AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998
REGISTRATION NO. 333-50323
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OEI INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8711 76-552644
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2727 NORTH LOOP WEST, SUITE 400
HOUSTON, TEXAS 77009
PHONE: (713) 880-6200
FAX: (713) 880-6300
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL L. BURROW
CHIEF EXECUTIVE OFFICER
OEI INTERNATIONAL, INC.
2727 NORTH LOOP WEST, SUITE 400
HOUSTON, TEXAS 77009
PHONE: (713) 880-6200
FAX: (713) 880-6300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
ROBERT G. REEDY STEPHEN P. FARRELL
PORTER & HEDGES, L.L.P. MORGAN, LEWIS & BOCKIUS LLP
700 LOUISIANA, 35TH FLOOR 101 PARK AVENUE
HOUSTON, TEXAS 77002-2764 NEW YORK, NEW YORK 10178-0060
PHONE: (713) 226-0600 PHONE: (212) 309-6000
FAX: (713) 226-0274 FAX: (212) 309-6273
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED JUNE 1, 1998
PROSPECTUS
4,300,000 Shares
OEI INTERNATIONAL, INC. --LOGO
Common Stock
------------------
All of the 4,300,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by OEI
International, Inc. ("OEI"). Prior to the Offering, there has been no public
market for the Common Stock of OEI. It is currently estimated that the initial
public offering price will be between $13.00 and $15.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
listing on the New York Stock Exchange under the symbol "ENG," subject to
official notice of issuance
SEE "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- ------------------------------------------------------------------------------
Per Share $ $ $
- ------------------------------------------------------------------------------
Total(3) $ $ $
==============================================================================
(1) For information regarding indemnification of the several Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by OEI, estimated at
$ .
(3) OEI has granted the Underwriters a 30-day option to purchase up to 645,000
additional shares of Common Stock solely to cover over-allotments, if any.
See "Underwriting." If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Company
will be $ , $ and $ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998 at the office of Salomon Smith Barney, 333 West 34th Street,
New York, NY 10001.
Salomon Smith Barney
CIBC Oppenheimer
Sanders Morris Mundy
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO (i) "OEI" MEAN OEI
INTERNATIONAL, INC., WHICH IS THE HOLDING COMPANY FORMED FOR THE PURPOSE OF
CONDUCTING THE OFFERING AND SIMULTANEOUSLY COMBINING, IN SEPARATE TRANSACTIONS
(THE "PENDING ACQUISITIONS"), FOUR OTHER ENGINEERING FIRMS (SUCH OTHER FIRMS
COLLECTIVELY, THE "ACQUIRED COMPANIES") WITH PETROCON ENGINEERING, INC. AND
ITS SUBSIDIARIES ("PETROCON") AND (ii) THE "COMPANY" MEAN OEI AND ITS
SUBSIDIARIES, WHICH INCLUDE, AFTER GIVING EFFECT TO THE PENDING ACQUISITIONS,
PETROCON AND THE ACQUIRED COMPANIES.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS, INCLUDING SHARE AND PER SHARE DATA, (i) GIVES EFFECT TO THE
PENDING ACQUISITIONS, (ii) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED AND (III) GIVES EFFECT TO A 1,828.368-FOR-ONE SPLIT OF COMMON
STOCK EFFECTED ON APRIL 6, 1998.
THE COMPANY
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. During 1997, the Company was involved in engineering
projects in 26 states and over 21 countries worldwide, generating pro forma
combined revenues of approximately $169.1 million, of which $125.1 million, or
74.0%, was from domestic projects, and $44.0 million, or 26.0%, was from
international work.
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. The Company, through Petrocon, has
grown significantly through acquisitions, having acquired more than 13
engineering firms since 1988. As a result of the Pending Acquisitions and the
Offering, the Company believes it will have greater financial, technical and
professional resources, which will enable it to aggressively continue its
successful acquisition strategy, enhance its technical capabilities and expand
its already diversified client base.
The Company operates in two principal segments: engineering services and
engineered systems. The Company's engineering services encompass all aspects of
the process, civil, structural, mechanical, instrument, electrical, geotechnical
and environmental engineering and design disciplines, providing its clients with
a single source for all their design, engineering and permitting needs. The
Company has designed and engineered facilities ranging from refineries,
petrochemical plants, pulp and paper processing plants and wastewater treatment
facilities, to food and beverage processing plants, pharmaceutical plants and
laboratories, electronics manufacturing facilities, hotels and casinos. The
Company's engineered systems are primarily custom designed, built, programmed
and installed on a fixed-price, turnkey basis and include control and
instrumentation systems and modular processing plants primarily for the oil and
gas, refining and chemical processing industries. During 1997, approximately
$123.5 million, or 73.0%, of the Company's pro forma combined revenues were
attributable to engineering services and $45.6 million, or 27.0%, were
attributable to engineered systems. The Company provides engineering services
and engineered systems to a number of Fortune 100 companies through a staff of
over 1,600 employees, including approximately 1,100 engineers and design
professionals as of March 31, 1998.
The Company has developed a strategic plan to:
o EXPAND AND DIVERSIFY THROUGH ACQUISITIONS. By continuing to
acquire well-established and highly respected local and regional firms
within the U.S., as well as foreign firms, the Company intends to (i)
expand into new geographic markets, (ii) broaden its areas of acknowledged
technical
3
<PAGE>
expertise, (iii) continue to strengthen its presence within existing
geographic markets and specialties and (iv) enhance its cross-marketing
opportunities.
o ACCELERATE INTERNAL GROWTH. The principal elements of the
Company's internal growth strategy are to (i) attract larger, higher margin
projects, (ii) leverage the Company's capabilities and expertise through
cross-marketing and (iii) develop partnering relationships and other
strategic alliances.
o IMPROVE OPERATING MARGINS. The Company intends to capitalize on
opportunities to achieve operating efficiencies and cost savings by
implementing strategies to (i) increase its overall staff utilization rate
by more effectively deploying and allocating its professional resources,
(ii) consolidate administrative functions and (iii) use its increased
purchasing power to gain volume discounts for itself and in connection with
its procurement services for its clients.
o OUTSOURCE CONSTRUCTION ACTIVITIES. The Company believes it can
offer clients the advantages of turnkey, lump sum projects, without
directly performing the construction activities associated with these
projects, by forming joint ventures and other partnering relationships with
construction firms. The Company believes it will benefit from such a
strategy by limiting its exposure to construction risks.
o OPERATE ON A DECENTRALIZED BASIS. The Company intends to manage
its operating companies on a decentralized basis, with local management
retaining responsibility for day-to-day operations, profitability and
growth. The Company believes that combining a decentralized management
structure with strong, centralized operating and financial controls geared
to accountability, will support the entrepreneurial and creative culture at
each of the operating companies, while allowing the Company to capitalize
on the local and regional market knowledge, goodwill, name recognition and
client relationships of each of the operating companies.
In recent years, the Company has observed and benefitted from a growing
demand for its services and systems due to, among other reasons, (i) an industry
trend towards outsourcing engineering functions as a result of reduced in-house
engineering staffs, (ii) rapid technological advancements in construction,
manufacturing and processing operations, (iii) the increased scope and
complexity of governmental, and particularly environmental, regulations and (iv)
increased capital expenditures resulting from aging infrastructures of the
United States and Western Europe, as well as the rapid growth and
industrialization of the lesser developed countries. According to ENGINEERING
NEWS-RECORD ("ENR"), its "Top 500 Design Firms," which include U.S.-based
engineer-constructor, engineer-architect and other hybrid organizations, as well
as exclusively design and planning firms, billed their clients an aggregate of
$32.7 billion in 1997. ENR also reports that the world's "Top 200 International
Design Firms" had worldwide revenues aggregating more than $34.5 billion in
1996, the latest year for which data is currently available. Industry
consultants estimate there are more than 28,000 engineering firms in the U.S.
alone, and the Company believes there are significant opportunities for an
established, professionally managed and well-capitalized engineering company to
consolidate regional, local and foreign engineering firms.
The Company's executive offices are located at 2727 North Loop West, Suite
400, Houston, Texas 77009, and its telephone number is (713) 880-6200.
4
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 4,300,000
Common Stock to be outstanding after
the Offering(1).................... 11,835,494
Use of Proceeds...................... To pay the cash portion of the purchase
price for the Pending Acquisitions, to
repay expenses incurred in connection
with the organization of OEI and the
Offering and to repay certain
indebtedness of the Company. See "Use of
Proceeds."
NYSE symbol.......................... ENG
- ------------
(1) The number of shares estimated to be outstanding on completion of the
Offering consists of (i) 1,828,368 shares issued to the organizers of OEI,
including 609,395 shares issued to members of OEI's executive management,
(ii) 5,053,027 shares to be issued as consideration in the Pending
Acquisitions, (iii) the 4,300,000 shares being offered by this Prospectus
and (iv) 654,099 shares which will be placed in escrow, and which will be
subject to a maximum three-year earnout arrangement with respect to one of
the Pending Acquisitions (see "The Company -- Summary of Terms of the
Pending Acquisitions"). Such share number does not include (i) an aggregate
of 1,765,223 subject to options to be granted or allocated for grant on or
prior to the closing of the Offering under the Company's 1998 Incentive Plan
(the "Incentive Plan"), 996,839 shares of which have an exercise price
equal to the initial public offering price per share and 768,384 of which
will have a weighted average exercise price per share of $7.68 (see
"Management -- Incentive Plan") or (ii) an aggregate of 357,579 shares
subject to warrants at an exercise price per share of $9.42 to be issued in
connection with the acquisition of Petrocon (see "The Company -- Summary of
Terms of the Pending Acquisitions").
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning immediately after this Prospectus Summary for information
that should be considered by prospective investors. Such risks include limited
combined operating history and risks related to integration and internal growth;
dependence on industry spending; dependence on large projects; risks related to
foreign operations; dependence on acquisitions for growth; need for additional
financing for acquisition program; risks associated with new credit facility;
pricing and related risk sharing; competition; risks associated with backlog;
risks inherent in completion guarantees; reliance on skilled professionals and
management personnel; proceeds of offering payable to affiliates and associates;
liability claims and insurance; fluctuations in quarterly operating results;
implications of government regulations; significant intangible assets; impact of
year 2000 compliance; significant voting control by existing management and
stockholders; potential effect of shares eligible for future sale on price of
Common Stock; immediate and substantial dilution; no prior market and possible
volatility of stock price; potential anti-takeover effects; and forward-looking
statements.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The Company will consummate the Pending Acquisitions concurrently with, and
as a condition to, the consummation of the Offering. For financial statement
presentation purposes, Petrocon is deemed to be the accounting acquirer. The
following summary historical financial data of Petrocon for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, have
been derived from audited consolidated financial statements of Petrocon included
elsewhere in this Prospectus. The following selected historical financial data
for Petrocon for the three months ended March 31, 1997 and 1998, and as of March
31, 1998, have been derived from unaudited consolidated financial statements of
Petrocon which have been prepared on the same basis as the audited financial
statements and, in the opinion of Petrocon, reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of such data.
The following summary unaudited pro forma combined financial data gives effect
to the Pending Acquisitions and certain other pro forma adjustments and is
adjusted to reflect the consummation of the Offering and the application of the
estimated net proceeds therefrom. See "Selected Historical and Pro Forma
Combined Financial Data" and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PETROCON
----------------------------------------------------- PRO FORMA COMBINED(1)
THREE MONTHS ------------------------------
ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------- -------------------- DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998 1997 1998
--------- --------- --------- --------- --------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 52,386 $ 61,851 $ 92,616 $ 19,496 $ 25,915 $ 169,065 $ 42,184
--------- --------- --------- --------- --------- ------------ ------------
Gross profit....................... 10,242 12,599 20,923 4,017 5,394 51,204 12,183
General and administrative
expenses.......................... 8,336 9,498 15,062 3,233 3,689 30,903(2) 8,385(2)
Goodwill amortization.............. 23 79 254 85 103 1,858(3) 504(3)
--------- --------- --------- --------- --------- ------------ ------------
Income from operations............. 1,883 3,022 5,607 699 1,602 18,443 3,294
Interest income (expense), net..... (456) (592) (1,569) (350) (386) (446)(4) (196) (4)
Other income (expense), net........ 382 86 290 88 (65) 421 (51)
--------- --------- --------- --------- --------- ------------ ------------
Income from continuing operations
before provision for income
taxes............................. 1,809 2,516 4,328 437 1,151 18,418 3,047
Provision for income taxes....... 599 1,051 1,574 159 479 8,010 1,379
--------- --------- --------- --------- --------- ------------ ------------
Income from continuing
operations........................ $ 1,210 $ 1,465 $ 2,754 $ 278 $ 672 $ 10,408 $ 1,668
========= ========= ========= ========= ========= ============ ============
Income per share from continuing
operations
Basic............................ $ .88 $ .14
============ ============
Diluted.......................... $ .85 $ .14
============ ============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4) 11,835,494(4)
============ ============
Diluted.......................... 12,299,454(4) 12,299,454(4)
============ ============
PETROCON
----------------------------------
MARCH 31, 1998
DECEMBER 31, MARCH 31, ------------------------------
-------------------- ----------- PRO FORMA
1996 1997 1998 COMBINED(1) AS ADJUSTED(5)
--------- --------- ----------- ------------ --------------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Working capital (deficit).......... $ (1,482) $ (3,807) $(3,610) $(32,556) $ 17,080
Total assets....................... 26,377 41,903 42,864 135,845 137,017
Total debt, including current
portion........................... 11,865 16,445 16,435 56,890 5,832
Stockholders' equity............... 6,753 13,919 14,638 54,251 107,237
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
- ------------
(1) The pro forma combined statement of operations data assume the following
transactions and events were consummated on January 1, 1997: (i) the
organization of OEI and its initial issuance of shares of Common Stock; (ii)
a 1,828.368 for-one split of the outstanding Common Stock; (iii) the Pending
Acquisitions; and (iv) the closing of the Offering and the application of
its estimated net proceeds, and are not necessarily indicative of the
results the Company would have obtained had these events actually occurred
at that date or of the Company's future results. The pro forma combined
balance sheet data assume that items (i), (ii) and (iii) above occurred on
March 31, 1998 and that the net indebtedness incurred by the Company since
March 31, 1998 occurred and existed on that date. The pro forma combined
financial data (i) are based on preliminary estimates, available information
and certain assumptions that management deems appropriate and (ii) should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data include the effect of:
(i) a reduction in compensation and benefits of approximately $2.7 million
for the year ended December 31, 1997 and $0.1 million for the three months
ended March 31, 1998 agreed to as part of the purchase agreements by certain
owners and key employees of the Acquired Companies pursuant to the Pending
Acquisitions; (ii) the elimination of a non-cash, non-recurring compensation
charge of approximately $7.2 million by the Company for the year ended
December 31, 1997 and $0.5 million for the three months ended March 31,
1998; and (iii) distributions by certain Acquired Companies of certain
assets prior to the closing of the Pending Acquisitions. The Unaudited Pro
Forma Combined Financial Statements do not reflect other potential cost
savings, revenue growth or costs associated with being a public company.
(3) Reflects amortization of the goodwill to be recorded over a 40-year period
as a result of the Pending Acquisitions.
(4) Computed on a basis described in Note 4 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of the Offering and the Company's application of the
net proceeds therefrom and repayment of $1.4 million at March 31, 1998 of
Petrocon indebtedness from cash on hand. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
Prior to making an investment decision, prospective purchasers of the
Common Stock offered hereby should consider carefully all of the information set
forth in this Prospectus and, particularly, should evaluate the following risk
factors.
LIMITED COMBINED OPERATING HISTORY; RISKS RELATED TO INTEGRATION AND INTERNAL
GROWTH
Petrocon and the Acquired Companies have operated, and will continue to
operate prior to the closing of the Pending Acquisitions, as separate,
independent businesses. Consequently, the pro forma financial information
contained herein may not be indicative of the Company's future operating results
and financial condition. The Company will rely initially on the separate
accounting and information systems of Petrocon and each of the Acquired
Companies, but the success of the Company will depend, in part, on the extent to
which it is able to centralize and integrate necessary systems and functions,
including accounting, financial reporting and job costing systems, among the
Acquired Companies. The inability of the Company to successfully centralize and
integrate these systems and functions could have a material adverse effect on
the Company's business, financial condition and results of operations, and could
adversely affect the Company's implementation of its acquisition and operating
strategies. See "Business -- Operations."
The success of the Company's internal growth strategy will depend on
various factors, including the demand for the Company's services and systems and
the Company's ability to (i) attract larger, higher margin projects, (ii)
leverage its capabilities and expertise through cross-marketing, (iii) develop
partnering relationships and other strategic alliances and (iv) achieve client
acceptance of project processes through which the Company intends to share work,
professionals and other resources among its operating companies. These factors
are, at least in part, beyond the Company's control, and there can be no
assurance the Company's internal growth strategy will be successful.
DEPENDENCE ON INDUSTRY SPENDING
The demand for the Company's services and systems depends on the level of
capital and maintenance expenditures by its industrial, commercial and
institutional clients, particularly those private sector clients involved in the
oil and gas, refining and petrochemical industries. In 1997, the revenues
attributable to the oil and gas, refining and petrochemical industries
represented $141.2 million, or 83.5% of the Company's pro forma combined
revenues. These industries historically have been cyclical in nature and
vulnerable to many of the same national and regional economic factors that
affect the economy in general. In addition, if the current or any future decline
in energy prices were to be sustained over a significant period of time, the
capital and maintenance expenditures within these industries may be adversely
affected, which could have a material adverse effect on the Company's operating
results. Other factors influencing private and public spending levels include
general economic conditions, inflation, interest rates, the availability of
financing, the availability and price of raw materials, and political
considerations.
DEPENDENCE ON LARGE PROJECTS
The Company historically has not had a continuing dependence on any single
client or a limited group of clients; however, one or a few clients have
contributed in the past, and may in the future contribute, a substantial portion
of the Company's revenues in any one year or over a period of several
consecutive years due to the size of particular engineering projects. In 1997,
the Company's five largest projects represented $14.4 million, or 8.5%, of the
Company's pro forma combined revenues. Accordingly, the Company must continually
obtain significant new engineering projects, whether from existing or new
clients, in order to generate revenues in the future as existing projects are
completed. The failure to do so would have a material adverse effect on the
Company's operating results. See "Business -- Clients."
RISKS RELATED TO FOREIGN OPERATIONS
In 1997, the Company derived approximately $44.0 million, or approximately
26.0%, of its pro forma combined revenues from foreign projects. Also, Petrocon
Arabia Limited ("PAL"), in which the Company has a 50% interest, had 1997
revenues of approximately $16.5 million, which are not included in the
8
<PAGE>
Company's 1997 pro forma combined revenues because the Company accounts for its
interest in PAL by the equity method. Most of PAL's revenues were derived from
work in the Middle East. International engineering and design work involves
risks that are normally associated with doing business overseas, such as risks
of war, terrorism, expropriation, civil unrest, political and economic
instability, nationalization of assets, currency fluctuation and repatriation
risks, overlap of different tax structures and sometimes ill-defined or
underdeveloped systems of contract laws and commercial codes. Additionally,
certain international risks are particular to engineering and construction,
including (i) open-ended bonds or other security instruments to guarantee bids
and performance, (ii) reliance on host country subcontractors, suppliers and
personnel, (iii) permitting, construction and payment delays occasioned by
bureaucratic inefficiencies, and (iv) difficulties in obtaining required or
appropriate insurance. See "Business -- Foreign Operations."
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring engineering and design
firms which expand or complement the Company's existing operations. The
Company's acquisition strategy presents risks that, singly or in combination,
could materially adversely affect its business and financial performance. These
risks include those inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential profitability of acquisition
candidates, the possibility of an adverse effect on existing operations of the
Company from the diversion of management attention and resources to
acquisitions, and the possible loss of acquired client bases and key personnel,
including engineers, designers, scientists and other professionals. The success
of the Company's acquisition strategy will depend on the extent to which
acquisition candidates continue to be available and whether the Company will be
able to acquire, successfully integrate and profitably manage additional
businesses. The Company believes that competitive and other pressures are
causing engineering firms of all sizes to combine at the local, regional,
national and international levels. Therefore, competition for acquisition
candidates could materially increase their cost. The timing, size and success of
the Company's acquisition efforts, and the associated capital commitments,
cannot readily be predicted. Accordingly, no assurance can be given the
Company's acquisition strategy will succeed. See "Business -- Business
Strategy" and "Business -- Acquisition Strategy."
NEED FOR ADDITIONAL FINANCING FOR ACQUISITION PROGRAM
All of the net proceeds of the Offering will be used in connection with the
Pending Acquisitions. See "Use of Proceeds." The Company's acquisition
strategy will require substantial additional capital. The Company currently
intends to use cash and shares of Common Stock in making future acquisitions.
Using internally generated cash or debt to complete acquisitions could
substantially limit the Company's operational and financial flexibility. The
extent to which the Company will be able or willing to use Common Stock for
acquisitions will depend on the market value of the Common Stock from time to
time and the willingness of potential sellers to accept the Common Stock as full
or partial payment. Using Common Stock for acquisitions may result in a
significant dilution to then existing Company stockholders. To the extent the
Company is unable to use Common Stock to make future acquisitions, its growth
may be limited by its ability to raise capital for this purpose through debt or
additional equity financings. The Company cannot assure that it will be able to
obtain the necessary capital to finance a successful acquisition program while
meeting its other cash needs. If the Company is unable to obtain additional
capital on acceptable terms, it may be required to reduce the scope of its
presently anticipated expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Pro Forma Combined -- Liquidity
and Capital Resources."
RISKS ASSOCIATED WITH NEW CREDIT FACILITY
The Company has recently received a commitment letter from Bank One, Texas,
N.A. to provide the Company with a credit facility (the "New Credit Facility")
from $50.0 million to $75.0 million, depending on syndication subscriptions,
which may be used for refinancing of certain indebtedness of the Company,
acquisitions, working capital and other general corporate purposes. The New
Credit Facility will be secured by a pledge of the capital stock of all OEI's
domestic subsidiaries and a negative pledge of the Company's assets. The New
Credit Facility will require compliance with various affirmative and negative
covenants
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(including maintenance of certain financial ratios) which could limit the
Company's operational and financial flexibility. The New Credit Facility is
subject to negotiation of definitive documentation and certain other customary
conditions, and there can be no assurance that the Company will be able to
obtain the New Credit Facility on terms acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pro Forma Combined -- Liquidity and Capital Resources."
PRICING AND RELATED RISK SHARING
Historically, a high percentage of the Company's projects have been
undertaken on a relatively riskless cost plus fee (either fixed or a percentage)
basis. However, project owners are increasingly seeking, and the Company and its
competitors are accepting and even initiating, pricing alternatives designed to
shift to the service provider, or requiring the service provider to at least
share in, the risks of cost overruns and inefficiencies in the delivery of
services. These alternatives include fixed-price, guaranteed maximum price,
incentive fee, competitive bidding and other "value based" pricing
arrangements. The Company expects this trend to continue in the future, with the
result that the Company will be required to maintain and continually improve,
relative to its competitors, both the precision of its cost estimates and the
efficiency with which it delivers its services. If the Company's discipline in
either of these areas declines or fails to keep pace with that of its
competitors, both the volume of awarded projects and their margins may be
affected adversely. See "-- Competition," "Business -- Contracts" and
"Business -- Competition."
COMPETITION
The Company competes nationally and internationally with many engineering
and construction management firms that are substantially larger and have
substantially greater financial, professional and other resources than the
Company. The Company also faces competition from many regional and local firms.
Barriers to entry for engineering firms are relatively low, and the risk of new
competitors entering the market, particularly in local and regional areas, and
particularly with respect to speciality areas, is high. See
"Business -- Competition."
RISKS ASSOCIATED WITH BACKLOG
The Company's combined backlog was $101.7 million at December 31, 1997
compared to $63.3 million at December 31, 1996, and was $86.2 million at March
31, 1998. The combined backlog, most of which is expected to be completed within
the next 12 months, includes only contracts for which the Company has received
authorization to proceed with the work. Although this backlog represents only
work which is under contract, it is not necessarily indicative of the Company's
future revenues or earnings related to the performance of the work included in
backlog. The Company's contracts are subject to standard industry cancellation
provisions, including cancellation on short notice or upon completion of
designated stages. Authorizations to proceed are for periods generally shorter
than the duration of the work the Company expects to perform for a particular
client, and substantial scope-of-work adjustments are common. For these and
other reasons beyond the Company's control, work represented in backlog may be
delayed or cancelled, and backlog should not be relied upon as an indicator of
the Company's future performance. See "Business -- Backlog."
RISKS INHERENT IN COMPLETION GUARANTEES
In certain instances, the Company guarantees project completion by a
scheduled date or by achievement of certain acceptance and performance testing
or milestone levels. At December 31, 1997, the Company had underway projects
aggregating approximately $46.9 million in contract amount, which are subject to
some form of completion or performance guarantee. If the Company fails to meet
any required completion or performance requirement and is unable to remedy the
failure within any applicable cure period, the Company could incur financial
penalties in the form of liquidated damages or could be required to redesign or
repeat the service or replace or repair the system. While the Company has in the
past undertaken a limited number of guaranteed projects and has not incurred
material obligations with respect to
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such projects, the Company may in the future undertake more guaranteed projects,
which could have a material adverse effect on the Company if it is unable to
satisfy future guarantee requirements.
RELIANCE ON SKILLED PROFESSIONALS AND MANAGEMENT PERSONNEL
The Company derives its revenues from, and its reputation is based on, the
efforts of engineers, scientists, chemists, designers and other highly skilled
and experienced technical personnel. Demand for these professionals is high,
their qualifications render them particularly mobile, and they are particularly
attentive to their workplace environment. The on-going risk of losing qualified
and experienced professionals from the Company could increase because of actual
or perceived changes resulting from becoming part of a larger and perhaps
culturally different organization. The business of the Company could be affected
adversely if the Company's ability to retain skilled professionals becomes
impaired for any reason.
The Company also depends in large part on the continuing efforts of its
executive officers and senior management, and will likely depend on the senior
management of any significant business it acquires in the future. That
dependence may be intensified by the Company's decentralized operating strategy.
If members of senior management leave the Company, until the Company attracts
and retains qualified replacements, the Company's business or prospects could be
affected adversely. Further, the historical growth of the Company can in some
measure be attributed to the entrepreneurial spirit of the senior management of
the Acquired Companies. To the extent the Company, as a larger, more structured
organization than any of the Acquired Companies, fails to sustain this
entrepreneurial attitude, the impetus for the Company's continued growth
following the Pending Acquisitions could diminish.
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES AND ASSOCIATES
The net proceeds from the Offering will be used: (i) to pay the cash
portion of the aggregate purchase price for the Pending Acquisitions
(approximately $27.8 million); (ii) to repay certain outstanding indebtedness of
the Company (approximately $21.8 million); (iii) to place in escrow
approximately $3.4 million, which will be subject to a maximum three year
earnout arrangement with respect to one of the Pending Acquisitions; and (iv) to
pay certain expenses of the Offering and the Pending Acquisitions. See "Use of
Proceeds." The cash payable to the former stockholders of Petrocon and the
Acquired Companies will include approximately $2.7 million payable to persons
who will become directors or executive officers of OEI. The Offering will enable
the Company to repay $2.5 million of advances by Equus II Incorporated ("Equus
II"), which were used to pay expenses of the Offering, and will benefit the
existing stockholders of the Company by creating a public market for the Common
Stock. For a more detailed discussion of the use of proceeds of the Offering,
and the benefits to be received by persons who are or will become directors or
executive officers of OEI or beneficial holders of 5% or more of the Common
Stock on consummation of the Offering and the Pending Acquisitions, see "Use of
Proceeds" and "Certain Transactions -- Pending Acquisitions Involving Certain
Officers, Directors and Stockholders."
LIABILITY CLAIMS AND INSURANCE
Providing engineering and design services involves the risk of contract,
professional errors and omissions and other liability claims, as well as adverse
publicity. Further, many of the Company's contracts with its clients require the
Company to indemnify the clients not only for the Company's negligence, but also
for the concurrent negligence of the clients. While the Company maintains
liability insurance coverage, including for professional errors and omissions,
in amounts it considers adequate, there can be no assurance that claims outside
of or exceeding its insurance coverage will not be made, or that the Company
will be able to continue to obtain adequate insurance coverage at rates it
considers reasonable. See "Business -- Risk Management; Litigation."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Holidays and inclement weather during the Company's fourth quarter exert
downward pressure on the Company's revenues for that quarter, which is only
partially offset by the year-end efforts on the part of many of the Company's
clients, particularly in the energy and public sectors, to spend any remaining
funds
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budgeted for capital expenditures during the year. The annual budgeting and
approval process under which these clients operate is normally not completed
until after the beginning of each new year, which, when combined with continuing
inclement weather, can depress the Company's operating results for the first
quarter. Principally due to these factors, the Company's revenues during its
first and fourth quarters tend to be, but are not always, lower than in its
second and third quarters.
IMPLICATIONS OF GOVERNMENT REGULATIONS
The Company and its clients are subject to various foreign, federal, state
and local laws and regulations, including those relating to the environment,
health and safety. To date, the Company has mostly benefited from these laws and
regulations because of their impact on its clients, and the cost of the
Company's own compliance has not been material, but the fact that such laws and
regulations are changed frequently makes uncertain both the Company's future
benefits and costs associated with such laws and regulations. The modification
of existing laws or regulations or the adoption of new laws or regulations
affecting the Company's clients or its own operations or industry could
adversely affect the Company.
SIGNIFICANT INTANGIBLE ASSETS
As a result of the Pending Acquisitions, goodwill accounts for a material
portion of the Company's total assets and stockholders' equity. On a pro forma
combined basis, as adjusted for the Offering, goodwill was recorded at $73.5
million at March 31, 1998, representing approximately 53.6% and 68.5% of the
Company's total assets and stockholders' equity, respectively. The Company may
also record additional goodwill and related amortization charges in connection
with the implementation of its acquisition strategy. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets acquired. Generally accepted
accounting principles require that goodwill and all other intangible assets be
amortized over the period benefited, not to exceed 40 years. If management of an
acquiring Company does not separately recognize a material intangible asset
having a benefit period less than 40 years, or does not give effect to shorter
benefit periods of factors giving rise to a material portion of the goodwill,
earnings reported in periods immediately following the acquisition of an
acquired business would be overstated. Further, in later years, the acquiring
Company would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the
consideration paid for the businesses. Earnings in later years also could be
significantly affected if management determined then that the remaining balance
of goodwill was impaired. The Company's management has determend that the period
benefited by goodwill resulting from the Pending Acquisitions will be no less
than 40 years. In making such determination, management has reviewed with its
independent accountants all of the factors and related future cash flows which
it considered in arriving at the amount incurred to acquire each of Petrocon and
the Acquired Companies. Management concluded that the anticipated future cash
flows associated with the intangible assets recognized in the Pending
Acquisitions will continue indefinitely, and there is no persuasive evidence
that any material portion will dissipate over a period shorter than 40 years.
IMPACT OF YEAR 2000 COMPLIANCE
The Company uses computer software programs and operating systems in its
internal operations, including applications used in financial business systems
and various administration functions, and also utilizes software programs in
providing certain engineering services and engineered systems. To the extent
that these software applications contain code that is unable to appropriately
interpret upcoming calendar year 2000, some level of modification of such source
code or applications will be necessary. Prior to the year 2000, the Company
expects to incur approximately $2.4 million of capital expenditures for new
computer software and hardware relating to financial reporting and certain
engineering applications, all of which will be year 2000 compliant. The Company
also expects to spend approximately $0.1 million for upgrades to certain
existing engineering software to ensure year 2000 compliance, which amounts will
be expensed in the period incurred. The Company is currently in the process of
evaluating its other computer software programs and operating systems to ensure
such programs and systems will be able to process transactions in the year 2000.
The Company does not believe that the costs to modify its other programs or
systems will be material to its financial condition or results of operations.
The Company does not currently have information concerning the year 2000
compliance of its clients and suppliers. However, since the
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Company does not generally interface its computer systems with its clients or
suppliers, the failure of the Company's clients and suppliers to achieve year
2000 compliance should not have a material adverse effect on the Company's
financial condition and results of operations.
SIGNIFICANT VOTING CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Upon closing of the Pending Acquisitions and the Offering, the respective
stockholders of Petrocon and the Acquired Companies, OEI's initial financing
source (Equus II) and the executive officers of OEI (all but one of whom is also
an executive officer of Petrocon), will beneficially own in the aggregate
approximately 63.7% of the outstanding Common Stock. If these persons were to
act in concert, they would be able to exercise control over the Company's
affairs, including the election of the entire Board of Directors and, subject to
Section 203 of the Delaware General Corporation Law (the "DGCL"), any matter
submitted to a vote of stockholders. See "Principal Stockholders."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
RESALES OF EXISTING SHARES. Upon closing of the Pending Acquisitions and
the Offering, 11,835,494 shares of Common Stock will be outstanding. The
4,300,000 shares sold in the Offering (other than shares purchased by affiliates
of the Company) will be freely tradable. The remaining shares outstanding may be
resold publicly only following their effective registration under the Securities
Act of 1933, as amended (the "Securities Act"), or under an available
exemption from the registration requirements of the Securities Act, such as the
exemption provided by Securities Act Rule 144 promulgated by the Securities and
Exchange Commission (the "SEC"). Under Rule 144, all those remaining shares
will be eligible for Rule 144 sales, subject to certain volume limitations and
other requirements, on the day following the first anniversary of the date the
Offering closes. The holders of a substantial number of those remaining shares
have certain registration rights granted by OEI in connection with the Pending
Acquisitions, subject to a one-year lockup period.
EXERCISES OF OPTIONS AND WARRANTS. Upon closing of the Offering, options
and warrants to purchase up to a total of 2,122,802 shares of Common Stock will
be outstanding, of which options and warrants to purchase 566,076 shares will be
exercisable immediately after the closing. The Company intends to register all
the shares subject to options granted under the Incentive Plan and the Company's
1998 Employee Stock Purchase Plan (the "Employee Purchase Plan") under the
Securities Act for public resale.
LOCKUP ARRANGEMENTS. OEI, the OEI directors, executive officers and
current stockholders (including Equus II) and all persons who acquire shares of
Common Stock in connection with the Pending Acquisitions have agreed not to
offer, sell or otherwise dispose of any shares for a period of one year
following the date of this Prospectus without the prior written consent of Smith
Barney Inc., except that the Company may issue, subject to certain conditions,
Common Stock in connection with acquisitions and pursuant to awards under the
Incentive Plan and the Employee Purchase Plan (see "Management -- Incentive
Plan"). Smith Barney, Inc. will evaluate various factors in determining whether
to consent to any proposed transfer during the two-year restriction period,
including the reason for the transfer, the number of shares requested to be
transferred, the potential effect of the transfer on the market price of the
Common Stock, the number of shares previously allowed to be transferred and
other relevant circumstances at the time of the transfer. In addition, under the
terms of the respective purchase agreements, persons receiving shares of Common
Stock in the Pending Acquisitions have agreed with OEI to similar transfer
restrictions for a period of one year following the date of this Prospectus.
FUTURE REGISTRATIONS FOR ACQUISITIONS. The Company intends to register
3,000,000 additional shares of Common Stock under the Securities Act during
1998, for use in connection with future acquisitions. These shares generally
will be freely tradable after their issuance by persons not affiliated with the
Company, unless the Company is able to contractually restrict their resale.
Sales of these shares during the Lockup Period would require the prior written
consent of Smith Barney, Inc.
Availability for sale, or sale, of the shares of Common Stock eligible for
future sale could adversely affect the market price of the Common Stock from
time to time. See "Shares Eligible for Future Sale."
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IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $11.15 per
share and (ii) may experience further dilution in that value from future
issuances of shares of Common Stock. See "Dilution."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Before the Offering, no public market for the Common Stock has existed, and
the initial public offering price negotiated by the Company and the
representatives of the Underwriters may not be indicative of the price at which
the Common Stock will trade after the Offering. See "Underwriting" for the
factors to be considered in determining the initial public offering price. The
Company has applied for listing of the Common Stock on the New York Stock
Exchange, but no assurance can be given that an active trading market for the
Common Stock will develop or, if it does, that it will continue after the
Offering. The market price of the Common Stock after the Offering may be subject
to significant fluctuations from time to time in response to many factors,
including variations in the reported financial results of the Company and
changing conditions in the economy in general, in the Company's industry in
particular, or in the industry of one of the Company's major client groups. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company or its performance.
POTENTIAL ANTI-TAKEOVER EFFECTS
OEI's Certificate of Incorporation, as amended (the "Charter"),
authorizes the issuance, without stockholder approval, of one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends, distributions and voting rights) as the board of directors
of OEI (the "Board of Directors") may determine. See "Description of Capital
Stock -- Preferred Stock."
Certain provisions of the Charter, OEI's bylaws and the DGCL may delay,
discourage, inhibit, prevent or render more difficult an attempt to obtain
control of the Company, whether by means of a tender offer, business
combination, proxy contest or otherwise. These provisions include the Charter
authorization of "blank check" preferred stock, classification of the Board of
Directors, a limitation on the removal of directors only for cause, and then
only on approval of holders of two-thirds of the outstanding voting stock, a
restriction on the ability of stockholders to take actions by written consent
and a DGCL restriction on business combinations with certain interested parties.
See "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Prospectus may include forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Business -- Business Strategy,"
"Business -- Acquisition Strategy," "Business -- Business Development and
Marketing" and "Business -- Clients," as well as in this Prospectus
generally. While forward-looking statements are sometimes presented with
numerical specificity, they are based on a variety of assumptions made by
management regarding future circumstances over which the Company has little or
no control. A number of important factors, including those identified in this
paragraph or discussed elsewhere in this Prospectus, could cause the Company's
actual results to differ materially from those depicted in forward-looking
statements or financial information. Actual results may differ from
forward-looking results for a number of reasons, including the following: (i)
changes in world economic conditions (including, but not limited to, the
potential instability of governments and legal systems in countries in which the
Company conducts business, and significant changes in energy prices and currency
valuations); (ii) changes in client demands as they affect levels of capital and
maintenance expenditures (including, but not limited to, the effect of strikes
at clients' facilities, variations in backlog and the impact of changes in
business cycles); (iii) competitive factors (including, but not limited to,
changes in client contract terms and procedures and
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the introduction of new design and other processes by existing and new
competitors); (iv) changes in operating costs (including, but not limited to,
the effect of changes in the Company's engineering processes, changes in costs
associated with varying levels of operations, changes resulting from different
levels of clients' demands and changes in cost of labor and benefits); (v) the
success of the Company's operating plan (including, but not limited to, its
ability to achieve the total planned benefits of its strategic plan, its ability
to integrate acquisitions into Company operations, and the ability of recently
acquired companies to achieve satisfactory operating results); and (vi)
unanticipated litigation, claims or assessments (including, but not limited to,
claims or problems related to contract, professional errors and omissions and
other liability claims).
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THE COMPANY
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. Petrocon is a multidisciplined
engineering company, which provides a full range of process, civil, structural,
mechanical, instrument and electrical engineering and design services,
principally to the oil and gas, petroleum processing and pulp and paper
industries both domestically and abroad. Petrocon also designs, engineers,
programs and installs automated control systems for specific applications,
primarily for the downstream petroleum and chemical processing industries.
Petrocon, formed in 1988, is headquartered in Beaumont, Texas, with offices in
Houston, Texas, Lake Charles and Baton Rouge, Louisiana, Saudi Arabia and Abu
Dhabi. At March 31, 1998, Petrocon had approximately 1,171 employees, including
839 engineers, designers and draftsmen and 124 construction managers, inspectors
and technicians. Petrocon has experienced significant growth in its ten-year
history, having increased its revenues from approximately $4.0 million in 1988,
to approximately $92.6 million in 1997, in large part through acquisitions.
Since 1988, Petrocon has made more than 13 acquisitions, gaining in the process
valuable experience in negotiating, closing and successfully integrating
acquisitions. According to ENR'S 1997 ranking of the top 500 engineering and
design firms in the United States, Petrocon ranked 58th in terms of client
billings.
Concurrently with, and as a condition to, the closing of the Offering, OEI
will consummate the Pending Acquisitions. For a description of the transactions
in which Petrocon and the Acquired Companies will be acquired and the
consideration to be paid by OEI for each of them, see "-- Summary of Terms of
the Pending Acquisitions" and "Certain Transactions -- Organization of OEI."
The Acquired Companies are:
PS&S: Paulus, Sokolowski and Sartor, Inc. ("PS&S") provides total
design, engineering, geotechnical and environmental services to the
pharmaceutical, industrial, entertainment and utility industries, as well as to
commercial, institutional and public sector clients in the United States and
abroad. PS&S was founded in 1962 and is headquartered in Warren, New Jersey,
with regional offices in Atlantic City, New Jersey and Tampa, Florida. At March
31, 1998, PS&S's staff consisted of approximately 204 employees, including over
160 engineers, designers and draftsmen. For 1997, PS&S had revenues of
approximately $21.7 million and was ranked 253rd, based on client billings, in
ENR'S ranking of the top 500 engineering and design firms in the United States.
GEI: Gulsby Engineering, Inc. (together with its subsidiary, "GEI")
designs, engineers, builds and installs modular processing plants for the oil
and gas industry. GEI was founded in 1977 and maintains its offices and
fabrication facilities in Houston, Texas. While GEI specializes in cryogenic
turbo-expander units which employ extremely low temperatures in the processing
of natural gas, it also designs and fabricates a large range of modular
treatment and processing facilities for the refining and petrochemical
industries, including plants for gas treatment, sulfur, dehydration and
fractionation, crude stabilization and production, MTBE, waste heat recovery,
cogeneration and amine treatment. At March 31, 1998, GEI's staff consisted of
approximately 25 employees, including a team of 7 chemical, electrical and
mechanical engineers and designers. For 1997, GEI had revenues of approximately
$18.3 million.
W-I: W-Industries, Inc. ("W-I") designs, engineers, assembles, programs
and installs control and instrumentation systems for specific applications in
the upstream and offshore oil and gas and processing industries, including both
conventional pneumatic and hydraulic control systems and sophisticated
microprocessor-based controls employing programmable logic. W-I was founded in
1984 and maintains its headquarters and engineering and assembly plant
facilities in Houston, Texas. At March 31, 1998, W-I's staff consisted of
approximately 103 employees, including 17 engineers and designers representing
the instrument, electrical and mechanical disciplines. For 1997, W-I had
revenues of approximately $20.6 million.
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C&I: Chemical & Industrial Engineering, Inc. ("C&I") provides full
engineering, procurement and construction management services, with
state-of-the-art 3D modeling capabilities, principally to the refining,
chemical, food and beverage, pharmaceutical and utility industries, both
domestically and internationally. C&I was founded in 1983 and maintains its
executive and engineering offices in Louisville, Kentucky. At March 31, 1998,
C&I's staff consisted of approximately 107 employees, including approximately 79
engineers. For 1997, C&I had revenues of approximately $15.9 million and was
ranked 338th, based on client billings, in ENR'S 1997 ranking of the top 500
engineering and design firms in the United States.
SUMMARY OF TERMS OF THE PENDING ACQUISITIONS: Subject to certain
adjustments described below, the aggregate consideration payable to consummate
the Pending Acquisitions consists of (i) approximately $27.8 million in cash,
(ii) 5,053,027 shares of Common Stock, (iii) 654,099 shares of Common Stock and
approximately $3.4 million, which will be placed in escrow, and which will be
subject to a maximum three-year earnout arrangement with respect to one of the
Pending Acquisitions, (iv) options to purchase 768,384 shares of Common Stock to
be issued in connection with the Petrocon acquisition (the "Replacement
Options") and (v) warrants to purchase 357,579 shares of Common Stock to be
issued in connection with the Petrocon acquisition (the "Replacement
Warrants"). The Replacement Options and Replacement Warrants will be in the
money at the closing of the Offering in the aggregate amount of approximately
$6.5 million (assuming an initial public offering price of $14.00 per share).
The Company will assume and repay upon or shortly after the Closing of the
Offering, certain of the then outstanding indebtedness of Petrocon and the
Acquired Companies, which as of March 31, 1998 aggregated approximately $28.7
million ($21.8 million of which will be repaid from proceeds of the Offering and
$1.4 million of which will be repaid from cash on hand), attributable as
follows: Petrocon -- $16.4 million; PS&S -- $3.2 million; GEI -- $4.6 million;
W-I -- $4.3 million; and C&I -- $0.1 million. The Company will also repay to
Equus II funds advanced to OEI to pay expenses of the Offering (estimated to be
approximately $2.5 million as of the closing of the Offering). Before the
closing of the Pending Acquisitions, W-I and PS&S, each of which is an S
corporation, are expected to distribute cash to their respective stockholders in
amounts accumulated in their respective accumulated adjustment accounts ("AAA
accounts") after December 31, 1997. An AAA account generally represents
undistributed earnings of an S corporation on which taxes have been or will be
paid by its stockholders. Before the closing of the Pending Acquisitions,
certain of the Acquired Companies will make other distributions to their
stockholders of certain assets and related liabilities with an aggregate net
book value of approximately $9.1 million.
The Replacement Options and Replacement Warrants to be issued in the
Petrocon acquisition will replace options and warrants to purchase shares of
Petrocon common stock granted to employees and issued in connection with a prior
Petrocon acquisition. The aggregate purchase price which would have otherwise
been payable for Petrocon has been reduced by $4.2 million as a result of the
grant of the Replacement Options and Replacement Warrants.
The purchase price for Petrocon was reduced by $2.0 million based on a
negotiated discounted value of projected annual earnout payments due by Petrocon
to the former shareholders of RPM Engineering, Inc. ("RPM") through 2001 in
connection with the RPM acquisition in October 1996. The additional earnout
payments, if any, will be accounted for as additional goodwill and amortized
over the applicable amortization period. See Note 15 to the Notes to the
Petrocon Consolidated Financial Statements.
