
NOTE J--UNCOLLECTIBLE NOTE RECEIVABLE
The Company advanced money to and performed services for another
construction company from time to time. During the year ended December 31,
1995, it became known to the Company that the amounts advanced would be
uncollectible and the asset was written off.
NOTE K--COMMITMENT
On January 29, 1998 the Corporation entered into a letter of intent with
Consolidation Capital Corporation (CCC) for the potential sale of Garfield
Electric Company to CCC.
NOTE L--CONTINGENCIES
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations. In addition, a shareholder resigned from the Company on
April 30, 1993 and his stock was redeemed in accordance with the shareholders
agreement. He has refused to accept the amount paid by the Company and asserts
that a larger amount is due. No suit has been filed.
NOTE M--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Company the option to
purchase the shares at book value as of the last audited financial statement.
F-109
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Indecon, Inc.
We have audited the accompanying balance sheets of Indecon, Inc. as of
December 31, 1996 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indecon, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
F-110
<PAGE>
INDECON, INC.
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31
--------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Accounts receivable:
Trade (including retainages of $4 and $0 in 1996 and 1997 and
net of allowances of $0 and $40 in 1996 and 1997)........... $1,427 $1,876
Affiliates................................................... 20 183
Notes receivable--affiliate.................................... 259 743
Inventory...................................................... 137 39
Unbilled receivables on completed contracts.................... 418 373
Cost and estimated earnings in excess of billings on
uncompleted contracts......................................... 464 56
Prepaid expenses............................................... 1 3
Deferred Federal income tax.................................... 15 42
------ ------
Total current assets....................................... 2,741 3,315
Equipment--net................................................. 126 200
Deposits....................................................... 1 1
------ ------
Total assets............................................... $2,868 $3,516
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................. $ 71 $ 728
Bank overdraft................................................. 382 16
Accounts payable:
Trade........................................................ 388 209
Affiliate.................................................... 297 302
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... 4 134
Accrued income taxes........................................... 186 164
Deferred federal income tax.................................... -- 8
Accrued expenses:
Payroll...................................................... 365 388
Other........................................................ 110 51
------ ------
Total current liabilities.................................. 1,803 2,000
STOCKHOLDERS' EQUITY
Common stock (750 shares authorized and issued, with 500
shares outstanding in 1996 and 1997, with a stated value of
$4 per share)............................................... 3 3
Retained earnings............................................ 1,095 1,546
Less 250 treasury shares at cost in 1995 and 1996............ (33) (33)
------ ------
Total stockholders' equity................................. 1,065 1,516
------ ------
Total liabilities and stockholders' equity................. $2,868 $3,516
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-111
<PAGE>
INDECON, INC.
STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Contract revenue..................................... $7,425 $11,291 $13,672
Contract costs (net affiliated company labor
transactions of $235, $505 and $472 for the years
ended December 31, 1995, 1996 and 1997.............. 5,886 9,199 11,301
------ ------- -------
Gross profit..................................... 1,539 2,092 2,371
Selling and administrative expenses (including
administrative expense reimbursement to affiliate of
$210, $441and $360 for the years ended December 31,
1995, 1996 and 1997)................................ 1,006 1,244 1,376
------ ------- -------
Operating profit................................. 533 848 995
Other expense (income)
(Gain) on disposal of asset........................ (2) -- (1)
Interest--expense.................................. 22 24 33
Interest income.................................... (17) (16) (40)
------ ------- -------
Earnings before income taxes..................... 530 840 1,003
Income taxes......................................... 214 356 452
------ ------- -------
Net earnings..................................... $ 316 $ 484 $ 551
====== ======= =======
Net earnings per common share--primary........... $ 632 $ 968 $ 1,102
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE>
INDECON, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Retained Treasury stockholders'
stock earnings stock equity
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995............... $ 3 $ 335 $(31) $ 307
Net earnings........................... -- 316 -- 316
--- ------ ---- ------
Balance, December 31, 1995............. 3 651 (31) 623
Dividends, $80 per share............... -- (40) -- (40)
Purchase price adjustment on treasury
shares................................ -- -- (2) (2)
Net earnings........................... -- 484 -- 484
--- ------ ---- ------
Balance, December 31, 1996............. 3 1,095 (33) 1,065
Dividends, $200 per share.............. -- (100) -- (100)
Net earnings........................... -- 551 -- 551
--- ------ ---- ------
Balance, December 31, 1997............. $ 3 $1,546 $(33) $1,516
=== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-113
<PAGE>
INDECON, INC.
STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings............................................. $ 316 $ 484 $ 551
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Gain) on disposal of asset............................. (2) -- (1)
Deferred Federal income tax............................. 3 (11) (19)
Depreciation and amortization........................... 59 65 81
Changes in assets and liabilities
Accounts receivable.................................... (411) (477) (612)
Inventory.............................................. -- (136) 98
Unbilled receivables on completed contracts............ (394) 157 45
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 62 (58) 130
Cost and estimated earnings on uncompleted contracts in
excess of billings.................................... 130 (441) 408
Prepaid expenses....................................... 1 1 (2)
Accounts payable....................................... 267 305 (174)
Accrued income taxes................................... 5 58 (22)
Accrued expenses....................................... 239 101 (36)
----- ----- -----
Net cash provided by operating activities............. 275 48 447
Cash flows (used in) investing activities:
Proceeds from sale of equipment.......................... -- -- 1
Purchases of equipment................................... (71) (61) (155)
Increase in notes receivable affiliate................... (167) (91) (484)
----- ----- -----
Net cash used in investing activities................. (238) (152) (638)
Cash flows provided by (used in) financing activities:
Increase in purchase price of treasury stock............. -- (2) --
Dividends paid........................................... -- (40) (100)
(Proceeds) payment of note payable....................... (288) 42 657
Increase (decrease) in bank overdraft.................... 251 104 (366)
----- ----- -----
Net cash provided by (used in) financing activities... (37) 104 191
----- ----- -----
Net decrease in cash...................................... -- -- --
Cash at beginning of year................................. -- -- --
----- ----- -----
Cash at end of year....................................... $ -- $ -- $ --
===== ===== =====
Supplemental disclosure of cash transactions:
Interest paid............................................ $ 22 $ 20 $ 33
===== ===== =====
Taxes paid............................................... $ 205 $ 309 $ 297
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-114
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Corporation is an industrial electrical contractor whose work is
primarily in Ohio and Kentucky. A summary of significant accounting policies
applied in the preparation of the accompanying financial statements follows:
1. Income Recognition
The Corporation recognizes income on the percentage of completion method.
The percentage of completion is calculated on the cost to cost method using
cost to date and total estimated cost on a job by job basis. Actual results
may vary from estimates. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is accrued. The current asset
caption "unbilled receivables on completed contracts" includes revenues earned
in excess of billings for time and materials contracts as of December 31, 1996
and 1997. Contract Revenues include $4,520, $8,122, and $10,936 in 1995, 1996,
and 1997 derived from time and material jobs.
2. Inventory
Inventory represents materials purchased for jobs which have not commenced
at December 31. The inventory is carried at the lower of cost or market on a
FIFO basis.
3. Equipment
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
approximately three to ten years, principally on accelerated methods.
4. Income Taxes
The provision for tax is charged to current earnings. Deferred taxes have
been recorded for timing differences in deductibility of state income taxes
which completely reverse in the subsequent year and differences in
depreciation methods for book and tax purposes.
5. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
6. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value as
the interest rates approximate market rates for debt with similar terms and
average maturities.
F-115
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
7. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of trade accounts
receivable. Receivables are not collateralized and accordingly, the
Corporation performs on-going credit evaluations to reduce the risk of loss.
The Corporation also maintains bank accounts at one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100.
8. Earnings Per Share
Basic earnings per share is computed based upon weighted-average shares
outstanding during the period. Weighted-average shares outstanding for all
periods was 500 shares.
NOTE B--NOTES RECEIVABLE--AFFILIATE
The notes receivable--affiliate result from cash advances to two different
affiliated Companies which have common ownership with this Company. The notes
are due on demand and bear interest at a rate equal to the Corporations line
of credit. The notes are unsecured.
NOTE C--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Office equipment............................................. $ 108 $ 142
Construction equipment....................................... 249 364
------ ------
357 506
Accumulated depreciation................................... (231) (306)
------ ------
$ 126 $ 200
====== ======
</TABLE>
Depreciation expense for the year ended December 31, 1995, 1996 and 1997 was
$59, $65 and $81, respectively.
NOTE D--NOTE PAYABLE
The Corporation used at December 31, 1996 and 1997 $71 and $728 of a $1,200
revolving note from the bank. The interest rate is 1% over the prime rate
(currently 8.25%) as of December 31, 1997. The note is secured by inventory
and accounts receivable and is guaranteed by the stockholders. There are also
guarantees in place with Garfield Electric Company, a related company.
F-116
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE E--OPERATING LEASES
The Corporation entered into an agreement in June 1997 which leases office
space under an operating lease. The following is a schedule, by years, of the
future minimum rental payments which expire January 31, 2003:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998 $59,316
1999 $59,952
2000 $59,952
2001 $59,952
2002 $59,952
2003 $ 4,996
</TABLE>
Total rent expense under the operating lease was $66,761 for 1997.