A portion of the purchase price for GEI will be subject to a maximum
three-year earnout arrangement. Upon the closing of the GEI acquisition,
approximately $3.4 million in cash and 654,099 shares of Common Stock will be
placed in escrow and held for subsequent distribution to the former GEI
stockholders, or returned to the Company, depending on the future financial
performance of GEI. Distributions from the escrow will be made annually to the
former GEI stockholders if certain cumulative financial performance thresholds
are achieved by GEI within the three-year period, or earlier if those thresholds
are achieved sooner. The additional earnout payments, if any, will be accounted
for as additional goodwill and amortized
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over the applicable amortization period. Any escrowed stock and cash not
distributed to the former GEI stockholders after three years will be returned by
the escrow agent to the Company.
The consideration being paid by the Company for each Acquired Company was
determined by customary and usual negotiations between the Company and
representatives of that Acquired Company. The consideration being paid for
Petrocon was determined using the same valuation methodology used to negotiate
the consideration being paid to the stockholders of the Acquired Companies,
except that in the determination of the Petrocon consideration, a higher pricing
multiple was applied to Petrocon's adjusted earnings. See "Certain
Transactions."
The closing of each Pending Acquisition is subject to customary conditions.
They include, among others: the continuing accuracy of the respective
representations and warranties made by Petrocon and the Acquired Companies,
their respective principal stockholders and OEI; the performance of each of
their respective covenants included in the agreements relating to the Pending
Acquisitions; and the absence of a material adverse change in the results of
operations, financial condition or business of Petrocon and each Acquired
Company.
No assurance can be given that the conditions to the closing of all the
Pending Acquisitions will be satisfied or waived or that each of the Pending
Acquisitions will close. For information regarding the employment agreements to
be entered into by certain key officers of Petrocon and the Acquired Companies,
see "Management -- Employment Agreements."
STRATEGIC BENEFITS OF ACQUIRED COMPANIES: The Company believes the
Acquired Companies provide the following strategic benefits, among others: PS&S
provides the Company with additional engineering services expertise in the
geotechnical and environmental disciplines, as well as broadening the Company's
client base to include the pharmaceutical and entertainment industries. GEI
contributes modular plant systems expertise, which the Company believes can be
cross-marketed to clients of certain of the other operating companies. W-I
enhances the Company's control systems capabilities, while at the same time
expanding the Company's client base into the upstream oil and gas market. C&I
expands the geographic coverage of the Company's engineering services segment,
broadens the Company's client base into the food and beverage and pharmaceutical
industries and provides the Company with state-of-the-art 3D modeling
capabilities that can be utilized at other operating companies.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by this Prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company (including
the repayment of approximately $2.5 million of advances by Equus II to fund a
portion of the Offering expenses), are estimated to be approximately $53.0
million (approximately $61.4 million if the Underwriters exercise their
over-allotment option in full), assuming an initial public offering price of
$14.00 per share (the midpoint of the estimated initial public offering price
range). Of the net Offering proceeds, approximately $27.8 million will be used
to pay the cash portion of the purchase prices for the Pending Acquisitions,
approximately $21.8 million will be used concurrently for the repayment of
certain outstanding indebtedness of Petrocon and the Acquired Companies
(excluding the repayment of the $2.5 million of advances by Equus II referred to
above) and approximately $3.4 million will be placed in escrow with respect to
one of the Pending Acquisitions. See "The Company -- Summary of Terms of the
Pending Acquisitions" and "Certain Transactions -- Organization of OEI."
The indebtedness to be repaid from the proceeds of the Offering (some of
which has been guaranteed by stockholders of the Acquired Companies) bears
interest at rates ranging from 5.9% to 10.0% per annum. Such indebtedness would
otherwise mature at various dates through January 2004.
DIVIDEND POLICY
It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed by the New Credit Facility and any restrictions that may be
imposed by the Company's future credit facilities. The Company expects that its
New Credit Facility will require compliance with various loan covenants,
including restrictions on the payment of dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Pro
Forma Combined -- Liquidity and Capital Resources."
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of March 31, 1998 of the Company
on a pro forma combined basis: (i) giving effect to the Pending Acquisitions and
the net incurrence of indebtedness by the Company since March 31, 1998; and (ii)
as adjusted giving effect to the Offering and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and Unaudited Pro Forma Combined
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
MARCH 31, 1998
------------------------
PRO FORMA
COMBINED AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Short-term debt and current maturities
of long-term obligations(1)........... $53,540 $ 5,832
========= ===========
Long-term obligations, less current
maturities............................ $ 3,350 $ --
--------- -----------
Stockholders' equity:
Preferred stock: $.001 par value
1,000,000 authorized; none issued
and outstanding.................. -- --
Common stock: $.001 par value
40,000,000 shares authorized;
7,535,494 outstanding pro forma;
and 11,835,494 outstanding, as
adjusted(2)...................... 8 12
Additional paid-in capital......... 48,654 101,636
Retained earnings.................. 5,589 5,589
--------- -----------
Total stockholders' equity.... 54,251 107,237
--------- -----------
Total capitalization.......... $57,601 $ 107,237
========= ===========
- ------------
(1) The pro forma combined balance includes $27.8 million of cash consideration
payable in connection with the Pending Acquisitions.
(2) Includes an aggregate 654,099 shares which will be placed in escrow and will
be subject to a maximum three-year earnout arrangement with respect to one
of the Pending Acquisitions (see "The Company -- Summary of Terms of the
Pending Acquisitions"), and excludes (i) an aggregate of 1,765,223 shares
subject to options to be granted or allocated for grant on or prior to the
closing of the Offering under the Incentive Plan, 996,839 of which will have
an exercise price equal to the initial public offering price per share and
768,384 of Replacement Options which will have a weighted average exercise
price per share of $7.68, and (ii) an aggregate of 357,579 shares subject to
the Replacement Warrants to be issued in connection with the Petrocon
acquisition and which have an exercise price per share of $9.42. See
"Management -- Incentive Plan," "Certain Transactions -- Organization of
OEI" and "The Company -- Summary of Terms of the Pending Acquisitions."
20
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company as
of March 31, 1998 was approximately $19.2 million, or approximately $2.55 per
share, after giving effect to the Pending Acquisitions and the net incurrence of
indebtedness by the Company since March 31, 1998. The deficit in pro forma net
tangible book value per share represents the amount by which the Company's pro
forma total liabilities exceeded the Company's pro forma net tangible assets as
of March 31, 1998, divided by the number of shares to be outstanding after
giving effect to the Pending Acquisitions. After giving effect to the sale of
the 4,300,000 shares offered hereby and deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's pro forma net tangible book value as of March 31, 1998
would have been approximately $33.8 million, or approximately $2.85 per share,
based on an assumed initial public offering price of $14.00 per share (the
midpoint of the estimated initial public offering price range). This represents
an immediate increase in pro forma net tangible book value of approximately
$5.40 per share to existing stockholders and an immediate dilution of
approximately $11.15 per share to new investors purchasing shares in the
Offering. The following table illustrates this per share pro forma dilution:
Initial public offering price per
share.............................. $ 14.00
Pro forma net tangible book
value (deficit) per share
before the Offering............ $ (2.55)
Increase in pro forma tangible
value attributable to new
investors...................... 5.40
Pro forma net tangible book value per
share after the Offering........... 2.85
---------
Dilution per share to new
investors.......................... $ 11.15
=========
The following table sets forth, on a pro forma basis to give effect to the
Pending Acquisitions and the closing of the Offering and the application of the
estimated net proceeds therefrom as of March 31, 1998, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid to the Company by existing
stockholders (including persons acquiring Common Stock in the Pending
Acquisitions) and the new investors purchasing shares of Common Stock in the
Offering (before deducting the underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION(1) AVERAGE
---------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 7,535,494 63.7% $(19,203) (46.8)% $(2.55)
New investors........................ 4,300,000 36.3 60,200 146.8 14.00
---------- -------- -------- --------
Total...................... 11,835,494 100.0% $ 40,997 100.0%
========== ======== ======== ========
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the pro forma
stockholders' equity of the Company less pro forma goodwill before giving
effect to the post-merger adjustments set forth on the Unaudited Pro Forma
Combined Balance Sheet included herein.
21
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company will consummate the Pending Acquisitions concurrently with, and
as a condition to, the consummation of the Offering. For financial statement
presentation purposes, Petrocon is deemed to be the accounting acquirer. The
following selected historical financial data of Petrocon for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, have
been derived from the audited consolidated financial statements of Petrocon
included elsewhere in this Prospectus. The following selected historical
financial data for Petrocon for the years ended December 31, 1993 and 1994 and
the three months ended March 31, 1997 and 1998, and as of December 31, 1993,
1994 and 1995 and March 31, 1998, have been derived from unaudited consolidated
financial statements of Petrocon which have been prepared on the same basis as
the audited financial statements and, in the opinion of Petrocon, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The following summary unaudited pro forma combined
financial data gives effect to the Pending Acquisitions and certain other pro
forma adjustments and is adjusted to reflect the consummation of the Offering
and the application of the estimated net proceeds therefrom. See the Unaudited
Pro Forma Combined Financial Statements and the notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
PETROCON PRO FORMA
--------------------------------------------------------------------------- COMBINED(1)
THREE MONTHS ENDED ------------
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED
----------------------------------------------------- -------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997 1998 1997
--------- --------- --------- --------- --------- --------- --------- ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 48,113 $ 51,524 $ 52,386 $ 61,851 $ 92,616 $ 19,496 $ 25,915 $ 169,065
--------- --------- --------- --------- --------- --------- --------- ------------
Gross profit....................... 9,162 9,317 10,242 12,599 20,923 4,017 5,394 51,204
General and administrative
expenses.......................... 7,989 7,274 8,336 9,498 15,062 3,233 3,689 30,903(2)
Goodwill amortization.............. -- -- 23 79 254 85 103 1,858(3)
--------- --------- --------- --------- --------- --------- --------- ------------
Income from operations............. 1,173 2,043 1,883 3,022 5,607 699 1,602 18,443
Interest income (expense), net..... (291) (358) (456) (592) (1,569) (350) (386) (446)(4)
Other income (expense), net........ (93) 739 382 86 290 88 (65) 421
--------- --------- --------- --------- --------- --------- --------- ------------
Income from continuing operations
before provision for income
taxes............................. 789 2,424 1,809 2,516 4,328 437 1,151 18,418
Provision for income taxes......... 307 720 599 1,051 1,574 159 479 8,010
--------- --------- --------- --------- --------- --------- --------- ------------
Income from continuing
operations........................ $ 482 $ 1,704 $ 1,210 $ 1,465 $ 2,754 $ 278 $ 672 $ 10,408
========= ========= ========= ========= ========= ========= ========= ============
Income per share from continuing
operations
Basic............................ $ .88
============
Diluted.......................... $ .85
============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4)
============
Diluted.......................... 12,299,454(4)
============
</TABLE>
PRO FORMA
COMBINED(1)
------------
THREE MONTHS
ENDED
MARCH 31,
1998
-------------
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 42,184
-------------
Gross profit....................... 12,183
General and administrative
expenses.......................... 8,385(2)
Goodwill amortization.............. 504(3)
-------------
Income from operations............. 3,294
Interest income (expense), net..... (196)(4)
Other income (expense), net........ (51)
-------------
Income from continuing operations
before provision for income
taxes............................. 3,047
Provision for income taxes......... 1,379
-------------
Income from continuing
operations........................ $ 1,668
=============
Income per share from continuing
operations
Basic............................ $ .14
=============
Diluted.......................... $ .14
=============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4)
=============
Diluted.......................... 12,299,454(4)
=============
<TABLE>
<CAPTION>
PETROCON
---------------------------------------------------------------- MARCH 31,
1998
DECEMBER 31, -------------
----------------------------------------------------- MARCH 31, PRO FORMA
1993 1994 1995 1996 1997 1998 COMBINED (1)
--------- --------- --------- --------- --------- --------- -------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficit)............. $ 73 $ 1,044 $ 2,402 $ (1,482) $ (3,807) $(3,610) $ (32,556)
Total assets.......................... 21,013 18,007 20,014 26,377 41,903 42,864 135,845
Total debt, including current
portion.............................. 4,950 5,121 5,495 11,865 16,445 16,435 56,890
Stockholders' equity.................. 3,331 4,271 3,865 6,753 13,919 14,638 54,251
</TABLE>
MARCH 31,
1998
------------
AS
ADJUSTED (5)
------------
BALANCE SHEET DATA:
Working capital (deficit)............. $ 17,080
Total assets.......................... 137,017
Total debt, including current
portion.............................. 5,832
Stockholders' equity.................. 107,237
(FOOTNOTES ON FOLLOWING PAGE)
22
<PAGE>
- ------------
(1) The pro forma combined statement of operations data assume that the
following transactions and events were consummated on January 1, 1997: (i)
the organization of OEI and its initial issuance of shares of Common Stock;
(ii) a 1,828.368-for-one split of the outstanding Common Stock; (iii) the
Pending Acquisitions; and (iv) the closing of the Offering and the
application of its estimated net proceeds, and are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred at that date or of the Company's future results. The pro
forma combined balance sheet data assume that items (i), (ii) and (iii)
above occurred on March 31, 1998 and that the net indebtedness incurred by
the Company since March 31, 1998 occurred and existed on that date. The pro
forma combined financial data (i) are based on preliminary estimates,
available information and certain assumptions that management deems
appropriate and (ii) should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data include the effect of:
(i) a reduction in compensation and benefits of approximately $2.7 million
for the year ended December 31, 1997 and $0.1 million for the three months
ended March 31, 1998 agreed to as part of the purchase agreements by certain
owners and key employees of the Acquired Companies pursuant to the Pending
Acquisitions; (ii) the elimination of a non-cash, non-recurring compensation
charge of approximately $7.2 million by the Company for the year ended
December 31, 1997 and $0.5 million for the three months ended March 31,
1998; and (iii) distributions by certain Acquired Companies of certain
assets prior to the closing of the Pending Acquisitions. The Unaudited Pro
Forma Combined Financial Statements do not reflect other potential cost
savings, revenue growth or costs associated with being a public company.
(3) Reflects amortization of the goodwill to be recorded over a 40-year period
as a result of the Pending Acquisitions.
(4) Computed on a basis described in Note 4 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of the Offering and the Company's application of the
net proceeds therefrom and repayment of $1.4 million at March 31, 1998 of
Petrocon indebtedness from cash on hand. See "Use of Proceeds."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Historical and Pro Forma
Combined Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from engineering, design and
related services provided to its clients. Direct costs consist primarily of
labor, material and other related expenses necessary to complete the various
engineering and design projects. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office supplies, rent, utilities, insurance and
professional fees.
Petrocon and the Acquired Companies have been managed throughout the
periods discussed below as independent private companies, and their results of
operations reflect different tax structures (S corporations and C corporations),
which have influenced, among other things, their historical levels of owners'
compensation. Some owners of these companies and certain key employees have
prospectively agreed to certain reductions in their compensation and benefits in
connection with the Pending Acquisitions.
OEI has conducted no operations to date other than in connection with the
Offering and the Pending Acquisitions. The Company intends to integrate these
businesses and their operations and administrative functions. The integration
process may present opportunities to reduce costs through the elimination of
duplicate functions and through economies of scale, but will necessitate
additional costs and expenditures for corporate management and administration.
The Company will also incur corporate expenses related to being a public
company, implementation of an acquisition program and systems integration. These
various costs and possible cost-savings may make comparison of historical
operating results not comparable to, nor indicative of, future performance. No
such cost savings were reflected in the pro forma combined statement of
operations data, except for compensation reductions provided for in the
agreements entered into in connection with certain of the Pending Acquisitions
and other known cost eliminations.
In October 1997 and March 1998, OEI sold 609,395 shares of Common Stock to
its management, all but one of whom are members of the management of Petrocon.
As a result, the Company recorded a non-recurring, non-cash compensation charge
of $7.2 million and $0.5 million in the fourth quarter of 1997 and first quarter
of 1998, respectively, representing the difference between the amount paid for
the shares and the estimated fair value of the shares, which value has been
discounted from the estimated initial public offering price due primarily to
restrictions on the sale and transferability of the shares issued.
In July 1996, the SEC issued Staff Accounting Bulletin No. 97 ("SAB 97")
relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of accounting. Under the purchase method, the owners of the
company that receive the largest portion of voting rights in the combined
enterprise as a result of the Pending Acquisitions are presumed to be the
accounting acquirer. Accordingly, Petrocon has been designated as the accounting
acquirer. For the Acquired Companies, $64.2 million, representing the excess of
the fair value of the merger consideration to be received over the fair value of
the net assets to be acquired, will be recorded as goodwill on the Company's
balance sheet. This goodwill will be amortized over a 40-year period as a
non-cash charge to the Company's statements of operations. The pro forma impact
of this amortization expense, which is non-deductible for federal income tax
purposes, is $1.6 million per year on an after-tax basis.
PRO FORMA COMBINED -- LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, on a pro forma combined basis, after giving effect to
(i) the net incurrence of indebtedness by the Company since March 31, 1998, (ii)
the Pending Acquisitions, (iii) the closing of the Offering and the Company's
application of the net proceeds therefrom to repay certain indebtedness of
Petrocon and the Acquired Companies (approximately $21.8 million), (iv) the
repayment of an additional
24
<PAGE>
1.4 million of Petrocon indebtedness from cash on hand and (v) $1.0 million of
advances by Equus II, which have been used to pay a portion of the expenses of
the Offering (which advances are estimated to aggregate $2.5 million at the time
the Offering closes), the Company would have had an aggregate of $3.5 million of
cash and short-term investments, $19.4 million of working capital and no
long-term debt obligations.
The Company has recently received a commitment letter from Bank One, Texas,
N.A. to provide the New Credit Facility, which would be available upon the
closing of the Offering. According to the proposed New Credit Facility terms,
the Company would have a line of credit from $50.0 million to $75.0 million,
depending on syndication subscriptions, which may be used for general corporate
purposes, including refinancing of certain indebtedness of Petrocon and the
Acquired Companies, acquisitions, capital expenditures and working capital. The
New Credit Facility will be secured by a pledge of the capital stock of all
OEI's domestic subsidiaries and a negative pledge of the Company's assets. The
New Credit Facility will require compliance with various affirmative and
negative covenants, including, among others, (i) maintenance of certain
financial ratios, (ii) a restriction on additional indebtedness and (iii)
restrictions on liens, guarantees, advances, dividends and business activities
unrelated to the Company's existing operations. Failure to comply with such
covenants and restrictions would constitute a default under the New Credit
Facility. The New Credit Facility is subject to negotiation of definitive
documentation and certain other customary conditions, and there can be no
assurance that the Company will be able to obtain the New Credit Facility on
terms acceptable to the Company.
The Company intends to pursue further acquisition opportunities. The
Company expects to fund future acquisitions through the issuance of additional
Common Stock, borrowings (including amounts available under the New Credit
Facility) and cash flow from operations. To the extent the Company funds a
significant portion of the consideration for future acquisitions with cash, it
may have to increase the amount available under the New Credit Facility or
obtain other sources of financing. There can be no assurance such financing will
be available on terms acceptable to the Company. The Company expects that its
cash flow from operations will provide cash sufficient to meet the Company's
normal working capital needs, debt service requirements and planned capital
expenditures for property and equipment (exclusive of acquisitions of other
businesses) for at least the next several years. On a combined basis, the
Company made capital expenditures for property and equipment of approximately
$1.6 million and $1.9 million in 1996 and 1997, respectively. The Company's
capital expenditures for 1998 are expected to be approximately $2.0 million,
primarily for computer equipment and software, excluding capital expenditures
for acquisitions.
Due to the relatively low levels of inflation experienced in 1997,
inflation did not have a significant effect on the pro forma combined results of
operations of the Company in that period.
SEASONALITY
The Company historically has experienced quarterly fluctuations in
revenues, operating income and cash flows. In recent years, the Company has
experienced greater revenue, operating income and cash flows in the second and
third calendar quarters as compared with the other two calendar quarters,
primarily as a result of holidays and inclement weather during the first and
fourth calendar quarters and delays in expenditures until after completion of
the Company's clients annual budgeting process, which normally occurs during the
first calendar quarter.
IMPACT OF YEAR 2000
Prior to the year 2000, the Company expects to incur approximately $2.4
million of capital expenditures for new computer software and hardware relating
to financial reporting and certain engineering applications, all of which
software will be year 2000 compliant. The Company also expects to spend
approximately $0.1 million for upgrades to certain existing engineering software
to ensure year 2000 compliance, which amounts will be expensed in the period
incurred. The Company is currently in the process of evaluating its other
computer software programs and operating systems to ensure such programs and
systems will be able to process transactions in the year 2000. The Company does
not believe that the
25
<PAGE>
costs to modify these other programs or systems will be material to its
financial condition or results of operations. The Company does not currently
have information concerning the year 2000 compliance of its clients and
suppliers. However, since the Company does not generally interface its computer
systems with its client or suppliers, the failure of the Company's clients and
suppliers to achieve year 2000 compliance could have a material adverse effect
on the Company's financial condition and results of operations.
PETROCON -- RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship that certain items in Petrocon's Consolidated Statements of Income
bear to revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 52,386 100.0% $ 61,851 100.0% $ 92,616 100.0%
Direct costs............................ 42,144 80.4 49,252 79.6 71,693 77.4
--------- --------- --------- --------- --------- ---------
Gross profit............................ 10,242 19.6 12,599 20.4 20,923 22.6
General and administrative expenses..... 8,359 16.0 9,577 15.5 15,315 16.6
--------- --------- --------- --------- --------- ---------
Income from operations.................. 1,883 3.6 3,022 4.9 5,608 6.0
Other income (expense).................. (74) (0.1) (506) (0.8) (1,279) (1.3)
--------- --------- --------- --------- --------- ---------
Income from continuing operations before
income tax............................ 1,809 3.5 2,516 4.1 4,329 4.7
Provision for income tax................ 599 1.2 1,051 1.7 1,574 1.7
--------- --------- --------- --------- --------- ---------
Income from continuing operations....... $ 1,210 2.3% $ 1,465 2.4% $ 2,755 3.0%
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED
MARCH 31,
--------------------------------------------
1997 1998
-------------------- --------------------
Revenues................................ $ 19,496 100.0% $ 25,915 100.0%
Direct costs............................ 15,479 79.4 20,521 79.2
--------- --------- --------- ---------
Gross profit............................ 4,017 20.6 5,394 20.8
General and administrative expenses..... 3,318 17.0 3,792 14.6
--------- --------- --------- ---------
Income from operations.................. 699 3.6 1,602 6.2
Other income (expense).................. (262) (1.3) (451) (1.7)
--------- --------- --------- ---------
Income from continuing operations before
income tax............................ 437 2.3 1,151 4.5
Provision for income tax................ 159 .8 479 1.9
--------- --------- --------- ---------
Income from continuing operations....... $ 278 1.5% $ 672 2.6%
========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues increased by $6.4 million, or 32.9%, to $25.9 million during the
first quarter of 1998 from $19.5 million during the three months ended March 31,
1997. This increase was mainly due to internal growth at most of the Company's
subsidiaries caused by strong customer demand for Petrocon's engineering and
design services. In addition, Alliance Engineering, Inc. ("AEI"), was acquired
during the first quarter of 1997 and contributed revenues of $2.1 million during
that period compared to $4.9 million during the first three months of the
current year.
Gross profit improved by $1.4 million, or 34.3%, to $5.4 million during the
three months ended March 31, 1998 from $4.0 million during the same period in
the prior year. The gross margin increased to 20.8% for the first quarter of
1998 from 20.6% for the same period in 1997. The increase was primarily due to
increased revenues throughout the Company, and particularly at AEI, which
generally achieves higher gross margins than the other Petrocon subsidiaries.
General and administrative expenses increased by $0.5 million to $3.8
million during the first quarter of 1998 from $3.3 million during the comparable
prior year period. This increase was principally related to the inclusion of
administrative costs for AEI for the full three-month period during 1998 versus
only two months during the 1997 quarter. Various other payroll-related and
administrative costs increased during the first three months of 1998 from the
comparable prior year period mainly due to the rise in revenues from 1997 to
1998.
Other income (expense) for the first quarter of 1998 increased by $(0.2)
million to $(0.5) million from $(0.3) million for the comparable period in 1997.
This increase was primarily related to a $0.2 million decrease in the earnings
of PAL resulting from a reduction in project revenues from the Middle East
region, which earnings are reported under the equity method.
Net income increased by $0.4 million, or 142%, to $0.7 million for the
first three months ended March 31, 1998 from $0.3 million during the same period
in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for 1997 increased by $30.7 million, or 49.6% to $92.6 million
from $61.9 million for 1996. This increase was principally due to the
acquisitions of AEI, RPM/Barnard & Burke ("RPM") and Triangle Engineers &
Constructors, Inc. ("TE&C") in February 1997, October 1996 and July 1996,
respectively. These entities contributed revenues of $39.7 million in 1997 as
compared to $6.1 million in
26
<PAGE>
1996. This increase was partially offset by a reduction in revenues at Petrocon
(excluding revenues attributable to the acquisitions) primarily as a result of
the transfer of an aggregate of approximately $3.5 million of revenues to PAL
and the acquired companies.
Gross profit for 1997 increased by $8.3 million, or 65.9%, to $20.9 million
from $12.6 million for 1996. The gross margin increased to 22.6% in 1997 from
20.4% in 1996. This increase was principally due to the acquisitions of AEI and
RPM, which achieved generally higher gross margins than the other Petrocon
subsidiaries. AEI, RPM and TE&C contributed aggregate gross profit for 1997 of
$10.6 million as compared to $1.6 million for 1996.
General and administrative expenses for 1997 increased by $5.7 million to
$15.3 million from $9.6 million for 1996, primarily as a result of the AEI, RPM,
and TE&C acquisitions, the addition during June 1996 of a corporate acquisition
staff and an increase in office work as contrasted with in-plant assignments.
AEI, RPM and TE&C accounted for $7.4 million of general and administrative
expenses for 1997 as compared to only $1.2 million in 1996. In addition, office
work generally carries higher general and administrative expenses but also
generates higher margins than in-plant assignments.
Other income (expense) for 1997 increased by $(0.8) million to $(1.3)
million from $(0.5) million for 1996. This increase was primarily due to (i) a
$1.0 million increase in interest expense resulting from increased borrowings
needed to fund acquisitions, a shareholder preferred stock buy-back program and
working capital requirements and (ii) a $0.5 million charge related to the
write-off of certain leasehold improvements and other property. These expense
increases were partially offset by an $0.8 million increase in the earnings of
PAL reported under the equity method.
Income from continuing operations for 1997 increased by $1.3 million, or
86.7%, to $2.8 million from $1.5 million for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for 1996 increased by $9.5 million, or 18.1%, to $61.9 million
from $52.4 million in 1995. This increase was primarily the result of the
acquisitions of RPM and TE&C, which contributed revenues of $6.1 million in
1996. In addition, internal growth accounted for an increase of $3.4 million
based in part on the receipt of significant incentive payments on several large
projects completed in 1996.
Gross profit for 1996 increased by $2.4 million, or 23.5%, to $12.6 million
from $10.2 million for 1995, primarily due to the increase in revenues and from
the RPM and TE&C acquisitions. The gross margin increased to 20.4% in 1996 from
19.6% in 1995. This improvement was principally due to the RPM acquisition,
which achieved generally a higher gross margin than the other Petrocon
subsidiaries.
General and administrative expenses for 1996 increased by $1.2 million to
$9.6 million from $8.4 million for 1995, primarily as a result of the RPM and
TE&C acquisitions and the addition of the corporate acquisition staff in June
1996. RPM and TE&C accounted for $1.2 million of general and administrative
expenses in 1996.
Other income (expense) for 1996 increased by $(0.4) million to $(0.5)
million from $(0.1) million for 1995. This increase related principally to (i) a
$0.1 million increase in interest expense due to increased borrowings to fund
acquisitions and the shareholder preferred stock buy-back program and (ii) a
$0.5 million decrease in the earnings of PAL reported under the equity method.
The decrease in the earnings of PAL resulted primarily from the imposition of
quota requirements under certain client contracts that have since been resolved.
Income from continuing operations for 1996 increased $0.3 million to $1.5
million from $1.2 million for 1995.
PETROCON -- LIQUIDITY AND CAPITAL RESOURCES
Petrocon had cash and cash equivalents of $2.3 million and $0.7 million at
December 31, 1997 and March 31, 1998, respectively. In addition, Petrocon has a
$14.5 million revolving credit facility, of which $11.6 million and $12.3
million was outstanding at December 31, 1997 and March 31, 1998, respectively.
This credit facility is secured by the Company's accounts receivable and
requires Petrocon to maintain certain financial covenants regarding net worth
and cash flow, as well as certain financial ratios, including fixed charge
coverage and specified levels of certain other items. The credit facility
expires in August 1999. The Company intends to repay this credit facility with
proceeds from the Offering and enter into the New
27
<PAGE>
Credit Facility. See "Use of Proceeds" and "-- Pro Forma
Combined -- Liquidity and Capital Resources."
For 1997, net cash provided by operations totaled $3.3 million as compared
to $4.6 million for 1996. Cash provided by operations for 1997 consisted of net
income of $2.8 million, plus non-cash revenue and expenses of $1.9 million, less
changes in working capital of $1.4 million in the aggregate. Non-cash revenue
and expenses for 1997 included depreciation and amortization expense of $1.8
million. Changes in working capital included a $3.3 million increase in accounts
receivable as a result of the higher revenues in 1997, and a $1.4 million
increase in costs and estimated earnings in excess of billings on uncompleted
contracts due to an increase in projects in progress but not completed at year
end. This use of working capital was partially offset by increases in accounts
payable of $0.8 million and accrued salaries and fringe benefits of $2.7
million, primarily due to the higher revenues in 1997 and the AEI acquisition.
For the three months ended March 31, 1998, net cash used in operations
totaled $1.2 million compared to $0.8 million during the same period in 1997.
Current year cash used in operations consisted of net income of $0.7 million,
plus non-cash expenses of $0.3 million, less working capital changes of $2.2
million.
Non-cash revenue and expenses during the January to March 1998 period
included depreciation and amortization expense of $0.4 million. Changes in
working capital included a $0.8 million increase in accounts receivable as a
result of higher revenues in 1998, and a $1.4 million increase in costs and
estimated earnings in excess of billings on uncompleted contracts due to an
increase in the amount of projects in progress but not completed at March 31. In
addition, working capital was used to reduce accrued compensation and benefits.
This use of working capital was partially offset by an increase in amounts
payable of $1.1 million, primarily due to higher revenues in 1998.
Capital expenditures were $1.2 million and $0.4 million for the year ended
December 31, 1997 and for the three months ended March 31, 1998, respectively.
Such expenditures were principally for the purchase of computer equipment and
software and certain AEI leasehold improvements.
In February 1997, a wholly-owned subsidiary of Petrocon merged with AEI.
Cash used for the acquisition, net of cash acquired, was $3.1 million in the
aggregate. In August 1997, Petrocon repurchased 154,531 shares of its
outstanding Series A preferred stock in exchange for cash of $0.9 million and
other consideration. At December 31, 1997, net increases in amounts outstanding
under PEI's credit facility and notes payable were $3.8 million in the
aggregate, principally to fund the AEI acquisition and for working capital
requirements.
Petrocon capital expenditures for 1998 are expected to be approximately
$1.5 million, primarily for Petrocon computer equipment and software.
28
<PAGE>
INDUSTRY OVERVIEW
GENERAL
Engineering is an integral part of virtually every type of construction,
manufacturing, processing, natural resource extraction, power generation or
transportation activity. Firms providing engineering services range from small,
local firms employing several or even a single engineer, to global organizations
whose professionals number in the thousands and which have worldwide
capabilities. Some engineering firms confine their activities to "pure"
planning and design functions, while many combine their engineering work with
varying degrees of construction, architectural and other activities. Some
engineering firms are specialized, either on a discipline or industry basis, and
others are multidisciplined and serve a broader base of clients.
Given the breadth of activities constituting "engineering" and the
diversity of the firms conducting these activities, generalizations and
characterizations are difficult and largely subjective. ENR annually reports on
and ranks by client billings what it calls "The Top 500 Design Firms," which
include U.S.-based engineer-constructor, engineer-architect and other hybrid
organizations, as well as exclusively design and planning firms. Ranked
companies classify themselves as concentrating in specified areas of work.
According to ENR'S report for 1997, its 500 top ranked firms as a group billed
their clients $32.7 billion in 1997, representing a 10.3% increase over 1996.
For 1997, the "Top 500's" total reported client billings by areas of work were
as follows:
BILLINGS
(IN BILLIONS PERCENT
TYPE OF WORK OF DOLLARS) OF TOTAL
- ------------------------------------- ------------- --------
General Building..................... 5.0 16.8
Transportation....................... 4.6 15.4
Hazardous Waste...................... 4.5 15.1
Petroleum............................ 4.0 13.7
Industrial Process................... 3.0 10.1
Sewerage/Solid Waste................. 2.6 8.7
Power................................ 1.7 5.6
Manufacturing........................ 1.6 5.3
Water Supply......................... 1.5 4.9
Other................................ 1.3 4.5
Of the total 1997 billings reported by ENR'S "Top 500," $25.4 billion, or
77.7%, was represented by domestic billings, and $7.3 billion, or 22.3%, was
represented by international work. Out of the "Top 500" firms, 309 firms
reported increases in their professional staff during 1997, versus 179 firms
which reported losses or no change in professional staff, and 304 firms reported
higher backlogs at the end of the year, while 163 firms reported lower or
unchanged backlog levels.
INDUSTRY CONDITIONS
The markets served by the ENR ranked firms and the many thousands of
unranked U.S. and foreign-based design and engineering firms make up a global
construction market estimated to exceed $3 trillion annually. In the United
States, over the last decade, the annual value of construction put in place has
been assessed by the U.S. Department of Commerce at over $400 billion in current
dollars. The market for engineering services has experienced significant growth
in recent years as reflected by an increase in annual billings by ENR'S "Top
500" of $3.3 billion, or 11.2%, from $29.4 billion in 1995 to $32.7 billion in
1997. The Company believes there will be a continued strong demand for
engineering services within the United States and internationally due to, among
other things, the following factors:
ANTICIPATED SPENDING ON INFRASTRUCTURES. The United States
infrastructure needs have been much publicized. Upgrades and expansions of
the existing infrastructure, including highways, water and sewer lines and
gas and other power utilities are currently estimated by the Associated
General Contractors of America to require more than $3 trillion over the
next 20 years, averaging approximately $180 billion each year. Similarily,
significant infrastructure expenditures are expected in
29
<PAGE>
Europe, with construction spending estimated at approximately $500 billion
per year. In lesser developed countries, increasing urbanization and the
growing demand for an improved standard of living are expected to generate
substantial engineering and construction infrastructure projects.
CONTINUED IMPROVEMENT OF INDUSTRIAL OPERATING AND PROCESSING
EFFICIENCIES. The industrial construction market both within the United
States and abroad is expected to continue to be driven by competitive and
technological forces. Global competition is believed by management to be
motivating plant owners to increase their spending on solutions that
further automate and streamline their businesses. As a result, the global
demand for technically diverse engineering services is expected to continue
to increase.
CONTINUED INCREASES IN REGULATORY REQUIREMENTS IMPACTING U.S.
INDUSTRY. Regulations regarding the environmental and safety compliance of
U.S. businesses continue to create significant construction and engineering
opportunities. For example, the EPA currently estimates that U.S. pulp and
paper manufacturers will be required to make more than $1.8 billion in
total capital expenditures and $277 million annually to comply with surface
water discharge limitations currently in effect. The EPA further estimates
that approximately $140 billion must be spent over the next 20 years to
conform U.S. wastewater and hazardous waste disposal sites to comply with
current regulatory requirements.
CONTINUED TRENDS IN OUTSOURCING OF PLANT OPERATION AND
MAINTENANCE. Technical staffing by engineering firms should continue to
expand as refineries and manufacturing and processing plants rely
increasingly on outside firms to provide engineering services related to
plant operations and maintenance. Industrial clients have continued to
reduce their in-house engineering staffs related to these areas as a result
of outsourcing non-core business functions and industry downsizing.
Industry studies estimate that between 20% and 50% of the total cost of
running a plant is represented by maintenance and that the total potential
plant maintenance market ranges from $300 billion to $500 billion annually.
TREND TOWARD CONSOLIDATION
The Company believes that more than 28,000 U.S. firms, and an even greater
number of foreign firms, offer some form of engineering and design services. The
Company also believes that these firms are combining at the local, national and
international levels as they seek to expand their geographic coverage, broaden
their professional capabilities, expand within existing geographic markets and
specialties, and leverage their engineering capabilities through
cross-marketing. The Company believes that the same motivating factors that have
led some of Europe's largest firms to acquire or obtain controlling interests in
some of the largest and best known engineering firms in the United States, and
VICE VERSA, will continue to induce combinations among local, regional, national
and foreign firms of every size and type.
The Company further believes that at the mid-size and regional firm level,
several other factors are contributing to an increasing number of firms seeking
to combine with other, larger organizations. Frequently, the founders and
principals of these firms are engineers or designers first, and professional
business managers second. Their firm's growth has imposed on them greater
management responsibilities at the expense of their professional practice, and
many are seeking either relief from or assistance with their management burdens.
Also, regardless of their legal form, many such firms, over the life of their
development, have assumed partnership-like characteristics as growing numbers of
professionals have become equity owners in the firm, a process which often
raises difficult governance and other issues that can be solved by a combination
with a larger, professionally managed firm. Furthermore, many of these firms
recognize their need for overhead reductions, but feel constrained in making
them by what often are non-economic factors. The Company believes that in many
instances, such firms may view their acquisition as an opportunity to achieve
appropriate and necessary overhead reductions without having to self-impose
them. Finally, the growth opportunities of these firms are often limited by
bonding and other performance guarantee requirements which are beyond their
financial capabilities, but which could be satisfied by access to greater
financial resources through association with a larger firm.
30
<PAGE>
BUSINESS
GENERAL
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. During 1997, the Company was involved in engineering
projects in 26 states and over 21 countries worldwide, generating pro forma
combined revenues of $169.1 million, of which $125.1 million, or 74.0%, was from
domestic projects, and $44.0 million, or 26.0%, was from international work.
OEI was formed in October 1997 by Petrocon's management to conduct the
offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. The Company, through Petrocon, has
grown significantly through acquisitions, having acquired more than 13
engineering firms since 1988. As a result of the Pending Acquisitions and the
Offering, the Company believes it will have greater financial, technical and
professional resources, which will enable it to aggressively continue its
successful acquisition strategy, enhance its technical capabilities and expand
its already diversified client base.
The Company operates in two principal segments: engineering services and
engineered systems. The Company's engineering services encompass all aspects of
the process, civil, structural, mechanical, instrument, electrical, geotechnical
and environmental engineering and design disciplines, providing its clients with
a single source for all their design, engineering and permitting needs. The
Company has designed and engineered facilities ranging from refineries,
petrochemical plants, pulp and paper processing plants and wastewater treatment
facilities, to food and beverage processing plants, pharmaceutical plants and
laboratories, electronics manufacturing facilities, hotels and casinos. The
Company's engineered systems are primarily custom designed, built, programmed
and installed on a fixed-price, turnkey basis and include control and
instrumentation systems and modular processing plants primarily for the oil and
gas, refining and chemical processing industries. During 1997, approximately
$123.5 million, or 73.0%, of the Company's pro forma combined revenues were
attributable to engineering services and $45.6 million, or 27.0%, were
attributable to engineered systems. The Company provides engineering services
and engineered systems to a number of Fortune 100 companies through a staff of
over 1,600 employees, including approximately 1,100 engineers and design
professionals as of March 31, 1998.
BUSINESS STRATEGY
The Company has developed a strategic plan to:
EXPAND AND DIVERSIFY THROUGH ACQUISITIONS. The Company intends to
aggressively continue its acquisition program targeted at well-established,
profitable engineering companies offering engineering services and engineered
systems similar or complementary to those offered by the Company. See
"-- Acquisition Strategy" and "-- Acquisition History." The key elements of
the Company's acquisition strategy are to:
ENTER NEW GEOGRAPHIC MARKETS. The Company intends to expand its
geographic coverage by acquiring well-established and highly respected
local and regional firms within the U.S., as well as foreign firms, with
operations in geographic areas not currently served by the Company.
EXPAND AREAS OF TECHNICAL EXPERTISE. The Company intends to expand
the scope of its technical expertise by acquiring firms with acknowledged
expertise and experience in specialized service areas that are not offered
by the Company or in which the Company does not enjoy a widely recognized
reputation. This would provide the Company's existing and future clients
with a broader range of services.
31
<PAGE>
STRENGTHEN PRESENCE WITHIN EXISTING GEOGRAPHIC MARKETS AND
SPECIALTIES. The Company intends to acquire firms in markets currently
served and specialties currently offered by the Company in order to
increase the professional resources available to the Company and secure
larger projects.
ENHANCE CROSS-MARKETING OPPORTUNITIES The Company also intends to
enhance its cross-marketing opportunities by acquiring other engineering
firms whose services and systems can be packaged or cross-marketed with the
Company's existing services and systems.
ACCELERATE INTERNAL GROWTH. The principal elements of the Company's
internal growth strategy are to (i) attract larger, higher-margin projects by
virtue of increased financial, professional and technical resources, (ii)
leverage the Company's capabilities and expertise through cross-marketing and
(iii) develop new partnering relationships and other strategic alliances.
IMPROVE OPERATING MARGINS. The Company believes that combining Petrocon
and the Acquired Companies will provide significant opportunities to increase
the Company's profitability. The key components of this strategy are to:
INCREASE OPERATING EFFICIENCIES. The Company believes that it will be
able to increase its overall staff utilization rate by more effectively
deploying and allocating its professional resources. The Company intends to
accomplish this goal with the aid of computer networking, which will allow
work to be sent instantly by computer to the location of available
resources, and by extending the concepts of the Company's "Vision 2000,"
a project-driven approach which the Company has had in place for almost
four years and which has helped Petrocon lower significantly its
non-billable hours and maximize its rate of chargeability. The Company also
expects improvements in its overall staff utilization rate as a result of:
(i) increased utilization of highly specialized personnel based upon a
larger number of Company-wide engineering projects; (ii) increased
flexibility to make staff adjustments at those operating companies located
in geographic areas with more limited talent pools; and (iii) the
Company-wide application of Petrocon's operating experience in the Texas
Gulf Coast area, which is one of the country's most competitive
environments for engineering services.
CENTRALIZE APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company believes
that opportunities exist to improve operating margins by consolidating the
administrative functions of the Company, such as finance, insurance,
employee benefits and accounting.
EXPLOIT PURCHASING POWER. The Company expects to use its increased
purchasing power to gain volume discounts both for itself and in connection
with its procurement services for its clients. These discounts will enable
the Company to secure larger margins on its turnkey projects and
fixed-price contracts, and to potentially secure additional contracts in
situations where these discounts can be passed through to its clients.
OUTSOURCE CONSTRUCTION ACTIVITIES. While the Company recognizes the
current trend among project owners and operators toward turnkey projects, under
which a single firm provides all engineering, procurement and construction
services associated with a project, the Company believes it can offer clients
these projects, without assuming all of their associated construction risks, by
forming joint ventures and other partnering relationships with specialized
construction firms. Similarly, in instances where the Company is asked or
required to take an equity interest in a project, the Company intends to seek
financial partners with capital available for that purpose, rather than
deploying its own capital in meeting any project equity requirements. The
Company believes that combining Petrocon and the Acquired Companies will result
in a larger firm, both financially and in terms of professional resources, and
thus a more attractive partnering candidate for potential construction and
financial partners.
OPERATE ON A DECENTRALIZED BASIS. The Company intends to manage its
operating companies and subsequently acquired companies on a decentralized
basis, with local management retaining responsibility for day-to-day operations,
profitability and growth. The Company's executive management intends to closely
monitor operating results of its operating companies and will provide direction
and guidance on operational matters, such as staff utilization rates, backlog
control and marketing and cross-selling opportunities, in an effort to improve
profitability at each operating level. The Company believes that
32
<PAGE>
combining a decentralized management structure with strong, centralized
operating and financial controls geared to accountability will support the
entrepreneurial and creative culture at each of its operating companies, while
allowing the Company to capitalize on the local and regional market knowledge,
goodwill, name recognition and client relationships of each of the operating
companies.
ACQUISITION STRATEGY
The Company intends to aggressively continue its acquisition program
targeting well-established and profitable companies offering engineering
services and engineered systems similar or complementary to those offered by the
Company. Acquisitions will be expected to expand the Company's geographic
coverage, broaden its technical capabilities or expertise, improve its market
share within existing geographic markets or specialties, or provide increased
cross-selling opportunities. Certain acquisitions will be large enough to
maintain their own operating and management structure, while other smaller
acquisitions will be folded into an existing operation without significantly
increasing the Company's infrastructure. From among the many thousands of
engineering companies estimated to be active in the United States, and the many
more thousands of foreign firms, the Company believes there will be no shortage
of acquisition candidates. The Company will selectively pursue acquisition
candidates based on the Company's acquisition criteria, such as profitability,
revenue growth potential, similar or complementary services, systems and client
bases that provide potential cross-selling opportunities, established
reputation, qualified and experienced management, professional and technical
personnel and geographic and cultural compatibility.
The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of: (i) the Company's strategy for creating a
professionally managed engineering firm of internationally recognized stature;
(ii) the Company's decentralized operating strategy which emphasizes an ongoing
role for owners, management and key personnel of acquired firms, as well as
meaningful equity positions for these individuals which will enable them to
participate in the Company's growth and realize improved liquidity; (iii) the
Company's objective of maintaining a professional environment which will attempt
to preserve and capitalize on the entrepreneurial spirit, creativity and
ingenuity of the acquired firms' owners and professional personnel; (iv) the
potential for growth of both the acquired entity and the Company overall by
virtue of increasing the scope and variety of services which the acquired firm
and the Company can together make available to their existing client bases, as
well as increasing the size and variety of the projects which can be undertaken
by the acquired firm as a result of its access to greater financial, technical
and professional resources; and (v) the potential for increased profitability of
the acquired company due to centralization of administrative functions, enhanced
information and design systems capabilities and purchasing economies.