NOTE F--INCOME TAXES
Provision for income taxes:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current.................................................. $162 $282 $352
Deferred................................................. 3 (11) (19)
State and local.......................................... 49 85 119
---- ---- ----
$214 $356 $452
==== ==== ====
Components of effective income tax rate:
Federal:
Statutory................................................ 34% 34% 34%
Permanent differences.................................... -- -- --
Other.................................................... (3) -- --
State and local.......................................... 10 6 12
---- ---- ----
Net effective income tax rate.......................... 41% 40% 46%
==== ==== ====
</TABLE>
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax asset is:
<TABLE>
<CAPTION>
December 31
------------
1996 1997
------ -----
<S> <C> <C>
Deferred tax asset
Currently non-deductible state accrual....................... $ 15 $ 42
====== =====
Deferred tax liability depreciation.......................... $ -- $ 8
====== =====
</TABLE>
NOTE G--RELATED PARTIES
Two of the stockholders of Indecon, Inc. are stockholders of a related
company to which payments are made to perform some of the administrative
functions of Indecon. The total of this administrative fee paid to reimburse
F-117
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE G--RELATED PARTIES (continued)
the cost of the services provided was $210, $441 and $360, in 1995, 1996 and
1997, respectively. The Corporation and its' related party from time to time
provide workers to each other during peak labor needs. These charges are
recorded at cost, including benefits and payroll taxes. The totals charged to
the related party for work performed by its' workers was $40, $34 and $5 for
the years ended 1995, 1996 and 1997, respectively. The totals charged to the
Corporation for work performed by its' workers was $275, $539 and $477 for the
years ended 1995, 1996 and 1997 respectively.
In 1997, the company separated its Data Network Solutions Cabling division
and sold its net assets at book value to a separate company owned
substantially by Indecon's shareholders.
NOTE H--MAJOR CUSTOMERS
The Corporation had sales to one customer totaling for 79% of total revenue
in 1995, and sales to three customers for 40% of total revenues (15%, 13% and
12%) in 1996 and sales to one customer for 56% of total revenues in 1997.
NOTE I--PROFIT-SHARING PLAN
As of January 1, 1991, the Corporation implemented a 401(k) profit-sharing
plan for all eligible employees. Employer contributions are made at the
discretion of the Board of Directors, with all costs funded as accrued.
Contributions by the Corporation in 1995, 1996 and 1997 totaled $40, $65 and
$44.
NOTE J--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31
-------------
1996 1997
----- ------
Costs incurred on uncompleted contracts..................... $ 442 $163
Estimated earnings.......................................... 145 17
----- ------
587 180
Less billings to date....................................... 127 258
----- ------
$ 460 $ (78)
===== ======
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $ 464 $ 56
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... (4) (134)
----- ------
$ 460 $ (78)
===== ======
NOTE K--SETTLEMENT OF STOCKHOLDER LAWSUIT
In February 1996, a lawsuit with a stockholder was settled. The Corporation
was directed to pay a total of $27 for the stockholder's one hundred twenty-
five shares, pursuant to the Corporation's stock repurchase agreement. An
additional $2 was paid to the stockholder.
F-118
<PAGE>
INDECON, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE L--COMMITMENT
On January 29, 1998 the Corporation entered into a Letter of Intent with
Consolidation Capital Corporation (CCC) for the potential sale of Indecon,
Inc. to CCC.
NOTE M--LITIGATION
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE N--STOCK REPURCHASE AGREEMENT
The Company has entered into a stock repurchase agreement with each of its'
shareholders. The repurchase agreement, triggered by death, disability,
retirement or termination from the Company gives the Corporation the option to
purchase shares at book value as of the last audited financial statement.
F-119
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Taylor Electric, Inc.
We have audited the accompanying balance sheet of Taylor Electric, Inc. as
of December 31, 1997, and the related statements of earnings, retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taylor Electric, Inc. as
of December 31, 1997 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Leverich, Phillips, Rasmuson & Company
Leverich, Phillips, Rasmuson & Company
Salt Lake City, Utah
February 20, 1998
F-120
<PAGE>
TAYLOR ELECTRIC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (Note F)............................... $1,158,324 $2,942,591
Contracts receivable (including retentions
of $1,370,552)
(Note A5).................................. 3,918,633 4,159,332
Employee receivable......................... 1,315 3,011
Inventory (Note A6)......................... 113,778 198,805
Prepaid expenses............................ 55,097 33,117
Costs and estimated profits in excess of
billings on uncompleted contracts (Note
B)......................................... 316,191 44,999
---------- ----------
TOTAL CURRENT ASSETS...................... 5,563,338 7,381,855
PROPERTY AND EQUIPMENT, net of accumulated
depreciation (Note C)........................ 420,591 405,575
OTHER ASSETS
Deposits.................................... 9,125 9,449
---------- ----------
TOTAL ASSETS............................ $5,993,054 $7,796,879
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Including retentions of
$44,304 and $27,174)....................... $ 505,664 $1,092,520
Accrued expenses............................ 493,821 323,281
Billings in excess of costs and estimated
profits on uncompleted contracts (Note B).. 908,277 1,895,733
---------- ----------
TOTAL CURRENT LIABILITIES................. 1,907,762 3,311,534
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized
50,000 shares, issued and outstanding
1,222 shares............................... 425,986 425,986
Retained earnings........................... 3,659,306 4,059,359
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................ 4,085,292 4,485,345
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $5,993,054 $7,796,879
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-121
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
Year Ended Three Months Ended
December 31, 1997 March 31,
----------------- ----------------------
1997 1998
---------- ----------
Construction revenue........... $ 19,192,685 $4,070,974 $4,782,343
Construction costs............. 13,799,340 3,287,914 4,099,057
----------------- ---------- ----------
Gross Profit............... 5,393,345 783,060 683,286
General and administrative
expenses...................... 1,271,756 278,129 296,912
----------------- ---------- ----------
Earnings from Operations... 4,121,589 504,931 386,374
Other income/(expense)
Miscellaneous income
(expense)................... 41,458 (8,582) (23,013)
Interest income.............. 112,759 13,680 30,509
Interest expense............. (31) -- (18)
Gain on sale of assets....... 1,298 6,771 6,201
----------------- ---------- ----------
NET EARNINGS............... 4,277,073 516,800 400,053
Retained earnings--beginning of
year.......................... 2,610,579 2,610,578 3,659,306
Shareholder distributions...... (3,228,346) -- --
----------------- ---------- ----------
Retained earnings--end of
year.......................... $ 3,659,306 $3,127,378 $4,059,359
================= ========== ==========
The accompanying notes are an integral part of this statement.