The Company intends to use various combinations of its Common Stock, cash
and notes as consideration for future acquisitions. The consideration for each
future acquisition will vary on a case-by-case basis. The Company will finance
future acquisitions through funds provided by operations, by the New Credit
Facility and from the proceeds of future equity and debt financings. During
1998, the Company intends to register 3,000,000 shares of Common Stock under the
Securities Act for use in connection with future acquisitions.
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<PAGE>
ACQUISITION HISTORY
Since 1988, the Company has experienced substantial growth through
acquisitions. Key members of the Company's management team have worked together
for several years at Petrocon, which has made over 13 acquisitions to date. In
the process, the Company's management has gained valuable experience in
sourcing, negotiating, closing and successfully integrating acquisitions. The
following table describes eight of the more strategically significant
acquisitions by the Company since 1988:
<TABLE>
<CAPTION>
PRE-ACQUISITION
YEAR REVENUES(1)
COMPANY ACQUIRED ACQUIRED (IN MILLIONS) DESCRIPTION
- ------------------------------ -------- --------------- ------------------------------
<S> <C> <C>
Engineering Division of Austin 1988 $ 6.5 Multidisciplined engineering
Industries, Inc. services to the process
industries in the Texas and
Louisiana Gulf Coast Area
DLH Associates 1991 $ 1.2 Intrumentation and
programmable logic control
systems
Coastal Technical Corporation 1991 $ 8.0 Technical personnel
outsourcing
HTC, Inc. 1992 $ 0.6 Instrumentation and
programmable logic control
systems
Eagleton Saudi Arabia Limited 1992 $12.0(3) Engineering services to the
(PAL)(2) petroleum industry in the
Middle East
Triangle Engineers & 1996 $ 7.0 Multidisciplined engineering
Constructors, Inc. services to the petroleum and
chemical industries in the
Gulf Coast area
RPM/Barnard & Burke 1996 $17.5 Services to the downstream oil
and gas industry in the
Mississippi River corridor of
Louisiana
Alliance Engineering, Inc. 1997 $14.0 Process design serving the
upstream segment of the oil
and gas industry, with subsea
structural design specialty
</TABLE>
- ------------
(1) Represents unaudited revenues for the fiscal year ending in the year
immediately preceding the year of the acquisition.
(2) Acquisition of a 50% interest in what is now PAL.
(3) Represents 100% of PAL's revenues. No PAL revenues are included in the
Company's revenues because it uses the equity method to account for PAL.
Through these acquisitions, the Company has demonstrated the ability to
implement its acquisition strategy. The Company expanded internationally through
its acquisition of a 50% interest in PAL (formerly Eagleton Saudi Arabia
Limited), which has provided the Company with a presence in the Middle East and
surrounding countries. PAL has also provided cross-selling opportunities by
assisting the Company in securing engineering projects for its U.S-based
operating companies. The Company broadened its technical expertise in control
systems through a series of acquisitions, including DLH Associates and HTC,
Inc., which enabled the Company to immediately compete for a growing number of
control system project opportunities. The Company acquired Coastal Technical
Corporation to take advantage of an industry trend of outsourcing certain
in-plant engineering functions and as a hedge against cyclical downturns. The
acquisitions of RPM/Barnard & Burke, Triangle Engineers & Constructors, Inc. and
Alliance Engineering, Inc. have strengthened the Company's position in the Gulf
Coast region, while at the same time expanding the Company's engineering
capabilities in the upstream oil and gas market. These acquisitions also
permitted the Company to gain additional plant engineering projects with certain
of its long-term alliance clients by adding new office locations in close
proximity to their plants.
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<PAGE>
ENGINEERING ACTIVITIES
The Company groups its engineering activities into two principal segments:
engineering services and engineered systems. The following table sets forth, for
the periods indicated, the contribution to the Company's combined revenues from
each of these segments:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
Engineering Services................. $ 80.8 $ 94.7 $ 123.5
Engineered Systems................... 19.6 39.7 45.6
--------- --------- ---------
Total........................... $ 100.4 $ 134.4 $ 169.1
========= ========= =========
ENGINEERING SERVICES. The Company's engineering service capabilities
encompass all aspects of the process, civil, structural, mechanical, instrument,
electrical, geotechnical and environmental engineering disciplines, providing
its clients with a single source for all their design, engineering and
permitting needs. This multidisciplined expertise enables the Company to offer
total design and engineering solutions extending from product inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets.
The Company's services include feasibility studies, conceptual design,
detail engineering, site and environmental planning, evaluation and permitting,
procurement, project and construction management, inspection and verification,
maintenance, plant operations, quality assurance/control and information
technology. The Company has designed and engineered facilities ranging from
refineries, petrochemical plants, pulp and paper processing plants and
wastewater treatment facilities, to food and beverage processing plants,
pharmaceutical plants and laboratories, electronics manufacturing facilities,
hotels and casinos.
The nature and variety of the Company's engineering services are
illustrated by the following representative listing of projects completed by the
Company:
o Total design, integration and project management for a substantial
refinery upgrade project for Lyondell-Citgo in the Houston, Texas
area.
o Total design, procurement, installation supervision and startup of a
fruit processing plant in southern India.
o Engineering, procurement and construction management services for a
significant distributed control system upgrade for a major refinery in
the Middle East.
o Engineering, design, procurement, construction support and startup
services for a process system to blend coffee for Pepsi-Cola
International.
o Full range of environmental planning, permitting and engineering
consulting services relating to a 25,000 seat waterfront amphitheater
located in New Jersey.
o Design and permitting services related to a gas/odor collection system
project for a major New York landfill.
o Total engineering and design services for a marine research
laboratory, which includes a state-of-the-art 32,000 gallon aquarium
with seawater filtration and water temperature and lighting controls
for simulation of various aquatic conditions.
o Process engineering services for a substantial chemical plant project
in mainland China for a major U.S. chemical company.
The Company also provides engineers, designers and draftsmen to its clients
for assignment inside the clients' facilities. These staffing arrangements,
primarily with refineries and petrochemical and processing plants in the Texas
and Louisiana Gulf Coast region, include: partnering relationships with clients;
in-plant task forces operating under the Company's supervision; and
employee-lending arrangements where Company employees work under the client's
supervision. At March 31, 1998, approximately 509 Company
35
<PAGE>
personnel were contracted for some form of in-plant assignment. The Company
intends to continue pursuing a strategy of placing employees on in-plant
assignments in order to take advantage of what it believes to be a sustained
trend toward outsourcing and single sourcing among plant owners and operators,
and as a hedge against cyclical slumps resulting from general economic or
industry specific conditions.
ENGINEERED SYSTEMS. The Company provides two primary types of engineered
systems: control and instrumentation systems and modular processing plants.
CONTROL AND INSTRUMENTATION SYSTEMS. The Company designs, engineers,
assembles, programs, installs, integrates and services control and
instrumentation systems for specific applications, principally in various energy
and processing related industries. The Company's control and instrumentation
systems are custom designed and include both conventional pneumatic and
hydraulic control systems and sophisticated electronic, microprocessor-based
controls employing programmable logic. Typical applications for the Company's
control and instrumentation systems include oil and gas production safety
systems, fire and gas detection systems, pipeline compressor station and data
acquisition systems, surface controls for subsea production systems and control
systems for oil and gas wells, engine and gas turbine driven compressors, pumps,
boilers and heaters, and processing equipment. The Company offers turnkey
electrical and instrumentation field construction services for equipment
packages, offshore oil and gas production facilities, pipeline compressor
stations, refineries and processing plants. All facets of control and
instrumentation system design, engineering, assembly and testing are performed
in-house by the Company, and the Company's full service field installation and
technical staff performs complete electrical and instrumentation installation
projects, start-up and commissioning services, modifications to existing
systems, on-site training and routine maintenance procedures for client
operating personnel. The Company's control systems unit does not produce
products for inventory and purchases component parts for its systems only on an
as-needed basis.
MODULAR PROCESSING PLANTS. The Company designs, engineers, fabricates and
installs modular processing plants for the oil and gas and petrochemical
industries. The Company specializes in cryogenic turbo-expander units which
employ extreme low temperatures in the processing of natural gas for the
extraction of ethane and heavier gas liquids and the removal of nitrogen and
other inerts. The Company also designs and builds extraction plants using
conventional refrigeration to remove propane and heavier gas liquids from
natural gas. Other modular plants designed and built by the Company include
plants for gas treatment, sulfur, dehydration and fractionation, crude
stabilization and production, MTBE, waste heat recovery and cogeneration, and
amine treatment. The Company has designed and built plants ranging in capacity
up to 450 million standard cubic feet per day for extraction plants, 250 million
standard cubic feet per day for gas treatment plants, 600 tons per day for
sulfur plants, 60,000 barrels per day for fractionation plants and 1.2 billion
cubic feet per day for gas dehydration plants.
All mechanical, structural, civil, piping, electrical and instrumentation
engineering incorporated in the Company's modular plants is performed by the
Company. The Company's modular plants are constructed at its fabrication
facility in Houston, Texas. The plants are built on skids and transported to
their site either by the Company or its client depending on the client's
preference. If requested by the client, the Company provides full on-site
installation, testing and commissioning services for its modular plants.
The Company believes that its modular plants offer advantages over
comparable plants constructed on site, including quicker and more predictable
delivery schedules, higher quality assurance due to the controlled environment
in which the plants are built, and lower costs attributable to simplified
materials delivery, quantifiable labor costs and simplified field installation.
Historically, the Company has undertaken only a small number of high-margin
modular plant projects annually, and most of its plants were for installation in
the oil and gas producing regions of the United States, principally in Texas,
Louisiana, Oklahoma and New Mexico. In recent years, the Company has been
concentrating on building plants for foreign clients, for installation abroad,
since the Company believes foreign projects generally offer greater profit
opportunities. In 1997, the Company's two largest foreign projects were built
for installation in Argentina and the Ivory Coast, respectively.
36
<PAGE>
BUSINESS DEVELOPMENT AND MARKETING
The Company believes marketing and business development are Company-wide
responsibilities, and all of the Company's project and other managers are
formally encouraged to be actively involved in business development efforts
through the maintenance of professional and personal relationships and through
the identification and pursuit of new business opportunities. Company managers
closely monitor the Company's client list to insure that all existing clients
are contacted on a regular basis so that the Company remains before the client
and aware of all current and proposed client projects.
At March 31, 1998, the Company has 20 full-time business development
managers who are responsible for both maintaining existing client relationships
and identifying new clients, projects and markets. The Company business
development managers are located in Houston (six) and Beaumont (four), Texas;
Baton Rouge (four) and Lake Charles (one), Louisiana; Louisville, Kentucky
(three); and Warren, New Jersey (two). The Company has two full-time business
development managers responsible primarily for international business
development. In addition, the Company retains business development agents in
Mexico City, three Saudi Arabia locations and Lagos, Nigeria.
In addition to the regional business development managers, the Company has
recently created the position of Executive Vice President of Marketing and
Development to implement, control, monitor, report and evaluate marketing
policies and procedures to be adopted on a corporate level and approved by the
President. These policies and procedures will be set after consultation with
management of the Company's primary operating locations and will be modified
from time to time as market and Company conditions warrant. Other
responsibilities of the Executive Vice President of Marketing and Development
will include developing, implementing, monitoring and evaluating policies and
procedures relating to cost-effective integration techniques at the operating
company level with emphasis on resource allocation, such as staff utilization,
work-load variances and man-hour cost-to-billing differentials, in an effort to
achieve periodic and long-term consolidated financial planning objectives, while
at the same time maintaining acceptable internal growth rates at the operating
companies.
OPERATIONS
The Company intends to operate on a decentralized basis, with the
management of each operating company responsible for day-to-day operations,
profitability and growth. However, the Company intends to centralize certain
administrative activities from its executive offices. Centralized activities
will include accounting for the consolidated group, financing, business
development support, management information systems support, contract
administration, insurance and safety administration and audits. In addition, all
operating locations will be required to adhere to Company-wide policies and
procedures relating to financial reporting, internal controls, purchasing and
human resources and administration.
The Company will also initiate "best practices" among all the operating
companies for project monitoring and cost controls, backlog reporting, risk
management and, where determined by the Company to be advisable, engineering
policies and procedures. The Company intends to establish a President's Council,
comprised of the president of OEI and the presidents of each of the Company's
significant operating companies, to meet periodically for the purpose of
implementing "best practices" and identifying areas where opportunities for
synergies may be realized.
The Company intends to integrate in the near term the existing computer
system of Petrocon with each of the primary facilities of the Company's
significant operations. This system should increase the Company's overall staff
utilization rate by allowing the Company to instantly transmit work to the
location of available resources. The Company has recently retained an
integration coordinator to implement the integration of this system and other
centralized administrative functions.
COMPETITION
In its engineering services segment, the Company competes nationally and
internationally with a large number of other firms of all sizes, ranging from
the industry's largest firms which operate on a worldwide basis to much smaller
regional and local firms. Among the firms larger than the Company, many offer a
37
<PAGE>
broader range of services than does the Company, many concentrate their services
in one or more of the Company's service areas, and many have greater financial
and professional resources than the Company. The Company does not believe that
any one firm dominates or contributes a significantly large percentage of the
total volume of work performed in any particular service area.
Competition in the Company's engineering services segment is primarily
centered on performance and the ability to provide the engineering, planning and
project execution skills required to complete projects in a timely and cost
efficient manner, as well as price. The high level of competition in this area
of the Company's business has fostered a trend away from the relatively riskless
cost-plus fee arrangements to pricing alternatives designed to shift to the
service provider, or requiring the service provider to at least share in, the
risks of cost overruns and inefficiencies in the delivery of services. These
alternatives include fixed-price, guaranteed maximum price, incentive fee,
competitive bidding, and other "value based" pricing arrangements. See "Risk
Factors -- Pricing and Related Risk Sharing" and "-- Contracts."
In its engineered systems segment, the Company emphasizes, and believes it
is known for, the engineering quality and performance characteristics of its
systems, its total turnkey capabilities, its innovative design solutions and its
ability to meet promised delivery dates. The emphasis both clients and the
Company place on pricing tends to vary with cyclical conditions in the oil and
gas, petroleum and processing industries, with pricing becoming a more important
factor during industry downturns. The Company's control systems and modular
processing plants compete with similar systems built by other companies both
larger and smaller than the Company, some of which compete primarily on the
basis of pricing.
FOREIGN OPERATIONS
The Company has performed engineering and construction management services
in over 25 countries, both directly and through its 50% interest in PAL, which
is headquartered in Al Khobar, Saudi Arabia and serves the entire Arabian Gulf
Region. In addition to its Al Khobar headquarters, PAL has branch offices in
Riyadh, Yanbu and Abu Dhabi, from which it services clients in Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab Emirates. Through agents and
partners, the Company maintains offices in Mexico City, Mexico and Lagos,
Nigeria.
For the years ended December 31, 1995, 1996 and 1997, combined revenues
from Company projects outside of the United States, excluding all PAL projects,
were approximately 19.2%, 29.3% and 26.0% of total revenues, respectively. The
Company accounts for its 50% interest in PAL by the equity method, and therefore
no PAL revenues are included in the Company's revenues. For the years ended
December 31, 1995, 1996 and 1997, PAL had revenues of approximately $9.2
million, $8.1 million and $16.5 million, respectively.
CONTRACTS
The price provisions of the Company's contracts with its clients vary
greatly. However, these provisions can generally be grouped into one of three
categories: cost-plus; guaranteed maximum price; and fixed-price.
COST-PLUS contracts provide for reimbursement of costs incurred by the
Company plus a predetermined fee or a fee based on a percentage of costs
incurred. This pricing arrangement presents the least risk to the Company.
GUARANTEED MAXIMUM PRICE contracts are performed in the same manner as cost
plus contracts, except the total actual cost plus the fee cannot exceed the
guaranteed price negotiated between the Company and its client. If it does, then
the Company may bear all or a portion of the excess. Where the cost and fee are
less than the guaranteed price, the Company may share the savings with the
client on a predetermined basis.
FIXED-PRICE contracts include both negotiated fixed-price contracts and
lump sum bid contracts that require the Company to perform work for a stated
amount. Under a negotiated fixed-price contract, the Company is first selected
as the contractor, and then the contract price is negotiated. Negotiated
fixed-price contracts are frequently agreed to in turnkey arrangements where the
Company has the opportunity to
38
<PAGE>
perform feasibility studies and design work before negotiating the price. Under
lump sum bid contracts, the Company must bid against other firms based upon
specifications furnished by the client. Contract bidding carries certain
inherent risks, including the possibility of ambiguities in specifications,
problems with new technologies, strike delays, work stoppages and other
unforseen developments and changes that may occur over the contract period, that
are reallocated through the negotiation process. Although both forms of contract
involve a firm price for the customer, the lump sum bid contract presents the
greater degree of risk to the Company.
The Company's control systems and modular processing plants are contracted
primarily on a lump sum, turnkey basis either FOB the Company or installed on
site. For modular processing plants, the client typically makes an initial
payment upon commencement of the project and progress payments at various stages
of the project. Retainages beyond the completion date, designed to insure plant
performance and compliance with specifications, are common.
Most of the Company's contracts related to its engineering services
activities have historically been undertaken on a cost-plus basis. However, the
trend in the industry is away from this form of relatively riskless pricing,
with project owners increasingly requiring pricing alternatives that shift to
the service provider certain or all of the risk associated with cost overruns
and other service delivery inefficiencies. These alternatives include guaranteed
maximum price, fixed-price, incentive fee and other forms of "value-based"
pricing arrangements. The Company expects this trend to continue in the future,
with the result that the Company will be required to maintain and continually
improve, relative to its competitors, both the precision of its cost estimates
and the efficiency with which it delivers services. If managed properly, these
forms of pricing arrangements provide the Company with the potential for higher
margins. However, if the Company's discipline in either its cost estimates or
service efficiency declines or fails to keep pace with that of its competitors
the volume of awarded projects and their margins may be affected adversely. See
"-- Competition."
The following table reflects the amount and approximate percentage of the
Company's combined revenues for each of the last three years, derived from each
of the Company's three basic types of contract pricing provisions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cost-plus............................ $ 74.8 74.5% $ 84.9 63.2% $ 109.6 64.8%
Guaranteed maximum price............. 6.1 6.1 5.9 4.4 6.7 4.0
Fixed-price.......................... 19.5 19.4 43.6 32.4 52.8 31.2
--------- --------- --------- --------- --------- ---------
Total........................... $ 100.4 100.0% $ 134.4 100.0% $ 169.1 100.0%
========= ========= ========= ========= ========= =========
</TABLE>
In cases relating to the Company's engineering service projects where the
Company is responsible for equipment or materials procurement and places a
markup on the procurement costs, the Company records on its accounts the
revenues and expenses associated with the procurement services. On other
projects involving procurement services where the Company charges no mark-up on
the equipment or materials provided to its client, the revenues and expenses
associated with the Company's procurement services are not recorded on its
accounts.
In accordance with industry practice, most of the Company's contracts are
subject to termination at the discretion of the client. Most contracts provide
for reimbursement of costs incurred and payment of fees earned by the Company
through the date of termination. Many of the Company's contracts also provide
indemnification to the client for losses and expenses incurred by the client as
a result of the Company's negligence and, in certain instances, the concurrent
negligence of the client. While the Company historically has not incurred
material losses with respect to these claims and maintains insurance in amounts
it considers adequate, no assurance can be given that the Company will not have
significant indemnification claims in the future, that claims made will not be
outside or exceed the Company's insurance coverage or that the
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<PAGE>
Company will be able to continue to obtain insurance coverage at rates it
considers reasonable. See "-- Risk Management; Litigation."
Under certain contracts, the Company guarantees project completion by a
scheduled date or by achievement of certain acceptance and perfomance testing or
milestone levels. At December 31, 1997, the Company had underway projects
aggregating approximately $46.9 million in contract amount, which are subject to
some form of completion or performance guarantee. If the Company fails to meet
any required completion or performance requirements and is unable to remedy the
failure within the applicable cure period, the Company could incur financial
penalties in the form of liquidated damages or could be required to design or
repeat the service or repair or replace the system. See "Risk
Factors -- Completion Guarantees."
CLIENTS
During 1997, the Company provided engineering, design, construction
management and procurement services to more than 702 industrial, commercial and
institutional clients, involving more than 1,780 projects in the private sector
and 90 projects in the public sector. The following table reflects the
approximate percentage of combined revenues derived from the Company's major
client groups for each of the last three years:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
General Building..................... $ 4.7 $ 5.2 $ 6.5
Transportation....................... 1.9 1.7 0.2
Hazardous waste...................... 3.2 1.2 0.7
Industrial/Petroleum................. 75.5 112.8 141.2
Sewerage/solid waste................. 4.9 4.1 4.5
Power................................ 3.3 3.1 1.7
Manufacturing........................ 5.9 5.3 5.6
Water supply......................... 0.4 1.0 1.4
Other(1)............................. 0.6 0.0 7.3
--------- --------- ---------
Total........................... $ 100.4 $ 134.4 $ 169.1
========= ========= =========
- ------------
(1) Includes environmental and geotechnical reports and retail and residential
site surveys.
The Company's engineering services group has many clients representing a
broad range of industries and institutions, most of whom are repeat clients, and
historically has not had a continuing dependence on any single client or any
limited group of clients. However, one or a few clients have in the past and may
in the future contribute a substantial portion of the Company's revenues in any
one year or over a period of several consecutive years due to the size of major
engineering projects. The Company's business is not necessarily dependent upon
sustaining the level of revenues contributed by particular clients in any given
year or period of consecutive years. Historically, the Company has not generated
significant revenues from governmental clients, which accounted for only
approximately $4.4 million, $4.4 million and $3.6 million of the Company's
combined revenues during 1995, 1996 and 1997, respectively. In the Company's
experience, once it begins work on a particular project, it is unlikely the
client will terminate the Company's involvement before completion of the
project, unless the project itself is cancelled or postponed. Historically, the
Company has undertaken new projects for prior clients and has provided ongoing
services to clients following completion of their projects. Nonetheless, the
Company must continually obtain new engineering projects, whether from existing
or new clients, in order to generate revenues in future years as existing
projects are completed.
In recent years, the continuing trend among the Company's engineering
services clients and their industry counterparts toward outsourcing,
single-sourcing and downsizing has fostered the development of arrangements with
clients which are less oriented toward specified projects and more focused on
ongoing,
40
<PAGE>
longer-term relationships. These arrangements, often referred to as partnering
relationships or alliances, and, in some cases, sole source contracts, vary in
their scope, duration and degree of commitment. Some provide the Company with a
minimum number of work man-hours over specified periods; some assure the Company
of at least a designated percentage of the client's requirements for engineering
services at one or more locations; and some establish the Company as the
client's sole source of engineering services at a specific location or
locations. Other agreements express only a client's non-binding preference or
intent with respect to the Company and its services, or establish a general
contractual framework for what the parties expect will be an ongoing
relationship. Despite their variety, the collective effect of these partnering
relationships or alliances is to exert a stabilizing influence on the Company's
engineering services revenues. At present, the Company has some form of
partnering or alliance arrangement with several major refineries and chemical
companies. At March 31, 1998, approximately an aggregate $51.0 million of future
work under the Company's partnering or alliance contracts was considered to be
sufficiently firm for inclusion in the Company's backlog at that date. See
"-- Backlog".
The Company's engineered systems clients include both end users, such as
drilling companies, oil and gas producers, pipelines, compressor stations,
chemical companies and processing plants, that own or operate the facilities for
which the systems are designed, and equipment manufacturers, construction
contractors and other engineering firms that incorporate the Company's control
systems into facilities and products of their own design, construction and
manufacture. In the past, the Company has undertaken only a small number of
modular processing plant projects each year, seeking out and choosing only those
which offer the greatest profit margin opportunities. As in the Company's
engineering services segment, in any given year, a small number of clients may
account for a large percentage of the engineered systems revenues for that year,
depending on the number of major projects undertaken by the Company. Though the
engineered systems segment frequently receives work from repeat clients, its
client list may vary greatly from year to year.
No single client accounted for 10% or more of the Company's 1997 pro forma
combined revenues.
BACKLOG
The following table sets forth the Company's combined backlog at December
31, 1996 and 1997 and March 31, 1998, for each of its two major segments and by
geographic regions:
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(IN MILLIONS)
Engineering Services................. $ 42.7 $ 86.2 $ 74.6
Engineered Systems................... 20.6 15.5 11.6
--------- --------- ---------
Total........................... $ 63.3 $ 101.7 $ 86.2
========= ========= =========
Domestic............................. $ 44.0 $ 79.5 $ 73.3
International........................ 19.3 22.2 12.9
--------- --------- ---------
Total........................... $ 63.3 $ 101.7 $ 86.2
========= ========= =========
The Company's combined backlog at March 31, 1998, most of which is expected
to be completed within the next 12 months, includes only contracts for which the
Company has received authorization to proceed with the work. Although this
backlog represents only work which is under contract, it is not necessarily
indicative of the Company's future revenues or earnings related to the
performance of the work included in backlog. The Company's contracts are subject
to standard industry cancellation provisions, including cancellation on short
notice or upon completion of designated stages. Authorizations to proceed are
for periods generally shorter than the duration of the work the Company expects
to perform for a particular client, and significant scope-of-work adjustments
are common. For certain risks associated with the Company's backlog, see "Risk
Factors -- Nature of Backlog."
41
<PAGE>
FACILITIES
For its professional, technical and administrative staff, the Company
leases 16 offices in the U.S. and foreign locations totaling approximately
358,000 square feet, and owns two office buildings in Baton Rouge, Louisiana
totaling approximately 40,500 square feet. The leases have remaining terms
ranging from one to four years and are at what the Company considers to be
commercially reasonable rental rates. The Company's principal office locations
are in Houston, Beaumont and Nederland, Texas; Baton Rouge and Lake Charles,
Louisiana; Warren and Atlantic City, New Jersey; Miami and Tampa, Florida;
Louisville, Kentucky; Al-Khobar, Riyadh and Yanbu, Saudi Arabia; and Abu Dhabi,
United Arab Emirates. The Company's Warren, New Jersey offices, comprising
approximately 90,300 square feet, are leased from entities controlled by certain
of the former stockholders of PS&S under several leases expiring in 2008.
Engineering and assembly of the Company's control and instrumentation
systems is performed at its approximately 21,000 square foot leased facility in
Beaumont, Texas, and at its approximately 30,000 square foot owned facility in
Houston. The Beaumont property is leased from a partnership owned one-third by
each of Petrocon, Michael L. Burrow and another Petrocon shareholder, which
lease expires in 2000.
The Company builds its modular gas processing plants in Houston, Texas at a
five-acre site, which includes approximately 33,000 square feet of owned office
and shop space and an adjacent 2,300 square foot leased paint and sandblasting
building, which is leased from a former GEI stockholder.
The Company believes its office and other facilities are well-maintained
and adequate for the Company's existing and planned operations at each operating
location.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,610 regular,
full-time employees, including 1,105 engineers, scientists, chemists, designers
and draftsmen, 225 construction managers, inspectors and technicians, 29
production support staff, and 251 administrative and clerical personnel. At that
date, approximately 1,606 Company employees were based in the United States, of
which approximately 509 were placed on assignment in client facilities, and
approximately 4 employees were based in foreign countries. In addition, at March
31, 1998, PAL employed 239 foreign-based employees. The table below shows the
number of regular, full-time employees in each of the Company's engineering
segments at the dates indicated.
DECEMBER 31,
------------------------------- MARCH 31,
1995 1996 1997 1998
--------- --------- --------- ---------
Engineering Services............. 1,473 1,322 1,393 1,415
Engineered Systems............... 150 195 221 195
--------- --------- --------- ---------
Total....................... 1,623 1,517 1,614 1,610
========= ========= ========= =========
The Company is not a party to any collective bargaining agreements, has not
experienced any strikes or work stoppages and believes its relationship with its
employees is good.
GOVERNMENT REGULATION
The Company and its clients are subject to various evolving foreign,
federal, state and local laws and regulations, including those relating to the
environment, health and safety. To date, the Company has mostly benefited from
these laws and regulations and their impact on its clients, and the cost of the
Company's own compliance has not been material, but the fact that such laws and
regulations are changed frequently makes uncertain both the Company's expected
continuing benefits and costs associated with such laws and regulations. The
modification of existing laws or regulations or the adoption of new laws or
regulations affecting the Company's clients or its own operations or industry
could adversely affect the Company.
The Company and members of its professional staff are subject to a variety
of state, local and foreign licensing, registration and other regulatory
requirements governing the practice of engineering. Company professionals are
licensed or registered in approximately 46 states and foreign jurisdictions. The
Company endeavors to be in compliance with all applicable licensing and
registration requirements, and does not
42
<PAGE>
believe that any failure to be in such compliance at any given time will have a
material adverse effect on its operations or revenues. Nor does the Company
believe that such licensing or registration requirements will offer any material
impediment to the Company's proposed geographic expansion due to the prevalence
of reciprocity arrangements, the relative ease of the licensing process in most
jurisdictions, and the number and varied disciplines and qualifications of its
professional staff.
RISK MANAGEMENT; LITIGATION
In performing services for its clients, the Company could potentially be
liable for breach of contract, personal injury, property damage or negligence,
including professional errors and omissions. The Company often agrees to
indemnify its clients for losses and expenses incurred by them as a result of
the Company's negligence and, in certain instances, the concurrent negligence of
the clients. A portion of the Company's activities relate to environmental
services which involve significant risks to the Company with respect to
environmental damage, personal injury, fines and costs imposed by regulatory
agencies. Although liabilities arising from environmental regulations are more
directly applicable to the Company's clients, under certain circumstances those
regulations could impose liability on the Company, including on a joint and
several liability basis. The Company's quality control and assurance program
includes a control function to establish standards and procedures for
performance and documentation of performance project tasks, and an assurance
function to audit the control function and to monitor compliance with procedures
and quality standards. The Company maintains liability insurance for bodily
injury and third-party property damage, professional errors and omissions, and
workers compensation coverage which it considers sufficient to insure against
these risks, subject to self-insured amounts.
The Company is, from time to time, a party to litigation arising in the
ordinary course of its business, most of which involves contract claims,
professional errors and omissions claims and claims for personal injury or
property damage incurred in connection with its operations. The Company is not
currently involved in any litigation that the Company believes will have a
material adverse effect on its financial condition or results of operations.
No assurance can be given that the Company's insurance will be sufficient
under all circumstances to protect the Company against significant claims for
damages. The occurrence of a significant event not fully insured against could
materially and adversely affect the Company's financial condition and results of
operations. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at commercially reasonable rates or on
acceptable terms.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
individuals who will be OEI's directors and executive officers when the Offering
closes (ages are as of May 15, 1998):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------------- ---- ------------------------------------------------ -----------
<S> <C>
Michael L. Burrow, P.E.(1)(4)........ 50 Chairman of the Board, Chief Executive Officer Class III
Gary J. Coury(1)(4).................. 53 President, Chief Operating Officer, Director Class II
Rick Berry........................... 45 Executive Vice President, Chief Financial
Officer
Dana W. Swindler..................... 39 Executive Vice President -- Mergers and
Acquisitions
Robert W. Raiford.................... 53 Controller
Nolan Lehmann(1)(2)(3)(4)............ 54 Director Class II
Gary L. Forbes(1)(2)(3)(4)........... 54 Director Class I
W. Bernard Pieper*(2)(3)............. 66 Director Class I
Bob G. Gower*(2)(3).................. 60 Director Class III
C. Roland Haden*(2)(3)............... 58 Director Class II
</TABLE>
- ------------
* Appointment will become effective on closing of the Offering.
(1) Member of the Board's Executive Committee.
(2) Member of the Board's Audit Committee.
(3) Member of the Board's Compensation Committee.
(4) Member of the Board's Nominating Committee.
MICHAEL L. BURROW has been the Chairman, Chief Executive Officer and a
director of OEI since its formation in October 1997. Mr. Burrow founded Petrocon
and has served as its Chairman and Chief Executive Officer since its inception
in 1988. Mr. Burrow is a registered mechanical engineer and has approximately 27
years of experience in the engineering industry.
GARY J. COURY has been the President, Chief Operating Officer and a
director of OEI since its formation in October 1997. Mr. Coury has served as the
President and Chief Operating Officer of Petrocon since September 1995. Before
then, he served for eight years in various positions with Petrocon and its
predecessors, subsidiaries and affiliates, including as the President of PAL and
the President of international operations and a Vice President/General Manager,
of Petrocon's Houston operations from 1989 to 1993. Mr. Coury has over 30 years
of experience in the engineering industry.
RICK BERRY was appointed Executive Vice President and Chief Financial
Officer of OEI in March 1998. From 1989 to March 1998, Mr. Berry served as
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
TEI, Inc., a publicly traded environmental services company. From 1979 to 1989,
he served as Senior Vice President Finance of Mischer Enterprises, Inc., and
prior to that time, was employed by Peat Marwick, Mitchell & Co. Mr. Berry is a
certified public accountant.
DANA W. SWINDLER has been the Executive Vice President -- Mergers and
Acquisitions of OEI since October 1997. From June 1996 to the present, Mr.
Swindler served in that same capacity for Petrocon. Mr. Swindler served as the
Chief Financial Officer and a director of Maxim Technologies, Inc., a Dallas,
Texas based engineering and environmental company from April 1995 to May 1996,
and as the Executive Vice President of Maxim Engineers, Inc., a predecessor of
Maxim Technologies, Inc., commencing in April 1992.
ROBERT W. RAIFORD has been the Controller of OEI since its formation in
October 1997. He has served as the Executive Vice-President, Administrative
Services and Chief Financial Officer of Petrocon, since 1988.
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NOLAN LEHMANN has been a director of OEI since its formation in October
1997. Since 1983, Mr. Lehmann has served as the President and a director of
Equus Capital Management Corporation, a registered investment advisor. He also
serves as the President and a director of Equus II, a registered investment
company. Mr. Lehmann serves as a director of Allied Waste Industries, Inc., a
solid waste management company, American Residential Services, Inc., a
residential services company, Brazos Sportswear, Inc., a casual sportswear
company, Drypers Corporation, a manufacturer of disposable diapers, and Garden
Ridge Corporation, a specialty retailer, all of which are public companies. He
was appointed to the Board of Directors under OEI's funding agreement with Equus
II. See "Certain Transactions."
GARY L. FORBES has been a director of OEI since October 1997. Since 1991,
Mr. Forbes has served as a Vice President of Equus Capital Management
Corporation, a registered investment advisor, and as a Vice President of Equus
II. He serves as a director of Consolidated Graphics, Inc., a consolidator of
commercial printing companies, Drypers Corporation, a manufacturer of disposable
diapers, NCI Building Systems, Inc., a manufacturer of prefabricated metal
buildings, and Advanced Technical Products, Inc., a manufacturer of high
performance composite parts for the aerospace and defense industries, all of
which are publicly owned companies. Mr. Forbes was also appointed to the Board
of Directors under OEI's funding agreement with Equus II. See "Certain
Transactions."
W. BERNARD PIEPER will be appointed a director of OEI upon the closing of
the Offering. Mr. Pieper retired from Halliburton Company in January 1996, after
a 38-year career with Halliburton Company and its Brown & Root, Inc. subsidiary.
He was named President of Brown & Root, Inc. in 1989, and served in that
capacity until 1992, when he became Vice Chairman of Halliburton Company. In
1994, he added the title of Chief Operating Officer and became responsible for
Halliburton's three operating units: Brown & Root, Inc., Halliburton Energy
Services and Highlands Insurance Company. Mr. Pieper is a fellow of the American
Society of Civil Engineers and serves on the Board of Governors, the George R.
Brown School of Engineering Advisory Board, and the Jones Graduate School of
Administration Council of Overseers at Rice University, and is the current
Chairman of the Engineering Advisory Board at Rice. Mr. Pieper serves as a
director of Union Texas Petroleum Holdings, Inc., a public independent oil and
gas company, and Highlands Insurance Group, Inc., a public insurance company.
BOB G. GOWER will be appointed a director of OEI upon the closing of the
Offering. Mr. Gower is Chairman and Chief Executive Officer of Specified Fuels &
Chemicals, L.L.C., a custom processor of specialty chemicals and manufacturer of
reference fuels. From 1988 to 1997, he served first as President and Chief
Executive Officer and then as Chairman and Chief Executive Officer of Lyondell
Petrochemical Company. Mr. Gower serves as a director of Kirby Corporation, a
public marine transportation company.
C. ROLAND HADEN will be appointed a director of OEI upon the closing of the
Offering. Since 1993, Dr. Haden has served as Vice Chancellor and Dean of
Engineering of Texas A&M University. He serves as the Chair for the Texas
Society of Professional Engineers PEE Committee and the Engineering Deans
Council of Texas, and as director of the Engineering Dean Council ASEE, and has
affiliations with several other professional and engineering organizations. Dr.
Haden also serves as a director of Inter-Tel, Inc., a public communication
company. He has served in various academic capacities for over 30 years,
including Dean and Professor of Engineering and Applied Services at Arizona
State University and Vice Chancellor for Academic Affairs at Louisiana State
University. Dr. Haden received his Ph.D. from University of Texas, Austin and
his MS from California Institute of Technology.
CLASSES OF DIRECTORS; DIRECTOR COMPENSATION
The Board of Directors is divided into three classes. Following a
transitional period, the directors of each class will serve for three years,
with one class being elected each year at the annual stockholders' meeting.
During the transitional period, the terms of the Class I directors will expire
at the 1999 meeting, the terms of the Class II directors will expire at the 2000
meeting and the terms of the Class III directors will expire at the 2001
meeting. Classification of the Board could lengthen the time necessary to change
the composition of a majority of the members comprising the Board. In general,
at least two annual meetings of
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stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Following the closing of the Offering,
each director who is not an employee of the Company initially will receive a fee
of $2,500 for each board meeting attended and $1,500 for each board committee
meeting attended and will periodically be granted options under the Incentive
Plan for the purchase of Common Stock. See "-- Incentive Plan." When the
Offering closes, each of OEI's five outside directors will be granted options to
purchase 10,000 shares of Common Stock at an exercise price per share equal to
the initial public offering price. The Company will reimburse directors for
out-of-pocket expenses incurred in attending Board of Directors or Board
committee meetings in their capacity as directors.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
On closing of the Offering, the Company will have employment agreements
with Messrs. Burrow, Coury, Berry, Swindler and Raiford, which provide for
annual base salaries of $300,000, $250,000, $175,000, $200,000 and $162,000,
respectively. As of the closing of the Pending Acquisitions, certain Acquired
Companies will enter into employment agreements with a total of 13 of their key
officers, including Jerry G. Gulsby, the President of GEI, William Paulus, Jr.,
Anthony J. Sartor and Philip A. Falcone, the principal stockholders and
executive officers of PS&S, Kenneth W. Castlebury, T.L. Lynn, Kenneth W. Oliver
and John W. White, the principal stockholders and executive officers of W-I, and
James W. Kerr and Jamie Ghazi, stockholders and executive officers of C&I. The
following is a summary of the material terms of the employment agreements of
these executives and key officers, a form of which agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
Each of these agreements has a three-year term subject to the right of the
Company to terminate the employee's employment at any time after one year. If
the employee's employment is terminated by the Company within the first three
years without cause (as defined), the employee will be entitled to the payment
of any annual base salary and continuation of health insurance benefits for one
year following termination. Each employment agreement contains a covenant
limiting competition with the Company following the termination of employment
for a period of (i) four years from the effective date of the employment
agreement if employment is terminated for cause (as defined) or voluntarily by
the executive or (ii) six months following the termination if employment is
terminated without cause or due to disability, subject to the right of the
Company, in the latter circumstances, to extend the period of restricted
competition for up to an additional one year by continuing the executive's
annual base salary and insurance benefits for the additional year.
The Company will also pay one-time cash bonuses in the amount of $60,000 to
each of Messrs. Coury and Swindler for their efforts and assistance in
connection with, and conditioned on the closing of, the Pending Acquisitions and
the Offering.
INCENTIVE PLAN
The description set forth below summarizes the principal terms and
conditions of the Incentive Plan, does not purport to be complete and is
qualified in its entirety by reference to the Incentive Plan, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
GENERAL. The objectives of the Incentive Plan, which was approved by the
Board of Directors and stockholders, are to attract and retain selected key
employees, consultants and outside directors, encourage their commitment,
motivate their performance, facilitate their obtaining ownership interests in
the Company (aligning their personal interests to those of the Company's
stockholders) and enable them to share in the long-term growth and success of
the Company.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, the Company
may issue Incentive Awards (as defined below) covering at any one time an
aggregate of the greater of (i) 2,000,000 shares of Common Stock and (ii) 10% of
the number of shares of Common Stock issued and outstanding on the last day of
the then preceding calendar quarter. No more than 2,000,000 shares of Common
Stock will be available for ISOs (as defined below). As of the closing of the
Pending Acquisitions, options covering
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1,765,223 shares of Common Stock will be outstanding or allocated for grant and
234,777 shares of Common Stock then will be available for subsequent Incentive
Awards. The number of securities available under the Incentive Plan and
outstanding Incentive Awards are subject to adjustments to prevent enlargement
or dilution of rights resulting from stock dividends, stock splits,
recapitalization or similar transactions or resulting from a change in
applicable laws or other circumstances.
ADMINISTRATION. The Incentive Plan will be administered by the
compensation committee of the Board of Directors (the "Committee"). Following
the Offering, the Committee will consist solely of directors ("Outside
Directors") each of whom is (i) an "outside director" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) a
"non-employee director" under Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Committee may delegate to the chief
executive officer or other senior officers of the Company its duties under the
Incentive Plan, except with respect to any authority to grant Incentive Awards
or take other action with respect to persons who are subject to Section 16 of
the Exchange Act or Section 162(m) of the Code. In the case of an Incentive
Award to an Outside Director, the Board of Directors shall act as the Committee.
Subject to the express provisions of the Incentive Plan, the Committee is
authorized to, among other things, select grantees under the Incentive Plan and
determine the size, duration and type, as well as the other terms and conditions
(which need not be identical), of each Incentive Award. The Committee also
construes and interprets the Incentive Plan and any related agreements. All
determinations and decisions of the Committee are final, conclusive and binding
on all parties. The Company will indemnify members of the Committee against any
damage, loss, liability, cost or expenses arising in connection with any claim,
action, suit or proceeding by reason of any action taken or failure to act under
the Incentive Plan, except for any such act or omission constituting willful
misconduct or gross negligence.
ELIGIBILITY. Key employees, including officers (whether or not they are
directors), and consultants of the Company and non-employee directors are
eligible to participate in the Incentive Plan. A key employee generally is any
employee of the Company who, in the opinion of the Committee, is in a position
to contribute materially to the growth and development and to the financial
success of the Company.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant (i) incentive stock options ("ISOs"), as defined in Section 422 of the
Code, (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation
rights ("SARs"), (iv) shares of restricted stock, (v) performance units and
performance shares, (vi) other stock-based awards, and (vii) supplemental
payments dedicated to the payment of income taxes (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options." The terms of each Incentive Award will be reflected in an agreement
(the "Incentive Agreement") between the Company and the participant.
OPTIONS. Generally, Options must be exercised within 10 years of the grant
date. ISOs may be granted only to employees, and the exercise price of each ISO
may not be less than 100% of the fair market value of a share of Common Stock on
the date of grant. The Committee will have the discretion to determine the
exercise price of each NSO granted under the Incentive Plan. To the extent the
aggregate fair market value of shares of Common Stock with respect to which ISOs
are exercisable for the first time by any employee during any calendar year
exceeds $100,000, those Options must be treated as NSOs.
The exercise price of each Option is payable in cash or, in the discretion
of the Committee, by the delivery of shares of Common Stock owned by the
Optionee, or the withholding of shares that would otherwise be acquired on the
exercise of the Option, or by any combination of the foregoing.
An employee will not recognize any income for federal income tax purposes
at the time an ISO is granted, or on the qualified exercise of an ISO, but
instead will recognize capital gain or loss (as applicable) upon the subsequent
sale of shares acquired in a qualified exercise. The exercise of an ISO is
qualified if a participant does not dispose of the shares acquired by the
participant's exercise within two years after the ISO grant date and one year
after such exercise. The Company is not entitled to a tax deduction as a result
of the grant or qualified exercise of an ISO.
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An optionee will not recognize any income for federal income tax purposes,
nor will the Company be entitled to a deduction, at the time an NSO is granted.
However, when an NSO is exercised, the optionee will recognize ordinary income
in an amount equal to the difference between the fair market value of the shares
received and the exercise price of the NSO, and the Company will generally
recognize a tax deduction in the same amount at the same time.
The foregoing federal income tax information is a summary only, does not
purport to be a complete statement of the relevant provisions of the Code and
does not address the effect of any state, local or foreign taxes.
SARS. Upon exercise of an SAR, the holder will receive cash, shares of
Common Stock or a combination thereof, as specified in the related Incentive
Agreement, the aggregate value of which equals the amount by which the fair
market value per share of the Common Stock on the date of exercise exceeds the
exercise price of the SAR, multiplied by the number of shares underlying the
exercised portion of the SAR. An SAR may be granted in tandem with or
independently of an NSO. SARs will be subject to such terms and conditions and
will be exercisable at such times as determined by the Committee, provided, that
the exercise price per share must equal at least 100% of the fair market value
of a share of a Common Stock on the date of grant. The value of an SAR may be
paid in cash, shares of Common Stock or both in combination, as determined by
the Committee.