F-122
<PAGE>
TAYLOR ELECTRIC, INC.
STATEMENT OF CASH FLOWS
Increase/(Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended
December Three Months Ended
31, 1997 March 31,
---------- ----------------------
1997 1998
---------- ----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................. $4,277,073 $ 516,800 $ 400,053
Adjustment to reconcile net earnings to
net cash provided by operating
activities:
Depreciation............................. 125,043 29,539 27,614
Gain on sale of assets................... (1,298) -- --
Changes in operating assets and
liabilities:
(Increase)/Decrease in:
Contracts receivable................... (420,127) 309,622 (218,719)
Inventory.............................. 135,510 (43,515) (85,027)
Costs and estimated profits in excess
of billings on uncompleted contracts.. (291,089) -- 271,192
Employee receivable.................... 8,119 3,546 (1,696)
Prepaid expenses....................... (4,190) -- --
Deposits............................... 694 619 (325)
(Decrease)/Increase in:
Billings in excess of costs and
estimated profits on uncompleted
contracts............................. 22,989 -- 987,456
Accounts payable....................... (210,170) 95,028 509,272
Accrued expenses....................... (96,491) (16,403) (92,956)
---------- ---------- ----------
Total adjustment to net earnings...... (731,010) 378,436 1,396,811
---------- ---------- ----------
Net Cash Provided by Operating
Activities.......................... 3,546,063 895,236 1,796,864
Cash flows from investing activities:
Purchase of equipment..................... (118,112) (37,193) (12,598)
Proceeds from sale of assets.............. 6,832 -- --
---------- ---------- ----------
Net Cash Used by Investing
Activities.......................... (111,280) (37,193) (12,598)
Cash flows from financing activities:
Shareholder distributions................. (3,228,346) -- --
---------- ---------- ----------
Net Cash Used by Financing
Activities.......................... (3,228,346) -- --
---------- ---------- ----------
Net increase in cash....................... 206,437 858,043 1,784,266
Cash--beginning of year.................... 951,887 951,887 1,158,325
---------- ---------- ----------
Cash--end of year.......................... $1,158,324 $1,809,930 $2,942,591
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-123
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Method of accounting for long-term construction contracts
The Company is engaged in electrical contracting under long-term
construction contracts in Utah and surrounding areas. The accompanying
financial statements have been prepared using the percentage-of-completion
method measured by percentage of cost incurred to date to estimated total cost
for each contract and, therefore, take into account the cost, estimated
earnings, and revenue to date on the contracts not yet complete. That method
is used because management considers total cost to be the best available
measure of progress on the contracts.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final total costs, based on current estimates of cost to complete. It is not
related to the progress billings to customers.
Revenue earned on contracts in process in excess of billings (underbillings)
is classified as a current asset. Amounts billed in excess of revenue earned
(overbillings) are classified as current liabilities.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
2. Use of estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, and the reported revenues and expenses.
3. Operating cycle
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheet, as
they will be liquidated in the normal course of contract completion, although
this may be more than one year.
4. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. During the year ended December 31, 1997, the Company paid
interest of $31, none of which was required to be capitalized. There were no
non-cash investing or financing activities for the year ended December 31,
1997.
5. Allowance for doubtful accounts
The Company considers contracts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts has been provided. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
The Company also expects all retention receivables to be collected within
the normal course of contract completion.
F-124
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
6. Inventory
The inventory of the Company consists of electrical materials and supplies
used on construction contracts. Inventory is stated at the lower of cost or
market using the first-in, first-out (FIFO) method of accounting. At December
31, 1997, the inventory was valued at $113,778.