RESTRICTED STOCK. Restricted stock may be subject to substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal of the Company, as determined by the Committee. Unless otherwise
determined by the Committee, during the period of restriction, the grantee will
have all other rights of a stockholder, including the right to vote and receive
dividends on the shares.
PERFORMANCE UNITS AND PERFORMANCE SHARES. Performance units and
performance shares may be granted only to employees and consultants. For each
performance period (to be determined by the Committee), the Committee will
establish specific financial or non-financial performance objectives, the number
of performance units or performance shares and their contingent values, which
values may vary depending on the degree to which such objectives are met.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to or otherwise related
to shares of Common Stock. Subject to the terms of the Incentive Plan, the
Committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration to be received by the
Company shall be either (i) no consideration other than services actually
rendered or to be rendered (in the case of the issuance of shares) or (ii) in
the case of an award in the nature of a purchase right, consideration (other
than services rendered) at least equal to 50% of the fair market value of the
shares covered by such grant on the date of grant. Payment or settlement of
other stock-based awards will be in shares of Common Stock or in other
consideration related to such shares.
SUPPLEMENTAL PAYMENTS FOR TAXES. The Committee may grant, in connection
with an Incentive Award (except for ISOs), a supplemental payment in an amount
not to exceed the amount necessary to pay the federal and state income taxes
payable by the grantee with respect to the Incentive Award and the receipt of
the supplemental payment.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of Options and
accelerated lapsing of restrictions upon restricted stock or other Incentive
Awards in connection with a Change in Control (as defined in the Incentive
Plan), certain amounts associated with such Incentive Awards could, depending
upon the individual circumstances of the participant, constitute "excess
parachute payments" under Section 280G of the Code, thereby subjecting the
participant to a 20% excise tax on those payments and denying the Company a
corresponding deduction. The limit on the deductibility of compensation under
Section 162(m) of the Code is also reduced by the amount of any excess parachute
payments. Whether amounts constitute excess parachute payments depends upon,
among other things, the value of the Incentive Awards accelerated and the past
compensation of the participant.
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Taxable compensation earned by executive officers who are subject to
Section 162(m) of the Code in respect of Incentive Awards is subject to certain
limitations set forth in the Incentive Plan generally intended to satisfy the
requirements for "qualified performance-based compensation," but no assurance
can be given that OEI will be able to satisfy these requirements in all cases,
and the Company may, in its sole discretion, determine in one or more cases that
it is in its best interest not to satisfy these requirements even if it is able
to do so.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable Incentive Agreement, if a participant's employment or
other service with the Company (or its subsidiaries) is terminated (i) other
than due to his death, Disability, Retirement or for Cause (each capitalized
term as defined in the Incentive Plan), his then exercisable Options will remain
exercisable for 60 days after such termination, (ii) by reason of Disability or
death, his then exercisable Options will remain exercisable for one year
following such termination, (iii) due to his retirement, his then exercisable
Options will remain exercisable for six months (except for ISOs, which will
remain exercisable for three months), or (iv) for Cause, all his Options will
expire at the commencement of business on the date of such termination.
Upon a Change in Control of OEI, any restrictions on restricted stock and
other stock-based awards will be deemed satisfied, all outstanding Options and
SARs may become immediately exercisable and all the performance shares and units
and any other stock-based awards may become fully vested and deemed earned in
full, at the discretion of the Committee. These provisions could in some
circumstances have the effect of an "anti-takeover" defense because, as a
result of these provisions, a Change in Control of OEI could be more difficult
or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No Incentive Award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any encumbrance, pledge, lien,
assignment or charge. An Incentive Award may be exercised during the
participant's lifetime only by the participant or the participant's legal
guardian.
AMENDMENT AND TERMINATION. The Board of Directors may amend or terminate
the Incentive Plan at any time, except that the Incentive Plan may not be
modified or amended, without stockholder approval, if such amendment would (i)
increase the number of shares of Common Stock which may be issued thereunder,
except in connection with a recapitalization of the Common Stock, (ii) amend the
eligibility requirements for employees to purchase Common Stock under the
Incentive Plan, (iii) increase the maximum limits on Incentive Awards that may
be issued to executive officers who are subject to Section 162(m) of the Code,
(iv) extend the term of the Incentive Plan or (v) decrease the authority granted
to the Committee under the Incentive Plan in contravention of Rule 16b-3 under
the Exchange Act. No termination or amendment of the Incentive Plan shall
adversely affect in any material way any outstanding Incentive Award previously
granted to a participant without his consent.
On the closing of the Offering, the Company expects Options to purchase a
total of 1,765,223 shares of Common Stock will be outstanding or allocated for
grant. Of these Options, 768,384 Options represent Replacement Options
(including 2,722, 238,038, 146,734 and 153,288 options held by Messrs. Burrow,
Coury, Raiford and Swindler, respectively). These replacement options have a
weighted exercise per share of $7.68. On or prior to closing of the Offering,
additional Options to purchase shares of Common Stock will be granted or
allocated for grant to the following persons to purchase the respective number
of shares indicated: (i) Mr. Burrow (15,512 shares); (ii) Mr. Coury, (13,812
shares); (iii) Mr. Berry (36,564 shares); (iv) Mr. Swindler (11,046 shares); (v)
Mr. Raiford (6,984 shares); (vi) Messrs. Lehmann, Forbes, Pieper, Gower and
Haden (10,000 shares each); and (vii) other employees as a group (862,921
shares). All these additional options will have an initial exercise price per
share equal to the initial public offering price and will become exercisable as
to 25% of such shares six months after the date the Offering closes and as to
25% of such shares on each anniversary of that date.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan for United States employees (the
"Employee Purchase Plan") was adopted by the Board of Directors in April 1998.
A total of 300,000 shares of Common Stock
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has been reserved for issuance under the Employee Purchase Plan. The Employee
Purchase Plan, which is intended to qualify under Section 423 of the Code, has
quarterly offering periods each year beginning on the first trading day on or
after January 1, April 1, July 1 and October 1, respectively, except for the
first such offering period which commences on the first trading day on or after
the effective date of the Offering and ends on the last trading day on or before
June 30, 1998. The Employee Purchase Plan is administered by the Board of
Directors or by a committee appointed by the Board. A United States employee is
eligible to participate if the employee is (i) customarily employed by the
Company or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year and (ii) employed by the Company or any
participating subsidiary on the effective date of the Employee Purchase Plan, or
if not employed on such effective date, has completed at least six consecutive
months of employment with the Company or any participating subsidiary. The
Employee Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions of up to 15% of an employee's compensation (including
commissions and overtime, but excluding other bonuses and incentive
compensation), up to a maximum of $25,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the Employee Purchase
Plan is 90% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be repaid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company or any participating subsidiary.
Rights granted under the Employee Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Employee Purchase Plan. The Employee Purchase Plan
provides that, in the event of a merger of OEI with or into another corporation
or a sale of substantially all of OEI's assets, the Board of Directors shall
shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The Employee Purchase Plan will terminate in April 2008. The Board of
Directors has the authority to amend or terminate the Employee Purchase Plan,
except that no such action may adversely affect any outstanding rights to
purchase stock under the Employee Purchase Plan.
BONUS AWARDS; OTHER PLANS
The 1998 bonuses for officers and key employees of the Company, if any,
will be based upon the performance standards to be established by the
Compensation Committee. The Company expects the Compensation Committee to
establish such performance standards for the remainder of 1998 following the
closing of the Offering.
The Company has adopted or intends to adopt deferred compensation,
supplemental disability, supplemental life and retirement or other benefit or
welfare plans in which executive officers of the Company will be eligible to
participate.
The Compensation Committee will be established on the closing of the
Offering and will be comprised solely of non-employee directors of OEI. In the
past, matters with respect to the compensation of executive officers of OEI were
determined by its Board of Directors, including those members who serve as
executive officers.
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CERTAIN TRANSACTIONS
ORGANIZATION OF OEI
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. OEI was initially capitalized with
$1,000 provided by Messrs. Burrow, Coury, Berry and Swindler and Equus II, in
exchange for 1,828,368 shares of Common Stock. Mr. Lehmann, a director of OEI,
is a director and the President of Equus II, and Mr. Forbes, also an OEI
director, is a Vice President of Equus II.
Since October 1997, Equus II has advanced funds to OEI under a $2.5 million
short-term promissory note (the "Equus Note") for use in connection with OEI's
efforts to conduct the Offering and consummate the Pending Acquisitions. The
Equus Note bears interest at a designated prime rate plus 1/2%. At March 31,
1998, approximately $1.0 million was outstanding under the Equus Note. OEI
expects to borrow an additional $1.5 million under the Equus Note before the
Offering closes. The Company intends to repay the Equus Note in full from
proceeds of the Offering.
Concurrently with the closing of the Offering, OEI will consummate the
Pending Acquisitions. The consideration to be paid by the Company in the Pending
Acquisitions consists of (i) approximately $27.8 million in cash, (ii) 5,053,027
shares of Common Stock and (iii) approximately $3.4 million and 654,099 shares
to be placed in escrow with respect to one of the Pending Acquisitions. In
addition, the Company will assume certain of the indebtedness of Petrocon and
the Acquired Companies (approximately $28.1 million as of December 31, 1997).
Subject to certain adjustments described below, the following table sets
forth for Petrocon and each Acquired Company the cash and shares of Common Stock
to be paid and issued to its stockholders in the Pending Acquisitions.
CASH SHARES OF
COMPANY CONSIDERATION COMMON STOCK
- ---------------------------------------- ------------- ------------
Petrocon................................ $ 12,715,786 2,118,888
PS&S.................................... 4,521,905 879,258
GEI..................................... 2,786,170 541,757
W-I..................................... 4,901,814 953,129
C&I..................................... 2,879,981 559,995
------------- ------------
Total.............................. $ 27,805,656 5,053,027
============= ============
The Company will also assume and repay an aggregate of $28.7 million of
indebtedness of Petrocon and certain of the Acquired Companies ($21.8 million of
which will be repaid from proceeds of the Offering and $1.4 million of which
will be repaid from cash on hand), as follows: Petrocon -- $16.4 million;
PS&S -- $3.2 million; GEI -- $4.6 million; W-I -- $4.3 million; and C&I -- $0.1
million. In addition, the Company will place approximately $3.4 million and
654,099 shares of Common Stock in escrow in connection with the GEI acquisition,
which will be paid to the former GEI stockholders, or returned to the Company,
depending on the future financial performance of GEI. See "The Company --
Summary of Terms of the Pending Acquisitions."
Prior to the closing of the Pending Acquisitions, certain Acquired
Companies may make additional distributions to their stockholders of certain
assets and related liabilities with an aggregate net book value of approximately
$9.1 million.
Pursuant to the acquisition agreements, certain stockholders of each of
Petrocon and the Acquired Companies have agreed not to compete with the Company
for a period of three years commencing on the date of closing of the Pending
Acquisitions.
In connection with the Pending Acquisitions, OEI will grant certain
registration rights to former stockholders of Petrocon and the Acquired
Companies. OEI has also granted certain registration rights to Equus II. See
"Shares Eligible for Future Sale."
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PENDING ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Persons who are or will become directors, executive officers, or beneficial
owners of 5% or more of the Common Stock will receive the following
consideration in the Pending Acquisitions for their equity interests in Petrocon
and the Acquired Companies.
CASH SHARES OF
NAME CONSIDERATION COMMON STOCK(1)
- ------------------------------------- ------------- ---------------
Michael L. Burrow(2)................. $ 2,409,238 451,188
Gary J. Coury........................ 35,397 6,629
Robert W. Raiford.................... 301,811 56,521
Jerry G. Gulsby(3)................... 2,786,170 541,757
------------- ---------------
Total........................... $ 5,532,616 1,056,095
============= ===============
- ------------
(1) Excludes options to purchase 540,782 shares of Common Stock which are to be
granted on closing of the Offering in replacement of Petrocon options as
follows: Michael L. Burrow -- 2,722 shares at an exercise price per share of
$6.52; Gary J. Coury -- 238,038 shares at exercise prices per share of $6.52
(133,327 shares) and $9.55 (104,711 shares); Dana W. Swindler -- 153,288
shares at an exercise price per share of $6.52; and Robert W.
Raiford -- 146,734 shares at exercise prices per share of $9.55 (104,711
shares) and $6.52 (42,023 shares).
(2) Represents cash and shares payable to the M.L. Burrow Family Partnership,
Ltd., in which Mr. Burrow has a 95% partnership interest.
(3) Includes approximately $0.8 million and 157,110 shares issuable to certain
trusts for the benefit of Mr. Gulsby's descendents. Excludes (i)
approximately $3.4 million and 654,099 shares of Common Stock which will be
placed in escrow in connection with the GEI acquisition, and which will be
subject to a maximum three-year earnout arrangement, (ii) approximately $3.1
million of advances from GEI to Mr. Gulsby to be assumed by OEI upon
consummation of the GEI acquisition, which, for accounting purposes, will be
eliminated on the consolidation of GEI with OEI and (iii) the assignment of
retainages associated with certain GEI client contracts having a net book
value of approximately $3.7 million, plus approximately $0.1 million for
adjustments in retainages between December 31, 1997 and the closing of the
Pending Acquisitions.
REAL ESTATE AND OTHER TRANSACTIONS
The Company leases office space in Beaumont, Texas from a partnership owned
one-third by each of Petrocon, Mr. Burrow and another Petrocon shareholder. The
lease expires in 2000 and has a present annual rental rate of approximately
$115,000.
The Company believes the rentals paid under the lease described above
represent fair market rates.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved in advance by a majority of the Board of Directors, including a
majority of disinterested members of the Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table shows, immediately after giving effect to the closing
of the Pending Acquisitions and the Offering, the beneficial ownership of the
Common Stock of (i) each person who then will beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each person who then
will be a director of OEI, (iii) each person who then will be an executive
officer of OEI and (iv) all persons who then will be directors and executive
officers of OEI as a group. The table assumes none of these persons intends to
acquire shares directly from the Underwriters in connection with the Offering.
SHARES BENEFICIALLY
OWNED
AFTER OFFERING(2)
-----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
- ------------------------------------- ----------- -------
Equus II Incorporated................ 1,218,973 10.3%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Jerry G. Gulsby(3)................... 1,195,856 10.1
1250 Indiana Drive
Humble, Texas 77347
Michael L. Burrow(4)................. 661,104 5.6
Gary J. Coury(5)..................... 281,356 2.4
Rick Berry........................... 36,564 *
Dana W. Swindler(6).................. 189,101 1.6
Robert W. Raiford(7)................. 92,832 *
Nolan Lehmann(8)..................... 1,218,973 10.3
Gary L. Forbes(8).................... 1,218,973 10.3
W. Bernard Pieper.................... -- *
Bob G. Gower......................... -- *
C. Roland Haden...................... -- *
All directors and officers as a group
(10 persons) (4)-(8)............... 2,479,930 20.7%
- ------------
* Less than 1%.
(1) All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
(2) Shares shown do not include shares of Common Stock that could be acquired on
exercise of currently outstanding options which do not vest within 60 days
hereof.
(3) Includes 654,099 shares which will be placed in escrow on closing of the
Offering, subject to a maximum three-year earnout arrangement. Mr. Gulsby
has voting but not investment powers during the period these shares are held
in escrow. Also, includes 157,110 shares held by certain trusts for the
benefit of Mr. Gulsby's descendents.
(4) Includes 451,188 shares held by the M.L. Burrow Family Partnership, Ltd., in
which Mr. Burrow has a 95% partnership interest and includes 2,722 shares of
Common Stock issuable on exercise of stock options.
(5) Includes 67,653 shares of Common Stock issuable on exercise of stock
options.
(6) Includes 30,658 shares of Common Stock issuable on exercise of stock
options.
(7) Includes 36,311 shares of Common Stock issuable on exercise of stock
options.
(8) All these shares are beneficially owned by Equus II. Messrs. Lehmann and
Forbes are both directors of OEI. Mr. Lehmann is the President and a
director of Equus II, Mr. Forbes is a Vice President of Equus II, and each
of them may be deemed to be beneficial owners of the Equus II shares. Both
Mr. Lehmann and Mr. Forbes disclaim beneficial ownership of any of those
shares.
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SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Pending Acquisitions and the Offering, 11,835,494 shares
of Common Stock will be outstanding. The shares sold in the Offering (other than
to affiliates of the Company) will be freely tradable by the public. The
remaining outstanding shares of Common Stock (collectively, the "Restricted
Shares") have not been registered under the Securities Act and may be resold
publicly only following their effective registration under the Securities Act or
under an available exemption from the registration requirements of the
Securities Act, such as Rule 144. In general, under Rule 144 as now in effect,
if a minimum of one year elapses from the later of the date of acquisition of
the Restricted Shares from OEI or from an affiliate of OEI, a person (or persons
whose shares of Common Stock are aggregated), including persons who may be
deemed "affiliates" of OEI, would be entitled to sell in any three-month
period a number of Restricted Shares which does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock and (ii) the average weekly
trading volume of the Common Stock during the period of the four preceding
calendar weeks. Sales under Rule 144 are also subject to certain provisions as
to the manner of sale, notice requirements and the availability of current
public information about the Company. In addition, under Rule 144, if a period
of at least two years elapses from the later of the date Restricted Shares were
acquired from OEI or the date they were acquired from an affiliate of OEI, a
stockholder who is not an affiliate of OEI at the time of sale and has not been
an OEI affiliate for at least three months before the sale would be entitled to
sell shares of Common Stock in the public market immediately, without compliance
with the foregoing Rule 144 requirements. Rule 144 does not require the same
person to hold the Restricted Shares for the applicable periods under certain
circumstances. This Rule 144 summary is not intended to be a complete
description of the Rule. The SEC has proposed amendments to Rule 144 that would,
among other things, eliminate the manner of sale requirements and revise the
notice provisions of the Rule. The SEC has also solicited comments on other
possible changes to Rule 144, including possible revisions to its one- and two-
year holding periods and its volume limitations.
The Company has agreed not to directly or indirectly sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of any shares of Common Stock or any security
convertible or exchangeable for Common Stock for a period of one year (the
"Lockup Period") following the date of this Prospectus, without the prior
written consent of Smith Barney Inc., except that the Company may issue Common
Stock in connection with acquisitions, pursuant to awards under the Incentive
Plan or pursuant to the exercise of warrants outstanding as of the closing of
the Offering (consisting only of the Replacement Warrants). Further, all of
OEI's officers, directors and current stockholders (including Equus II), and all
persons who acquire shares in connection with the Pending Acquisitions, have
agreed generally not to offer, sell or otherwise dispose of any of their shares
for one year following the date of this Prospectus, without the prior written
consent of Smith Barney Inc. Various factors will be considered by Smith Barney,
Inc. in evaluating whether to consent to a proposed transfer of shares during
the Lockup Period, including the reason for the transfer, the number of shares
requested to be transferred, the potential effect of the transfer on the market
price of the Common Stock, the number of shares previously allowed to be
transferred and other relevant circumstances at the time of the transfer. In
addition, under the terms of the respective purchase agreements, persons
receiving shares of Common Stock in the Pending Acquisitions have agreed with
OEI to similar transfer restrictions for a period of one year following the date
of this Prospectus.
OEI will enter into a registration rights agreement (the "RRA") with the
former stockholders of Petrocon and the Acquired Companies, which will provide
certain registration rights with respect to the Common Stock issued to such
stockholders in the Pending Acquisitions. The RRA will provide for a single
demand registration right, exercisable by the holders of at least 51.0% of the
shares of Common Stock initially subject to the RRA, to require the Company to
file a registration statement under the Securities Act to register the sale of
not less than 1,000,000 shares by the requesting stockholders and any other
holders of Common Stock parties to the RRA who desire to sell pursuant to such
registration statement. The demand request may not be made until the second
anniversary date after the closing of the Offering. The demand registration
rights conferred by the RRA will terminate on December 31, 2002. Subject to
certain conditions and limitations, the RRA will also give its parties the right
to participate in registrations by the Company of
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OEI equity securities in underwritten offerings commencing on the second
anniversary date after the closing of the Offering. In a separate registration
rights agreement with Equus II, OEI has granted Equus II the right to demand two
registrations of shares of Common Stock, and the right to include for its own
account, or for the account of others, subject to certain exceptions, shares of
Common Stock in certain registrations in which the Company registers shares for
its account.
The RRA requires the Company to pay the costs associated with an offering
subject to the RRA, other than underwriting discounts and commissions and
transfer taxes attributable to the shares sold on behalf of the selling
stockholders. The RRA provides that the number of shares of Common Stock that
must be registered on behalf of selling stockholders is subject to limitation if
the managing underwriter determines that market conditions require such a
limitation. Pursuant to the RRA, OEI will indemnify the selling stockholders,
and the selling stockholders will indemnify OEI, against certain liabilities in
respect of any registration statement or offering covered by the RRA.
The Company intends to register 3,000,000 shares of Common Stock under the
Securities Act during 1998 for its use in connection with future acquisitions.
These shares generally will be freely tradable after their issuance by persons
not affiliated with the Company; however, sales of these shares during the
Lockup Period would require the prior written consent of Smith Barney Inc.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan and Employee Purchase
Plan. Shares of Common Stock issued pursuant to the Incentive Plan and Employee
Purchase Plan after the effective date of that registration statement generally
will be available for sale in the open market by holders who are not affiliates
of OEI and, subject to the volume and other limitations of Rule 144, by holders
who are affiliates of OEI.
DESCRIPTION OF CAPITAL STOCK
OEI's authorized capital stock consists of 40,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At May 15, 1998, 1,828,368 shares of Common Stock and no
shares of Preferred Stock were issued and outstanding. On closing of the Pending
Acquisitions and the Offering, 11,835,494 shares of Common Stock (12,480,494
shares if the underwriters' over-allotment option is exercised in full) will be
issued, outstanding and nonassessable, and 2,122,802 shares of Common Stock will
then be reserved for issuance under all then outstanding options, warrants and
other rights (consisting only of Incentive Plan options and the Replacement
Warrants issued in connection with the Petrocon acquisition). The following is a
summary of the material terms and provisions relevant to the holders of OEI
capital stock contained in the Charter, which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters. Each share has one vote.
The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all
directors if they so choose. The Common Stock carries no preemptive rights and
is not convertible, redeemable, assessable or entitled to the benefits of any
sinking fund. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available for that purpose, subject to the dividend preference of
any stock ranking senior to the Common Stock, including the Preferred Stock. See
"Dividend Policy" for information regarding the Company's initial dividend
policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Charter and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, fix the number of
shares and
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change the number of shares constituting any series, and provide for the powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, including without
limitation, voting powers, dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of the Preferred Stock, in each case
without any further action or vote by the holders of Common Stock. Although OEI
has no present intention to issue shares of Preferred Stock, the issuance of
shares of Preferred Stock, or the issuance of rights to purchase such shares,
could be used to discourage an unsolicited acquisition proposal. For example,
the issuance of a series of Preferred Stock might impede a business combination
by including class voting rights that would enable the holders to block the
transaction; or such an issuance might facilitate a business combination by
including voting rights that would supply a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. The Board of Directors could act in a manner that would discourage
an acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over its then market price.
The Board of Directors does not presently intend to seek stockholder approval
before any issuance of currently authorized stock, unless otherwise required by
law or the rules of any exchange on which OEI's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
OEI is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date the person became an interested stockholder
unless: (i) before the person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
person becoming an interested stockholder, that person owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not permit employees to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (iii) following the transaction in
which such person became an interested stockholder, the business combination was
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, its restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the majority of the corporation's directors, if
the extraordinary transaction is approved or not opposed by a majority of the
directors who were directors before any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
OTHER MATTERS
Delaware law authorizes a Delaware corporation to limit or eliminate the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that directors, when acting on behalf of the corporation, must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors are accountable to a Delaware corporation and its stockholders in
monetary damages, for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables a Delaware corporation to limit
available relief to equitable remedies such as injunction or rescission. The
Charter limits the liability of directors of OEI to OEI or its stockholders to
the fullest extent permitted by Delaware law. Specifically, no member of the
Board of Directors will be
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personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the member's duty of
loyalty to OEI or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
member derived an improper personal benefit. This Charter provision may have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited OEI and its stockholders. The
Charter and bylaws provide indemnification to OEI's officers and directors and
certain other persons with respect to certain matters, and the Company has
entered into agreements with each of OEI's directors and executive officers
providing for indemnification with respect to certain matters.
The Charter provides that (i) stockholders may act only at an annual or
special meeting of stockholders and not by written consent and (ii) special
meetings of the stockholders can be called only by the chairman of the board,
the chief executive officer, the president or a majority of the Board of
Directors. The Charter also provides that the Board of Directors shall consist
of three classes of directors serving for staggered terms. It is currently
contemplated that approximately one-third of the Board of Directors will be
elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of OEI from
obtaining control of the Board of Directors until the second annual
stockholders' meeting following the date the acquirer obtains the controlling
interest. See "Management -- Directors and Executive Officers." The Charter
provides that the number of directors shall be as determined by the Board of
Directors from time to time, but shall not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least two-thirds of all outstanding voting stock. This
provision, in conjunction with the Charter provisions authorizing the Board of
Directors to fill vacant directorships, will prevent stockholders from removing
incumbent directors without cause and then filling the resulting vacancies with
their own nominees.
STOCKHOLDER PROPOSALS
OEI's bylaws contain provisions requiring that advance notice be delivered
to OEI of any business to be brought by a stockholder before an annual meeting
of stockholders and establishing certain procedures to be followed by
stockholders in nominating persons for election to the Board of Directors.
Generally, the advance notice provisions provide that written notice must be
given to the secretary of OEI by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, in each case not less than 60 nor more than 180 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders
(with certain exceptions if the date of the annual meeting is different by more
than specified periods from the anniversary date). The stockholder's notice must
set forth specific information regarding the stockholder and his business or
director nominee, as described in OEI's bylaws. The foregoing is a summary of
the material terms and provisions relating to stockholder proposals contained in
OEI's bylaws, which are filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, each of the Underwriters named below has severally agreed to purchase
from OEI, and OEI has agreed to sell to such Underwriter, the number of shares
of Common Stock set forth opposite the name of such Underwriter.
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------- ------------
Smith Barney Inc........................
CIBC Oppenheimer Corp...................
Sanders Morris Mundy Inc................
------------
Total......................... 4,300,000
============
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., CIBC Oppenheimer Corp. and
Sanders Morris Mundy Inc. are acting as representatives (the
"Representatives"), propose to offer part of the shares of Common Stock
directly to the public at the offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which represents
a concession not in excess of $ per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial offering
of the shares to the public, the public offering price and such concessions may
be changed by the Representatives. The Representatives of the Underwriters have
advised the OEI that the Underwriters do not intend to confirm any shares to any
accounts over which they exercise discretionary authority.
OEI has granted to the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to an additional 645,000 shares of
Common Stock at the price to the public set forth on the cover page of this
Prospectus, minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with the Offering. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
OEI's officers or directors when the Offering closes, its current
stockholders (including Equus II) and all persons who acquire shares of Common
Stock and receive Replacement Options and Replacement Warrants in the Pending
Acquisitions who, immediately following the Offering, collectively will
beneficially own an aggregate of at least 8,661,457 shares of Common Stock
(including shares issuable upon the exercise of outstanding options and warrants
exercisable within 60 days of the closing of the Offering), have agreed that for
a period of one year after the date of this Prospectus they will not, without
the prior written consent of Smith Barney Inc., directly or indirectly sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option to
purchase or otherwise transfer or dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or any securities exchangeable or
exercisable for or convertible into shares of Common Stock, except that persons
(other than stockholders of OEI on the consummation of the Pending Acquisitions,
officers or directors of OEI or beneficial owners of 5% of the Common Stock)
are not subject to these restrictions with respect to shares of Common Stock
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acquired on the exercise of employee stock options.. OEI has also agreed not to
directly or indirectly sell, offer to sell, solicit an offer to buy, contract to
sell, grant any option to purchase or otherwise transfer or dispose, or announce
the offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire shares of
the Common Stock or securities exchangeable or exercisable for or convertible
into shares of Common Stock, for a period of two years after the date of this
Prospectus without the prior written consent of Smith Barney Inc., except (i)
shares of Common Stock issued in connection with the Pending Acquisitions, (ii)
shares of Common Stock issued on the exercise of Options awarded under the
Incentive Plan, the Employee Purchase Plan or the Replacement Warrants, (iii)
additional Options awarded under the Incentive Plan and (iv) shares of Common
Stock issued in connection with future acquisitions (but not greater than an
aggregate of 3,000,000 shares during the lock-up period), so long as, (a) in the
case of issuances described in the preceding clauses (ii) and (iii), the
recipient agrees to remain subject to the lock-up until the end of the one-year
period (or, if the recipient is an employee of the Company but is neither an
officer or director of OEI nor the holder of 5% or more of the outstanding
shares of Common Stock, until the lapse of the first 180 days of the one-year
period) and (b) in the case of issuances described in the preceding clause (iv),
the recipient agrees to remain subject to a negotiated lock-up period.
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining such price are the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the pro
forma combined revenues and earnings of the Company, the historical revenues and
earnings of Petrocon and the Acquired Companies, the prospects for the growth of
the Company's revenues and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities in the securities markets,
including current market valuations of publicly traded companies that are
comparable to the Company.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for
or the purchase of the Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
Offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction,
and has therefore not been effectively placed by such Underwriter or syndicate
member. The Representatives have advised the Company that such transactions may
be effected on The New York Stock Exchange or otherwise and, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for OEI by Porter & Hedges, L.L.P.,
Houston, Texas, and for the Underwriters by Morgan, Lewis & Bockius LLP, New
York, New York.
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EXPERTS
The audited financial statements of OEI, Petrocon, each of the Acquired
Founding Companies and PAL included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP and Arthur
Andersen & Co., independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
OEI has not previously been subject to the reporting requirements of the
Exchange Act. OEI has filed a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with the SEC with respect
to the Offering. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
or the exhibits thereto, in accordance with the rules and regulations of the
SEC, and reference is hereby made to such omitted information. The statements
made in this Prospectus concerning documents filed as exhibits to the
Registration Statement accurately describe the material provisions of such
documents and are qualified in their entirety by reference to such exhibits for
complete statements of their provisions. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities of the SEC at its principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and its regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of all
or any portion of the Registration Statement can be obtained at prescribed rates
from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Unaudited Pro Forma Combined Financial
Statements
Basis of Presentation.............. F-2
Unaudited Pro forma Combined
Balance Sheet..................... F-3
Unaudited Pro Forma Combined
Statements of Operations.......... F-4
Notes to Unaudited Pro Forma
Combined Financial Statements..... F-6
Historical Financial Statements
OEI International, Inc.
Report of Independent Public
Accountants................... F-11
Balance Sheet................. F-12
Statement of Loss............. F-13
Statement of Stockholders'
Equity........................ F-14
Statement of Cash Flows....... F-15
Notes to Financial
Statements.................... F-16
Petrocon Engineering, Inc. and
Subsidiaries
Report of Independent Public
Accountants................... F-19
Consolidated Balance Sheets... F-20
Consolidated Statements of
Income........................ F-22
Consolidated Statements of
Stockholders' Equity.......... F-23
Consolidated Statements of
Cash Flows.................... F-24
Notes to Consolidated
Financial Statements.......... F-26
Petrocon Arabia Limited
Report of Independent Public
Accountants................... F-39
Balance Sheets................ F-40
Statements of Income.......... F-41
Statements of Partners'
Equity........................ F-42
Statements of Cash Flows...... F-43
Notes to Financial
Statements.................... F-44
Paulus, Sokolowski and Sartor, Inc.
Report of Independent Public
Accountants................... F-48
Balance Sheets................ F-49
Statements of Income.......... F-50
Statements of Shareholders'
Equity........................ F-51
Statements of Cash Flows...... F-52
Notes to Consolidated
Financial Statements.......... F-54
Gulsby Engineering, Inc. and
Subsidiary
Report of Independent Public
Accountants................... F-62
Balance Sheets................ F-63
Statements of Income.......... F-64
Statements of Stockholders'
Equity........................ F-65
Statements of Cash Flows...... F-66
Notes to Financial
Statements.................... F-67
W-Industries, Inc.
Report of Independent Public
Accountants................... F-72
Balance Sheets................ F-73
Statements of Income.......... F-74
Statements of Stockholders'
Equity........................ F-75
Statements of Cash Flows...... F-76
Notes to Financial
Statements.................... F-77
F-1
<PAGE>
PAGE
-----
Chemical & Industrial Engineering,
Inc.
Report of Independent Public
Accountants................... F-81
Balance Sheets................ F-82
Statements of Income.......... F-83
Statements of Stockholders'
Equity........................ F-84
Statements of Cash Flows...... F-85
Notes to Financial
Statements.................... F-86
F-1(a)
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by OEI International, Inc. (OEI), of the outstanding
capital stock of Petrocon Engineering, Inc. and Subsidiaries (Petrocon), Paulus,
Sokolowski and Sartor Inc. (PS&S), Gulsby Engineering, Inc. and Subsidiary
(GEI), W-Industries, Inc. (W-I) and Chemical & Industrial Engineering, Inc.
(C&I) (together, the Pending Acquisitions), and related transactions and (ii)
the Offering. The Pending Acquisitions will occur simultaneously with the
closing of OEI's initial public offering (the Offering) and will be accounted
for using the purchase method of accounting. Petrocon has been identified as the
accounting acquirer for financial statement presentation purposes as its
stockholders will represent the largest voting interest within OEI.
The unaudited pro forma combined balance sheet gives effect to the Pending
Acquisitions and related transactions, and the Offering, as if they had occurred
on March 31, 1998. The unaudited pro forma combined statements of operations
give effect to these transactions as if they had occurred on January 1, 1997.
OEI has preliminarily analyzed the savings expected to be realized from
reductions in salaries, bonuses and certain benefits to the owners and other
known cost eliminations. To the extent the owners of Petrocon and the Acquired
Companies have contractually agreed to prospective reductions in salary,
bonuses, benefits and lease payments, these reductions and other known cost
eliminations have been reflected in the unaudited pro forma combined statements
of operations. With respect to other potential cost savings, OEI has not and
cannot quantify these savings until completion of the Pending Acquisitions. It
is anticipated that these savings will be offset by costs related to OEI's new
corporate management and by the costs associated with being a public company.
However, because these costs cannot be accurately quantified at this time, they
have not been included in the pro forma financial information of OEI.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. However,
management does not expect the final purchase price allocation to be materially
different from the preliminary allocation nor does it expect there to be any
material post closing adjustments. The pro forma financial data do not purport
to represent what OEI's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates and
are not necessarily representative of OEI's financial position or results of
operations for any future period. Since Petrocon and the Acquired Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance. 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.
See also "Risk Factors" included elsewhere herein.
F-2
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS COMBINED
--------- --------- ------- ------ --------- ------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and equivalents................. $ 657 $ 122 $ 508 $ 86 $ 224 $ 1 $ -- $ 1,598
Trade receivables.................... 16,203 5,897 870 3,347 1,761 -- -- 28,078
Other receivables.................... -- -- 27 -- -- -- -- 27
Advances to stockholder.............. -- -- 3,096 -- -- -- (3,096) --
Current portion of note receivable... 13 -- -- -- -- -- -- 13
Inventory............................ -- -- -- 186 -- -- -- 186
WIP.................................. -- -- -- -- -- -- -- --
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 3,302 3,409 4,684 4,092 191 -- (3,726) 11,952
Prepaid expenses and other........... 1,194 329 140 114 118 756 -- 2,651
Deferred tax asset................... 600 -- -- -- 176 -- -- 776
--------- --------- ------- ------ --------- ------ ------------ ----------
Total current assets............. 21,969 9,757 9,325 7,825 2,470 757 (6,822) 45,281
Property and equipment, net.......... 6,662 590 524 1,099 1,171 -- 371 10,417
Investment in Petrocon Arabia, LTD... 3,775 -- -- -- -- -- -- 3,775
Note receivable, net of current
portion............................ 50 -- -- -- -- -- -- 50
Deferred tax asset................... -- 55 1,074 -- -- -- -- 1,129
Goodwill............................. 9,239 -- -- -- -- -- 64,215 73,454
Other assets......................... 1,169 2,358 3 -- 29 -- (1,820) 1,739
--------- --------- ------- ------ --------- ------ ------------ ----------
Total assets..................... $42,864 $ 12,760 $10,926 $8,924 $ 3,670 $ 757 $ 55,944 $135,845
========= ========= ======= ====== ========= ====== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 3,259 $ 1,175 $ 302 $1,908 $ 312 $ -- $ -- $ 6,956
Accrued compensation and benefits.... 6,888 1,098 31 213 648 -- -- 8,878
Accrued liabilities.................. -- -- 73 44 47 1,024 -- 1,188
Short-term debt...................... 12,435 2,590 4,636 3,689 115 -- 28,182 51,647
Current maturities of long-term
debt............................... 1,760 63 -- 70 -- -- -- 1,893
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... 323 -- 418 206 266 -- -- 1,213
Income taxes payable................. 710 -- 1,900 -- 69 -- -- 2,679
Deferred tax liability............... -- 737 -- -- -- -- 2,353 3,090
Other liabilities.................... 204 89 -- -- -- -- -- 293
--------- --------- ------- ------ --------- ------ ------------ ----------
Total current liabilities........ 25,579 5,752 7,360 6,130 1,457 1,024 30,535 77,837
Long-term debt, net of current
portion............................ 2,240 555 -- 555 -- -- -- 3,350
Deferred tax liability............... 407 -- -- -- -- -- -- 407
--------- --------- ------- ------ --------- ------ ------------ ----------
Total liabilities................ 28,226 6,307 7,360 6,685 1,457 1,024 30,535 81,594
Stockholders' equity:
Common stock....................... 1,531 437 10 12 576 2 (2,560) 8
Additional paid-in capital......... 7,518 -- -- 8 -- 7,677 33,451 48,654
Note receivable -- capital stock... -- (379) -- -- -- -- 379 --
Retained earnings.................. 5,589 6,395 3,556 2,219 1,637 (7,946) (5,861) 5,589
--------- --------- ------- ------ --------- ------ ------------ ----------
Total stockholders' equity....... 14,638 6,453 3,566 2,239 2,213 (267) 25,409 54,251
--------- --------- ------- ------ --------- ------ ------------ ----------
Total liabilities and
stockholders' equity........... $42,864 $ 12,760 $10,926 $8,924 $ 3,670 $ 757 $ 55,944 $135,845
========= ========= ======= ====== ========= ====== ============ ==========
</TABLE>
POST MERGER AS
ADJUSTMENTS ADJUSTED
------------ --------
ASSETS
Cash and equivalents................. $ 1,928 $ 3,526
Trade receivables.................... -- 28,078
Other receivables.................... -- 27
Advances to stockholder.............. -- --
Current portion of note receivable... -- 13
Inventory............................ -- 186
WIP.................................. -- --
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... -- 11,952
Prepaid expenses and other........... (756) 1,895
Deferred tax asset................... -- 776
------------ --------
Total current assets............. 1,172 46,453
Property and equipment, net.......... -- 10,417
Investment in Petrocon Arabia, LTD... -- 3,775
Note receivable, net of current
portion............................ -- 50
Deferred tax asset................... -- 1,129
Goodwill............................. -- 73,454
Other assets......................... -- 1,739
------------ --------
Total assets..................... $ 1,172 $137,017
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ -- $ 6,956
Accrued compensation and benefits.... -- 8,878
Accrued liabilities.................. (756) 432
Short-term debt...................... (45,815) 5,832
Current maturities of long-term
debt............................... (1,893) --
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... -- 1,213
Income taxes payable................. -- 2,679
Deferred tax liability............... -- 3,090
Other liabilities.................... -- 293
------------ --------
Total current liabilities........ (48,464) 29,373
Long-term debt, net of current
portion............................ (3,350) --
Deferred tax liability............... -- 407
------------ --------
Total liabilities................ (51,814) 29,780
Stockholders' equity:
Common stock....................... 4 12
Additional paid-in capital......... 52,982 101,636
Note receivable -- capital stock... -- --
Retained earnings.................. -- 5,589
------------ --------
Total stockholders' equity....... 52,986 107,237
------------ --------
Total liabilities and
stockholders' equity........... $ 1,172 $137,017
============ ========
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS
-------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $92,616 $ 21,675 $ 18,264 $ 20,604 $ 15,906 $ -- $ --
DIRECT COSTS......................... 71,693 9,731 11,768 13,700 10,969 -- --
-------- --------- --------- --------- --------- --------- ------------
Gross profit..................... 20,923 11,944 6,496 6,904 4,937 -- --
GENERAL AND
ADMINISTRATIVE EXPENSES............ 15,062 10,787 927 3,003 3,997 7,217 (10,090)
GOODWILL AMORTIZATION................ 254 -- -- -- -- -- 1,604
-------- --------- --------- --------- --------- --------- ------------
Income from operations............... 5,607 1,157 5,569 3,901 940 (7,217) 8,486
OTHER INCOME (EXPENSE):
Interest income (expense), net... (1,569 ) (208) (233) (247) 36 -- 1,775
Equity in earnings of
affiliates..................... 860 -- -- -- -- -- --
Abandonment/Loss on impairment of
assets......................... (364 ) -- -- -- -- -- --
Other............................ (206 ) (75) 57 154 (5) -- --
-------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations before
income tax......................... 4,328 874 5,393 3,808 971 (7,217) 10,261
Provision for income tax............. 1,574 97 1,559 -- 424 -- 4,356
-------- --------- --------- --------- --------- --------- ------------
NET INCOME........................... $ 2,754 $ 777 $ 3,834 $ 3,808 $ 547 $ (7,217) $ 5,905
======== ========= ========= ========= ========= ========= ============
PRO FORMA
COMBINED
----------
REVENUES............................. $ 169,065
DIRECT COSTS......................... 117,861
----------
Gross profit..................... 51,204
GENERAL AND
ADMINISTRATIVE EXPENSES............ 30,903
GOODWILL AMORTIZATION................ 1,858
----------
Income from operations............... 18,443
OTHER INCOME (EXPENSE):
Interest income (expense), net... (446)
Equity in earnings of
affiliates..................... 860
Abandonment/Loss on impairment of
assets......................... (364)
Other............................ (75)
----------
Income (loss) from operations before
income tax......................... 18,418
Provision for income tax............. 8,010
----------
NET INCOME........................... $ 10,408
==========
NET INCOME PER SHARE
Basic............................ $ .88
==========
Diluted.......................... $ .85
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................ 11,835,494
==========
Diluted.......................... 12,299,454
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS
-------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $25,915 $ 5,899 $ 1,524 $ 6,695 $ 2,151 $ -- $--
DIRECT COSTS......................... 20,521 2,469 1,188 4,330 1,493 -- --
-------- --------- --------- --------- --------- --------- ------------
Gross profit..................... 5,394 3,430 336 2,365 658 -- --
GENERAL AND
ADMINISTRATIVE EXPENSES............ 3,689 2,655 184 691 1,088 729 (651)
GOODWILL AMORTIZATION................ 103 -- -- -- -- -- 401
-------- --------- --------- --------- --------- --------- ------------
Income from operations............... 1,602 775 152 1,674 (430) (729) 250
OTHER INCOME (EXPENSE):
Interest income (expense), net... (386 ) (59) (94) (107) 4 -- 446
Equity in earnings of
affiliates..................... (42 ) -- -- -- -- -- --
Abandonment/Loss on impairment of
assets......................... -- -- -- -- -- -- --
Other............................ (23 ) -- -- 20 (6) -- --
-------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations before
income tax......................... 1,151 716 58 1,587 (432) (729) 696
Provision for income tax............. 479 69 18 -- (165) -- 978
-------- --------- --------- --------- --------- --------- ------------
NET INCOME........................... $ 672 $ 647 $ 40 $ 1,587 $ (267) $ (729) $ (282)
======== ========= ========= ========= ========= ========= ============
PRO FORMA
COMBINED
----------
REVENUES............................. $ 42,184
DIRECT COSTS......................... 30,001
----------
Gross profit..................... 12,183
GENERAL AND
ADMINISTRATIVE EXPENSES............ 8,385
GOODWILL AMORTIZATION................ 504
----------
Income from operations............... 3,294
OTHER INCOME (EXPENSE):
Interest income (expense), net... (196)
Equity in earnings of
affiliates..................... (42)
Abandonment/Loss on impairment of
assets......................... --
Other............................ (9)
----------
Income (loss) from operations before
income tax......................... 3,047
Provision for income tax............. 1,379
----------
NET INCOME........................... $ 1,668
==========
NET INCOME PER SHARE
Basic............................ $ .14
==========
Diluted.......................... $ .14
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................ 11,835,494
==========
Diluted.......................... 12,299,454
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
OEI INTERNATIONAL, INC. AND PETROCON AND THE ACQUIRED COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. OEI has conducted no operations to date and will
acquire Petrocon and the Acquired Companies concurrently with and as a condition
of the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of Petrocon and the Acquired Companies' and were derived
from Petrocon and the Acquired Companies' respective financial statements where
indicated. The periods included in these financial statements for Petrocon and
the Acquired Companies are as of and for the three months ended March 31, 1998
and for the year ended December 31, 1997. The audited historical financial
statements included elsewhere in this Prospectus have been included in
accordance with Securities and Exchange Commission (SEC) Regulation S-X. I. Rule
3-05.
2. ACQUISITION OF PETROCON AND THE ACQUIRED COMPANIES:
Concurrently with and as a condition to the closing of the Offering, OEI
will acquire all of the outstanding capital stock of Petrocon and Acquired
Companies. The acquisitions will be accounted for using the purchase method of
accounting with Petrocon being reflected as the accounting acquiror as its
stockholders will represent the largest voting interest within OEI.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of Petrocon and
Acquired Companies. For purposes of computing the estimated purchase price for
accounting purposes, the value of the shares was determined using an estimated
fair value of $12.60 per share, which is less than the initial public offering
price of $14.00 per share (the midpoint of the estimated offering price range)
due primarily to restrictions on the sale and transferability of the shares
issued. The total estimated purchase price of $91.5 million for the acquisitions
is based upon preliminary estimates and is subject to certain purchase price
adjustments at and following closing.
SHARES OF
CASH COMMON STOCK
--------- ------------
(IN THOUSANDS)
Petrocon............................. $ 12,716 2,119
PS&S................................. 4,522 879
GEI.................................. 2,786 542
W-I.................................. 4,902 953
C&I.................................. 2,880 560
--------- ------------
Total...................... $ 27,806 5,053
========= ============
The GEI consideration set forth above does not include approximately $3.4
million in cash and 654,099 shares of Common Stock, which will be placed in
escrow in connection with the acquisition. These amounts will be held for
subsequent distribution to the former GEI stockholders, or returned to the
Company, depending on the future financial performance of GEI. The earnout
payments, if any, will be accounted for as additional goodwill and amortized
over the applicable amortization period.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the liability for the cash portion of the consideration to be
paid to the stockholders of Petrocon and the Acquired Companies in
connection with the Pending Acquisitions.
F-6
<PAGE>
(b) Records the distribution of contract retainages, advances to
stockholder and other personal assets to stockholders.
(c) Records the issuance of 2,934,139 shares of Common Stock valued at
$12.60 per share (or $37.0 million) in connection with the purchase of
the Acquired Companies by OEI, excluding Petrocon (the accounting
acquirer) for a total estimated purchase price of $52.1 million
(including cash consideration of $15.1 million) resulting in goodwill
of $46.5 million after allocating the purchase price to the aggregate
assets acquired and liabilities assumed, as shown below. In addition,
goodwill of $15.3 million has been recorded attributable to the 1.2
million shares of Common Stock issued to Equus II Incorporated, OEI's
initial financing source and goodwill of $2.4 million has been
recorded attributable to additional deferred tax liabilities
associated with the Pending Acquisitons. See Note 2.
ASSETS
Cash and equivalents................. $ 941
Accounts receivable.................. 11,902
Inventories.......................... 186
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 8,650
Prepaid expenses and other........... 1,457
Deferred tax asset................... 176
---------
Total current asssets........... 23,312
Property and equipment, net.......... 3,384
Deferred tax asset................... 1,129
Other assets......................... 638
---------
Total assets.................... $ 28,463
=========
LIABILITIES
Accounts payable and accrued
liabilities........................ $ 4,885
Accrued compensation and benefits.... 1,990
Short-term debt...................... 11,102
Current maturities of long-term
debt............................... 133
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... 890
Income taxes payable................. 1,969
Deferred income taxes................ 737
Other liabilities.................... 89
---------
Total current liabilities....... 21,795
---------
Long-term obligation, net of current
maturities......................... 1,110
---------
Total liabilities............... $ 22,905
=========
(d) Records the contribution of assets to OEI.
(e) Records the cash proceeds of $60.2 million from the issuance of shares of
OEI Common Stock net of estimated offering costs of $7.2 million (based on
an initial public offering price of $14.00 per share and includes the
payment of deferred offering costs of $1 million incurred through March 31,
1998). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of Petrocon and the Acquired Companies in connection with the
Pending Acquisitions.
(g) Records the repayment of certain liabilities and debt obligations with the
net proceeds from the Offering and from cash on hand, including $3.6
million of notes payable to stockholders or related parties of Petrocon and
the Acquired Companies, all of which was current at March 31, 1998, and
$3.5 million attributable to an accrued legal judgment.
F-7
<PAGE>
The following table summarizes unaudited pro forma balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
---------- --------- ---------- --------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Advances to stockholder.............. $ -- $ (3,096) $ -- $ -- $ (3,096)
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... -- (3,726) -- -- (3,726)
---------- --------- ---------- --------- ------------
Total current asssets........... -- (6,822) -- -- (6,822)
Property and equipment, net.......... -- -- -- 371 371
Goodwill............................. -- -- 64,215 -- 64,215
Other assets......................... -- (1,753) -- (67) (1,820)
---------- --------- ---------- --------- ------------
Total assets......................... $ -- $ (8,575) $ 64,215 $ 304 $ 55,944
========== ========= ========== ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt...................... $ 27,806 $ 72 $ -- $ 304 $ 28,182
Deferred tax liability............... -- -- 2,353 -- 2,353
---------- --------- ---------- --------- ------------
Total current liabilities....... 27,806 72 2,353 304 30,535
---------- --------- ---------- --------- ------------
Total liabilities............... 27,806 72 2,353 304 30,535
Stockholders' equity
Common stock.................... -- -- (2,560) -- (2,560)
Additional paid-in capital...... (27,806) -- 61,257 33,451
Note receivable -- capital
stock......................... -- 379 -- -- 379
Retained earnings............... -- (9,026) 3,165 -- (5,861)
---------- --------- ---------- --------- ------------
Total stockholders' equity...... (27,806) (8,647) 61,862 -- 25,409
---------- --------- ---------- --------- ------------
Total liabilities and stockholders'
equity............................. $ -- $ (8,575) $ 64,215 $ 304 $ 55,944
========== ========= ========== ========= ============
POST MERGER
(e) (f) (g) ADJUSTMENTS
--------- ---------- ---------- ------------
ASSETS
Cash and equivalents................. $ 52,986 $ (27,806) $ (23,252) $ 1,928
Deferred costs....................... (756) -- -- (756)
--------- ---------- ---------- ------------
Total current
assets............. 52,230 (27,806) (23,252) 1,172
--------- ---------- ---------- ------------
Total assets......................... $ 52,230 $ (27,806) $ (23,252) $ 1,172
========= ========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities.................. $ (756) $ -- $ -- $ (756)
Short-term debt...................... -- (27,806) (18,009) (45,815)
Current maturities of long-term
debt............................... -- -- (1,893) (1,893)
--------- ---------- ---------- ------------
Total current
liabilities........ (756) (27,806) (19,902) (48,464)
Long-term debt, net of current
portion............................ -- -- (3,350) (3,350)
--------- ---------- ---------- ------------
Total liabilities..... (756) (27,806) (23,252) (51,814)
Stockholders' equity
Common stock.................... 4 -- -- 4
Additional paid-in capital...... 52,982 -- -- 52,982
--------- ---------- ---------- ------------
Total stockholders'
equity............. 52,986 -- -- 52,986
--------- ---------- ---------- ------------
Total liabilities and stockholders'
equity............................. $ 52,230 $ (27,806) $ (23,252) $ 1,172
========= ========== ========== ============
</TABLE>
F-8
<PAGE>
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1997
(a) Reduces compensation expense to the contractual levels the owners and
key employees of the Petrocon and the Acquired Companies have agreed
to receive subsequent to the Pending Acquisitions. Additionally,
reflects the reversal of the $7.2 million non-recurring non-cash
compensation charge by OEI related to the issuance of 572,831 shares
of Common Stock to management. The historical financial statements of
OEI include a compensation charge representing the differences between
the amounts paid for the shares issued to OEI's management and their
estimated value on the date of the sale as if the Pending Acquisitions
had occurred.
(b) Records goodwill amortization expense using a 40-year estimated life.
(c) Reduces interest expense for repayment of certain debt obligations
which will be repaid from the net proceeds of the Offering and
existing cash.
(d) Records a reduction of rent expense of $236 net of depreciation of $74
for property to be acquired in connection with the Pending
Aquisitions.
(e) Reflects the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on S Corporation income.
(f) The number of shares estimated to be outstanding on completion of the
Offering includes the following (reflects the April 6, 1998 stock
split) (in thousands):
Issued to management................. 609
Issued to financial sponsor.......... 1,219
Issued in the Pending Acquisitions
(including escrowed shares).......... 5,707
Issued in the Offering............... 4,300
---------
Shares used in computing basic pro
forma income per share............... 11,835
Net effect of OEI stock options and
warrants using the Treasury Stock
method............................... 464
---------
Shares used in computing fully
diluted pro forma income per share... 12,299
=========
Such share number does not include an aggregate of 937,662 shares
subject to options granted under OEI's Incentive Plan which have an
exercise price equal to the initial Offering price per share. See
"Management -- Incentive Plan."
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(a) (b) (c) (d) (e) ADJUSTMENTS
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (9,928) $ -- $ -- $ (162) $ -- $(10,090)
GOODWILL AMORTIZATION................ -- 1,604 -- -- -- 1,604
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 9,928 (1,604) -- 162 -- 8,486
OTHER INCOME (EXPENSE):
Interest expense................. -- -- 1,775 -- -- 1,775
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 9,928 (1,604) 1,775 162 -- 10,261
PROVISION FOR INCOME TAXES........... -- -- -- -- 4,356 4,356
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 9,928 $ (1,604) $ 1,775 $ 162 $ (4,356) $ 5,905
========= ========= ========= ========= ========= ============
</TABLE>
F-9
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998
(a) Reduces compensation expense to the contractual levels the owners and
key employees of the Petrocon and the Acquired Companies have agreed
to receive subsequent to the Pending Acquisitions. Additionally,
reflects the reversal of the $0.5 million non-recurring non-cash
compensation charge by OEI related to the issuance of 36,564 shares of
Common Stock to management. The historical financial statements of OEI
include a compensation charge representing the differences between the
amounts paid for the shares issued to OEI's management and their
estimated value on the date of the sale as if the Pending Acquisitions
had occurred.
(b) Records goodwill amortization expense using a 40-year estimated life.
(c) Reduces interest expense for repayment of certain debt obligations
which will be repaid from the net proceeds of the Offering and
existing cash.
(d) Records a reduction of rent expense of $59 net of depreciation of $19
for property to be acquired in connection with the Pending
Acquisitions.
(e) Reflects the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on S Corporation income.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(a) (b) (c) (d) (e) ADJUSTMENTS
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (611) $ -- $ -- $ (40) $ -- $ (651)
GOODWILL AMORTIZATION................ -- 401 -- -- -- 401
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 611 (401) -- 40 -- 250
OTHER INCOME (EXPENSE):
Interest expense................. -- -- 446 -- -- 446
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 611 (401) 446 40 -- 696
PROVISION FOR INCOME TAXES........... -- -- -- -- 978 978
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 611 $ (401) $ 446 $ 40 $ (978) $ (282)
========= ========= ========= ========= ========= ============
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OEI International, Inc.:
We have audited the accompanying balance sheet of OEI International, Inc.
(a Delaware corporation), as of December 31, 1997, and the related statement of
loss, stockholders' equity and cash flows from inception (October 9, 1997)
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OEI International, Inc., as
of December 31, 1997, and the results of its operations and its cash flows from
inception (October 9, 1997) through December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 27, 1998
F-11
<PAGE>
OEI INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
CASH................................. $ 893 $ 840
DEFERRED OFFERING COSTS.............. 112,427 755,681
------------ ------------
Total assets.......... $ 113,320 $ 756,521
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCRUED LIABILITIES AND AMOUNTS DUE
TO STOCKHOLDER..................... $ 112,427 $ 1,024,050
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par,
1,000,000 authorized, none
issued and outstanding......... -- --
Common stock, $.001 par,
40,000,000 shares authorized,
1,791,804 and 1,828,368 shares
outstanding, respectively...... 1,792 1,828
Additional paid-in capital...... 7,216,581 7,677,247
Retained deficit................ (7,217,480) (7,946,604)
------------ ------------
Total stockholders'
equity............ 893 (267,529)
------------ ------------
Total liabilities and
stockholders'
equity............ $ 113,320 $ 756,521
============ ============
Reflects a 1,828.368-for-one stock split effective April 6, 1998.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF LOSS
PERIOD FROM
INCEPTION
(OCTOBER 9, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ ---------------
(UNAUDITED)
REVENUES............................. $ -- $ --
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 7,217,480 729,124
------------------ ---------------
NET LOSS............................. $ (7,217,480) $ (729,124)
================== ===============
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION (October 9,
1997).............................. 1,791,804 $1,792 $7,216,581 $ -- $ 7,218,373
Net loss........................ -- -- -- (7,217,480) (7,217,480)
--------- ------ ---------- ----------- ------------
BALANCE, December 31, 1997........... 1,791,804 1,792 7,216,581 (7,217,480) 893
Issuance of Common Stock
(unaudited)................... 36,564 36 460,666 -- 460,702
Net loss (unaudited)............ -- -- -- (729,124) (729,124)
--------- ------ ---------- ----------- ------------
BALANCE, March 31, 1998
(unaudited)........................ 1,828,368 $1,828 $7,677,247 $(7,946,604) $ (267,529)
========= ====== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM
INCEPTION
(OCTOBER 9, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $(7,217,480) $ (729,124)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities --
Compensation expense related to
issuance of management
shares........................ 7,217,393 460,682
Changes in assets and
liabilities --
Increase in deferred
costs................... (112,427) (643,254)
Increase in accrued
liabilities and amounts
due to stockholder...... 112,427 911,623
----------------- ---------------
Net cash used in
operating
activities (87) (73)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of
common stock.................. 980 20
----------------- ---------------
Net cash provided by
financing
activities......... 980 20
----------------- ---------------
NET INCREASE (DECREASE) IN CASH...... 893 (53)
CASH, beginning of period............ -- 893
----------------- ---------------
CASH, end of period.................. $ 893 $ 840
================= ===============
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
OEI International, Inc. (OEI or the Company), a Delaware corporation, was
founded on October 9, 1997. The Company is a diversified engineering company
providing engineering services and engineered systems to a broad range of
industrial, commercial and institutional clients throughout the United States
and internationally. OEI intends to acquire five engineering companies (the
Pending Acquisitions), complete an initial public offering (the Offering) of its
common stock and, subsequent to the Offering, continue to acquire, through
merger or purchase, similar companies to expand its national and international
operations.
OEI's primary assets at December 31, 1997, are cash and deferred offering
costs. OEI has not conducted any operations, and all activities to date have
related to the Pending Acquisitions and the Offering. Cash of $980 was generated
from the initial capitalization of the Company (see Note 2). There is no
assurance that the Pending Acquisitions discussed below will be completed and
that OEI will be able to generate future operating revenues. Funding for the
deferred offering costs has been provided by Equus II Incorporated (Equus II).
OEI is dependent upon the Offering to fund the amounts due to Equus II, the
Pending Acquisitions and future operations.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months then ended are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK OPTIONS
Effective September 4, 1997, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." This pronouncement allows two methods of
calculating the fair market value of equity instruments issued to employees, in
accordance with Accounting Principles Board (APB) Opinion No. 25 or using an
option-pricing model. The fair market value of equity instruments issued to
employees may be calculated using an option-pricing model such as the
Black-Scholes model that takes into account, as of the grant date, the exercise
price and expected life of the equity instrument, the current price of the
underlying stock, expected dividends on the stock and the risk-free interest
rate for the expected term of the equity instrument. The Company has elected to
calculate compensation expense in accordance with APB No. 25 which calculates
compensation expense as the difference between the employee's exercise price and
the current price of the underlying stock. There were no financial statement
effects from the adoption of this pronouncement.
F-16
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. STOCKHOLDERS' EQUITY:
On April 6, 1998, OEI effected a 1,828.368-for-one stock split for each
share of common stock of the Company ("Common Stock") then outstanding. In
addition, the Company increased the number of authorized shares of Common Stock
to 40,000,000 and authorized 1,000,000 shares of $.001 par value preferred
stock. The effects of the Common Stock split and the increase in the shares of
authorized Common Stock have been retroactively reflected on the balance sheet
and in the accompanying notes. In connection with the organization and initial
capitalization of OEI, the Company issued 1,218,973 shares of common stock at
$.001 per share to Equus II at an aggregate purchase price of $666.67.
In October 1997, the Company issued a total of 572,831 shares of Common
Stock to management at an aggregate purchase price of $313.33. As a result, the
Company recorded a non-recurring, non-cash compensation charge of $7.2 million
at December 31, 1997, representing the difference between the amount paid for
the shares and the estimated fair value of the shares, which value has been
discounted from the estimated initial public offering price due primarily to
restrictions on the sale and transferability of the shares issued. The shares
issued to Equus II and members of management were issued to engage such parties
in providing services related primarily to the Company's public offering
activities, including financial advisory and other consulting services. The fair
value of such shares was based on specific factors related to the Company and
the transactions including restrictions on transferability and sale of the
shares issued.
3. INCENTIVE PLAN:
In April 1998, the Company's stockholders and Board of Directors approved
the Company's Incentive Plan which provides for the granting of incentive or
nonstatutory stock options, stock appreciation rights, restricted stock,
performance units and performance shares and other stock-based awards
(collectively, "Incentive Awards") to key employees, officers, non-employee
directors and consultants to the Company. Under the Incentive Plan, the Company
may issue Incentive Awards covering at any one time an aggregate of the greater
of (i) 2,000,000 shares of Common Stock and (ii) 10% of the number of shares of
Common Stock issued and outstanding on the last day of the then preceding
calendar quarter. No more than 2,000,000 shares of Common Stock will be
available for incentive stock options.
4. EMPLOYEE STOCK PURCHASE PLAN:
In April 1998, the Company's Board of Directors approved the Company's
Employee Stock Purchase Plan for the United States employees (the "Employee
Purchase Plan"). A total of 300,000 shares of Common Stock has been reserved
for issuance under the Employee Purchase Plan. The Employee Purchase Plan
permits eligible employees to purchase Common Stock through payroll deductions
of up to 15% of an employee's compensation (including commissions and overtime,
but excluding other bonuses and incentive
F-17
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
compensation), up to a maximum of $25,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the Employee Purchase
Plan is 90% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be repaid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company or any participating subsidiary. The
Employee Purchase Plan will terminate in April, 2008.
5. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
OEI has signed definitive agreements to acquire by acquisition or share
exchange five companies (the Pending Acquisitions) to be effective
contemporaneously with the Offering. The companies to be acquired are Petrocon
Engineering, Inc. and subsidiary, Paulus, Sokolowski, and Sartor, Inc., Gulsby
Engineering, Inc. and subsidiary, W-Industries, Inc., and Chemical & Industrial
Engineering, Inc. The aggregate consideration that will be paid by OEI to
acquire the Pending Acquisitions is approximately $27.8 million in cash and
5,053,027 shares of common stock.
In March 1998, the Company issued 36,564 shares of Common Stock to an
officer of the Company for $20. Approximately $461,000 has been recorded as a
non-recurring, non-cash compensation charge related to the issuance of these
shares.
In April 1998, OEI filed a registration statement on Form S-1 for the sale
of its common stock.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Petrocon Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of Petrocon
Engineering, Inc. (a Texas corporation), and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the 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 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 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
the Company as of 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.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-19
<PAGE>
PETROCON ENGINEERING, 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....... $ 320,811 $ 2,253,527 $ 656,904
Trade receivables, net.......... 10,697,851 15,397,931 16,202,765
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 463,786 1,881,417 3,302,316
Current portion of note
receivable.................... 33,746 16,884 12,793
Prepaid expenses and other...... 651,116 976,100 1,194,385
Deferred income taxes........... 667,439 543,373 599,787
-------------- -------------- -----------
Total current assets....... 12,834,749 21,069,232 21,968,950
PROPERTY AND EQUIPMENT, net.......... 6,385,573 6,583,796 6,662,269
INVESTMENT IN PETROCON ARABIA,
LTD................................ 3,555,964 3,666,306 3,775,308
NOTE RECEIVABLE, net of current
portion............................ 112,525 50,040 50,040
GOODWILL, net........................ 2,290,849 9,342,460 9,239,088
OTHER ASSETS......................... 1,197,107 1,190,840 1,169,212
-------------- -------------- -----------
Total assets............... $ 26,376,767 $ 41,902,674 $42,864,867
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 5,085,908 $ 11,641,357 $12,330,148
Current maturities of long-term
debt.......................... 2,772,604 1,976,174 1,760,092
Notes payable................... 249,544 147,284 105,282
Accounts payable................ 868,315 2,114,356 3,259,328
Accrued compensation and
benefits...................... 4,046,574 7,749,986 6,888,183
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... -- 499,395 322,695
Income taxes payable............ 478,104 526,002 709,772
Other liabilities............... 815,735 221,819 204,002
-------------- -------------- -----------
Total current
liabilities............. 14,316,784 24,876,373 25,579,502
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 3,756,492 2,680,046 2,240,023
Deferred income taxes........... 424,316 427,311 407,465
-------------- -------------- -----------
Total liabilities.......... 18,497,592 27,983,730 28,226,990
-------------- -------------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK........... 1,126,549 -- --
STOCKHOLDERS' EQUITY:
Common stock, $.3333 par value;
60,000,000 shares authorized;
3,945,186, 4,586,328 and
4,591,828 shares
outstanding................... 1,315,062 1,528,760 1,530,594
Additional paid-in capital...... 3,196,068 7,473,014 7,518,212
Retained earnings............... 2,275,271 4,917,170 5,589,071
Treasury stock, 7,607 common
shares, at cost............... (33,775) -- --
-------------- -------------- -----------
Total stockholders'
equity.................. 6,752,626 13,918,944 14,637,877
-------------- -------------- -----------
Total liabilities and
stockholders' equity.... $ 26,376,767 $ 41,902,674 $42,864,867
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 52,385,813 $ 61,850,638 $ 92,616,378 $ 19,496,160 $ 25,915,315
DIRECT COSTS......................... 42,143,967 49,251,240 71,692,881 15,479,245 20,521,489
------------ ------------ ------------ ------------ ------------
Gross profit..................... 10,241,846 12,599,398 20,923,497 4,016,915 5,393,826
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,358,923 9,577,274 15,315,782 3,318,177 3,792,093
------------ ------------ ------------ ------------ ------------
Income from operations........... 1,882,923 3,022,124 5,607,715 698,738 1,601,733
OTHER INCOME (EXPENSE):
Interest expense, net............ (456,114) (591,848) (1,569,475) (349,572) (385,557)
Equity in earnings of Petrocon
Arabia, Ltd.................... 527,353 28,293 860,582 93,136 (42,268)
Impairment of property........... -- -- (363,696) -- --
Other............................ (145,154) 57,282 (206,269) (5,686) (22,783)
------------ ------------ ------------ ------------ ------------
Income from continuing
operations
before income tax......... 1,809,008 2,515,851 4,328,857 436,616 1,151,125
PROVISION FOR INCOME TAX............. 598,738 1,050,853 1,574,045 158,786 479,224
------------ ------------ ------------ ------------ ------------
Income from continuing
operations................ 1,210,270 1,464,998 2,754,812 277,830 671,901
------------ ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
of construction subsidiaries
through October 19, 1995 (net
of $417,117 income tax
benefit)....................... (809,699) -- -- -- --
Estimated loss on disposal of
construction subsidiaries,
including a provision of
$341,012 for operating losses
from October 19, 1995, to
February 8, 1996 (net of
$180,774 income tax benefit)... (350,913) -- -- -- --
------------ ------------ ------------ ------------ ------------
Loss from discontinued
operations................ (1,160,612) -- -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 49,658 $ 1,464,998 $ 2,754,812 $ 277,830 $ 671,901
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
---------------------- PAID-IN RETAINED -------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
--------- ----------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995............. 3,857,147 $ 1,285,716 $ 1,381,965 $ 1,603,027 -- $ -- $ 4,270,708
Purchase of treasury stock....... -- -- -- -- (7,607) (33,775) (33,775)
Accretion on redeemable preferred
stock.......................... -- -- -- (421,200) -- -- (421,200)
Net income....................... -- -- -- 49,658 -- -- 49,658
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1995........... 3,857,147 1,285,716 1,381,965 1,231,485 (7,607) (33,775) 3,865,391
Common stock issued.............. 88,039 29,346 581,547 -- -- -- 610,893
Accretion on redeemable preferred
stock.......................... -- -- -- (421,212) -- -- (421,212)
Redemption of preferred stock.... -- -- -- -- -- -- --
Warrants issued in connection
with
acquisition.................... -- -- 1,232,556 -- -- -- 1,232,556
Net income....................... -- -- -- 1,464,998 -- -- 1,464,998
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1996........... 3,945,186 1,315,062 3,196,068 2,275,271 (7,607) (33,775) 6,752,626
Common stock issued.............. 542,443 180,812 4,043,607 -- -- -- 4,224,419
Treasury stock issued............ -- -- -- -- 7,607 33,775 33,775
Redemption of preferred stock.... 98,699 32,886 233,339 -- -- -- 266,225
Accretion on redeemable preferred
stock.......................... -- -- -- (112,913) -- -- (112,913)
Net income....................... -- -- -- 2,754,812 -- -- 2,754,812
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1997........... 4,586,328 1,528,760 7,473,014 4,917,170 -- -- 13,918,944
Common stock issued
(unaudited).................... 5,500 1,834 41,176 -- -- -- 43,010
Other (unaudited)............... -- -- 4,022 -- -- -- 4,022
Net income (unaudited)........... -- -- -- 671,901 -- -- 671,901
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, March 31, 1998
(unaudited)........................ 4,591,828 $ 1,530,594 $ 7,518,212 $ 5,589,071 -- $ -- $ 14,637,877
========= =========== =========== =========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 49,658 $ 1,464,998 $ 2,754,812 $ 277,830 $ 671,901
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 903,271 868,037 1,760,549 434,873 418,305
Equity in undistributed earnings
of Petrocon Arabia, Ltd......... (227,353) 971,707 (110,582) (93,136) (109,002)
Issuance of stock to
management...................... -- 102,293 24,420 -- 47,031
Deferred income taxes............ (689,421) 141,286 22,461 (79,472) (76,256)
Other, net....................... 240,621 27,565 262,479 -- (4,595)
Changes in current assets and
liabilities, net of effects of
acquisitions --
(Increase) decrease in --
Trade receivables.............. 806,140 1,855,630 (3,266,554) (1,292,816) (804,834)
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... (1,963,187) 1,499,401 (1,417,631) 463,786 (1,420,899)
Prepaid expenses and other..... (120,708) 203,032 323,079 (180,046) (199,268)
Increase (decrease) in --
Accounts payable............... 404,999 (939,071) 802,052 608,321 1,144,972
Accrued compensation and
benefits...................... 438,499 (394,969) 2,687,042 (447,669) (854,503)
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 1,390,412 (1,390,412) 499,395 -- (176,700)
Accrual for loss on disposal of
discontinued operations....... 114,307 (196,588) -- -- --
Other liabilities.............. (192,120) (369,714) (593,916) (380,374) (16,044)
Income taxes receivable
(payable)..................... (868,707) 771,243 (449,102) (76,389) 183,770
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities...................... 286,411 4,614,438 3,298,504 (765,092) (1,196,122)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment......................... (781,629) (723,056) (1,186,607) (248,614) (378,241)
Cash used for acquisitions, net of
cash acquired..................... -- (1,187,974) (3,134,223) (3,011,964) --
Other, net......................... (6,582) 18,108 100,867 -- 12,584
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities...................... (788,211) (1,892,922) (4,219,963) (3,260,578) (365,657)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock......... $ (33,775) $ -- $ -- $ -- $ --
Redemption of preferred stock...... -- (3,225,860) (939,463) -- --
Debt financing costs............... -- (145,509) -- -- --
Proceeds from borrowings under line
of credit........................ 33,977,000 56,614,032 106,438,476 25,205,056 25,776,612
Payments on line of credit......... (34,762,000) (55,178,123) (99,883,027) (20,920,666) (25,087,821)
Proceeds from issuance of notes
payable.......................... 2,916,623 1,935,645 1,806,296 372,140 --
Principal payments on notes
payable.......................... (1,516,301) (2,768,340) (4,568,107) (740,821) (723,635)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities........ 581,547 (2,768,155) 2,854,175 3,915,709 (34,844)
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 79,747 (46,639) 1,932,716 (109,961) (1,596,623)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 287,703 367,450 320,811 (198,429) 2,253,527
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 367,450 $ 320,811 $ 2,253,527 $ (308,390) $ 656,904
============= ============= ============= ============= =============
NONCASH ACTIVITIES:
Insurance acquired with notes
payable.......................... $ 143,743 $ 285,175 $ 370,054 $ -- $ 25,528
Accretion on redeemable preferred
stock............................ 421,200 421,212 112,913 13,434 --
Fair value of warrants issued as
consideration for acquisition.... -- 1,232,556 -- -- --
Shares issued as consideration for
acquisition...................... -- -- 4,200,000 -- --
Additional consideration payable
for acquisitions................. -- 89,409 916,781 -- --
Fair value of shares and options
issued for redemption of
preferred stock.................. -- -- 1,572,910 -- --
Combination of balances related to
discontinued operations --
Net book value of equipment
disposed......................... 433,758 -- -- -- --
Loans on equipment disposed........ 385,364 -- -- -- --
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest......................... 512,353 540,089 1,314,140 260,917 389,010
Income taxes..................... 1,558,973 714,461 2,007,791 495,000 311,697
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Petrocon Engineering, Inc. (a Texas corporation), is an international
engineering, systems and construction management contractor, servicing
industrial customers with primary focus in the process industries -- oil,
chemical, petrochemical and forest products.
A brief description of the active companies included in the consolidated
group follows:
a. PETROCON ENGINEERING, INC. (PEI) -- Provides general engineering
services for industrial customers with specialties in the areas of
distributive control systems, forest products, power distribution,
process design and process safety management.
b. PETROCON ENGINEERING OF LOUISIANA, INC. (PEI-LA) -- Extends PEI's
service area into southwest Louisiana.
c. PETROCON SYSTEMS, INC. (PSI) -- Provides design, fabrication,
installation, start-up, checkout and maintenance of analyzers and PLC
systems.
d. PETROCON TECHNOLOGIES, INC. (PTI) -- Currently provides development,
sales and marketing focused on PTI's licensed hybrid low NOX process.
e. PETROCON CONSTRUCTION RESOURCES, INC. (PCR) -- Provides technical,
inspection and operator personnel within client facilities.
f. TRIANGLE ENGINEERS AND CONSTRUCTORS, INC. (TE&C) -- Provides
engineering services and construction management services.
g. RPM ENGINEERING, INC. (RPM) -- Provides engineering services in
southeast Louisiana.
h. ALLIANCE ENGINEERING, INC. (AEI) -- Provides upstream engineering
design and project services.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrently with the consummation of the initial public
offering (the Offering) of the common stock of OEI.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Petrocon Engineering, Inc., and its wholly owned subsidiaries (collectively, the
Company). All significant intercompany transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus other reimbursable expenses incurred. Accounts receivable include
amounts currently billable per cost-plus contracts that are not billed until the
following
F-26
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period. Fixed-price contracts represent approximately 5%, 8% and 14% of revenues
in 1995, 1996 and 1997, respectively. Revenue on fixed-price contracts is
recognized using the percentage-of-completion method of accounting. Methods used
to measure percentage of completion consist of labor hours or costs incurred
compared to total estimated labor hours or costs or other appropriate bases of
measurement. Revisions in revenue and cost projections are recorded in the
period in which the facts requiring the revision become known. When estimates of
projected revenues and costs indicate a loss, the total estimated loss is
accrued. Contract performance incentives are included in income when earned.
Potential additional revenues on projects from claims and unapproved change
orders are not recognized until amounts may be reliably estimated and
realization is virtually certain. The asset "Costs and estimated profits in
excess of billings on uncompleted contracts" represents revenues recognized in
excess of amounts billed. The liability "Billings in excess of costs and
estimated profits on uncompleted contracts" represents amounts billed in excess
of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
INVESTMENTS
The Company has a one-third ownership interest in PEI Investments, a Texas
joint venture. The Company uses the equity method of accounting for this
investment. In addition, the Company accounts for its 50% interest in Petrocon
Arabia Limited (PAL) by the equity method. PAL, an engineering company located
in Saudi Arabia, provides general engineering services for oil field, pipeline,
gas plants and offshore facilities as well as refinery and petrochemical plants.
Results of operations for PAL are translated at the average exchange rate for
the year.
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.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flow associated with the asset is
compared to the asset's carrying amount to determine if a write-down to fair
value is necessary.
During 1997, the Company wrote off approximately $241,000 of leasehold
improvements made to a leased facility which the Company vacated prior to the
expiration of the lease term. Additionally, the Company has, during 1997,
written down to fair value certain property which the Company elected to hold
for sale. The amount of the property write-down was approximately $122,000, and
the net realizable value of the property, based on an independent appraisal, was
$275,000 at December 31, 1997. These write-downs have been included in the
accompanying consolidated statement of income for the year ended December 31,
1997.
F-27
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recorded based upon the differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are recovered or settled.
STOCK OPTIONS
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and, as permitted, has elected to calculate compensation expense
in accordance with Accounting Principles Bulletin Opinion No. 25 which
calculates compensation expense as the difference between the employee's
exercise price and the current price of the underlying stock. See Note 10 for
the financial statement effects from the adoption of this pronouncement.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill represents the excess of cost over the fair value of net tangible
assets of businesses acquired. Goodwill is being amortized on a straight-line
basis over an expected useful life of 40 years. Other intangible assets,
included in other assets, are amortized over the period expected to be benefited
(five to seven years). Amortization expense for goodwill and other intangible
assets was $1,020, $53,651 and $336,375 for 1995, 1996 and 1997, respectively.
Accumulated amortization of goodwill at December 31, 1996 and 1997, was $55,606
and $391,981, respectively. See Note 12 for amortization of cost over equity in
net assets included in the equity in earnings of PAL.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. MAJOR CUSTOMERS AND CREDIT RISK:
A significant portion of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and does not
generally require collateral in support of its trade receivables. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and adverse
governmental activities. Most of the Company's foreign sales are to large
international companies or are secured by letters of credit or similar
arrangements. The Company does not believe itself to be dependent to any
material degree on any single customer.
F-28
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1996 1997
------------- --------- ---------
Land................................. $ 535 $ 500
Buildings............................ 39 2,627 2,250
Transportation equipment............. 5 283 289
Machinery and equipment.............. 5-10 885 1,674
Computer equipment and software...... 3-5 3,607 5,278
Leasehold improvements............... 5-10 661 591
Furniture and fixtures............... 10 1,261 922
--------- ---------
9,859 11,504
Less -- Accumulated depreciation..... 3,473 4,921
--------- ---------
Property and equipment, net..... $ 6,386 $ 6,583
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The components of trade receivables are as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Amounts billable at December 31,
billed January of the following
year............................... $ 2,566,000 $ 3,592,762
Amounts billed at December 31........ 7,982,368 11,722,706
Retainage............................ 262,376 264,027
Allowance for uncollectible
accounts........................... (112,893) (181,564)
-------------- --------------
$ 10,697,851 $ 15,397,931
============== ==============
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Balance at beginning of year......... $ 124 $ 137 $ 113
Balance acquired at purchase of
subsidiary......................... -- 66 --
Additions to costs and expenses...... 126 87 120
Deductions for uncollectible
receivables written off and
recoveries......................... (113) (177) (51)
--------- --------- ---------
$ 137 $ 113 $ 182
========= ========= =========
F-29
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of fixed-price contracts in progress is as follows (in
thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Costs incurred on contracts in
progress........................... $ 2,608 $ 7,198
Estimated earnings, net of losses.... 801 1,933
--------- ---------
3,409 9,131
Less -- Billings to date............. (2,945) (7,749)
--------- ---------
$ 464 $ 1,382
========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 464 $ 1,881
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... -- (499)
--------- ---------
$ 464 $ 1,382
========= =========
5. LINE OF CREDIT AND DEBT:
The Company has a line of credit with a credit limit of $13,000,000, of
which $5,085,908 and $11,641,357 was outstanding at December 31, 1996 and 1997,
respectively. The line of credit is secured by an interest in all of the
Company's accounts receivable and expires on August 8, 1999. Advances on the
credit line accrue interest at a rate equal to one-half of 1% plus the prime
rate (9.0% at December 31, 1997), and the commitment fee on the unused line of
credit is 0.25%. Interest is payable monthly. The line of credit contains
covenants pertaining to the maintenance of certain ratios, including fixed
charge coverage, specified levels of certain other items, including tangible net
worth and EBITDA, and various other covenants as specified in the loan
agreement, as amended. The credit limit on the line of credit was increased to
$14,000,000 in March 1998, and thereafter was subsequently increased to
14,500,000.
In August 1996, the Company refinanced its long-term debt. The refinancing
paid off all long-term debt and established two term loans and a new line of
credit. Debt financing costs of approximately $145,000 were incurred in
conjunction with the refinancing. These costs are being amortized over three
years, the life of the debt agreement.
Debt consists of the following:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Heller Financial, Inc. --
Term Loan A, interest at prime
plus 0.75% (9.25% at December
31, 1997) due in monthly
installments, maturing through
1999.......................... $ 2,151,933 $ 2,610,000
Term Loan B, interest at prime
plus 1.25% (9.75% at December
31, 1997) due in quarterly
installments, maturing through
1999.......................... 3,083,333 1,793,357
Merrill Lynch Business Financial
Services, Inc...................... 834,570 --
RPM Investments, Inc., interest at
10% due in three installments,
maturing through 1998.............. 400,000 200,000
Other................................ 59,260 52,863
-------------- --------------
6,529,096 4,656,220
Less -- Current maturities...... (2,772,604) (1,976,174)
-------------- --------------
$ 3,756,492 $ 2,680,046
============== ==============
F-30
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all debt is collateralized by security interests in accounts
receivable, property and equipment.
Maturities of long-term debt are as follows:
Year ending December 31 --
1998............................ $ 1,976,174
1999............................ 2,680,046
------------
$ 4,656,220
============
6. LEASES:
The Company leases office space under noncancelable operating lease
agreements. Minimum payments on the multiyear leases over the remaining terms of
the leases are as follows:
Year ending December 31 --
1998............................ $ 1,280,992
1999............................ 967,812
2000............................ 505,815
2001............................ 225,757
2002............................ 5,700
------------
$ 2,986,076
============
Rent expense for operating leases was $870,735, $1,036,776 and $1,373,555
for the years ended December 31, 1995, 1996 and 1997, respectively.
7. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ------------ ------------
Federal --
Current......................... $ 483,884 $ 743,168 $ 1,476,332
Deferred........................ (623,183) 123,677 (134,352)
State --
Current......................... 206,384 166,399 266,477
Deferred........................ (66,238) 17,609 (34,412)
---------- ------------ ------------
$ 847 $ 1,050,853 $ 1,574,045
========== ============ ============
The provision for income tax does not include foreign income taxes of
$458,914, $155,330 and $781,006 for the years ended December 31, 1995, 1996 and
1997, respectively. These foreign income taxes are attributable to the Company's
interest in PAL (see Note 12). The earnings of PAL have been reflected net of
income taxes in equity in earnings of PAL in the accompanying statements of
income.
F-31
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income from
continuing operations before income taxes as follows:
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Provision at the statutory rate...... $ 615,062 $ 855,389 $ 1,471,811
Increase (decrease) resulting from --
Goodwill amortization and
other......................... (44,012) 71,670 338,210
Increase (decrease) in valuation
allowance..................... 101,049 (28,794) (10,689)
Net cost (benefit) of foreign
tax credit from unconsolidated
foreign subsidiary............ (143,336) 25,156 (366,749)
State income tax, net of benefit
for federal deduction......... 69,975 127,432 141,462
------------ ------------ ------------
$ 598,738 $ 1,050,853 $ 1,574,045
============ ============ ============
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Net current deferred income tax
assets (liabilities) --
Accrued expenses................ $ 651,953 $ 737,504
Allowance for doubtful accounts
receivable.................... 15,486 69,686
Deferred income................. -- (263,817)
------------ ------------
$ 667,439 $ 543,373
============ ============
Net noncurrent deferred income tax
assets (liabilities) --
Depreciation and amortization... $ (432,275) $ (440,061)
Federal and state net operating
loss carryforward............. 221,378 215,480
Valuation allowance............. (213,419) (202,730)
------------ ------------
$ (424,316) $ (427,311)
============ ============
At December 31, 1997, the Company had state of California, state of Texas
and federal net operating loss carryforwards of $317,050, $3,108,557 and
$133,685, respectively, which will expire between 1998 and 2012. Most of the
federal and all of the state net operating loss carryforwards are expected to
expire unused. The valuation allowance is due to expected expiration of net
operating loss carryforwards. During 1997, the deferred tax asset and valuation
allowance were reduced by $10,689 due to the expiration of net operating losses
that were not expected to be utilized.
8. STOCKHOLDERS' EQUITY:
The Company has a common stock redemption agreement whereby, upon a
stockholder's employment termination, divorce or desire to sell, the Company has
right of first refusal to purchase the stock held by such stockholder. Upon the
death or disability of a stockholder, the Company is obligated to purchase the
stock held by such stockholder subject to certain limits as set forth by the
Company's amended and restated stockholders' agreement. The purchase price per
share is at fair market value, as determined by the Company's board of
directors, in its good faith, and as reasonably acceptable to the stockholder.
F-32
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company issued 65,000 shares of common stock valued at $4.44
per share in connection with the acquisition of TE&C (see Note 15) and awarded a
stock bonus to management of 23,039 shares valued at $4.44 per share.
In 1997, the Company issued 536,943 shares of common stock valued at $7.82
per share in connection with the acquisition of AEI (see Note 15).
9. REDEEMABLE PREFERRED STOCK:
The Company has authorized 3,000,000 shares of $.3333 par value preferred
stock, which may be divided into one or more series as determined by the board
of directors. The board is authorized to fix and determine the relative rights
and preferences of each series as to dividend rate, redemption, liquidation
preferences, sinking fund provision, convertibility and voting rights. As
described below, the board has established one series of redeemable preferred
stock consisting of 675,168 shares.
The Company's Series A convertible preferred stock (Series A) was issued
for the purpose of acquiring PAL Series A is convertible into common shares at a
specified conversion ratio based upon a conversion price of $3.33 per share, and
the stock has a liquidation preference based upon a stated value of $4.44 per
share plus the greater of a valuation increment of 12% per annum compounded from
August 31, 1992, or the increment that would have occurred had the shares been
converted to common shares. The Series A shares have full voting rights
determined by the specified conversion ratio. Stockholders may demand redemption
of up to one-sixth of their shares on September 30, 1996, and an additional
one-sixth every six months thereafter until March 31, 1999. Such redemption
rights are cumulative for any amounts not previously redeemed. The redemption
price is equal to the stated value of $4.44 per share plus a redemption premium
computed as a 12% annualized compound rate of return on the stated value from
August 31, 1992, through the redemption date.
During such time as any shares of Series A are outstanding, the Company may
not declare or pay any dividend on or otherwise acquire or retire for value any
shares of common stock, except as required under the stock redemption agreement
described above. As of December 31, 1997, the Company has charged accretion
toward the redemption value in the aggregate amount of $1,774,785 to retained
earnings and increased the redeemable preferred stock by the same amount.
In August 1996, the Company redeemed 463,592 shares of its Series A at
$4.44 per share plus 12% per annum as provided in the stock agreement. In August
1997, the remaining 154,531 of the Series A shares were redeemed by the Company
in exchange for (a) cash of $939,463, (b) the issuance of 106,306 shares of
common stock and (c) the issuance of options to purchase 135,998 shares of
common stock of the Company for a price of $4.44 per share. At December 31,
1997, there are no shares of Series A outstanding.
10. EMPLOYEE BENEFIT PLANS:
Employees of the Company may participate in a 401(k) savings plan, whereby
the employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. The plan also
provides for discretionary contributions by the Company, as determined by the
board of directors. Under the plan, contributions to the 401(k) plan will be
made in the name of each participating employee in direct proportion to the
employee's 401(k) contribution. Contributions of $266,000 and $220,000 are
included in accrued expenses for the years ended December 31, 1996 and 1997,
respectively. No contributions were made related to the year ended December 31,
1995.
The Company and its employees contribute to a health plan that is
self-insured by the Company up to $60,000 per claim and approximately $2,300,000
in the aggregate.
F-33
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a nonqualified stock option plan that provides for the
issuance of options up to 1,200,000 shares of the Company's common stock. The
exercise price per share at the date of grant is equal to the fair market value
of the Company's common stock; therefore, no compensation expense is recognized.
Vesting of the options is generally as follows: one-third after one year,
two-thirds after two years and all after three years. Other vesting schedules
can be followed. Some of the options granted during 1996 and 1997 vest 10% at
grant date, 10% at January 1 of the year following grant and 10% annually
thereafter until fully vested. Another option granted during 1997 vests 16.67%
at January 1, 1998, and is fully vested in six years. Options are canceled upon
termination of employment and lapse 10 years after grant. A summary of stock
option activity is as follows:
EXERCISE
PRICE PER
SHARES SHARE
--------- ---------
Outstanding, January 1, 1995......... 94,750 $4.44
Granted.............................. 4,890 4.44
Canceled............................. (800) 4.44
---------
Outstanding, December 31, 1995....... 98,840 4.44
Granted.............................. 474,865 4.44
Granted.............................. 397,700 6.50
Canceled............................. (4,150) 4.44
---------
Outstanding, December 31, 1996
(397,700 options at $6.50 and
569,555 options at $4.44).......... 967,255
Granted.............................. 1,000 4.44
Granted.............................. 34,000 6.50
Canceled............................. (8,475) 4.44
---------
Outstanding, December 31, 1997
(431,700 options at $6.50 and
562,080 options at $4.44).......... 993,780
=========
Exercisable, December 31, 1997
(60,770 options at $6.50 and
212,843 options at $4.44).......... 273,613
=========
Available for grant, December 31,
1997............................... 70,222
=========
Weighted average remaining life of
options outstanding at December 31,
1997............................... 6.24
=========
The summary above does not include 135,998 options issued in consideration
for redemption of Series A preferred shares (see Note 9).
Stock-based compensation costs, as calculated under SFAS No. 123, would
have reduced pretax income by approximately $357,533 and $47,301 in 1996 and
1997, respectively, if the fair values of the options granted in those years had
been recognized as compensation expense on a straight-line basis over the
vesting period of the grant. For the purposes of SFAS No. 123, the fair market
value of the options granted during 1996 and 1997 used a risk-free interest rate
of 6.8% and 5.8%, respectively, an expected life of 10 years and expected
dividends of 0%. The pro forma effect on net income for 1996 and 1997 may not be
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
11. RELATED-PARTY TRANSACTIONS:
The Company leases office space from PEI Investments, a Texas joint
venture, of which the Company and an officer each own a one-third interest.