7. Income taxes
The income taxes on the net operations for the year are payable personally
by the shareholders pursuant to an election under Subchapter S of the Internal
Revenue Code not to have the Company taxed as a corporation. Accordingly, no
provision has been made for taxes. The tax liability would be approximately
$1,668,058 had such taxes been payable by the Corporation at December 31,
1997.
NOTE B--COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts......................... $ 8,797,615
Estimated earnings.............................................. 3,563,703
-----------
12,361,318
Less: Billings to date.......................................... 12,953,404
-----------
(592,086)
===========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated profits in excess of billings on uncompleted
contracts...................................................... 316,191
Billings in excess of costs and estimated profits on uncompleted
contracts...................................................... (908,277)
--------
(592,086)
========
</TABLE>
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Accumulated Book
Cost Depreciation Value
--------- ------------ ---------
<S> <C> <C> <C>
Leasehold improvements.................... $ 169,205 $ 43,904 $ 125,301
Furniture and fixtures.................... 177,986 102,175 75,811
Construction equipment.................... 256,116 154,249 101,867
Vehicles.................................. 339,179 221,567 117,612
--------- -------- ---------
$ 942,486 $521,895 $ 420,591
========= ======== =========
</TABLE>
Depreciation expense is computed using the straight-line method in amounts
sufficient to write off the cost of depreciable assets over their estimated
useful lives. Depreciation expense for the year ended December 31, 1997
amounted to $125,043. Of this amount, $90,184 was included in direct equipment
costs and $34,859 was included in general and administrative expenses.
F-125
<PAGE>
TAYLOR ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE D--BACKLOG
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997:
<TABLE>
<S> <C>
Balance--beginning of year...................................... $ 8,181,324
New contracts and change orders................................. 30,601,370
-----------
38,782,694
Less contract revenue earned at December 31, 1997............... 19,192,685
-----------
Balance--end of year............................................ $19,590,009
===========
</TABLE>
NOTE E--SALARY REDUCTION AND PROFIT SHARING PLAN
The Company maintains a defined contribution retirement plan pursuant to the
Internal Revenue Code 401(k). All employees that work over 1,000 hours and
have completed one year of service are eligible to enter the plan on the
plan's entry date. Participants are 100% vested in the employer's
contributions upon admission to the plan. The plan allows for a maximum
employee contribution of 10% of compensation up to the maximum amount allowed
by law. The Company matches 45% of employee contributions. For the year ended
December 31, 1997, the Company contributed $137,290 to the plan.
NOTE F--CONCENTRATIONS OF CREDIT RISK
The Company verifies sources of payment and has legal lien rights on all
significant private and commercial jobs. In compliance with state laws, the
Company pursues and perfects its mechanical lien rights against all
significant projects.
As of December 31, 1997, the Company held cash in demand accounts at banks
in excess of the federally insured amounts.
NOTE G--RELATED PARTY TRANSACTIONS
The Company rents the buildings it occupies from Jerald M. Taylor, president
and majority shareholder of the Company. Total rents paid to Mr. Taylor for
the year ended December 31, 1997 amounted to $56,100.
NOTE H--MAJOR CUSTOMERS
Construction contracts with three major customers accounted for 58% of
current year revenues.
F-126
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Regency Electric Company, Inc.
We have audited the accompanying consolidated balance sheets of Regency
Electric Company, Inc. (an S corporation) and subsidiaries, as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholder's equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Regency Electric Company, Inc. and subsidiaries, as of December 31, 1997
and 1996 and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Harbeson Beckerleg & Fletcher
Harbeson Beckerleg & Fletcher
Jacksonville, Florida
February 18, 1998
F-127
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 6,688,354 $11,337,758 $15,002,062
Short-term investments................... 4,511,541 3,726,007 3,918,438
Contract receivables (Note 2)............ 11,392,358 16,692,180 13,293,712
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note
3)...................................... 1,821,958 1,798,759 2,259,038
Deposits................................. 300,000 -- --
Prepaid expenses and other current
assets.................................. 200,156 282,202 330,653
----------- ----------- -----------
Total current assets................... 24,914,367 33,836,906 34,803,903
Property and equipment, less accumulated
depreciation (Note 4)..................... 243,501 3,513,029 3,467,252
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Notes payable, due within one year (Note
5)...................................... $ 1,000 $ 1,000 --
Accounts payable......................... 2,300,601 3,218,620 3,803,910
Accrued expenses......................... 1,682,130 1,208,867 2,714,353
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note
3)...................................... 5,750,211 10,282,005 7,846,055