Rental paid under these leases was $105,632 for 1995, 1996
F-34
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1997. The lease expires in 2000 and has a present annual rental rate of
approximately $115,000. The Company is contingently liable as a guarantor for a
PEI Investments bank loan. The principal balance was $288,838 and $229,916 at
December 31, 1996 and 1997, respectively.
During 1995, 1996 and 1997, the Company provided services to PAL which
totaled $176,521, $56,216 and $33,083, respectively, in revenue. A receivable of
$1,381 and $3,158 for these services was outstanding at December 31, 1996 and
1997, respectively.
The Company had a note payable to RPM Investments, Inc., a partnership
owned by members of Company management, in the amount of $400,000 and $200,000
at December 31, 1996 and 1997, respectively.
12. PETROCON ARABIA LIMITED:
The Company accounts for its 50% investment in PAL under the equity method
of accounting. Financial statement information of PAL as of and for the years
ended December 31, 1995, 1996 and 1997, is as follows:
1995 1996 1997
------------ ------------ --------------
Revenues............................ $ 9,186,507 $ 8,143,516 $ 16,376,628
Net income.......................... 1,276,200 267,873 1,932,444
Total assets........................ 8,500,268 6,981,670 9,860,244
Stockholders' equity................ 6,076,724 4,839,827 5,272,270
The difference between the carrying amount of the investment and the
underlying equity in net assets at acquisition date consisted of a noncompete
agreement in the amount of $1,000,000 and goodwill of $669,023, which are being
amortized over 15 years and 40 years, respectively.
The Company's equity in PAL and its earnings from PAL as of December 31,
1995, 1996 and 1997, and for the years then ended are as follows:
1995 1996 1997
------------ ------------ ------------
Company's equity in PAL.............. $ 3,265,827 $ 2,419,914 $ 2,636,135
Unamortized excess of cost over
equity in underlying net assets
acquired........................... 1,242,998 1,136,050 1,030,171
------------ ------------ ------------
Company's investment in
PAL..................... $ 4,508,825 $ 3,555,964 $ 3,666,306
============ ============ ============
Company's equity in net income of
PAL................................ $ 638,100 $ 133,937 $ 966,222
Amortization of the excess of cost
over equity in underlying net
assets acquired.................... (110,747) (105,644) (105,640)
------------ ------------ ------------
Company's equity in
earnings of PAL......... $ 527,353 $ 28,393 $ 860,582
============ ============ ============
The Company has guaranteed borrowings of PAL up to the amount of
$1,133,333.
F-35
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DISCONTINUED OPERATIONS:
On October 19, 1995, the board of directors approved a resolution to
discontinue all operations of Petrocon Plant Services, Inc. (PPS), PCR and
Petrocon Instrument and Electrical, Inc. (PIE), except for the PCR and PPS
inspection operations. The related financial results are reported as
discontinued operations. On February 8, 1996, the Company sold the discontinued
operations of PIE for $303,083. Combined financial statement information of the
discontinued operations through October 19, 1995, is as follows:
Revenues............................. $ 13,669,901
Operating costs...................... (14,858,327)
Interest expense..................... (38,390)
Income tax benefit................... 417,117
--------------
Net loss........................ $ (809,699)
==============
For the period from October 19, 1995, through December 31, 1995, the
discontinued operations had a net loss of $286,705.
14. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses in excess of insurance recoveries.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive officers, the
terms of which expire at various times through October 2001. Such agreements
provide for minimum salary levels, adjusted annually for cost-of-living changes,
as well as for incentive bonuses that are payable if specified management goals
are attained. The aggregate commitment for future salaries at December 31, 1997,
excluding bonuses, was approximately $4,400,000.
15. ACQUISITIONS:
Effective July 1, 1996, the Company acquired all outstanding shares of TE&C
in exchange for 65,000 shares of Company stock valued at $4.44 per share.
Additional consideration given for TE&C included assumption of outstanding
liabilities by the Company. The combination was accounted for using the purchase
method. The total purchase price of approximately $1,206,000 resulted in
$689,000 of goodwill which is being amortized over 40 years using the
straight-line method. The Company also signed an employment agreement with
TE&C's sole stockholder that includes the right to additional shares of the
Company's common stock based on continued employment with the Company. For the
years ended December 31, 1996 and 1997, $18,315 and $24,420, respectively, of
compensation expense was recognized by the Company in relation to 11,000
additional shares to be issued under this agreement. TE&C's sole stockholder
also received commissions based on the gross billings of TE&C through December
31, 1997, and these amounts were accounted for as compensation expense in the
period earned.
Effective October 17, 1996, the Company acquired all outstanding shares of
RPM for approximately $1,859,000 in cash and stock warrants for 525,386 shares
of the Company's stock at $6.50 per share. The
F-36
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
combination was accounted for using the purchase method and resulted in
approximately $1,843,556 of goodwill that is being amortized over 40 years using
the straight-line method. The warrants have an exercise price of $6.50 and an
exercise period from October 17, 1996, through October 17, 2003. RPM's
stockholders will receive additional compensation based on the earnings of RPM
through December 31, 2001. The additional compensation will be accounted for as
additional goodwill to be amortized over the remaining goodwill amortization
period when the required earnings levels are achieved. The Company also signed
three- and five-year employment agreements with two of RPM's stockholders. As of
December 31, 1997, approximately $955,781 of additional consideration had been
earned and accounted for as additional goodwill.
Effective February 1, 1997, a wholly owned subsidiary of the Company merged
with AEI in exchange for cash of $4,500,000 and 536,943 shares of Company stock
valued at $7.82 per share. The combination was accounted for using the purchase
method, and the total purchase price of $8,700,000 resulted in approximately
$6,266,000 of goodwill, which is being amortized over 40 years using the
straight-line method. The Company also signed four-year employment agreements
with certain of the former officers of AEI.
The results of operations of companies acquired are included in the
accompanying consolidated statements of income from their respective acquisition
dates.
The following unaudited pro forma consolidated results of operations assume
that the purchase of AEI occurred on January 1, 1997 and that the purchases of
RPM and TE&C occurred on January 1, 1996:
<TABLE>
<CAPTION>
EARNINGS (LOSS)
FROM CONTINUING NET INCOME
REVENUE OPERATIONS (LOSS)
-------------- ---------------- -----------
<S> <C> <C> <C>
1997:
Petrocon as reported............ $ 92,616,378 $2,754,812 $ 2,754,812
AEI............................. 954,980 56,584 56,854
-------------- ---------------- -----------
Pro Forma.................. $ 93,571,358 $2,811,666 $ 2,811,666
============== ================ ===========
1996:
Petrocon as reported............ $ 61,850,638 $1,464,998 $ 1,464,998
AEI............................. 14,068,660 1,088,748 1,088,748
RPM............................. 13,826,582 531,424 531,424
TE&C............................ 2,738,911 (567,427) (567,427)
-------------- ---------------- -----------
Pro Forma.................. $ 92,484,791 $2,517,743 $ 2,517,743
============== ================ ===========
</TABLE>
The pro forma financial information may not necessarily be indicative of
the Company's results of operations that would have occurred had the
transactions been effected on the assumed dates, nor do the pro forma results
purport to indicate the Company's results of operations for any future period.
16. EXPORT SALES:
Export sales were approximately $13,100,000, $15,500,000 and $24,100,000
for the years ended December 31, 1995, 1996 and 1997, respectively. Such sales
were in South America, Europe, Africa and the Middle East and the Far East.
F-37
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Concurrently with the acquisition, the Company will enter into agreements
with PEI Investments to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Petrocon Arabia Limited:
We have audited the accompanying balance sheets of Petrocon Arabia Limited
(a Saudi limited liability company) as of December 31, 1996 and 1997, and the
related statements of income, changes in partners' equity and cash flows for
each of the three years in the period ended December 31, 1997 and the notes from
1 to 14 which are an integral part of these financial statements which were
prepared by the Company's management and presented to us together with all the
information and explanations which we requested. We express our opinion on these
financial statements based on our audits and on the information and explanations
we obtained which we considered necessary for the purpose of 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 Petrocon Arabia Limited as
of 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, based
on the presentation and disclosure of the information included in the financial
statements and in conformity with generally accepted accounting principles as
summarized in Note 2.
ARTHUR ANDERSEN & CO.
Al Khobar, Saudi Arabia
May 27, 1998
F-39
<PAGE>
PETROCON ARABIA LIMITED
BALANCE SHEETS
(SAUDI RIYALS)
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... 212,914 476,003
Accounts receivable, net........... 9,251,412 21,304,269
Prepayments and other
receivables....................... 5,818,774 2,420,202
Retentions receivable.............. 2,533,040 3,700,168
------------ ------------
Total current assets.......... 17,816,140 27,900,642
PARTICIPATION IN CONSORTIUM............. 2,314,267 2,313,453
PROPERTY AND EQUIPMENT, net............. 5,675,855 6,761,823
OTHER ASSETS............................ 375,000 --
------------ ------------
Total assets.................. 26,181,262 36,975,918
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Due to banks....................... 3,937,200 7,414,639
Accounts payable and accrued
expenses.......................... 2,863,875 4,831,427
Payable to related parties......... 149,825 892,509
Provision for zakat and income
tax............................... 478,748 3,184,957
Payable to consortium.............. 213,204 --
------------ ------------
Total current liabilities..... 7,642,852 16,323,532
END OF SERVICE BENEFITS................. 389,060 881,372
------------ ------------
Total liabilities............. 8,031,912 17,204,904
------------ ------------
PARTNERS' EQUITY:
Capital............................ 1,000,000 1,000,000
Statutory reserve.................. 500,000 500,000
Retained earnings.................. 16,649,350 18,271,014
------------ ------------
Total partners' equity........ 18,149,350 19,771,014
------------ ------------
26,181,262 36,975,918
============ ============
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
PETROCON ARABIA LIMITED
STATEMENTS OF INCOME
(SAUDI RIYALS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CONTRACT REVENUE..................... 34,449,403 30,538,186 61,412,354
OPERATING COSTS...................... (27,847,230) (24,172,824) (41,764,575)
-------------- -------------- --------------
Income from operations..... 6,602,173 6,365,362 19,647,779
GENERAL AND ADMINISTRATIVE
EXPENSES........................... (7,410,412) (6,007,337) (8,763,868)
FINANCE CHARGES...................... (601,545) (397,225) (445,709)
INCOME FROM A CONSORTIUM............. 7,770,334 1,364,097 69,184
OTHER INCOME (EXPENSES), net......... 190,432 218,388 (42,569)
-------------- -------------- --------------
Net income before zakat and
income tax................. 6,550,982 1,543,285 10,464,817
PROVISION FOR ZAKAT AND INCOME TAX... (1,765,233) (538,760) (3,218,153)
-------------- -------------- --------------
Net income for the year.... 4,785,749 1,004,525 7,246,664
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
PETROCON ARABIA LIMITED
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
(SAUDI RIYALS)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CAPITAL................................. 1,000,000 1,000,000 1,000,000
------------ ------------ ------------
STATUTORY RESERVE....................... 500,000 500,000 500,000
------------ ------------ ------------
RETAINED EARNINGS:
Beginning of the year.............. 20,609,076 21,287,715 16,649,350
Net income for the year............ 4,785,749 1,004,525 7,246,664
Distribution to partners........... (4,107,110) (5,642,890) (5,625,000)
------------ ------------ ------------
End of the year.................... 21,287,715 16,649,350 18,271,014
------------ ------------ ------------
Total partners' equity........ 22,787,715 18,149,350 19,771,014
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
PETROCON ARABIA LIMITED
STATEMENTS OF CASH FLOWS
(SAUDI RIYALS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before zakat and income
tax............................. 6,550,982 1,543,285 10,464,817
Adjustment to reconcile net income
to net cash provided by
operating activities --
Depreciation.................. 1,280,117 1,318,273 1,568,323
End of service benefits....... (269,112) (8,567) 492,312
Income tax and zakat paid..... (2,125,479) (1,709,790) (511,944)
Gain on disposal of fixed
assets........................ (190,432) (170,157) (26,555)
Income from a consortium...... (7,770,334) (1,364,097) (69,186)
Profits distribution from
consortium.................... 9,000,000 11,964,500 70,000
Changes in --
Accounts receivable........... 3,560,589 (3,991,749) (12,052,857)
Retentions receivable......... (1,595,455) 2,474,724 (1,167,128)
Prepaid expenses and other
receivables................... 112,537 (3,321,979) 3,398,572
Accounts payable and accrued
liabilities................ 199,540 (328,017) 1,967,552
Payable to related parties.... 537,485 (1,321,052) 742,684
-------------- -------------- --------------
Net cash provided by
operating activities....... 9,290,438 5,085,374 4,876,590
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in payables to a
consortium......................... 4,109,970 (1,921,989) (213,204)
Purchase of property and
equipment....................... (2,552,752) (1,005,352) (2,675,268)
(Increase) decrease in other
assets............................. -- (375,000) 375,000
Proceeds from sale of property and
equipment....................... 190,432 198,650 47,532
-------------- -------------- --------------
Net cash provided (used) by
investing activities....... 1,747,650 (3,103,691) (2,465,940)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due to banks........... (7,933,823) 3,694,276 3,477,439
Dividend distributions............. (3,178,555) (5,642,890) (5,625,000)
-------------- -------------- --------------
Net cash used by financing
activities.............. (11,112,378) (1,948,614) (2,147,561)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (74,290) 33,069 263,089
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS BEGINNING
OF YEAR............................ 254,135 179,845 212,914
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS END OF THE
YEAR............................... 179,845 212,914 476,003
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
PETROCON ARABIA LIMITED
NOTES TO FINANCIAL STATEMENTS
(SAUDI RIYALS)
1. GENERAL:
Petrocon Arabia Limited is a limited liability company operating in the
Kingdom of Saudi Arabia under commercial registration no. 2051005348 dated
October 23, 1979 (2 Dhu Al-Hijjah 1399H). The partners of the Company are
Petrocon Engineering, Inc. (PEI), a US company and Fahad Al Tamimi, a Saudi
businessman. The Company formed a new branch in Abu Dhabi in the year 1996. The
attached financial statements include all transactions relating to the Company's
head office and its branch in Abu Dhabi from the date when the branch commenced
its commercial operations on January 1, 1997.
The objectives of the Company are to manage the construction of petroleum
and gas pipelines and associated facilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements are prepared in accordance with generally accepted
accounting principles in the Kingdom of Saudi Arabia. The following is a summary
of the Company's significant accounting policies:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets at the following annual percentage rates, which are
the rates specified by the Saudi Arabian Department of Zakat and Income Tax:
Office equipment..................... 10%-25%
Furniture and fixtures............... 10%
Motor vehicles....................... 25%
ZAKAT AND INCOME TAX
The Company is subject to Saudi Arabian income taxes computed on income
attributable to the non-Saudi shareholder. The Company is also subject to a
zakat assessment attributable to the Saudi shareholder. Such income taxes and
zakat are expensed by the company.
END OF SERVICE BENEFITS
Benefits payable to the Company's staff at the end of their services are
provided for in accordance with the guidelines set by the Saudi Arabian Labour
Law, and the Company's policy is to fund such benefits annually as earned.
REVENUE RECOGNITION
Contract revenue is recognized as services are performed.
PARTICIPATION IN CONSORTIUM
The Company accounts for its 50% participation in a consortium using the
equity method of accounting. Income from a consortium represents 50% of the
consortium's results of operations for the respective periods.
TRANSLATION OF FOREIGN CURRENCIES
The accompanying financial statements are denominated in Saudi Riyals.
Appropriate exchange rates have been used to translate transactions or balances
denominated in other currencies. Exchange gains or losses are recorded in the
statement of income.
F-44
<PAGE>
PETROCON ARABIA LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid financial charges of SR 601,545, SR 397,225 and SR 445,709
during the years ended December 31, 1995, 1996 and 1997, respectively.
3. PREPAYMENTS AND OTHER RECEIVABLES:
Prepayments and other receivables comprised the following at December 31,
1996 and 1997:
1996 1997
----------- -----------
Prepaid expenses........................ 2,984,351 2,015,369
Other receivables....................... 1,896,923 197,158
Advances to suppliers................... 937,500 207,675
----------- -----------
5,818,774 2,420,202
=========== ===========
Included in 1996 other receivables is an amount of SR 1,488,142
representing advances made on account of forming a branch in Abu Dhabi.
4. RETENTIONS RECEIVABLE:
The Company is required to present its final income tax and zakat clearance
certificate to its customers in order to collect the retentions receivable
outstanding at December 31, 1997. The Company expects to obtain such certificate
and to collect the retentions receivable during 1998.
5. PARTICIPATION IN CONSORTIUM:
The Company entered into a consortium with Bugshan S&W Company Limited
(BSW), a Saudi Arabian company, on August 8, 1987, for the purpose of executing
a contract with Saudi Aramco for construction technical support services. This
contract expired on March 31, 1996, and the consortium ceased operations on that
date. As a result, the consortium's partners have decided to dissolve the
consortium upon completion of contractual formalities and collection of
retentions receivable, which are expected to take place during 1998. Under the
consortium agreement, the Company and BSW equally share the consortium's results
of operations.
Summarized financial information for the consortium at December 31, 1995,
1996 and 1997, and for the years then ended is as follows:
1995 1996 1997
-------------- ------------ -----------
At December 31 --
Total assets.................... 28,330,942 4,628,534 4,626,906
Liabilities..................... 2,501,602 -- --
Participants' equity............ 25,829,340 4,628,534 4,626,906
-------------- ------------ -----------
Total liabilities and participants'
equity............................. 28,330,942 4,628,534 4,626,906
============== ============ ===========
For the years ended December 31 --
Revenue......................... 82,497,480 11,651,865 138,368
Expense......................... (66,956,812) (8,923,671) --
-------------- ------------ -----------
Net income........................... 15,540,668 2,728,194 138,368
============== ============ ===========
F-45
<PAGE>
PETROCON ARABIA LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT, NET:
Property and equipment comprised the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1997
1996 ----------------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST DEPRECIATION VALUE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Motor vehicles....................... 655,801 3,047,899 1,621,908 1,425,991
Housing assets....................... 1,097,874 2,134,035 1,025,133 1,108,902
Office assets........................ 3,922,180 7,571,656 3,344,726 4,226,930
----------- ------------ ----------- -----------
5,675,855 12,753,590 5,991,767 6,761,823
=========== ============ =========== ===========
</TABLE>
Depreciation was SR 1,318,273 and SR 1,568,323 for the years ended December
31, 1996 and 1997, respectively.
7. DUE TO BANKS:
The Company has an overdraft facility with a commercial bank with a credit
limit of SR 7.5 million. The facility is collateralized by the retentions
receivable from Saudi Aramco and future collection of revenues from contracts
with Saudi Aramco. The outstanding balance amounted to SR 7,414,639 as of
December 31, 1997, (1996: SR 3,937,200). The facility is subject to interest at
a rate averaging 11.25 percent per annum during 1997 (1996: 11.75 percent per
annum) and is guaranteed by each of the Company's partners proportionate to
their ownership of the Company's capital.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Account payable and accrued expenses comprised the following at December
31, 1996 and 1997:
1996 1997
----------- -----------
Trade payables....................... 2,085,434 2,067,312
Accrued expenses..................... 778,441 2,764,115
----------- -----------
2,863,875 4,831,427
=========== ===========
9. PAYABLE TO RELATED PARTIES
Payable to related parties comprised the following at December 31, 1996 and
1997:
1996 1997
--------- ---------
Fahad Al Tamimi...................... -- 937,500
Petrocon Engineering, Inc............ 149,825 (44,991)
--------- ---------
149,825 892,509
========= =========
10. CAPITAL:
The Company's capital at December 31, 1996 and 1997, consists of 10,000
shares of SR 100 each fully paid and held as follows:
NUMBER OF
SHARES AMOUNT
---------- ---------
Fahad Al Tamimi...................... 5,000 500,000
Petrocon Engineering, Inc............ 5,000 500,000
---------- ---------
10,000 1,000,000
========== =========
F-46
<PAGE>
PETROCON ARABIA LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STATUTORY RESERVE:
In accordance with Saudi Arabian Companies Law and the Company's Articles
of Incorporation, 10 percent of the annual net income is required to be
transferred to a statutory reserve until this reserve equals 50 percent of the
capital. This limit was attained in the previous years and, accordingly, no
further transfer has been made to this reserve. This reserve is not available
for dividend distribution.
12. LEASES:
The Company has various operating leases for office space, employees'
housing and equipment which generally have a term of one year. Rental expense
for 1997 was SR 4,790,075 (1996: SR 3,851,667; 1995: SR 6,182,565).
13. CONTINGENCIES:
The Company was contingently liable in respect of bank guarantees totaling
SR 2,566,158 at December 31, 1997 (SR 141,308 at December 31, 1996).
14. RECLASSIFICATIONS:
Certain reclassifications have been made to the prior years' financial
statements to conform to the classifications used in 1997.
F-47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Paulus, Sokolowski and Sartor, Inc.:
We have audited the accompanying balance sheets of Paulus, Sokolowski and
Sartor, Inc. (a New Jersey corporation) as of December 31, 1996 and 1997 and the
related statements of income, shareholders' 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 Paulus, Sokolowski and
Sartor, Inc. as of 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.
ARTHUR ANDERSEN LLP
Houston, Texas
May 8, 1998
F-48
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents....... $ 102,531 $ 96,247 $ 121,560
Trade receivables, net.......... 4,807,538 5,172,513 5,896,808
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 2,369,097 2,817,853 3,409,436
Prepaid expenses................ 111,527 159,266 328,669
-------------- -------------- --------------
Total current assets....... 7,390,693 8,245,879 9,756,473
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, net.......... 733,729 611,235 590,276
DEFERRED TAX ASSET................... 73,364 54,800 54,800
OTHER ASSETS:
Cash surrender value of life
insurance..................... 1,446,781 1,698,299 1,752,378
Intangible assets............... 500,000 500,000 458,333
Other receivables............... 99,228 103,961 147,432
-------------- -------------- --------------
Total other assets......... 2,046,009 2,302,260 2,358,143
-------------- -------------- --------------
Total assets............... $ 10,243,795 $ 11,214,174 $ 12,759,692
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable.................... $ 960,000 $ 950,000 $ 2,590,000
Current portion of long-term
debt.......................... 116,181 82,076 62,908
Accounts payable................ 1,200,391 1,618,440 1,175,350
Accrued compensation and
benefits...................... 1,495,357 1,505,958 1,097,887
Other liabilities............... 60,570 38,450 88,968
Deferred income taxes........... 589,562 667,768 736,742
Due to affiliate................ 88,000 -- --
Billings in excess of costs and
estimated earnings
on uncompleted contracts...... 110,846 -- --
-------------- -------------- --------------
Total current
liabilities............. 4,620,907 4,862,692 5,751,855
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 599,688 546,522 554,540
-------------- -------------- --------------
Total liabilities.......... 5,220,595 5,409,214 6,306,395
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value,
50,000 shares authorized;
31,176, 31,076 and 31,076
shares outstanding,
respectively.................. 1,023,969 1,005,169 1,005,169
Retained earnings............... 4,971,038 5,748,195 6,395,273
Shareholder note receivable..... (403,329) (379,926) (378,667)
Treasury Stock, 4,833 common
shares........................ (568,478) (568,478) (568,478)
-------------- -------------- --------------
Total shareholders'
equity.................. 5,023,200 5,804,960 6,453,297
-------------- -------------- --------------
Total liabilities and
shareholders' equity.... $ 10,243,795 $ 11,214,174 $ 12,759,692
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 18,706,643 $ 20,514,995 $ 21,675,092 $ 5,358,988 $ 5,898,774
DIRECT COSTS......................... 8,974,302 9,395,908 9,730,641 2,411,155 2,469,129
------------ ------------ ------------ ----------- -----------
Gross profit..................... 9,732,341 11,119,087 11,944,451 2,947,833 3,429,645
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 9,384,957 10,454,943 10,787,390 2,678,852 2,654,933
------------ ------------ ------------ ----------- -----------
Income from operations........... 347,384 664,144 1,157,061 268,981 774,712
OTHER INCOME (EXPENSE)
Interest expense, net............ (190,308) (149,889) (208,359) (52,089) (58,660)
Other............................ 8,445 358 (74,775) (18,694) --
------------ ------------ ------------ ----------- -----------
Income from continuing operations
before income taxes............ 165,521 514,613 873,927 198,198 716,052
PROVISION (BENEFIT) FOR INCOME TAX... 25,124 56,339 96,770 47,137 68,974
------------ ------------ ------------ ----------- -----------
Income before Extraordinary
Item........................... 140,397 458,274 777,157 151,061 647,078
EXTRAORDINARY ITEM
Gain on forgiveness of debt (net
of applicable income tax of
$101,205)...................... 1,023,295 -- -- -- --
------------ ------------ ------------ ----------- -----------
NET INCOME........................... $ 1,163,692 $ 458,274 $ 777,157 $ 151,061 $ 647,078
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE-- TREASURY STOCK TOTAL
-------------------- COMMON RETAINED ------------------ SHAREHOLDERS'
SHARES AMOUNT STOCK EARNINGS SHARES AMOUNT EQUITY
------- --------- -------------- --------- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995............. 31,176 $1,023,969 $ (420,839) $3,444,072 -- -- $4,047,202
Payments on notes receivable......... -- -- 10,921 -- -- -- 10,921
Purchase of common stock............. -- -- -- -- (4,833) (568,478) (568,478)
Net income........................... -- -- -- 1,163,692 -- -- 1,163,692
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1995........... 31,176 1,023,969 (409,918) 4,607,764 (4,833) (568,478) 4,653,337
Dividends............................ -- -- -- (95,000) -- -- (95,000)
Payments on notes receivable......... -- -- 6,589 -- -- -- 6,589
Net income........................... -- -- -- 458,274 -- -- 458,274
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1996........... 31,176 1,023,969 (403,329) 4,971,038 (4,833) (568,478) 5,023,200
Cancellation of notes................ (100 ) (18,800) 18,800 -- -- -- --
Payments on notes receivable......... -- -- 4,603 -- -- -- 4,603
Net income........................... -- -- -- 777,157 -- -- 777,157
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1997........... 31,076 1,005,169 (379,926) 5,748,195 (4,833) (568,478) 5,804,960
Payments on notes receivable
(unaudited)........................ -- -- 1,259 -- -- -- 1,259
Net income (unaudited)............... -- -- -- 647,078 -- -- 647,078
------- --------- -------------- --------- ------ -------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 31,076 $1,005,169 $ (378,667) $6,395,273 (4,833) (568,478) $6,453,297
======= ========= ============== ========= ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 1,163,692 $ 458,274 $ 777,157 $ 151,061 $ 647,078
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and
amortization.............. 116,368 146,518 162,463 13,628 70,696
Provision for losses on
trade receivables......... (35,333) 34,953 148,849 -- --
Deferred tax asset.......... (65,379) (7,986) 18,564 -- --
Deferred income taxes....... 191,708 64,325 78,206 978 68,974
Gain on forgiveness of
debt...................... (1,124,500) -- -- -- --
(Loss) on sale of property
and equipment............. (8,445) -- 74,775 -- --
Changes in assets and
liabilities --
(Increase) decrease in --
Trade receivable............ 389,505 (44,515) (513,824) 554,691 (724,295)
Costs and estimated earnings
in excess of billings on
uncompleted jobs.......... (164,897) 257 (448,756) (837,971) (591,583)
Prepaid expenses............ (24,442) (63,098) (47,739) (11,038) (169,403)
Cash surrender value of life
insurance................. (166,636) (38,533) (251,518) (29,069) (54,079)
Intangible asset............ (500,000) -- -- --
Other receivables........... (20,492) (39,460) (4,733) (397,630) (43,471)
Increase (decrease) in --
Accounts payable............ 738,665 (80,657) 418,049 680,737 (443,090)
Accrued compensation and
benefits.................. 143,807 (435,282) 10,601 (524,632) (408,071)
Other liabilities........... 44,418 (22,120) 8,880 50,518
Billings in excess of costs
and estimated earnings on
uncompleted jobs.......... -- 110,846 (110,846) (110,846) --
------------ ---------- ---------- ----------- ------------
Net cash provided by
operating
activities............ 633,621 150,060 289,128 (501,211) (1,596,726)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of
property and equipment......... 23,685 -- 34,679 -- --
Purchase of property and
equipment...................... (439,355) (147,519) (149,423) -- (8,070)
------------ ---------- ---------- ----------- ------------
Net cash used in
investing
activities............ (415,670) (147,519) (114,744) -- (8,070)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable..................... (150,000) 360,000 (10,000) 740,000 1,640,000
Dividends paid................... -- (95,000) -- -- --
Repayment of long-term debt...... (188,018) (307,299) (87,271) 65,605 (11,150)
Proceeds from Shareholder notes
receivable..................... 10,921 6,589 23,403 403,329 1,259
(Reductions) Proceeds from
long-term debt................. 197,659 -- --
Retirement of common stock....... (85,272) -- (18,800)
Due from Affiliates.............. -- -- (88,000) (88,000) --
------------ ---------- ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (214,710) (35,710) (180,668) 1,120,934 1,630,109
------------ ---------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH...... 3,241 (33,169) (6,284) 619,723 25,313
CASH AND CASH EQUIVALENTS BEGINNING
OF YEAR............................ 132,459 135,700 102,531 102,531 96,247
------------ ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS END OF
YEAR............................... $ 135,700 $ 102,531 $ 96,247 $ 722,254 $ 121,560
============ ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest................... 202,715 165,590 224,549 33,290 44,529
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-53
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Paulus, Sokolowski and Sartor, Inc. (a New Jersey Corporation) provides
comprehensive consulting engineering services, including studies, reports, and
design and field inspections, in the areas of structural engineering, civil
engineering, mechanical and electrical engineering (including HVAC systems),
geology, geophysics, foundation design, site selection, environmental studies,
earth and rock structures, soil and foundation, air quality control, water
quality control, noise control, and solid waste disposal. The Company conducts
its business predominantly in New Jersey and New York.
The Company and its shareholders intend to enter into a definitive
agreement with OEI International, Inc. ("OEI") pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of OEI common stock concurrently with the consummation of the initial
public offering (the "Offering") of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line and accelerated methods over the estimated
useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus-markup
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus materials expense incurred. Fixed priced contracts represent
approximately 26.0, 19.7 and 24.8 percent of the Company's revenues in 1995,
1996 and 1997 respectively. Revenue on fixed priced contracts is accrued through
the recognition of projected revenues and costs on a percentage-of-completion
basis. Methods used to measure percentage of completion consist of labor hours
or costs incurred compared to total estimated labor hours or costs or other
appropriate
F-54
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
bases of measurement. Revisions in revenue and cost projections are recorded in
the period in which the facts which require the revision become known. When
estimates of projected revenues and costs indicate a loss, the total estimated
loss is accrued. Contract performance incentives are included in income when
earned. Potential additional revenues on projects from claims and unapproved
change orders are not recognized until amounts may be reliably estimated and
realization is virtually certain. The asset "Costs and estimated profits 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 amounts billed in
excess of revenues recognized.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. The Company will terminate its S Corporation status concurrent with
the effective date of the offering. Under S Corporation status, the shareholders
report their shares of the Company's taxable earnings or losses in their
personal tax returns.
Deferred income taxes reflect temporary differences between financial
reporting and state income tax reporting of revenues and expenses. The principal
differences arise from the reporting of income and expenses under the accrual
method of accounting for financial statement purposes versus the modified
accrual method for income tax purposes. These deferred taxes are classified in
the balance sheet as current.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES IN YEARS 1996 1997
------------------ -------------- --------------
<S> <C> <C> <C>
Furniture and fixtures............... 5-10 $ 339,441 $ 352,617
Field and laboratory equipment....... 5-7 323,948 351,996
Vehicles............................. 3-5 635,192 390,059
Leasehold improvements............... 5-39 785,845 813,858
-------------- --------------
2,084,426 1,908,530
Less -- Accumulated depreciation..... 1,350,697 1,297,295
-------------- --------------
Property and equipment, net..... $ 733,729 $ 611,235
============== ==============
</TABLE>
F-55
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Balance at beginning of year......... $ 689,580 $ 654,247 $ 689,198
Additions to costs and expenses...... 348,868 188,404 148,849
Deductions for uncollectible
receivables written off and
recoveries......................... (464,611) (153,453) (463,325)
---------- ---------- ----------
$ 654,247 $ 689,198 $ 374,722
========== ========== ==========
The status of contracts in progress is as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Costs incurred on contracts in
progress........................... $ 24,874,548 $ 27,117,851
Estimated earnings, net of losses.... 4,413,139 5,846,913
-------------- --------------
29,287,687 32,964,764
Less Billings to date................ 26,918,590 30,146,911
-------------- --------------
$ 2,369,097 $ 2,817,853
============== ==============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 2,479,943 $ 2,817,853
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (110,846) --
-------------- --------------
$ 2,369,097 $ 2,817,853
============== ==============
4. DEBT:
LINE OF CREDIT
The Company has a revolving line of credit of $2,000,000 in 1996 and
$3,000,000 in 1997 of which 1,040,000 and 2,050,000 was unused at December 31,
1996 and 1997, respectively. The line of credit expires July 31, 1998 and is
payable in monthly installments of interest only on the outstanding balance, at
the bank's prime rate. On December 31, 1997 the interest rate was 8.5%. This
obligation is secured by all of the assets of the Company and is personally
guaranteed by certain shareholders.
F-56
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
1996 1997
---------- ----------
Otokar Von Bradsky, a former
shareholder, note payable in
quarterly installments of interest
only at 7.93% per annum through
January 1, 1999. Thereafter quarterly
self-liquidating payments of $29,501
inclusive of interest at 7.93% per
annum until maturity on January 1,
2004. This note was issued in
connection with the repurchase of
4,833 shares of Company stock for
$568,478............................. $ 483,206 $ 483,206
Installment notes payable
collateralized by certain Company
vehicles having a net book value of
$124,267 at December 31, 1997. As of
December 31, 1997 the notes are
payable in monthly installments
through April, 2000 ranging from $617
to $4,284 inclusive of interest at
rates ranging from 5.9% to 8.75%..... 213,437 145,392
Robert Bloch, note payable in
quarterly installments of $6,457,
plus interest at 9% per annum,
through October 1997................. 19,226 --
---------- ----------
715,869 628,598
Less, current portion................ 116,181 82,076
---------- ----------
$ 599,688 $ 546,522
========== ==========
Principal payments for the next five years are scheduled as follows:
1998................................. $ 82,076
1999................................. 108,575
2000................................. 103,207
2001................................. 94,181
2002................................. 101,874
Thereafter........................... 138,685
----------
$ 628,598
==========
The Company paid interest of $100,688, $64,252 and $67,784 related to debt
for the years ended December 31, 1995, 1996 and 1997, respectively.
5. INCOME TAXES
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Federal --
Current......................... $ -- $ -- $ --
Deferred........................ -- -- --
State --
Current......................... (300) -- --
Deferred........................ 25,424 56,339 96,770
--------- --------- ---------
$ 25,124 $ 56,339 $ 96,770
========= ========= =========
F-57
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the state statutory corporate rate of 9 percent to income before income
taxes as follows:
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Provision at the statutory rate...... $ 14,897 $ 46,315 $ 78,653
Increase resulting from --
Permanent differences.............. 10,227 10,024 18,117
--------- --------- ---------
Provision for income tax............. 25,124 56,339 96,770
========= ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Trade receivable, net................ $ (432,678) $ (465,573)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... (177,151) (253,607)
Prepaid expenses and other
receivables........................ 30,677 (66,500)
Other................................ (58,246) 25,470
Accounts payable and accrued
compensation and benefits.......... 47,836 92,442
Net operating loss carryforwards..... 73,364 54,800
------------ ------------
Net deferred tax liability........... $ (516,198) $ (612,968)
============ ============
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Deferred tax assets --
Current......................... $ 47,595 $ 78,737
Long-term....................... 73,364 54,800
------------ ------------
Total...................... 120,959 133,537
============ ============
Deferred tax liabilities --
Current......................... 637,157 746,505
Long-term....................... -- --
------------ ------------
Total...................... 637,157 746,505
============ ============
Net deferred income tax
liability..................... $ (516,198) $ (612,968)
============ ============
At December 31, 1997, the Company had net operating loss carryforwards
which expire as follows:
1998................................. $ 544,000
2001................................. 61,800
6. RELATED PARTY TRANSACTIONS
Notes receivable common stock represent notes due from four shareholders in
connection with their purchase of 2,066 shares of common stock effective January
1, 1994. The notes are collateralized by the issued shares of stock and require
annual interest payments at 5% through December 15, 2002, at which time the
entire outstanding principal balance and any accrued interest is due. One
shareholder has elected to prepay his note through equal bi-weekly payments of
principal and interest until fully satisfied in January
F-58
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1998. Interest receivable on these notes is $20,825, $21,601 and $15,711 for
years ended December 31, 1995, 1996 and 1997.
The Company leases office space from Mountain Boulevard I, Mountain
Boulevard II, and Mountain Boulevard III. Rentals paid under these leases were
$1,544,357, $1,592,100 and $1,626,449 for 1995, 1996 and 1997, respectively.
The Company leases equipment from PSF Leasing Company. Rentals paid under
these leases were $307,803, $228,930 and $231,597 for 1995, 1996 and 1997,
respectively.
During 1995, 1996 and 1997, the Company provided services to Paulus,
Sokolowski & Sartor Engineering, P.C., an affiliate. Included in contract
revenues for the years ending December 31, 1995, 1996 and 1997 was $1,072,415,
$3,977,109 and $4,710,308, respectively. At December 31, 1996, and 1997,
included in accounts receivable was $606,994 and $1,936,169, respectively, for
these services. In addition, $69,000 of management fee income was received
during the year ended December 31, 1997 from this entity, which is included in
revenues.
In December, 1991, a shareholder loaned the Company $200,000 which was
repaid in March 1996. Interest expense for 1995 at 7% per annum amounted to
$14,000.
In April, 1992, a related entity loaned the Company $88,000, which was
repaid in December 1997. Interest expense for years 1995, 1996 and 1997, was
$7,040, $7,040 and $25,374, respectively.
During 1995, 1996 and 1997 the wife of a shareholder provided advertising
and promotional services to the Company, in the amounts of $39,898, $58,722 and
$101,082, respectively.
7. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. For the years ended
December 31, 1996 and 1997, one customer accounted for 10% and 11%,
respectively, of the Company's revenues. Receivables outstanding from this
customer represented $122,828 and $1,409,729 of the Company's trade receivables
at December 31, 1996 and 1997 respectively. For the year ended December 31,
1995, there was not a significant customer.
During the year ended December 31, 1995, 1996 and 1997, there were no
significant vendors.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, worker's compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
LEASES
The Company is the lessee under three long-term building leases and various
equipment leases with related entities. The controlling interests of the lessors
are the same as the controlling interests of the Company.
On December 31, 1995, the Company entered into new building leases with its
related lessors which reflect current market conditions and expire in 2011 and
2017. In addition to base rents the leases require the Company to pay all
operating costs plus real estate tax increases over base year amounts pertaining
to the buildings. In connection with the previously existing leases, the lessors
forgave rents due in the amount
F-59
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $1,124,500 in 1995. Furthermore, the lessors reduced the 1995 total base rent
from $2,065,616 to $1,371,532. The Company predominantly leases the buildings
for their offices and subleases certain space to third parties.
The equipment leases expire in various years through 2001 and require
monthly rent based upon the current prime rate plus six percentage points as
adjusted by Summit Bank.
The following is a summary of rental expense of all operating leases:
1995 1996 1997
------------ ------------ ------------
Rentals to related parties........... $ 1,679,524 $ 1,821,030 $ 1,858,046
Other rentals........................ 50,774 92,380 99,416
------------ ------------ ------------
1,730,298 1,913,410 1,957,462
Less: Sublease rentals............... (431,179) (462,705) (448,712)
------------ ------------ ------------
Total rent expense.... $ 1,299,119 $ 1,450,705 $ 1,508,750
============ ============ ============
The following is a schedule of noncancellable minimum rental payments under
all operating leases in excess of one year as of December 31, 1997:
RENTAL
RENTAL EXPENSE INCOME NET AMOUNT
-------------- ------------ --------------
1998............................. $ 1,847,278 $ 392,259 $ 1,455,019
1999............................. 1,808,046 420,701 1,387,345
2000............................. 1,708,596 425,126 1,283,470
2001............................. 1,682,191 415,741 1,266,450
2002............................. 1,660,724 35,101 1,625,623
Thereafter....................... 21,413,383 2,925 21,410,458
-------------- ------------ --------------
$ 30,120,218 $ 1,691,853 $ 28,428,365
============== ============ ==============
In addition to the above, the Company has a month-to-month sublease for
approximately $8,400 per month.
EMPLOYMENT ARRANGEMENT
The Company is committed to pay a former employee $125,000 per year for
four years effective March 31, 1995 for a total of $500,000. The employee's
services were terminated on December 31, 1997. During 1997 and 1996, the Company
paid $125,000, with respect to this obligation which has been classified as a
deferred expense on the balance sheet.
GUARANTEES
The Company guarantees a $500,000 line of credit for PSF Leasing Company,
an entity related through common ownership. The outstanding balance at December
31, 1997 was $370,564.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit-sharing 401k plan covering substantially all
employees. The plan provides for discretionary contributions by the Company, as
determined by the Board of Directors. Total contributions by the Company under
this plan were approximately $600,000, $118,382 and $119,463 during 1995, 1996
and 1997, respectively. Amounts due to this plan were approximately $600,000,
$118,382 and $119,463 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. EXPORT SALES
Export sales were approximately $65,000 and $60,000 for the years ended
December 31, 1996 and 1997, respectively. Such sales were in South America and
Europe. There were no export sales in 1995.
F-60
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Concurrently with the acquisition, the Company will enter into agreements
with the shareholders to lease land and buildings used in the Company's
operations for a negotiated amount and term.
For the three months ended March 31, 1998, notes payable increased
approximately $1.6 million for anticipated payments of payroll taxes and trade
payables currently due.
F-61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulsby Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of Gulsby
Engineering, Inc. (a Texas corporation), and its subsidiary, Gulsby
International Engineers, Limited, as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the 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 financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gulsby
Engineering, Inc., and its subsidiary as of 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.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1998
F-62
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,357,173 $ 603,390 $ 507,960
Receivables --
Trade receivables.......... 321,122 278,405 870,023
Other receivables.......... 15,761 27,821 27,015
Advances to stockholder.... 2,650,585 3,120,571 3,095,880
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 646,283 4,210,372 4,683,853
Prepaid expenses and other........... 43,367 154,292 139,771
------------ ------------ --------------
Total current assets....... 5,034,291 8,394,851 9,324,502
PROPERTY AND EQUIPMENT, net.......... 547,375 539,490 523,923
DEFERRED TAX ASSET................... 933,686 949,602 1,073,962
OTHER ASSETS......................... 10,221 3,736 3,552
------------ ------------ --------------
Total assets............... $ 6,525,573 $ 9,887,679 $ 10,925,939
============ ============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
LIABILITIES:
Accounts payable................ $ 211,483 $ 501,683 $ 301,668
Accrued compensation and
benefits...................... 125,092 13,309 30,522
Accrued liabilities............. 29,803 73,218 73,218
Accrued legal judgment.......... 3,200,741 3,520,815 3,608,835
Notes payable................... 29,831 66,300 1,027,414
Billings in excess of costs and
estimated profits on
uncompleted contracts......... 2,733,859 422,588 418,339
Income taxes payable............ 502,505 1,763,826 1,900,190
------------ ------------ --------------
Total liabilities.......... 6,833,314 6,361,739 7,360,186
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par; 1,000,000
shares authorized, 10,000
shares outstanding............ 10,000 10,000 10,000
Retained earnings (deficit)..... (317,741) 3,515,940 3,555,753
------------ ------------ --------------
Total stockholders' equity
(deficit)............... (307,741) 3,525,940 3,565,753
------------ ------------ --------------
Total liabilities and
stockholders' equity
(deficit)............... $ 6,525,573 $ 9,887,679 $ 10,925,939
============ ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-63
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 3,165,447 $ 20,285,341 $ 18,264,303 $ 1,515,397 $ 1,523,594
DIRECT COSTS......................... 2,324,980 17,451,222 11,768,322 1,167,228 1,187,963
----------- ------------ ------------ ----------- -----------
Gross profit..................... 840,467 2,834,119 6,495,981 348,169 335,631
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 633,296 849,868 927,357 278,450 183,893
----------- ------------ ------------ ----------- -----------
Income from operations........... 207,171 1,984,251 5,568,624 69,719 151,738
OTHER INCOME (EXPENSE):
Interest expense, net............ (299,245) (193,915) (233,066) (60,349) (93,665)
Other............................ 33,645 7,733 56,919 10,347 --
----------- ------------ ------------ ----------- -----------
Total....................... (265,600) (186,182) (176,147) (50,002) (93,665)
----------- ------------ ------------ ----------- -----------
Income (loss) before income
taxes..................... (58,429) 1,798,069 5,392,477 19,717 58,073
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (21,003) 529,127 1,558,796 5,612 18,260
----------- ------------ ------------ ----------- -----------
NET INCOME (LOSS).................... $ (37,426) $ 1,268,942 $ 3,833,681 $ 14,105 $ 39,813
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-64
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDERS'
----------------- EARNINGS EQUITY
SHARES AMOUNT (DEFICIT) (DEFICIT)
------ ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 10,000 $10,000 $ (1,549,257) $ (1,539,257)
Net loss........................ -- -- (37,426) (37,426)
------ ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 10,000 (1,586,683) (1,576,683)
Net income...................... -- -- 1,268,942 1,268,942
------ ------- -------------- -------------
BALANCE, December 31, 1996........... 10,000 10,000 (317,741) (307,741)
Net income...................... -- -- 3,833,681 3,833,681
------ ------- -------------- -------------
BALANCE, December 31, 1997........... 10,000 10,000 3,515,940 3,525,940
Net income (unaudited).......... -- -- 39,813 39,813
------ ------- -------------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 10,000 $10,000 $ 3,555,753 $ 3,565,753
====== ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-65
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ (37,426) $ 1,268,942 $ 3,833,681 $ 14,105 $ 39,813
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization.... 97,740 97,959 95,612 24,542 23,251
Deferred tax asset............... (64,758) (72,884) (15,916) (3,977) (124,360)
Changes in assets and
liabilities-
(Increase) decrease in-
Trade receivables........... 31,880 (311,725) 42,717 (1,040,180) (591,618)
Other receivables........... (15,271) 13,065 (12,060) (6,845) 806
Advances to stockholder..... (889,343) (1,227,303) (469,986) (391,010) 24,691
Costs and estimated profits
in excess of billings on
uncompleted contracts..... -- (646,283) (3,564,089) (39,037) (473,481)
Prepaid expenses and
other..................... (95,581) 56,101 (110,925) 14,586 14,521
Other assets................ (6,003) (4,425) 5,750 -- --
Increase (decrease) in-
Accounts payable............ (503,885) 35,100 290,200 100,709 (200,015)
Accrued compensation and
benefits.................. (32,029) 85,098 (111,783) (58,060) 17,213
Accrued liabilities......... (4,559) (392) 43,415 (1,646) --
Accrued legal judgment...... 264,525 290,975 320,074 80,018 88,020
Billings in excess of costs
and estimated profits on
uncompleted contracts..... 5,057,079 (2,547,484) (2,311,271) 919,910 (4,249)
Income taxes payable........ 60,168 612,116 1,261,321 11,157 136,364
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........... 3,862,537 (2,351,140) (703,260) (375,728) (1,049,044)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment........................ (63,720) (28,138) (86,992) (2,695) (7,500)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (63,720) (28,138) (86,992) (2,695) (7,500)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes
payable.......................... 338,116 53,655 112,367 -- 1,002,592
Principal payments on notes
payable.......................... (277,627) (176,510) (75,898) (17,955) (41,478)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 60,489 (122,855) 36,469 (17,955) 961,114
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 3,859,306 (2,502,133) (753,783) (396,378) (95,430)
CASH AND CASH EQUIVALENTS, beginning
of year............................ -- 3,859,306 1,357,173 1,357,173 603,390
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 3,859,306 $ 1,357,173 $ 603,390 $ 960,795 $ 507,960
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest......................... $ 72,465 $ 60,192 $ 2,434 $ 19,669 $ 4,020
Income taxes..................... 2,180 6,434 321,412 -- 6,255
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-66
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Gulsby Engineering, Inc. (the Company), a Texas corporation, and its
subsidiary, Gulsby International Engineers, Limited (a U.S. Virgin Islands
Foreign Sales Corporation), are engineering, systems and construction management
contractors, servicing industrial customers with primary focus in the process
industries--oil, chemical and petrochemical products. The Company has operated
primarily in the domestic markets of Texas, Louisiana, Oklahoma and New Mexico.
The Company focus in 1996 and 1997 has changed to the foreign market (98% and
94% of revenues for 1996 and 1997, respectively).
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany transactions and balances have
been eliminated.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
REVENUE RECOGNITION
The Company provides a majority of its services through fixed-price
contracts. Revenue on fixed-price contracts is recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Revisions in revenue and cost
projections are recorded in the period in which the facts requiring the revision
become known. When estimates of projected revenues and costs indicate a loss,
the total estimated loss is accrued. Potential additional revenues on projects
from claims and unapproved change orders are not recognized until amounts may be
reliably estimated and realization is virtually certain. The asset "Costs and
estimated profits in excess of billings on uncompleted contracts" represents
revenues recognized in excess of amounts billed. The liability "Billings in
excess of costs and estimated profits on uncompleted contracts" represents
amounts billed in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
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.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and
F-67
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciated. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the underlying assets or liabilities are
recovered or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
------------------ ------------ ------------
<S> <C> <C> <C>
Land................................. $ 214,775 $ 214,775
Equipment............................ 5-22 472,383 475,567
Buildings............................ 15-16.5 1,019,987 1,019,987
Leasehold improvements............... 15-16.5 464,650 523,980
Furniture and fixtures............... 5-10 552,452 576,930
------------ ------------
2,724,247 2,811,239
Less- Accumulated depreciation....... 2,176,872 2,271,749
------------ ------------
Property and equipment, net..... $ 547,375 $ 539,490
============ ============
</TABLE>
F-68
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Costs incurred on contracts in
progress........................... $ 26,536,894 $ 30,522,573
Estimated earnings, net of losses.... 5,999,206 10,487,443
-------------- --------------
32,536,100 41,010,016
Less -- Billings to date............. 34,623,676 37,222,232
-------------- --------------
$ (2,087,576) $ 3,787,784
============== ==============
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... $ 646,283 $ 4,210,372
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... (2,733,859) (422,588)
-------------- --------------
$ (2,087,576) $ 3,787,784
============== ==============
4. DEBT:
Current debt consists of the following:
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Note payable to a bank, interest at
7.69%, maturing May 9, 1997........ $ 29,831 $ --
Note payable to a finance company,
interest at 7.16%, maturing May 9,
1998............................... -- 66,300
--------- ---------
$ 29,831 $ 66,300
========= =========
The Company paid interest of $5,192 and $2,160 related to debt for the
years ended December 31, 1996 and 1997, respectively.
On March 6, 1998, the Company entered into a working capital loan agreement
with Sterling Bank in the principal amount of $1,000,000 at 10% interest per
annum. The loan matures the earlier of August 1, 1998 or the closing of the
acquisition of the Company by OEI.
5. INCOME TAXES:
Provisions (benefits) for federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ------------
Federal--
Current......................... $ 38,429 $ 539,594 $ 1,703,672
Deferred........................ (56,876) (74,872) (144,876)
State--
Current......................... 5,326 62,415 (128,959)
Deferred........................ (7,882) 1,990 128,959
---------- ---------- ------------
$ (21,003) $ 529,127 $ 1,558,796
========== ========== ============
F-69
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income (loss)
before income taxes as follows:
DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ------------ ------------
Provision (benefit) at the statutory
rate............................... $ (19,866) $ 611,343 $ 1,833,442
Increase (decrease) resulting from--
Permanent differences........... 550 2,092 19,244
State income tax, net of federal
benefit....................... (1,687) 42,508 --
Foreign Sales Corporation
benefit....................... -- (126,816) (293,890)
---------- ------------ ------------
$ (21,003) $ 529,127 $ 1,558,796
========== ============ ============
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing differed
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Accrued legal contingency not
deducted for tax purposes.......... $ 1,232,285 $ 1,197,077
State taxes.......................... (43,846) --
Bases differences on property and
equipment and capital lease
accounting......................... 3,358 (4,830)
Other accrued expenses not deducted
for tax purposes................... (258,111) (242,645)
------------ ------------
Net deferred tax asset.......... $ 933,686 $ 949,602
============ ============
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Deferred tax assets--
Current......................... $ -- $ --
Long-term....................... 1,176,332 1,192,248
------------ ------------
Total...................... 1,176,332 1,192,248
------------ ------------
Deferred tax liabilities--
Current......................... -- --
Long-term....................... 242,646 242,646
------------ ------------
Total...................... 242,646 242,646
------------ ------------
Net deferred income tax
asset................... $ 933,686 $ 949,602
============ ============
6. RELATED-PARTY TRANSACTIONS:
The Company has made noninterest-bearing advances to its stockholder over a
period of several years. The amounts outstanding at December 31, 1996 and 1997,
were $2,650,585 and $3,120,571, respectively. The stockholder has represented
that he has the intent and the ability to repay such advances by December 31,
1998. During 1995, 1996 and 1997, the Company paid interest of $24,108, $55,000
and $274 for loans to the Company which are reflected as an offset to the
stockholder advances. The Company makes various other noninterest-bearing loans
to its employees payable on demand.
The Company uses a paint facility on the premises which is owned by its
stockholder. The amount of rent not charged to the Company for the use of this
facility is not significant.
F-70
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. During the year ended
December 31, 1995, one customer accounted for 88% of the Company's revenues. No
receivables were outstanding for this customer at December 31, 1995. For the
year ended December 31, 1996, two customers accounted for 71% and 27% of the
Company's revenues. Receivables outstanding at December 31, 1996, for these
customers were less than 10%. For the year ended December 31, 1997, three
customers accounted for 65%, 16% and 10% of the Company's revenues. Receivables
outstanding from the largest customer were 64% of the Company's trade
receivables at December 31, 1997. No receivables were outstanding for the other
two significant customers.
During the years ended December 31, 1995 and 1996, one vendor accounted for
27% and 48%, respectively, of the Company's cost of services. During the year
ended December 31, 1997, no one vendor accounted for greater than 10% of the
Company's cost of services.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company and its stockholder were party to a suit in 1989 as defendants
against a customer. The suit sought reimbursement from the Company of amounts
paid by the customer in settlement with another general contractor in a patent
infringement suit. In 1991, a summary judgment against the Company for
approximately $1.6 million plus interest was rendered. The judgment accrues
simple interest at 10% from September 29, 1989, through the date of judgment
(October 21, 1991) and thereafter at the rate of 10% per annum compounded
annually until paid. The accompanying statements of income include accruals of
interest at the stated rate. No payments on the judgment have been made at this
time.
The Company is involved in various other legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business, auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
OTHER COMMITMENTS
The Company contributed $40,152 into a trust during 1996 on behalf of its
employees for a potential profit sharing plan. A plan has not been adopted as of
December 31, 1997.
9. EXPORT SALES:
Export sales were approximately $2,800,000, $19,900,000 and $17,900,000,
for the years ended December 31, 1995, 1996 and 1997, respectively. Such sales
were in South America, Europe, Africa and the Middle East.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April 1998, the Company and its stockholder entered into a definitive
agreement with OEI, providing for the acquisition of the Company by OEI. The
definitive agreement provides that the advances to stockholder (Note 6) and
accrued legal judgement (Note 8) will be paid from the proceeds of the sale of
the stockholder's shares under the agreement.
Concurrently with the acquisition, the Company will enter into agreements
with the stockholder to lease facilities used in the Company's operations for a
negotiated amount and term.
For the three months ended March 31, 1998, notes payable increased
approximately $1 million to provide working capital due to the increase in trade
receivables and cost and estimated profits in excess of billings on uncompleted
contracts.
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To W-Industries, Inc.:
We have audited the accompanying balance sheets of W-Industries, Inc. (a
Texas corporation), as of December 31, 1996 and 1997, and the related statements
of income, 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 W-Industries, Inc., as of
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.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1998
F-72
<PAGE>
W-INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 295,323 $ 1,978,972 $ 86,357
Trade receivables............... 1,213,683 3,393,416 3,346,535
Note receivable................. 32,052 -- --
Costs and estimated profits in
excess of billings on
uncompleted contracts......... 1,191,764 1,477,201 4,092,337
Inventory....................... 80,253 95,237 185,511
Prepaid expenses and other...... 3,789 9,145 113,846
------------ ------------ ------------
Total current
assets............. 2,816,864 6,953,971 7,824,586
PROPERTY AND EQUIPMENT, net.......... 1,045,395 1,051,582 1,099,175
------------ ------------ ------------
Total assets.......... $ 3,862,259 $ 8,005,553 $ 8,923,761
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 437,930 $ 885,502 $ 1,907,831
Accrued compensation and
benefits...................... 157,283 360,848 213,428
Accrued liabilities............. 55,032 26,850 43,513
Line of credit.................. 200,000 -- 100,000
Current maturities of long-term
debt.......................... 62,565 68,467 70,217
Payable to stockholder.......... 1,690,187 5,438,546 3,588,833
Billings in excess of costs and
estimated profits on
uncompleted contracts......... -- -- 206,022
------------ ------------ ------------
Total current
liabilities........ 2,602,997 6,780,213 6,129,844
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 641,593 573,127 554,903
------------ ------------ ------------
Total liabilities..... 3,244,590 7,353,340 6,684,747
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value,
100,000 shares authorized;
12,000 shares outstanding..... 12,000 12,000 12,000
Additional paid-in capital...... 8,000 8,000 8,000
Retained earnings............... 597,669 632,213 2,219,014
------------ ------------ ------------
Total stockholders'
equity............. 617,669 652,213 2,239,014
------------ ------------ ------------
Total liabilities and
stockholders'
equity............. $ 3,862,259 $ 8,005,553 $ 8,923,761
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 13,743,205 $ 14,615,652 $ 20,603,651 $ 3,610,380 $ 6,694,992
DIRECT COSTS......................... 8,563,129 10,382,226 13,699,944 2,451,166 4,330,106
-------------- -------------- -------------- ------------ ------------
Gross profit.................... 5,180,076 4,233,426 6,903,707 1,159,214 2,364,886
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,981,656 2,513,157 3,003,226 645,752 691,104
-------------- -------------- -------------- ------------ ------------
Income from operations.......... 3,198,420 1,720,269 3,900,481 513,462 1,673,782
-------------- -------------- -------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net........... (204,546) (189,381) (246,757) (60,041) (106,775)
Other........................... 89,658 31,106 154,185 38,041 19,794
-------------- -------------- -------------- ------------ ------------
Total...................... (114,888) (158,275) (92,572) (22,000) (86,981)
-------------- -------------- -------------- ------------ ------------
NET INCOME........................... $ 3,083,532 $ 1,561,994 $ 3,807,909 $ 491,462 $ 1,586,801
============== ============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 12,000 $ 12,000 $8,000 $ 181,106 $ 201,106
Net income...................... -- -- -- 3,083,532 3,083,532
Dividends declared.............. -- -- -- (1,279,458) (1,279,458)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1995........... 12,000 12,000 8,000 1,985,180 2,005,180
Net income...................... -- -- -- 1,561,994 1,561,994
Dividends declared.............. -- -- -- (2,949,505) (2,949,505)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1996........... 12,000 12,000 8,000 597,669 617,669
Net income...................... -- -- -- 3,807,909 3,807,909
Dividends declared.............. -- -- -- (3,773,365) (3,773,365)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1997........... 12,000 $ 12,000 8,000 632,213 652,213
Net income (unaudited).......... -- -- -- 1,586,801 1,586,801
--------- --------- ---------- ----------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 12,000 $ 12,000 $8,000 $ 2,219,014 $ 2,239,014
========= ========= ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 3,083,532 $ 1,561,994 $ 3,807,909 $ 491,462 $ 1,586,801
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation................ 99,237 35,193 60,440 7,284 13,635
Gain on sale of equipment... -- -- (2,020) -- --
Changes in assets and
liabilities --
(Increase) decrease in
assets --
Trade receivables........... (304,929) 110,126 (2,179,733) (1,082,920) 46,881
Note receivable............. (120,901) 88,849 32,052 23,919 --
Costs and estimated profits
in excess of billings on
uncompleted contracts..... (2,646,054) 1,797,672 (285,437) 297,327 (2,615,136)
Inventory................... 24,676 (43,104) (14,984) (11,376) (90,274)
Prepaid expenses and
other..................... 4,334 (3,123) (5,356) (115,638) (104,701)
Increase (decrease) in
liabilities --
Accounts payable............ 437,863 (80,827) 447,572 700,244 1,022,329
Accrued compensation and
benefits.................. (3,506) 74,608 203,565 50,891 (147,420)
Accrued liabilities......... 26,507 2,162 (28,182) (7,045) 16,663
Billings in excess of costs
and estimated profits on
uncompleted contracts..... -- -- -- -- 206,022
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ 600,759 3,543,550 2,035,826 354,148 (65,200)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (1,099,207) (24,592) (67,607) -- (61,228)
Proceeds from the sale of
equipment...................... -- -- 3,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash used in
investing
activities............ (1,099,207) (24,592) (64,607) -- (61,228)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) line
of credit 300,000 (100,000) (200,000) -- 100,000
Proceeds from issuance of note
payable........................ 800,000 -- -- -- --
Principal payments on note
payable........................ (33,642) (62,199) (62,564) (15,924) (16,474)
Payments on stockholder
payable........................ (815,229) (3,306,220) (25,006) (520,676) (1,849,713)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ 251,129 (3,468,419) (287,570) (536,600) (1,766,187)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (247,319) 50,539 1,683,649 (182,452) (1,892,615)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 492,103 244,784 295,323 295,323 1,978,972
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 244,784 $ 295,323 $ 1,978,972 $ 112,871 $ 86,357
============ ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest.................... $ 217,966 $ 217,799 $ 251,388 $ 61,716 $ 106,775
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
W-Industries, Inc. (the Company), a Texas corporation, is an engineering,
systems and construction management contractor, servicing industrial customers
with primary focus in the process industries -- oil, chemical and petrochemical.
W-Industries, Inc., primarily operates in Houston, Texas.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company generally provides its services under cost-plus contracts.
Revenues are recognized to the extent of billable rates times hours delivered
plus materials expense incurred. The Company reflects the costs of materials and
equipment as revenues which are reimbursable to the Company when it is
responsible for the engineering specification, procurement and management of
such cost components on behalf of the customer. The asset "Costs and estimated
profits in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
INVENTORY
Inventories consist of stainless steel tube fittings, valves and
accessories held for use in the course of business and are stated at the lower
of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method of depreciation.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if
F-77
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a write-down to market value is necessary. Adoption of this standard did not
have a material effect on the financial position or results of operations of the
Company.
INCOME TAX
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of the Offering.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of contract
accounting, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
---------------- ------------ ------------
<S> <C> <C> <C>
Land................................. -- $ 370,464 $ 370,464
Building............................. 39 707,459 707,459
Transportation equipment............. 5 133,145 167,429
Machinery and equipment.............. 3 16,994 16,994
Computer and telephone equipment..... 3-5 10,547 17,565
Furniture and fixtures............... 3 25,710 35,010
------------ ------------
1,264,319 1,314,921
Less -- Accumulated depreciation..... 218,924 263,339
------------ ------------
Property and equipment, net..... $ 1,045,395 $ 1,051,582
============ ============
</TABLE>
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Costs incurred on contracts in
progress............................. $ 2,004,847 $ 2,100,648
Estimated earnings, net of losses.... 1,038,527 1,034,648
------------ ------------
3,043,374 3,135,296
Less -- Billings to date............. 1,851,610 1,658,095
------------ ------------
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... $ 1,191,764 $ 1,477,201
============ ============
F-78
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT:
LINE OF CREDIT
The Company has a line of credit of $750,000, of which $550,000 and
$750,000 was unused at December 31, 1996 and 1997, respectively. The line of
credit is secured by an interest in all the Company's accounts receivable,
inventory and equipment and expires on April 14, 1998. Advances on the line of
credit accrue interest at a rate equal to prime (8.5% at December 31, 1997).
Interest is payable monthly.
On April 14, 1998, the Company renewed the line of credit and increased the
line to $1,500,000. All terms remain the same and the line expires on April 14,
1999.
Long-term debt consisted of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Note payable to a bank, interest at
the bank's base rate plus 0.5%
(interest is 10% at December 31,
1997), maturing February 24,
2000............................... $ 704,159 $ 641,594
Less -- Current maturities........... (62,565) (68,467)
------------ ------------
$ 641,594 $ 573,127
============ ============
The long-term debt is collateralized by buildings and real estate property.
Maturities of long-term debt are as follows:
Year ending December 31 --
1998............................ $ 68,467
1999............................ 75,740
2000............................ 497,387
----------
$ 641,594
==========
The Company paid interest of $80,043, $80,610 and $82,369 related to debt
for the years ended December 31, 1995, 1996 and 1997, respectively.
5. RELATED-PARTY TRANSACTIONS:
The Company has followed a policy of paying substantially all of its
earnings to its stockholders. As of December 31, 1995, 1996 and 1997,
$2,046,901, $1,690,187 and $5,438,546, respectively, have not been paid to the
stockholders. Approximately $1,700,000 of this payable at December 31, 1997,
represents taxes on the earnings which is paid by the Company on behalf of its
stockholders. This amount plus $140,000 to the stockholders were paid subsequent
to year-end. Interest is earned annually at a rate of 10% on the unpaid
principal from the date of funding. For the years ended December 31, 1995, 1996
and 1997, the Company paid interest of $137,923, $137,189 and $169,019,
respectively, related to these dividends payable.
6. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. For the years ended
December 31, 1995, 1996 and 1997, one customer accounted for 17%, 20% and 12%,
respectively, of the Company's revenues. Receivables outstanding from this
customer represented 47%, 23% and 9% of the Company's trade receivables at
December 31, 1995, 1996 and 1997, respectively.
F-79
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1995, one vendor accounted for 11% of
the Company's purchases. Also, during the years ended December 31, 1995, 1996
and 1997, one vendor accounted for 17%, 15% and 19%, respectively, of the
Company's purchases.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business, auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
8. EXPORT SALES:
Export sales were approximately $2,700,000, $2,900,000 and $5,200,000 for
the years ended December 31, 1995, 1996 and 1997, respectively. Such sales were
in South America, Africa and the Middle East and the Far East.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Prior to the acquisition, the Company will make a cash distribution of
$3,588,833 prior to the acquisition which represents the Company's payable to
shareholder (See Note 5). Had these transactions been recorded at March 31,
1998, the effect on the accompanying balance sheet would be a decrease in assets
of $3,588,833, and a decrease in liabilities of $3,588,833. This amount will be
funded through the proceeds of the Offering.
F-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chemical & Industrial Engineering, Inc.:
We have audited the accompanying balance sheets of Chemical & Industrial
Engineering, Inc. (a Kentucky corporation), as of December 31, 1996 and 1997,
and the related statements of income, 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 Chemical & Industrial
Engineering, Inc., as of 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.
ARTHUR ANDERSEN LLP
Houston, Texas
February 19, 1998
F-81
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 16,297 $ 1,730,847 $ 224,121
Trade receivables............... 3,268,064 1,493,635 1,760,951
Costs and estimated profits in
excess of billings on
uncompleted contracts......... 75,186 -- 190,887
Prepaid expenses and other...... 171,368 115,632 118,282
Deferred tax asset.............. 169,718 175,710 176,033
------------ ------------ -----------
Total current assets....... 3,700,633 3,515,824 2,470,274
PROPERTY AND EQUIPMENT, net.......... 1,297,269 1,220,778 1,170,786
DEFERRED TAX ASSET................... -- -- 28,830
------------ ------------ -----------
Total assets............... $ 4,997,902 $ 4,736,602 $ 3,669,890
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 1,124,419 $ 140,969 $ 311,834
Accrued compensation and
benefits...................... 798,129 1,168,250 648,233
Accrued liabilities............. 325,338 75,497 46,962
Notes payable................... 172,414 119,941 114,772
Billings in excess of costs and
estimated profits on
uncompleted contracts......... 331,780 364,615 266,031
Income taxes payable............ 70,520 253,301 68,885
------------ ------------ -----------
Total current
liabilities............. 2,822,600 2,122,573 1,456,717
LONG-TERM LIABILITIES:
Deferred tax liability.......... 119,788 146,462 --
------------ ------------ -----------
Total liabilities.......... 2,942,388 2,269,035 1,456,717
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
No par, nonvoting, 100,000
shares authorized; 13,913,
13,373, 13,384 shares
outstanding,
respectively............... 202,828 176,283 176,840
No par, voting, 200,000 shares
authorized; 27,658, 26,268,
26,540 shares outstanding,
respectively............... 419,418 386,384 399,547
Retained earnings............... 1,433,268 1,904,900 1,636,786
------------ ------------ -----------
Total stockholders'
equity.................. 2,055,514 2,467,567 2,213,173
------------ ------------ -----------
Total liabilities and
stockholders' equity.... $ 4,997,902 $ 4,736,602 $ 3,669,890
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 12,522,354 $ 17,176,773 $ 15,906,131 $4,607,795 $2,151,342
DIRECT COSTS......................... 9,165,439 13,300,422 10,968,890 3,268,888 1,492,612
------------ ------------ ------------ --------- -------------
Gross profit................ 3,356,915 3,876,351 4,937,241 1,338,907 658,730
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,151,834 3,546,955 3,996,613 773,332 1,087,835
------------ ------------ ------------ --------- -------------
Income from operations...... 205,081 329,396 940,628 565,575 (429,105)
OTHER INCOME (EXPENSE):
Interest income (expense), net... 33,714 (25,826) 36,464 (2,618) 4,353
Other............................ (2,761) 3,993 (5,249) (657) (6,270)
------------ ------------ ------------ --------- -------------
Total....................... 30,953 (21,833) 31,215 (3,275) (1,917)
------------ ------------ ------------ --------- -------------
Income before income
taxes..................... 236,034 307,563 971,843 562,300 (431,022)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 121,254 139,640 423,877 244,600 (165,031)
------------ ------------ ------------ --------- -------------
NET INCOME (LOSS).................... $ 114,780 $ 167,923 $ 547,966 $ 317,700 $(265,991)
============ ============ ============ ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------- TOTAL
NONVOTING VOTING NONVOTING VOTING RETAINED STOCKHOLDERS'
SHARES SHARES AMOUNT AMOUNT EARNINGS EQUITY
--------- ------ --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 23,181 28,210 $ 298,518 $280,233 $1,781,892 $ 2,360,643
Issuance of common stock........... 1,338 745 67,234 28,306 -- 95,540
Retirement of common stock......... (5,397) (2,745) (69,465) (11,024) (292,409) (372,898)
Transfers of common stock.......... (500) 500 (21,500) 21,500 -- --
Distribution to stockholders....... -- -- -- -- (113,883) (113,883)
Net income......................... -- -- -- -- 114,780 114,780
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1995.............. 18,622 26,710 274,787 319,015 1,490,380 2,084,182
Issuance of common stock........... 226 1,566 11,543 71,960 -- 83,503
Retirement of common stock......... (3,664) (1,889) (41,578) (13,481) (225,035) (280,094)
Transfers of common stock.......... (1,271) 1,271 (41,924) 41,924 -- --
Net income......................... -- -- -- -- 167,923 167,923
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1996.............. 13,913 27,658 202,828 419,418 1,433,268 2,055,514
Issuance of common stock........... 216 717 10,585 32,378 -- 42,963
Retirement of common stock......... (693) (2,170) (33,849) (68,693) (76,334) (178,876)
Transfers of common stock.......... (63) 63 (3,281) 3,281 -- --
Net income......................... -- -- -- -- 547,966 547,966
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1997.............. 13,373 26,268 176,283 386,384 1,904,900 2,467,567
Issuance of Common Stock
(unaudited)...................... 65 357 3,458 16,788 -- 20,246
Retirement of Common Stock
(unaudited)...................... -- (139) -- (6,526) (2,123) (8,649)
Transfer of Common Stock
(unaudited)...................... (54) 54 (2,901) 2,901 -- --
Net income (unaudited)............. -- -- -- -- (265,991) (265,991)
--------- ------ --------- -------- ---------- -------------
BALANCE, March 31, 1998 (unaudited)..... 13,384 26,540 $ 176,840 $399,547 $1,636,786 $ 2,213,173
========= ====== ========= ======== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 114,780 $ 167,923 $ 547,966 $ 317,700 $ (265,991)
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation................ 272,691 306,049 354,424 74,272 86,895
Loss (gain) on sale/disposal
of assets................. 5,916 (308) 9,132 (607)
Deferred income taxes....... (8,640) 11,853 20,682 246,745 (175,615)
Changes in assets and
liabilities --
(Increase) decrease in --
Trade receivables....... (1,359,907) (1,004,122) 1,774,429 692,485 (267,316)
Costs and estimated
profits in excess of
billings on
uncompleted
contracts............. (147,080) 71,894 75,186 75,186 (190,887)
Prepaid expenses and
other................. 2,649 (71,055) 55,736 79,628 (2,650)
Increase (decrease) in --
Accounts payable........ 637,146 306,976 (983,450) (1,022,229) 170,865
Accrued compensation and
benefits.............. 568,267 (271,887) 370,121 (83,300) (520,017)
Accrued liabilities..... 237,564 87,449 (249,841) (297,960) (28,535)
Billings in excess of
costs and estimated
profits on uncompleted
contracts............. 517,812 (186,032) 32,835 (62,189) (98,584)
Income taxes payable.... (212,821) 240,392 182,781 (77,360) (184,416)
------------ ------------ ----------- ------------ ------------
Net cash provided by (used
in) operating
activities................ 628,377 (340,868) 2,190,001 (57,022) (1,476,858)
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (521,294) (566,190) (287,065) (116,504) (39,983)
Proceeds from sale of
equipment...................... 2,222 1,939 -- -- 3,687
------------ ------------ ----------- ------------ ------------
Net cash used in investing
activities................ (519,072) (564,251) (287,065) (116,504) (36,296)
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (principal payments
on) notes payable.............. 243,426 (85,077) (52,473) 173,783 (5,169)
Proceeds from issuance of common
stock.......................... 95,540 83,503 42,963 9,654 20,246
Payments for retirement of common
stock.......................... (372,898) (280,094) (178,876) -- (8,649)
Distributions to stockholders.... (56,655) (57,228) -- -- --
------------ ------------ ----------- ------------ ------------
Net cash used in financing
activities................ (90,587) (338,896) (188,386) 183,437 6,428
------------ ------------ ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 18,718 (1,244,015) 1,714,550 9,911 (1,506,726)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 1,241,594 1,260,312 16,297 16,297 1,730,847
------------ ------------ ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 1,260,312 $ 16,297 $ 1,730,847 $ 26,208 $ 224,121
============ ============ =========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest.................... $ 8,029 $ 37,752 $ 27,109 3,595 --
Income taxes................ 343,839 -- 218,747 321,960 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Chemical & Industrial Engineering, Inc. (the Company), a Kentucky
corporation, is an engineering and systems procurement management contractor,
servicing industrial customers with primary focus in the process industries
- -oil, chemical, petrochemical and food products. Chemical & Industrial
Engineering, Inc., primarily operates in Kentucky.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus materials expense incurred. The Company does not reflect the
costs of materials and equipment as revenues which are reimbursable to the
Company when it is responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer. For the three
years ended December 31, 1995, 1996 and 1997, these amounts were $4,395,384,
$4,803,742 and $8,329,277, respectively. Fixed-price contracts represent
approximately 30% of the Company's revenues in 1996 and approximately 18% of
revenues in 1997. Revenue on fixed-price contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Revisions in revenue and cost
projections are recorded in the period in which the facts requiring the revision
become known. When estimates of projected revenues and costs indicate a loss,
the total estimated loss is accrued. Potential additional revenues on projects
from claims and unapproved change orders are not recognized until amounts may be
reliably estimated and realization is virtually certain. The asset "Costs and
estimated profits in excess of billings on uncompleted contracts" represents
revenues recognized in excess of amounts billed. The liability "Billings in
excess of costs and estimated profits on uncompleted contracts" represents
amounts billed in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term cash investments with
maturities of three months or less.
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.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and
F-86
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
depreciated. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the underlying assets or liabilities are
recovered or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Computer and telephone equipment..... 5 $ 1,893,389 $ 2,190,379
Leasehold improvements............... 3 21,437 21,437
Furniture and fixtures............... 10 920,760 863,292
------------ ------------
2,835,586 3,075,108
Less- Accumulated depreciation....... 1,538,317 1,854,330
------------ ------------
Property and equipment, net..... $ 1,297,269 $ 1,220,778
============ ============
</TABLE>
F-87
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Costs incurred on contracts in
progress.............................. $ 488,556 $ 3,145,107
Estimated earnings, net of losses....... 125,835 472,753
------------ ------------
614,391 3,617,860
Less -- Billings to date................ 870,985 3,982,475
------------ ------------
$ (256,594) $ (364,615)
============ ============
Costs and estimated profits in excess of
billings on uncompleted contracts..... $ 75,186 $ --
Billings in excess of costs and
estimated profits on uncompleted
contracts............................. (331,780) (364,615)
------------ ------------
$ (256,594) $ (364,615)
============ ============
4. DEBT:
LINE OF CREDIT
The Company has a line of credit of $1,500,000, which was unused at
December 31, 1996 and 1997. The line of credit is secured by an interest in all
the Company's accounts receivable, contract rights and equipment and expires on
June 15, 1998. Advances on the line of credit accrue interest at a rate equal to
prime (8.5% at December 31, 1997). Interest is payable quarterly. Management
believes the line of credit can be renewed upon expiration.
The line of credit contains covenants requiring the maintenance of a
borrowing base equal to the aggregate of 50% of the Company's net carrying value
of equipment plus 80% of the Company's then-current accounts receivable less
than 90 days old, and various other covenants as specified in the loan
agreement, as amended. The Company is in compliance with these covenants at
December 31, 1996 and 1997.
NOTES PAYABLE FOR STOCK REDEMPTIONS
Notes payable consist of amounts due to 12 terminated employees for stock
redemptions at book value at the date of termination. All notes payable have
maturities of one year from redemption (currently all are due in 1998) and bear
interest ranging from 8.25% to 8.5%. The Company paid interest of $49,757 and
$15,124 related to this debt for the years ended December 31, 1996 and 1997,
respectively.
5. LEASES:
The Company leases office space under an operating lease agreement which
expires in June 1999. Rent expense was $257,887, $302,176 and $366,308 for the
years ended December 31, 1995, 1996 and 1997, respectively.
The Company leases vehicles for certain key members of management which
expire 1998-2000. The lease payments under these vehicle leases were
approximately $5,437, $19,471 and $16,124 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-88
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future lease payments for existing operating leases are as follows:
Year ending December 31 --
1998................................. $ 355,581
1999................................. 165,137
2000................................. 4,343
----------
$ 525,061
==========
6. INCOME TAXES:
Provisions for federal, state and local income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Federal --
Current......................... $ 96,889 $ 100,681 $ 306,662
Deferred........................ -- 9,877 17,235
State and local --
Current......................... 24,365 27,106 96,533
Deferred........................ -- 1,976 3,447
---------- ---------- ----------
$ 121,254 $ 139,640 $ 423,877
========== ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory personal service corporate rate of 35% to
income before income taxes as follows:
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Provision at the statutory rate...... $ 82,612 $ 107,647 $ 340,145
Increase resulting from --
Nondeductible expenses.......... 15,099 11,853 17,400
State income tax, net of federal
benefit....................... 23,543 20,140 66,332
---------- ---------- ----------
$ 121,254 $ 139,640 $ 423,877
========== ========== ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The cumulative effects of these temporary differences represent
deferred tax assets and liabilities and relate principally to the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Accrued expenses..................... $ 169,718 $ 175,710
Property and Equipment............... (119,788) (146,462)
------------ ------------
Net deferred income tax asset... $ 49,930 $ 29,248
============ ============
F-89
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are classified in the
accompanying balance sheet as follows:
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Deferred tax assets-
Current......................... $ 169,718 $ 175,710
Long-term....................... -- --
Deferred tax liabilities-
Current......................... -- --
Long-term....................... 119,788 146,462
---------- ----------
Net deferred income tax
asset................... $ 49,930 $ 29,248
========== ==========
7. STOCKHOLDERS' EQUITY:
An employee is eligible to invest upon board-of-director approval in the
voting shares of the Company upon becoming a full-time, benefited employee with
a total continuous service of one year. Nonvoting stock is restricted to
full-time employees. Redemption of shares is mandatory upon employee
termination, change in employment status or death of employee. Issuance and
redemption price of stock is based on (a) the price last fixed by the board of
directors as the stock price or (b) the book value (defined as total
stockholders' equity divided by the total shares outstanding) per share,
whichever is larger. Book value per share at December 31, 1997, is $62.25. Stock
is canceled upon redemption.
8. EMPLOYEE BENEFIT PLANS:
Employees of the Company may participate in a 401(k) plan, whereby the
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. The plan provides
for the Company to match 50% of the first 6% contributed by each employee. Total
contributions by the Company under this plan were $132,895, $160,427 and
$165,345 during 1995, 1996 and 1997, respectively.
9. RELATED-PARTY TRANSACTIONS:
At December 31, 1997, the Company had advanced $27,083 to OEI in expenses
related to compliance with the letter-of-intent agreement with OEI dated
November 1997. These expenses are on behalf of the stockholders and are included
in the prepaid expenses. The current intent is for the monies advanced by the
Company to be reimbursed by the stockholders upon the consummation of the
Offering.
10. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. During the year ended
December 31, 1995, two customers accounted for 50% and 13% of the Company's
total revenues. Receivables outstanding from these customers represented 16% and
6% of the Company's trade receivables at December 31, 1995. For the year ended
December 31, 1996, two customers accounted for 47% and 20% of total revenues.
Receivables outstanding for these customers represented 34% and 15% of the
Company's trade receivables at December 31, 1996. For the year ended December
31, 1997, three customers accounted for 39%, 28% and 14% of total revenues.
Receivables outstanding from these customers represented 12%, 21% and 0% of the
Company's trade receivables at December 31, 1997.
For the years ended December 31, 1995, 1996 and 1997, no vendors accounted
for greater than 10% of the Company's purchases.
F-90
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including
professional and director and officer liability, general and business, auto
liability, commercial property, foreign coverage liability, workers'
compensation and a general umbrella policy. The Company has not incurred
significant claims or losses on any of its insurance policies.
12. EXPORT SALES
Export sales were approximately $2,200,000 for the year ended December 31,
1997. Such sales were in Africa and the Middle East.
13. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI, providing for the acquisition of the Company by OEI.
F-91
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 3
Risk Factors............................ 8
The Company............................. 16
Use of Proceeds......................... 19
Dividend Policy......................... 19
Capitalization.......................... 20
Dilution................................ 21
Selected Historical and Pro Forma
Combined Financial Data............... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operation............................. 24
Industry Overview....................... 29
Business................................ 31
Management.............................. 44
Certain Transactions.................... 51
Principal Stockholders.................. 53
Shares Eligible for Future Sale......... 54
Description of Capital Stock............ 55
Underwriting............................ 58
Legal Matters........................... 59
Experts................................. 60
Additional Information.................. 60
Index to Financial Statements........... F-1
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS, WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS ON
SUBSCRIPTIONS.
4,300,000 Shares
OEI INTERNATIONAL, INC.
Common Stock
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
CIBC OPPENHEIMER
SANDERS MORRIS MUNDY
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 3. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by OEI. All of such amounts
(except the SEC Registration Fee, the NASD Filing Fee and the New York Stock
Exchange Listing Fee) are estimated.
SEC Registration Fee................. $ 21,882
NASD Filing Fee...................... 7,918
New York Stock Exchange Listing
Fee................................ 120,085
Blue Sky Fees and Expenses........... 10,000
Printing and Engraving Costs......... 400,000
Legal Fees and Expenses.............. 800,000
Accounting Fees and Expenses......... 1,600,000
Transfer Agent and Registrar Fees and
Expenses........................... 5,000
Miscellaneous........................ 35,115
---------
Total........................... 3,000,000
=========
- ------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action. In an action brought to obtain a judgment in the corporation's favor,
whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for expenses, including attorney's fees, actually
and reasonably incurred in connection with the defense or settlement of such
action, and the corporation may not indemnify for amounts paid in satisfaction
of a judgment or in settlement of the claim. In any such action, no
indemnification may be paid in respect of any claim, issue or matter as to which
such person shall have been adjudged liable to the corporation except as
otherwise approved by the Delaware Court of Chancery or the court in which the
claim was brought. In any other type of proceeding, the indemnification may
extend to judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such other proceeding, as well as to
expenses.
The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
II-1
<PAGE>
OEI's Certificate of Incorporation and Bylaws require OEI to indemnify its
directors and officers to the fullest extent permitted under Delaware law. OEI's
Certificate of Incorporation limits the personal liability of a director to the
corporation or its stockholders to damages for breach of the director's
fiduciary duty.
OEI has not purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the registrant, or that
may arise out of their status as directors or officers of the registrant,
including liabilities under the federal and state securities laws. OEI has
entered into indemnification agreements to indemnify its directors and executive
officers to the maximum extent permitted under Delaware law.
The Underwriting Agreement provides for indemnification of the directors
and officers of the Company in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table reflects sales by OEI of unregistered securities within
the past three years. Share amounts have been adjusted for the 1,828.368-for-one
stock split effected on April 6, 1998. Except as otherwise disclosed, the
issuances by OEI of the securities sold in the transactions referenced below
were not registered under the Securities Act, pursuant to the exemption
contemplated in Section 4(2) thereof, for transactions not involving a public
offering. No underwriter was involved in the transactions and no commissions
were paid. The consideration for which the shares of Common Stock were sold, all
of which was payable in cash, is indicated below:
<TABLE>
<CAPTION>
NUMBER OF CASH
DATE PURCHASER SHARES CONSIDERATION
---- --------- ------ -------------
<S> <C> <C> <C>
October 9, 1997............... M. L. Burrow Family 207,194 $ 113.33
Partnership, Ltd.
October 9, 1997............... Gary J. Coury 207,194 $ 113.33
October 9, 1997............... Dana W. Swindler 158,443 $ 86.67
October 9, 1997............... Equus II Incorporated 1,218,973 $ 666.67
March 31, 1998................ Rick Berry 36,564 $ 20.00
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*1.1 -- Form of Underwriting Agreement dated ___________, 1998,
by and among OEI and Smith Barney Inc.
*2.1 -- Uniform Provisions for the Acquisition of the Founding
Companies.
*2.2 -- Agreement and Plan of Reorganization dated April 10, 1998, by
and among OEI, PEI Acquisition, Inc., Petrocon and certain of
its principal stockholders.
*2.3 -- Agreement and Plan of Reorganization dated as of April 10,
1998, by and among OEI, PS&S Acquisition, Inc., PS&S and its
stockholders.
*2.4 -- Agreement and Plan of Reorganization dated as of April 10,
1998, by and among OEI, GEI Acquisition, Inc., GEI and its
stockholders.
*2.5 -- Agreement and Plan of Reorganization dated as of April 10,
1998, by and among OEI, W-I Acquisition Inc., W-I and its
stockholders.
*2.6 -- Agreement and Plan of Reorganization dated as of April 10,
1998, by and among OEI, C&I Acquisition, Inc., C&I and certain
of its principal stockholders.
*3.1 -- Amended and Restated Certificate of Incorporation of OEI.
*3.2 -- Bylaws of OEI.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
+4.1 -- Form of Certificate representing Common Stock.
*4.2 -- Form of Registration Rights Agreement among OEI and the
stockholders listed on the signature pages thereto.
*5.1 -- Opinion of Porter & Hedges, L.L.P.
*10.1 -- 1998 Incentive Plan of OEI.
*10.2 -- 1998 Employee Stock Purchase Plan of OEI.
*10.3 -- Form of Indemnification Agreement between OEI and each of its
directors and executive officers.
*10.4 -- Employment Agreement by and between OEI and Michael L. Burrow
dated April 10, 1998.
*10.5 -- Employment Agreement by and between OEI and Gary J. Coury
dated April 10, 1998.
*10.6 -- Employment Agreement by and between OEI and Rick Berry dated
April 10, 1998.
*10.7 -- Employment Agreement by and between OEI and Dana W. Swindler
dated April 10, 1998.
*10.8 -- Employment Agreement by and between OEI and Robert W. Raiford
dated April 10, 1998.
*10.9 -- Employment Agreement by and between GEI and Jerry G. Gulsby
dated April 10, 1998.
**10.10 -- Lease dated as of May 1, 1983, as amended, between PS&S and
Mountain Boulevard Associates I and Lease Modification Agreement
dated , 1998.
**10.11 -- Lease Agreement dated January 12, 1981, as amended, between
PS&S and Mountain Boulevard Associates II and Lease Modification
Agreement dated , 1998.
**10.12 -- Lease Agreement dated December 29, 1986, as amended, between
PS&S and Mountain Boulevard Associates III and Lease
Modification Agreement dated , 1998.
*21.1 -- Subsidiaries of OEI.
**23.1 -- Consent of Arthur Andersen LLP.
**23.2 -- Consent of Arthur Andersen & Co.
*23.3 -- Consent of Porter & Hedges, L.L.P. (contained in Exhibit 5.1).
*23.4 -- Consent of W. Bernard Pieper as a nominee for director.
*23.5 -- Consent of Bob G. Gower as a nominee for director.
*23.6 -- Consent of C. Roland Haden as nominee for director.
*24.1 -- Power of Attorney (included on the signature page of this
Registration Statement).
*27.1 -- Financial Data Schedule.
- ------------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates representing the shares of Common Stock offered hereby in such
II-3
<PAGE>
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as a part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON JUNE 1, 1998.
OEI INTERNATIONAL, INC.
By: /s/ MICHAEL L. BURROW
MICHAEL L. BURROW,
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED AND ON JUNE 1, 1998.
SIGNATURE CAPACITY IN WHICH SIGNED
--------- ------------------------
/s/MICHAEL L. BURROW Chief Executive Officer, Director (Principal
MICHAEL L. BURROW Exercutive Officer)
/s/RICK BERRY Executive Vice President and Chief Financial Officer
RICK BERRY (Principal Financial and Accounting Officer)
* President, Chief Operating Officer
GARY J. COURY Director
* Director
NOLAN LEHMANN
* Director
GARY L. FORBES
*By: /s/ RICK BERRY
RICK BERRY
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
AS ATTORNEY-IN-FACT
II-5
<PAGE>
APPENDIX
OEI INTERNATIONAL, INC. GRAPHICS AND TEXT FOR PROSPECTUS
PAGE 2 (INSIDE FRONT COVER)
OEI International logo with OEI International, Inc.
TEXT: (TOP LEFT SIDE OF PAGE)
Engineered solutions for a global customer base.