----------- ----------- -----------
Total current liabilities.............. 9,733,942 14,710,492 14,364,318
Stockholder's equity:
Common stock, $.01 par value, 10,000
shares authorized, issued and
outstanding............................. 70 100 100
Additional paid-in capital............... 1,358,800 1,358,800 1,358,800
Retained earnings........................ 14,065,056 21,280,543 22,547,937
----------- ----------- -----------
Total stockholder's equity............. 15,423,926 22,639,443 23,906,837
----------- ----------- -----------
$25,157,868 $37,349,935 $38,271,155
=========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-128
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three For the Three
Year Ended December 31, Months Ended Months Ended
------------------------ 3/31/97 3/31/98
1996 1997 (unaudited) (unaudited)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Contract revenues earned
and contract
assignments............ $64,412,229 $66,161,538 14,405,500 21,307,430
Contract assignments
(Note 1)............... (4,099,877) (5,878,594) (1,940,134) (856,120)
----------- ----------- ---------- -----------
Contract revenues
earned................. 60,312,352 60,282,944 12,465,366 20,451,310
Cost of revenues
earned................. (43,688,707) (44,338,484) (8,964,767) (15,300,594)
----------- ----------- ---------- -----------
Gross profit.......... 16,623,645 15,944,460 3,500,599 5,150,716
Selling, general and
administrative
expenses............... (7,080,475) (7,162,763) (1,948,568) (2,095,422)
Other income (expense):
Interest and other.... 851,256 1,296,003 272,656 355,046
Minority interest in
joint venture........ (58,546) -- -- --
----------- ----------- ---------- -----------
Net income.............. $10,335,880 $10,077,700 $1,824,687 $ 3,410,340
=========== =========== ========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-129
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1997 and 1996
and the Three Months Ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Retained Earnings
------------------------------------
Additional Accumulated Tax Timing
Common Paid-in Adjustments Differences
Stock Capital Account and Other Total
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995 $ 60 $ 500,000 $10,286,585 $(289,355) $ 9,997,230
Issuance of common
stock................ 10 -- -- -- --
Capital contribution.. -- 858,800 -- -- --
Taxable income........ -- -- 10,561,335 -- 10,561,335
Tax deferred income... -- -- -- (290,341) (290,341)
Nondeductible
expenses............. -- -- (13,668) -- (13,668)
Dividends............. -- -- (6,268,054) -- (6,268,054)
Nontaxable income..... -- -- -- 78,554 78,554
---- ---------- ----------- --------- -----------
Balance, December 31,
1996 70 1,358,800 14,566,198 (501,142) 14,065,056
S corporation parent
election............. 30 -- -- -- --
Taxable income........ -- -- 8,489,798 -- 8,489,798
Tax deferred income... -- -- -- 1,310,037 1,310,037
Nondeductible
expenses............. -- -- (8,732) -- (8,732)
Dividends............. -- -- (2,727,264) -- (2,727,264)
Nontaxable income..... -- -- -- 151,648 151,648
---- ---------- ----------- --------- -----------
Balance, December 31,
1997 100 1,358,800 20,320,000 960,543 21,280,543
Net income
(unaudited).......... -- -- 3,410,340 -- 3,410,340
Dividends
(unaudited).......... -- -- (2,142,946) -- (2,142,946)
---- ---------- ----------- --------- -----------
Balance, March 31, 1998
(unaudited) $100 $1,358,800 $21,587,394 $ 960,543 $22,547,937
==== ========== =========== ========= ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-130
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Increase (decrease) in
cash and cash equivalents
Cash flow from operating
activities:
Cash received from
customers.............. $60,136,320 $59,538,115 $12,516,558 $20,953,549
Cash paid to
subcontractors,
suppliers and
employees.............. (54,188,057) (50,909,563) (10,605,680) (15,295,225)
Interest and other
income................. 508,284 648,637 272,656 355,046
Interest paid........... (5,332) (29,234) -- --
----------- ----------- ----------- -----------
Cash from operating
activities........... 6,451,215 9,247,955 2,183,534 6,013,370
----------- ----------- ----------- -----------
Cash flow from investing
activities:
Sales (purchases) of
short-term investments,
net.................... (3,651,725) 1,253,389 2,280,185 (192,431)
Purchase of equipment... (357,691) (4,635,460) (10,602) (12,689)
Deposit on airplane..... (300,000) 300,000 -- --
Sale of equipment....... 1,639,108 1,359,500 -- --
----------- ----------- ----------- -----------
Cash (for) from
investing
activities........... (2,670,308) (1,722,571) 2,269,583 (205,120)
----------- ----------- ----------- -----------
Cash flow from financing
activities:
Dividends paid.......... (6,268,054) (2,876,010) (928,276) (2,142,946)
Capital contribution.... 858,800 -- -- --
Distribution to minority
partner................ (223,389) -- -- --
Issuance of common
stock.................. 10 -- --
S corporation parent
election............... -- 30 30 --
Repayment of debt....... -- (1,000)
----------- ----------- ----------- -----------
Cash used for
financing
activities........... (5,632,633) (2,875,980) (928,246) (2,143,946)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (1,851,726) 4,649,404 3,524,871 3,664,304
Cash and cash equivalents:
Beginning of period..... 8,540,080 6,688,354 6,688,354 11,337,758
----------- ----------- ----------- -----------
End of period........... $ 6,688,354 $11,337,758 $10,213,225 $15,002,062
=========== =========== =========== ===========
Reconciliation of net
income to cash provided
by (used for) operating
activities
Net income................ $10,335,880 $10,077,700 $ 1,824,687 $ 3,410,340
Adjustments:
Depreciation............ 126,525 185,953 31,385 58,466
Gain on sale of fixed
assets................. (153,592) (179,521) -- --
Gain on short-term
investments............ (189,380) (467,845) -- --
Minority interest in
joint venture.......... 58,546 -- -- --
Changes in:
Contract receivables
and related billings
vs. earnings.......... (176,032) (744,829) 59,192 502,239
Prepaids and other
assets................ (7,247) (82,046) (143,804) (48,451)
Accounts payable and
accrued expenses...... (3,543,485) 458,543 420,074 2,090,776
Notes Receivable....... -- -- (8,000) --
----------- ----------- ----------- -----------
$ 6,451,215 $ 9,247,955 $ 2,183,534 $ 6,013,370
=========== =========== =========== ===========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-131
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Note 1--Significant Accounting Policies:
Basis of Presentation
The consolidated statements include Regency Electric Company, Inc. (REC),
Regency Electric Company Jacksonville Office, Inc. (REC Jacksonville), Regency
Electric Company Atlanta Office, Inc. (REC Atlanta), Regency Electric Company
Orlando Office, Inc. (REC Orlando), Regency Electric Company Charlotte Office,
Inc. (REC Charlotte), Regency Electric Company Projects Group, Inc. (REC
Proj.) and Regency Aviation Company, Inc. (RAC). All significant intercompany
accounts and transactions have been eliminated. In 1993, REC Orlando entered
into a joint venture agreement and became a 90% partner in Regency/Zap
Electrical Construction Team, a Joint Venture (Joint Venture). The sole
contract of the Joint Venture was completed during 1996 and the Joint Venture
was liquidated
REC became an S corporation parent effective January 1, 1997 when the
company's shareholder contributed the stock of the other entities and they
elected to become qualified S corporation subsidiaries. Consolidated financial
statements have been prepared as if the entities had always been parent and
subsidiary entities.
Unaudited Interim Financial Statement Information
In connection with the subsequent business combination agreement and related
Securities and Exchange Commission filing requirements, the management of the
Company has included unaudited interim financial statement information. In the
opinion of management, the Company has made all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
condition of the Company as of March 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1998 and 1997, and the
statements of stockholder's equity as of and for the three months ended March
31, 1998, as presented in the accompanying unaudited interim financial
statements information.
Company's Activities and Operating Cycle
The companies are engaged in the construction industry as electrical
contractors, with the exception of RAC which provides aviation services to the
companies. The work is performed under fixed-price, cost plus and fixed-fee
contracts.
The length of the companies' contracts vary, but typically do not extend
beyond 18-24 months. Assets and liabilities are classified as current and
noncurrent because the contract-related items in the balance sheet have
realization and liquidation periods within the operating cycle.
Accounting Estimates
The financial statements include various estimates and assumptions by
management that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period.
Revenue and Cost Recognition
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the cost-to-cost method.
Contract assignments include material or equipment furnished to the
contractor by the owner in which the contractor assumes all obligations,
liabilities and responsibilities for the material or equipment including but
not limited to the following: risk of loss, cost of unloading, handling,
maintenance, insuring, storing, securing, protecting, installing, starting-up,
checking-out, and safeguarding such material and equipment.
F-132
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Contracts and costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization
is reasonably assured. Additional contract revenue relating to claims is
recognized only when realization is probable and the amount can be reliably
estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the companies consider all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Short-Term Investments
The companies consider all short-term investments to be trading securities
as defined by SFAS 115 and as such are reported at fair value.
Property and Equipment
Depreciation and amortization are provided principally on the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Useful
Classification Lives
-------------- ---------
<S> <C>
Construction equipment.......................................... 3-5 years
Transportation equipment........................................ 3-5 years
Trailers........................................................ 5 years
Office furniture and equipment.................................. 3-5 years
Leasehold improvements.......................................... 2-5 years
</TABLE>
Income Taxes
The company, with the consent of its shareholder, elected under the Internal
Revenue Code to be an S corporation. In lieu of Federal corporation income
taxes, the shareholder will be taxed on the Company's taxable income. The
Companies pay state income taxes on behalf of the stockholder. Those payments
are reflected as dividends in the financial statements as the income tax is
paid.
Stock Appreciation Rights
Effective January 1, 1998 the Company adopted a Stock Appreciation Rights
Plan (the Plan) to reward personnel whose services are important to the
Company. The Plan provides that the award of Stock Appreciation Rights (SARs)
may be paid in cash or the issue of non-voting stock. The maximum number of
SARs outstanding at any time is 5,000. The SARs may have a fixed maturity date
of not less than twelve (12) months nor more than ten (10) years, however,
they will immediately mature and become payable upon a change in control of
the Company. Upon the maturity date an employee shall be entitled to receive
an amount equal to the sum of the excess of the fair market value over the
"Basis Value." On January 1, 1998 approximately 3,650 SARs were
F-133
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
outstanding with a "Basis Value" of $4,437. This value was based on a
professional appraisal of the Company as of December 31, 1997, therefore,
there has been no compensation recorded to date under the Plan.
Note 2--Contract Receivables:
Contract receivables are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Completed contracts.............................. $ 150,790 $ 369,234
Contracts in progress............................ 8,040,244 13,763,133
Retained......................................... 3,201,324 2,559,813
----------- -----------
$11,392,358 $16,692,180
=========== ===========
</TABLE>
All amounts are expected to be collected within one year.
Note 3--Costs and Estimated Earnings on Uncompleted Contracts:
Costs and estimated earnings on uncompleted contracts are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts..... $ 73,300,607 $ 69,436,470
Estimated earnings.......................... 21,301,733 20,137,303
Less-billings to date....................... (98,530,593) (98,057,019)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... $ 1,821,958 $ 1,798,759
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (5,750,211) (10,282,005)
------------ ------------
$ (3,928,253) $ (8,483,246)
============ ============
</TABLE>
Note 4--Property and Equipment:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Construction equipment............................. $ 231,854 $ 231,854
Transportation equipment........................... 87,561 3,468,034
Office furniture and equipment..................... 313,578 351,004
Leasehold improvements............................. 117,653 147,759
--------- ----------
750,646 4,198,651
Less-accumulated depreciation...................... (507,145) (685,622)
--------- ----------
$ 243,501 $3,513,029
========= ==========
</TABLE>
Depreciation expense was $185,953 in 1997 and $126,525 in 1996.
F-134
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Note 5--Notes Payable:
The Company has $4,000,000 in various credit facilities available at
December 31, 1997. These facilities include (a) an unsecured $2,000,000 line
of credit, (b) an irrevocable standby letter of credit of $450,000 and (c)
$1,550,000 credit availability. The line of credit, due June 30, 1998, had an
outstanding balance of $1,000 at December 31, 1997 and 1996. The line of
credit provides for borrowings of up to $2,000,000 at the prime rate. The
credit facilities are guaranteed by all of the combined companies and are also
personally guaranteed up to $2,000,000 by Alan J. Green.
The Company has an irrevocable standby letter of credit of $450,000 at
December 31, 1997, which guarantees the Company's payment of workers'
compensation insurance claims.
Additionally, the Company has $1,550,000 of additional credit availability
at December 31, 1997 under an Advised Guidance Line. The option to obtain the
additional credit has not been exercised as of December 31, 1997.
Note 6--Commitments and Contingencies:
Litigation
The Company may be a party to various claims, complaints and disputed
amounts arising in the normal course of its construction activities. In the
opinion of management such matters involve such amounts that the unfavorable
disposition would not have a material affect on the financial position of the
Company.
Lease Commitments
The assets utilized under operating lease arrangements in various operations
are as follows: office facilities, warehouse, office equipment and
transportation equipment.
The following is a schedule of minimum lease commitments outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C>
1998............................................................ $481,345
1999............................................................ 365,237
2000............................................................ 101,776
2001............................................................ 14,421
--------
$962,779
========
</TABLE>
Lease expense under operating leases was $506,018 in 1997 and $497,543 in
1996.
Note 7--Backlog:
The following schedule shows a reconciliation of backlog representing signed
contracts in existence at December 31, 1997 and 1996
<TABLE>
<CAPTION>
Balance, December 31, 1996.................................. $ 67,306,941
<S> <C>
Contract adjustments and new contracts...................... 51,171,503
------------
118,478,444
Less contract revenue earned................................ (60,042,333)
------------
Balance, December 31, 1997.................................. $ 58,436,111
============
</TABLE>
F-135
<PAGE>
REGENCY ELECTRIC COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996 March 31, 1998 (unaudited)
Contract adjustments include owner purchased materials of $5,878,594 in 1997
and $4,099,877 in 1996 (Note 1).
Note 8--Profit Sharing Plan:
The Companies all participate in a 401(k) profit sharing plan covering
substantially all employees. The plan became effective January 1, 1990.
Employer's contributions charged to earnings were $87,866 in 1997 and $56,077
in 1996.
Note 9--Risks and Uncertainties:
The companies are subject to a concentration of credit risk on accounts
receivable balances (Note 2) since business operations are limited to a
specific industry and geographical area. To limit these risks, it is the
companies' policy to obtain references on potential customers and contractors
prior to granting credit.
At times, cash balances held at financial institutions were in excess of
FDIC insurance limits. The companies place temporary cash investments with
high-credit, quality financial institutions. The companies believe no
significant concentration of credit risk exists with respect to these cash
investments.
F-136