TEXT: (TOP HALF OF PAGE)
The following table appears:
<TABLE>
<CAPTION>
COMPANY LOCATION BUSINESS
- ------- -------- --------
<S> <C> <C>
Petrocon Engineering, Inc. Beaumont, Texas Multidisciplined engineering
and design services
Paulus, Sokolowski and Sartor, Inc. Warren, New Jersey Engineering, geotechnical and
environmental services
W-Industries, Inc. Houston, Texas Designs, builds and installs
control and instrumentation
systems
Gulsby Engineering, Inc. Houston, Texas Designs and builds modular
processing plants
Chemical & Industrial Engineering, Inc. Louisville, Kentucky Engineering, procurement and
construction management
services
</TABLE>
GRAPHICS (MIDDLE OF PAGE):
One 3-D drawing and two photographs are contained in the middle of the
page. From left to right these include (i) a 3-D drawing of a gas treating
facility, (ii) a photograph of a control room with systems designed by the
Company and (iii) a photograph of a marine research laboratory designed by the
Company.
TEXT (BOTTOM OF PAGE):
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
(INSIDE GATE-FOLD)
GRAPHICS (GENERAL):
The gatefold contains a world map, which has been highlighted in those
states within the United States and countries worldwide where the Company was
involved in projects during 1997.
TEXT (BOTTOM RIGHT CORNER):
During 1997, OEI was involved in projects in 26 states and 21 countries
worldwide.
GRAPHICS (INTERSPERSED):
Collage of five photographs located in the top center of the page, top
right side of page, lower right portion of the page, bottom center of the page
and lower left hand corner of the page depicting a (i) gas treating facility,
(ii) fixed offshore platform, (iii) food processing unit, (iv) modular
processing plant and (v) control panel, respectively, all of which were designed
and/or built by the Company.
GRAPHICS (BOTTOM LEFT SIDE):
OEI International logo with OEI International, Inc.
A-1
<PAGE>
TEXT (INTERSPERSED):
Related text included with each of the photographs described above is as
follows:
o Gas Treating Facility
o Fixed Offshore Platform
o Food Processing Unit
o Modular Processing Unit
o Control Panel
INSIDE BACK COVER:
GRAPHICS (GENERAL): Chart depicting the following industries served by the
Company: Industrial Processing, Transportion, General Building, Manufacturing,
Power, Hazardous Waste, Water Supply, Sewer/Waste and Petroleum/Chemical.
TEXT (LOWER RIGHT HAND CORNER):
Engineered solutions for a global customer base.
A-2
Exhibit 10.10
LEASE
BETWEEN
MOUNTAIN BOULEVARD ASSOCIATES, I
AND
PAULUS, SOKOLOWSKI & SARTOR, INC.
<PAGE>
TABLE OF CONTENTS PAGE
1. TERM, PREMISES AND PARTIES.............................................1
2. RENT - TAXES...........................................................1
3. CONDITION OF LEASE.....................................................1
4. USE OF PREMISES........................................................1
5. INSURANCE RISK AND COST................................................2
6. HOLD HARMLESS..........................................................2
7. EMINENT DOMAIN.........................................................2
8. NO WASTE, NUISANCE OR UNLAWFUL USE.....................................2
9. LESSOR'S DELAY IN DELIVERING POSSESSION................................2
10. PAYMENT OF UTILITIES...................................................3
11. REPAIRS AND MAINTENANCE................................................3
12. DELIVERY, ACCEPTANCE AND SURRENDER OF THE PREMISES.....................3
13. PARTIAL DESTRUCTION OF PREMISES........................................3
14. POSTING "FOR SALE," "FOR LEASE" OR "FOR RENT" SIGNS....................4
15. SIGNS, AWNINGS, MARQUEES, ETC..........................................4
16. LESSEE TO CARRY LIABILITY INSURANCE....................................4
17. LEASE BREACHED BY LESSEE'S RECEIVERSHIP, ASSIGNMENT
FOR BENEFIT OF CREDITORS, INSOLVENCY, OR BANKRUPTCY....................4
18. LESSOR'S REMEDIES ON LESSEE'S BREACH...................................5
19. LESSEE TO PAY LESSOR'S ATTORNEYS' FEES.................................6
20. MANNER OF GIVING NOTICE................................................6
i
<PAGE>
21. EFFECT OF LESSOR'S WAIVER..............................................6
22. LEASE APPLICABLE TO SUCCESSORS, ETC....................................6
23. SUBORDINATION OF MORTGAGES, ETC........................................6
24. LESSEE'S ASSIGNMENT, SUBLEASE, OR LICENSE FOR OCCUPATION
BY OTHER PERSONS.......................................................7
25. SECURITY DEPOSIT.......................................................7
26. LAWS OF NEW JERSEY TO APPLY............................................7
27. LESSOR'S ENTRY FOR INSPECTION AND MAINTENANCE..........................7
ii
<PAGE>
LEASE
THIS LEASE, dated this 1st day of May, 1983, between MOUNTAIN BOULEVARD
ASSOCIATES, I, a partnership, having its principal office at 67 Mountain
Boulevard Extension, Warren, New Jersey 07060, (Lessor) and PAULUS, SOKOLOWSKI &
SARTOR, INC., a New Jersey corporation with offices at 67 Mountain Boulevard,
Warren, New Jersey 07060, (Lessee).
1. TERM, PREMISES AND PARTIES.
1.1 The term of this lease shall be for a period of ten (10) years and
shall commence May 1, 1984 and shall terminate April 30, 1994.
1.2 The premises to be leased shall be the first floor, second floor and
basement areas of the premises located at 67A Mountain Boulevard Extension,
Warren, New Jersey, and more fully described on the floor plan drawing attached
hereto as Schedule "A".
2. RENT - TAXES.
2.1 The rent for the leased premises for the first lease term shall be
$505,986.00 or $42,165.50 per month (the base rent), payable monthly in advance
on the first of the month at the office of the Lessor. Lessee shall pay Lessor
additional rent for the proportionate share of utilities attributable to
Lessee's space as shown in Schedule A-2.
3. CONDITION OF LEASE.
Subject to assignment to permanent lender. Lessee acknowledges that Lessee
has been advised that this Lease may be subject to an Assignment of Leases,
Rents and Profits by and between the Lessor and a permanent lender not
designated at the time of the making of this Lease. It is a condition of this
Lease that Lessee at all times comply with all applicable conditions of said
assignment provided the same are not unreasonable. In the event Lessee fails to
comply with any applicable provision of said assignment, the Lessor at Lessor's
option may declare this lease null and void.
4. USE OF PREMISES.
The premises are leased to be used as offices, including any uses
incidental to and associated with such use, or permit the use of, the premises
for any other purpose without first obtaining the consent in writing of the
Lessor's authorized representative.
<PAGE>
5. INSURANCE RISK AND COST.
Lessee agrees not to use the premises in any manner prohibited by law. If
used in a manner which will increase risks covered by insurance on the building
where the premises are located, so as to increase the rate of insurance on the
premises, or to cause cancellation of any insurance policy covering the
building, Lessee will pay for the increase in premium for use other than normal
office use or arrange at Lessee's expense for insurance coverage. In such event
Lessee shall obtain said substitute insurance immediately so that there is no
lapse in coverage and will notify Lessor within ten (10) days of obtaining same.
Lessee further agrees not to keep on the premises, or permit to be kept, used,
or sold thereon, anything prohibited by the policy of fire insurance covering
the premises of insurers necessary to keep in force the fire and public
liability insurance covering the premises and building.
6. HOLD HARMLESS.
Where Lessee is the cause, Lessee shall hold harmless and indemnify Lessor
from any loss, cost, expense, action, cause of action or judgment arising out of
any damage to property or injury or death to any person arising out of any
failure of Lessee to in any respect comply with and perform all of the
requirements and provisions hereof or in any wise connected with the occupation
or use of the demised premises.
7. EMINENT DOMAIN.
In the event the premises are made subject to a proceeding by which the
right of eminent domain is exercised, or any like proceeding, Lessor and Lessee,
at their respective costs and expenses shall join and cooperate in resisting
such proceeding if such resistance is feasible and desirable and if it is not,
shall join and cooperate in prosecuting their respective claims for damages
incurred from the successful exercise of such right or proceeding. The Lessee
shall continue to pay the rent required herein until, as a result of eminent
domain proceedings, the Lessee may no longer occupy the premises.
8. NO WASTE, NUISANCE OR UNLAWFUL USE.
Lessee shall not commit, or allow to be committed, any waste on the
premises, create or allow any nuisance to exist on the premises, or use or allow
the premises to be used for any unlawful purpose.
9. LESSOR'S DELAY IN DELIVERING POSSESSION.
This lease shall not be rendered void or voidable by Lessor's inability to
deliver possession to Lessee at the beginning of the lease term, nor shall such
inability to deliver render Lessor liable to Lessee for loss or damage suffered
thereby. If Lessor cannot deliver the premises at such time, the rent for the
period between the beginning of the term and the time when Lessor can deliver
2
<PAGE>
possession will be deducted from the total rent of the lease. However, Lessor
shall deliver possession of the premises to Lessee by August 1, 1984 or Lessee
may at Lessee's option, void this lease.
10. PAYMENT OF UTILITIES.
10.1 Lessee shall pay its pro rata share of all electrical service charges
furnished the premises for the term of this lease. Lessor shall bill Lessee
monthly on the first business day of the following month for Lessee's pro rata
share of the utilities. Additionally, Lessee shall pay for all maintenance and
service to Lessee's portion of the inside of the building. Lessor shall be
responsible for maintenance and service for the common areas inside and outside
the building.
10.2 It is understood by the parties hereto that electrical service to the
building shall be billed on one bill for all tenants. To the extent that the
basement area is leased to others under a lease or leases, the Lessee herein
shall receive a pro rate credit against the Lessee's electrical service bill for
payments made by others for electrical service.
11. REPAIRS AND MAINTENANCE.
Lessee, at its expense, shall maintain and keep the premises, under lease,
excepting common areas, in good repair, and shall be responsible for the expense
of same.
12. DELIVERY, ACCEPTANCE AND SURRENDER OF THE PREMISES.
Lessor represents that the premises shall be in fit condition for use as
offices. Lessee agrees to accept the premises on possession as being in a good
state of repair and in sanitary condition. It agrees to surrender the premises
to the Lessor at the end of the lease term in at least as good condition,
allowing for reasonable use and wear, and damage by acts of God, including fire
and storms. Lessee agrees to remove all business signs or symbols placed on the
premises by it before re-delivery of the premises to the Lessor and to restore
the portion of the premises in which they were placed to the same condition as
before their placement.
13. PARTIAL DESTRUCTION OF PREMISES.
Partial destruction of the leased premises shall not render this lease
void or voidable, or terminate it except as herein provided. "Partial
destruction" is hereby defined as destruction of 50% of the structure of the
building or less. If the premises are partially destroyed during the term of
this lease, Lessor shall repair them, when such repairs can be made in
conformity with local, state and federal laws and regulations, within 180 days
of the partial destruction. Rent for the premises will be reduced proportionally
to the extent to which the damage or repair operations interfere with the normal
conduct of Lessee's business on the premises, unless destruction is caused by
Lessee in which case the full rent schedule shall apply if the repairs are not
completed within 180 days. Thereafter either party hereto has the option to
terminate this lease.
3
<PAGE>
14. POSTING "FOR SALE," "FOR LEASE" OR "FOR RENT" SIGNS.
Lessor reserves the right to place "For Sale" signs on the premises at any
time during the lease, or "For Lease" or "For Rent" signs on the premises at any
time within 180 days of expiration of the lease.
15. SIGNS, AWNINGS, MARQUEES, ETC.
Lessee agrees that it will not construct or place, or permit to be
constructed or placed, signs, awnings, marquees, or other structures projecting
from the exterior of the premises without Lessor's written consent thereto.
Lessee further agrees to remove signs, displays, advertisements or decorations
it has placed, or permitted to be placed, on the premises, which, in Lessor's
opinion are offensive or otherwise objectionable. If Lessee fails to remove such
signs, displays, advertisements, or decorations within 5 days after receiving
written notice from Lessor to remove the same, Lessor reserves the right to
enter the premises and remove them, at Lessee's expense.
16. LESSEE TO CARRY LIABILITY INSURANCE.
Lessee agrees to procure and maintain in force during the term of this
lease and any extension thereof, at its expense, public liability insurance in
companies approved by Lessor, adequate to protect against liability for damage
claims through public use of or arising out of accidents occurring in or around
the leased premises, in a minimum amount of $3,000,000.00 aggregate (single
limit). The adequacy of the coverage shall be reviewed annually by Lessor and
Lessee and shall be increased annually by an amount equal to the percentage
increase in the consumer price index for northern New Jersey upon the request of
the Lessor. Such insurance policies shall provide coverage for Lessor's
contingent liability on such claims or losses. Copies of the policies, together
with Certificates of Insurance issued by the carriers and proof of payment of
premium, shall be delivered to the Lessor prior to Lessee's taking possession
hereunder. Lessee agrees to obtain a written obligation from the insurers to
notify Lessor in writing at least 30 days prior to cancellation or refusal to
renew any such policies. Lessee agrees that, if such insurance policies are not
kept in force during the entire term of this lease and any extension thereof,
Lessor may procure the necessary insurance, pay the premium therefor, and that
such premium shall be repaid to Lessor as an additional rent installment for the
month following the date on which such premiums are paid.
17. LEASE BREACHED BY LESSEE'S RECEIVERSHIP, ASSIGNMENT FOR BENEFIT OF
CREDITORS, INSOLVENCY, OR BANKRUPTCY.
Appointment of a receiver to take possession of Lessee's assets (except a
receiver appointed at Lessor's request as herein provided), Lessee's general
assignment for benefit of creditors, or Lessee's insolvency or taking or
suffering action under the Bankruptcy Act is a breach of this lease.
4
<PAGE>
18. LESSOR'S REMEDIES ON LESSEE'S BREACH.
If Lessee breaches this lease, Lessor shall have the following remedies in
addition to its other rights and remedies in such event:
a. Reentry. Lessor may reenter the premises upon giving five (5)
days' notice and remove all Lessee's personnel and property therefrom. Lessor
may store the property in a public warehouse or at another place of its choosing
at Lessee's expense or for Lessee's account.
b. Termination. After reentry, Lessor may terminate the lease on
giving ten (10) days written notice of such termination to Lessee. Reentry only,
without notice of termination, will not terminate this lease.
c. Reletting Premises. After reentering, Lessor may relet the
premises or any part thereof, for any term, without terminating the lease, at
such rent and on such terms as it may choose. Lessor may make alterations and
repairs to the premises.
(1) Liability of Lessee on Reletting. Lessee shall be liable
to Lessor, in addition to its other liability for breach of the lease, for all
reasonable expenses of the reletting, and for all reasonable alterations and
repairs made, which Lessor may incur. In addition Lessee shall be liable to
Lessor for the difference between the rent received by Lessor under the
reletting and the rent installments that are due for the same period under this
lease.
(2) Application for Rent on Reletting. Lessor at its option
may apply the rent received from reletting the premises as follows:
(a) To reduce Lessee's indebtedness to Lessor under the
lease, not including indebtedness for rent;
(b) To expenses of the reletting and alterations and
repairs made;
(c) To payment of future rent under this lease as it
becomes due.
d. Termination After Reletting. Lessor may at any time after such
reletting terminate the lease for the breach because of which it reentered and
relet.
Lessor may recover from Lessee on terminating the lease for Lessee's
breach, including the cost of recovering the premises, and the worth of the
balance of this lease over the reasonable rental value of the premises for the
remainder of the lease term, which sum shall be immediately due Lessor from
Lessee.
5
<PAGE>
19. LESSEE TO PAY LESSOR'S ATTORNEYS' FEES.
In any litigation brought to enforce any covenant of this lease, the
prevailing party shall recover attorney's fees from the other party.
20. MANNER OF GIVING NOTICE.
Notices given pursuant to the provisions of this lease, or necessary to
carry out its provisions, shall be given in writing, and delivered personally to
the person to whom the notice is to be given, or mailed postage prepaid,
addressed to such person. Lessor's address for this purpose shall be 67 Mountain
Boulevard, Warren, New Jersey 07060, or such other address as it may in writing
designate to Lessee. Notices to Lessee may be addressed to Lessee at the address
given at the beginning of this lease.
21. EFFECT OF LESSOR'S WAIVER.
No right or remedy herein conferred upon or reserved to Lessor is intended
to be exclusive of any other right or remedy, and each and every right and
remedy shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing at law or in equity or by statute. The
failure of Lessor to insist at any time upon the strict performance of any
covenant or agreement or to exercise any option, right, power or remedy
contained in this lease shall not be construed as a waiver or a relinquishment
thereof for the future. A receipt by Lessor of any basic rent, any additional
rent or any other sum payable hereunder with knowledge of the breach of any
covenant or agreement contained in this Lease shall not be deemed a waiver of
such breach, and no waiver by Lessor of any provision of this lease shall be
deemed to have been made unless expressed in writing and signed by Lessor. In
addition to other remedies provided in this lease, Lessor shall be entitled, to
the extent permitted by applicable law, to injunctive relief in case of the
violation, or attempted or threatened violation, of any of the covenants,
agreements, conditions or provisions of this lease, or to any other remedy
allowed to Lessor at law or in equity.
22. LEASE APPLICABLE TO SUCCESSORS, ETC.
This lease and the covenants and conditions hereof apply to and are
binding on the heirs, successors, executors, administrators, and assigns of the
parties hereto.
23. SUBORDINATION OF MORTGAGES, ETC.
This lease is subject and is hereby subordinate to all present and future
mortgages and other encumbrances affecting the leased premises. Lessee agrees to
execute, at no cost to the Lessor, any instrument which may be deemed necessary
or desirable by the Lessor to further the subordination of this lease to any
such mortgage or encumbrance.
6
<PAGE>
24. LESSEE'S ASSIGNMENT, SUBLEASE, OR LICENSE FOR OCCUPATION BY OTHER
PERSONS.
Lessee agrees not to assign or sublease the premises leased, any part
thereof, or any right or privilege connected therewith, or to allow any other
person, except Lessee's agents and employees, to occupy the premises or any part
thereof, without first obtaining Lessor's written consent, which shall not be
unreasonably withheld. One consent by Lessor shall not be consent to a
subsequent assignment, sublease, or occupation by other persons. Lessee's
unauthorized assignment, sublease, or license to occupy shall be void, and shall
terminate the lease at Lessor's option. Lessee's interest in this lease is not
assignable by operation of law, nor is any assignment of its interest herein,
without Lessor's written consent.
25. SECURITY DEPOSIT.
Lessee has this day deposited with the Lessor the sum of $42,165.50 (one
month's rent) as security for the full and faithful performance by the Lessee of
all the terms and conditions of this lease upon the Lessee's part to be
performed, which sum shall be returned to the Lessee with interest after the
time fixed as the expiration of the term herein, provided the Lessee has fully
and faithfully carried out all of the terms, conditions, and covenants on
Lessee's part to be performed or upon termination of the lease provided
termination has not resulted from Lessee's default in any of Lessee's
obligations hereunder. In the event of a bona fide sale of the leased premises,
the Lessor shall have the right to transfer the security deposit to the vendee
for the benefit of the Lessee and the Lessor shall be considered released by the
Lessee from all liability for the return of such security; and the Lessee agrees
to look to the new Lessor solely for the return of the said security deposit.
Lessee shall not mortgage, assign, or hypothecate or encumber the security
deposit without the written consent of Lessor. Lessor agrees to deposit said
security in an interest bearing account in accordance with applicable laws and
regulations.
26. LAWS OF NEW JERSEY TO APPLY.
In the event that a dispute regarding the terms and conditions of this
Lease or any part thereof shall arise, the Laws of the State of New Jersey shall
apply in the interpretation and adjudication of same.
27. LESSOR'S ENTRY FOR INSPECTION AND MAINTENANCE.
Lessor reserves the right to enter on the premises at reasonable times to
inspect them, to perform required maintenance and repair, or to make additions
or alterations to any part of the building, and Lessee agrees to permit Lessor
to do so. Lessor may, in connection with such alterations, additions, or
repairs, erect scaffolding, fences, and similar structures, post relevant
notices, and place moveable equipment without any obligation to reduce Lessee's
rent for the premises during such period, and without incurring liability to
Lessee for disturbance of quiet enjoyment of the premises, or loss of occupation
thereof. In the event the proposed work cannot be
7
<PAGE>
performed within two consecutive weeks, no work shall be commenced without the
consent of the Lessee.
IN WITNESS WHEREOF, the said parties have hereunto set their hands and
seals the day and year first above written.
MOUNTAIN BOULEVARD ASSOCIATES I
By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr., Partner
ATTEST: PAULUS, SOKOLOWSKI & SARTOR, INC.
- -------------------- By: /s/ PHILIP A. FALCONE
Philip A. Falcone
8
<PAGE>
SCHEDULE A-2
First Floor - 12,879 Square Feet Net
YEAR $/YEAR $/MONTH
- ---- ------ -------
1 $231,822 $ 19,318.50
2 242,254 20,187.83
3 253,201 21,100.08
4 264,277 22,023.08
5 275,868 22,989.00
6 289,777 24,148.08
7 301,368 25,114.00
8 315,277 26,273.08
9 329,187 27,432.25
10 345,414 28,784.50
Second Floor - 13,160 Square Feet Net
YEAR $/YEAR $/MONTH
- ---- ------ -------
1 $236,880 $ 19,740
2 247,540 20,628
3 258,679 21,556
4 270,319 22,526
5 282,484 23,540
6 295,196 24,600
7 308,479 25,707
8 322,361 26,863
9 336,867 28,072
10 352,026 29,335
Basement - 6,232 Square Feet Net
YEAR $/YEAR $/MONTH
- ---- ------ -------
1 $37,284 $ 3,107
2 38,962 3,247
3 40,715 3,393
4 42,547 3,546
5 44,462 3,705
6 46,463 3,872
7 48,554 4,046
8 50,739 4,228
9 53,022 4,419
10 55,408 4,617
9
<PAGE>
AGREEMENT TO EXTEND TERM OF LEASE
THIS AGREEMENT, dated this 2nd day of October, 1989, between MOUNTAIN
BOULEVARD ASSOCIATES I, a partnership, having its principal office at 67A
Mountain Boulevard Extension, Warren, New Jersey 07060 (hereinafter referred to
as MBA I) and PAULUS, SOKOLOWSKI AND SARTOR, INC., A New Jersey Corporation,
having its principal offices at 67A Mountain Boulevard Extension, Warren, New
Jersey 07060 (hereinafter referred to as PS&S).
WHEREAS, PS&S and MBA I entered into a lease (the "Lease") dated May 1,
1983 for certain leased premises consisting of the first floor, second floor and
basement areas of the premises located a 67A Mountain Boulevard Extension,
Warren, New Jersey 07060;
WHEREAS, PS&S and MBA I desire to extend the term of the Lease;
NOW, THEREFORE, it is agreed as follows:
1. EXTENSION OF TERM
The term of the Lease is extended until November 1, 1994.
2. RENT
The rent to be paid by PS&S to MBA I during the term of the Lease
Extension shall remain as set forth in the Lease.
3. PROVISIONS OF LEASE TO REMAIN IN EFFECT
All provisions of the Lease and any valid amendments or supplements
thereto, except for those provisions specifically modified herein, shall remain
in full force and effect as applied to this Lease Extension.
4. SUCCESSORS
This Lease Extension shall be binding upon the Lessor, the Lessee and
their respective heirs, successors, executors, administrators, and assigns.
<PAGE>
IN WITNESS WHEREOF, PS&S and MBA I have hereunto set their hands and seals
on the date first set forth above.
MOUNTAIN BOULEVARD ASSOCIATES I
Attest /s/ DOROTHY H. SNYDER BY: /s/ ANTHONY J. SARTOR
Anthony J. Sartor
General Partner
PAULUS, SOKOLOWSKI AND SARTOR, INC.
Attest /s/ DOROTHY H. SNYDER BY: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr.
President
2
<PAGE>
SECOND LEASE EXTENSION
THIS SECOND LEASE EXTENSION, dated the seventeenth day of December, 1992,
between MOUNTAIN BOULEVARD ASSOCIATES I, a partnership, having its principal
office at 67A Mountain Boulevard Extension, Warren, New Jersey 07059-0039
(hereinafter called Lessor) and Paulus, Sokolowski and Sartor, Inc., a New
Jersey Corporation, having its principal offices at 67A Mountain Boulevard
Extension, Warren, New Jersey 07059-0039 (hereinafter called Lessee).
WHEREAS, Lessor and Lessee entered into a lease dated May 1, 1983 (the
Lease) for certain premises consisting of the first floor, second floor and
basement areas of the premises located at 67A Mountain Boulevard Extension,
Warren, New Jersey 07059-0039;
WHEREAS, Lessor and Lessee extended the term of the Lease until, November
1, 1994, by entering into a certain lease extension agreement dated October 2,
1989 (the First Lease Extension);
WHEREAS, Lessor and Lessee desire to further extend the term of the Lease
by entering into this Second Lease Extension.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
Lessor and Lessee agree as follows:
1. EXTENSION OF TERM
The term of the lease is extended through December 31, 2007 (the
Termination Date).
<PAGE>
2. RENT
2.1 BASE RENT
Commencing on January 1, 1993, and lasting through December 31,
1993, the rent for the leased premises shall be $650,000.00 per
year, payable monthly, in advance at the rate of $54,166.67. After
December 31, 1993, rent shall be paid in accordance with the
following schedule:
TERM ANNUAL RENT MONTHLY RENT
1/1/94-12/31/94 $656,500.00 $54,708.33
1/1/95-12/31/95 $663,065.00 $55,255.42
1/1/96-12/31/96 $669,695.65 $55,807.97
1/1/97-12/31/97 $676,392.61 $56,366.05
1/1/98-12/31/98 $683,156.54 $56,929.71
1/1/99-12/31/99 $689,988.11 $57,499.01
1/1/00-12/31/00 $696,887.99 $58,074.00
1/1/01-12/31/01 $703,856.87 $58,654.74
1/1/02-12/31/02 $710,895.44 $59,241.29
1/1/03-12/31/03 $718,004.39 $59,833.70
1/1/04-12/31/04 $725,184.43 $60,432.04
1/1/05-12/31/05 $732,436.27 $61,036.36
1/1/06-12/31/06 $739,760.63 $61,646.72
1/1/07-12/31/07 $747,158.24 $62,263.19
======================= ====================== ===========================
2
<PAGE>
This rent schedule shall supersede any prior schedule of rent
contained in the Lease or first Lease Extension insofar as it
applies to any date subsequent to December 31, 1992.
2.2 UTILITIES
Lessee shall pay the cost of all potable water, sanitary sewage,
natural gas and electric utility charges to the leased premises
during the term of the Lease and Second Lease Extension.
2.3 TAXES
The term "base tax year" shall mean the calendar year 1992. From the
period between January 1, 1993 through and including the Termination
Date, the Lessee shall pay to the Lessor, the amount by which (i)
the annual real estate taxes which are levied or assessed against
the premises at 67A Mountain Boulevard Extension during said period
exceed (ii) the real estate taxes levied or assessed against said
premises for the base tax year. Any amount due to the Lessor under
the provisions of this paragraph 2.3 shall be paid upon rendition of
a bill therefor, and Lessor shall, at the time of the rendition of
such bill, submit to Lessee the bill received from the taxing
authorities or a photostat thereof. Lessee shall also pay and
discharge all assessments against the premises at 67A Mountain
Boulevard Extension during said period.
3. PROVISIONS OF LEASE TO REMAIN IN EFFECT
All provisions of the Lease and any valid amendments or supplements
thereto, except for those provisions specifically modified herein,
shall remain in full force and effect.
3
<PAGE>
4. SUCCESSORS
This Second Lease Extension shall be binding upon the Lessor, the
Lessee and their respective heirs, successors, executors,
administrators and assigns.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands
and seals on the date first set forth above.
LESSOR
MOUNTAIN BOULEVARD ASSOCIATES I
Attest: /s/ SUSAN M. SUMMERS By: /s/ PHILIP A. FALCONE
Philip A. Falcone
General Partner
Attest: /s/ PHILIP A. FALCONE LESSEE
PAULUS, SOKOLOWSKI & SARTOR, INC.
By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr.
President
4
<PAGE>
LEASE MODIFICATION
This Lease Modification is dated as of December 31, 1995 between MOUNTAIN
BOULEVARD ASSOCIATES I, a partnership, having its principal place of business at
67A Mountain Boulevard Extension, Warren, New Jersey 07059 (hereinafter called
"Lessor") and PAULUS, SOKOLOWSKI & SARTOR, INC., a New Jersey corporation,
having its principal place of business at 67A Mountain Boulevard Extension,
Warren, New Jersey 07059 (hereinafter called "Lessee").
WHEREAS, Lessor and Lessee entered into a lease dated May 1, 1983 (the
"Lease") for certain premises located in the building known and designated as
67A Mountain Boulevard Extension, Warren, New Jersey 07059 (the "Leased
Premises"); and
WHEREAS, Lessor and Lessee extended the term of the Lease by certain lease
extension agreements dated October 2, 1989 and December 17, 1992 (the "Lease
Extensions"); and
WHEREAS, Lessor and Lessee desire to modify the terms of the Lease as
provided for herein.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
Lessor and Lessee agree as follows:
1. TERM. The term of the Lease shall be extended for ten (10) years to
end on December 31, 2017.
2. RENT.
A. Commencing as of January 1, 1996 through and including December
31, 1996, the base rent for the Leased Premises shall be $567,300.00 per year
("Annual Minimum Rent"), payable in equal monthly installments of $47,275.00 per
month.
B. Commencing as of January 1, 1997 through the end of the term, the
annual base rent for the Leased Premises shall be the greater of the annual base
rent for the immediate
1
<PAGE>
preceding twelve (12) months or the adjusted amount as calculated in
subparagraph (c) below. In no event, however, shall there be a decrease in the
annual base rent as established for the immediate preceding twelve (12) months.
C. The adjusted Annual Minimum Rent shall be determined by applying
fluctuations in the Consumer Price Index to the Annual Minimum Rent as follows:
(i) The Consumer Price Index for purposes of this Lease shall
be the Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics of the United States Department of Labor, New York -
Northeastern New Jersey Area, Housing Component (1982-84=100). If the Consumer
Price Index ceases to be published by the United States Department of Labor,
Bureau of Statistics, then the calculation shall be based on the closest
successor index identified by the United States Department of Labor. If no such
successor exists, the calculation shall be based on an index that is mutually
agreed between Landlord and Tenant.
(ii) The Base Date shall be January, 1996.
(iii) The Adjusted Annual Minimum Rent shall be determined by
multiplying the Annual Minimum Rent by a fraction, the numerator of which shall
be the Consumer Price Index for the month of January, 1997 and each January of
every lease year thereafter, and the denominator of which shall be the Consumer
Price Index for the Base Date. The resulting sum, if greater than the annual
base rent for the immediate preceding twelve (12) months, shall be the Adjusted
Annual Minimum Rent for the next succeeding year payable in twelve (12) equal
monthly installments, commencing in January of that applicable year which
follows the period for which the most recent changes in the Consumer Price Index
have been calculated.
(iv) Since the rent payment for at least the first month after
each rent adjustment, will have been paid prior to the determination of the
applicable rent increase for those years, any increase from months already
elapsed and subject to determination by application of the
2
<PAGE>
formula shall then be added to the next monthly rent payment due and payable,
upon determination of the required monthly rental to be paid for such applicable
period.
(v) If the base year (1982-84=100) hereinabove referred to
with respect to the Index shall be changed after the execution of this Lease
Modification, appropriate adjustments based on such new Index shall be made so
as to have a proper application of the cost of living formula.
3. UTILITIES. Lessee shall pay the cost of all potable water, sanitary
sewage, natural gas and electric utility charges to the Leased Premises during
the term of the Lease.
4. TAXES. The term "Base Tax Year" shall mean the calendar year 1996.
From the period between January 1, 1997 through and including the end of the
term hereof, Lessee shall pay to Lessor the amount by which (i) the annual real
estate taxes which are levied or assessed against the premises at 67A Mountain
Boulevard Extension during said period exceed (ii) the real estate taxes levied
or assessed against said premises for the Base Tax Year. Any amount due to
Lessor under the provisions of this paragraph 4 shall be paid upon rendition of
a bill therefor, and Lessor shall, at the time of the rendition of such bill,
submit to Lessee the bill received from the taxing authorities or a photostat
thereof. Lessee shall also pay and discharge all assessments against the
premises at 67A Mountain Boulevard Extension during said period.
5. Except as modified and provided herein, all terms and conditions of
the Lease and any existing amendments or extensions thereto, shall remain in
full force and effect and shall be binding upon the parties.
6. This Lease Modification shall be binding upon Lessor and Lessee and
their respective heirs, successors, executors, administrators and assigns.
3
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and
seals as of the date first set forth above.
LESSOR:
WITNESS: MOUNTAIN BOULEVARD ASSOCIATES I
/s/ DOROTHY H. SNYDER By: /s/ PHILIP A. FALCONE
Philip A. Falcone, General Partner
By: /s/ DAVID ANTES
David Antes, General Partner
By: /s/ LOIS PAULUS
Lois Paulus, General Partner
By: /s/ ANTHONY SARTOR
Anthony Sartor, General Partner
LESSEE:
ATTEST: PAULUS, SOKOLOWSKI & SARTOR, INC.
/s/ DOROTHY H. SNYDER By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr., President
4
<PAGE>
FOURTH MODIFICATION TO LEASE AGREEMENT
This Fourth Modification to Lease Agreement (the "AMENDMENT") is made and
entered into by and between MOUNTAIN BOULEVARD ASSOCIATES I, a
____________________ partnership ("LESSOR"), and PAULUS, SOKOLOWSKI & SARTOR,
INC., a New Jersey corporation ("LESSEE").
WHEREAS, Lessor and Lessee entered into that certain Lease (the "LEASE")
with an effective date of May 1, 1983, for the lease of certain office space
located at 67A Mountain Boulevard Extension, Warren, New Jersey (the "LEASED
PREMISES"), more particularly described in the Lease and as modified by the
Addendum to Lease Agreement dated September 1, 1981; and
WHEREAS, Lessor and Lessee entered into that certain Agreement to Extend
Term of Lease (the "FIRST AMENDMENT") dated effective October 2, 1989, which
First Amendment extended the term of the Lease until November 1, 1994; and
WHEREAS, Lessor and Lessee entered into that certain Second Lease
Extension (the "SECOND AMENDMENT") dated effective December 17, 1992, which
Second Amendment extended the term of the Lease until December 31, 2007; and
WHEREAS, Lessor and Lessee entered into that certain Lease Modification
(the "THIRD AMENDMENT") dated effective December 31, 1995, which Third Amendment
extended the term of the Lease until December 31, 2017 (hereinafter the term
"LEASE" shall mean the Lease as amended by the First Amendment, the Second
Amendment and the Third Amendment); and
WHEREAS, Lessor and Lessee desire to further amend the Lease as herein
provided.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby amend the Lease as follows:
1. LEASE TERM. The term of the Lease is hereby amended to terminate ten
years after the date hereof.
2. NO OTHER MODIFICATIONS. Except as expressly amended and modified
hereby, all of the covenants and conditions of the Lease as amended by this
Amendment are ratified and confirmed by Lessor and Lessee.
<PAGE>
3. DEFINED TERMS. All terms, definitions and dates contained in the Lease
shall have the same meaning and application in this Amendment except to the
extent there is a conflict, in which event, the terms of this Amendment shall
control.
4. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
EXECUTED effective the ____ day of _________, 1998.
LESSOR:
MOUNTAIN BOULEVARD ASSOCIATES I
By:
Philip A. Falcone, General Partner
By:
David Antes, General Partner
By:
Lois Paulus, General Partner
By:
Anthony Sartor, General Partner
LESSEE:
PAULUS, SOKOLOWSKI & SARTOR, INC.
By:
William Paulus, Jr., President
-2-
Exhibit 10.11
LEASE AGREEMENT
MOUNTAIN BOULEVARD ASSOCIATES II, LESSOR
PAULUS, SOKOLOWSKI AND SARTOR, LESSEE
------------------------
<PAGE>
TABLE OF CONTENTS
PAGE NOS.
1. TERM, PREMISES AND PARTIES.............................................1
2. RENT...................................................................1
3. CONDITION OF LEASE.....................................................2
4. USE OF PREMISES........................................................3
5. INSURANCE RISK.........................................................3
6. HOLD HARMLESS..........................................................3
7. EMINENT DOMAIN.........................................................4
8. NO WASTE, NUISANCE, OR UNLAWFUL USE....................................4
9. LESSOR'S DELAY IN DELIVERING POSSESSION................................4
10. PAYMENT OF UTILITIES...................................................5
11. REPAIRS AND MAINTENANCE................................................5
12. DELIVERY, ACCEPTANCE, AND SURRENDER OF PREMISES........................5
13. PARTIAL DESTRUCTION OF PREMISES........................................6
14. LESSOR'S ENTRY FOR INSPECTION AND MAINTENANCE..........................6
15. POSTING "FOR SALE", "FOR LEASE" OR "FOR RENT" SIGNS....................7
16. SIGNS, AWNINGS, MARQUEES, ETC..........................................7
17. LESSEE TO CARRY LIABILITY INSURANCE....................................7
18. LESSEE'S ASSIGNMENT, SUBLEASE, OR LICENSE FOR OCCUPATION BY
OTHER PERSONS..........................................................8
19. LEASE BREACHED BY LESSEE'S RECEIVERSHIP, ASSIGNMENT FOR
BENEFIT OF CREDITORS, INSOLVENCY, OR BANKRUPTCY........................8
i
<PAGE>
20. LESSOR'S REMEDIES ON LESSEE'S BREACH...................................8
21. LESSEE TO PAY LESSOR'S ATTORNEYS' FEES................................10
22. MANNER OF GIVING NOTICE...............................................11
23. EFFECT OF LESSOR'S WAIVER.............................................11
24. LEASE APPLICABLE TO SUCCESSORS, ETC...................................12
25. TIME OF ESSENCE.......................................................12
26. SUBORDINATION TO MORTGAGES, ETC.......................................12
ii
<PAGE>
LEASE AGREEMENT
THIS LEASE, dated this 12th day of January, 1981, between MOUNTAIN
BOULEVARD ASSOCIATES, II, a partnership of the State of New Jersey, having its
principal offices at 744 Mountain Boulevard, Watchung, New Jersey, 07060
("Lessor"), and PAULUS, SOKOLOWSKI & SARTOR, INC., a corporation of the State of
New Jersey, having its principal offices at 744 Mountain Boulevard, Watchung,
New Jersey 07060 ("Lessee").
1. TERM, PREMISES AND PARTIES.
1.1 The term of this lease shall be for a period of ten (10) years and
shall commence on September 1, 1981, and shall terminate on August 31, 1991.
1.2 The premises to be leased shall be 23,295 square feet of the area
being the entire premises located at Mountain Boulevard, Warren Township,
Somerset County, New Jersey.
2. RENT.
2.1 The rent for the leased premises for the first lease year of the term
shall be $10.50 per square foot or $244,598.00 (the base rent), payable monthly
in advance on the first of the month at the office of the Lessor. Said rent
shall include real estate taxes, building insurance including fire insurance,
liability and casualty, elevator and building maintenance.
The rent shall increase each year thereafter at the rate of five percent
(5%) per annum as follows:
2nd year: $256,827.90 per annum, payable $21,402.33 per month
3rd year: $269,669.39 per annum, payable $22,472.44 per month
4th year: $283,152.75 per annum, payable $23,596.06 per month
5th year: $297,310.30 per annum, payable $24,775.87 per month
6th year: $312,175.93 per annum, payable $26,014.66 per month
7th year: $327,784.73 per annum, payable $27,315.39 per month
8th year: $344,173.97 per annum, payable $28,681.16 per month
9th year: $361,138.97 per annum, payable $30,115.22 per month
10th year: $379,451.73 per annum, payable $31,620.98 per month
<PAGE>
2.2 Condition of amount. Lessee acknowledges that Lessee has been advised
that the premises herein has been constructed with the use of funds borrowed
under a New Jersey Economic Development Authority Bond Issue which provides
favorable Federal Income Tax treatment of the interest income paid by the Lessor
to Lessor's construction and permanent lenders (the Lender). As a result
thereof, the interest paid by Lessor is less than the amount of interest which
would be charged if the interest income paid to the Lender was "taxable income"
for Federal Income Tax purposes. The Lessor and Lessee acknowledge and agree
that the rent described in 2.1 shall be the rent only so long as the Lessor's
payment of interest to the Lender continues to receive the favorable income tax
status and treatment referred to herein. In the event said payments no longer
receive the described favorable treatment, the Lessee agrees to a proportionate
increase in the rent in direct proportion to the increase in the Lessor's
monthly payments to the Lender. In that event, the rent shall be proportionately
increased effective the date that Lessor's payments to Lender are increased.
3. CONDITION OF LEASE.
3.1 Representations of Lessee. Lessee acknowledges receipt of a copy of
the Assignment of Leases, Rents and Profits by and between the Lessor and the
New Jersey Economic Development Authority. It is a condition of this lease that
Lessee at all times comply with all applicable conditions of said assignment. In
the event Lessee fails to comply with any applicable provision of said
assignment, the Lessor at Lessor's option may declare this lease null and void.
3.2 Lessee's Representation of Expenditures. Lessee represents that
Lessee's expenditures, if any, as defined in Section 103(b)(6) of the Internal
Revenue Code of 1954 as amended and as defined in Article 4.1 of the Credit
Agreement between the Lessor and the New Jersey Economic Development Authority,
will not exceed the threshold necessary to cause a
2
<PAGE>
disallowance of favorable income tax treatment of interest income paid by the
Lessor to the Lender referred to in 2.2 above.
3.3 Lessee's representations regarding prevailing wages. The Lessee agrees
to construct certain improvements, all at Lessee's expense. Lessee further
agrees that the construction of said improvements shall be in accordance with
the provisions of Article 6 of the Credit Agreement between Lessor and the New
Jersey Economic Development Authority.
4. USE OF PREMISES.
The premises are leased to be used as offices. Lessee agrees to restrict
its use to such purposes, and not to use, or permit the use of, the premises for
any other purpose without first obtaining the consent in writing of the Lessor's
authorized representative.
5. INSURANCE RISK.
Lessee agrees not to use the premises in any manner, even in its use for
the purposes for which the premises are leased, that will increase risks covered
by insurance on the building where the premises are located, so as to increase
the rate of insurance on the premises, or to cause cancellation of any insurance
policy covering the building. Lessee further agrees not to keep on the premises,
or permit to be kept, used, sold thereon, anything prohibited by the policy of
fire insurance covering the premises of insurers necessary to keep in force the
fire and public liability insurance covering the premises and building.
6. HOLD HARMLESS.
Lessee shall hold harmless and indemnify Lessor from any loss, cost,
expense, action, cause of action or judgment arising out of any damage to
property or injury or death to any person arising out of any failure of Lessee
to in any respect comply with and perform all of the requirements and provisions
hereof or in any wise connected with the occupation or use of the demised
premises.
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7. EMINENT DOMAIN.
In the event the premises are made subject to a proceeding by which the
right to eminent domain is exercised, or any like proceeding, Lessor and Lessee,
at their respective costs and expenses shall join and cooperate in resisting
such proceeding if such resistance is feasible and desirable and if it is not,
shall join and cooperate in prosecuting their respective claims for damages
incurred from the successful exercise of such right or proceeding. Lessee hereby
irrevocably assigns to Lessor any award or payment to which Lessee may become
entitled because of any taking of the premises. However, Lessee shall retain any
right it may have to any separate award or payment specifically relating to
reimbursement. Eminent domain proceedings resulting in the condemnation of a
part of the premises leased herein that leave the rest usable by Lessee for
purposes of the business for which the premises are leased will not terminate
this lease, unless Lessor at its option terminates it by giving written notice
of termination to the Lessee. The effect of such condemnation, should such
option not be exercised, will be to terminate the lease as to the portion of the
premises condemned, and leave it in effect as to the remainder of the premises.
Lessee's rental for the remainder of the lease term shall in such case be
reduced by the amount that the usefulness of the premises to him for such
business purposes is reduced.
8. NO WASTE, NUISANCE, OR UNLAWFUL USE.
Lessee shall not commit, or allow to be committed, any waste on the
premises, create or allow any nuisance to exist on the premises, or use or allow
the premises to be used for an unlawful purpose.
9. LESSOR'S DELAY IN DELIVERING POSSESSION.
This lease shall not be rendered void or voidable by Lessor's inability to
deliver possession to Lessee at the beginning of the lease term, nor shall such
inability to deliver render Lessor liable
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to Lessee for loss or damage suffered thereby. If Lessor cannot deliver the
premises at such time, the rent for the period between the beginning of the term
and the time when Lessor can deliver possession will be deducted from the total
rent of the lease. No extension of the lease shall result from a delay in
delivering possession.
10. PAYMENT OF UTILITIES.
Lessee shall pay for all utilities furnished the premises for the term of
this lease, including electricity, gas, water, and telephone service, and shall
pay for all maintenance and services to the inside of the building, except those
which are the responsibility of the Lessor pursuant to Article 11 hereof.
11. REPAIRS AND MAINTENANCE.
Lessee, at its expense, shall maintain and keep the premises, including,
without limitation, windows, doors, sky-lights, adjacent sidewalks, and the
inside of the building, except those parts which are the responsibility of the
Lessor pursuant to this Article, in good repair, and shall be responsible for
snow removal from sidewalks and adjacent parking areas. Lessor shall maintain in
good condition the building roof and exterior walls, and shall be responsible
for landscaping, snow removal, exterior lighting, and maintenance of the
entrance ways, hallways, and toilets.
12. DELIVERY, ACCEPTANCE, AND SURRENDER OF PREMISES.
Lessor represents that the premises shall be in fit condition for use as
offices. Lessee agrees to accept the premises on possession as being in a good
state of repair and in sanitary condition. It agrees to surrender the premises
to the Lessor at the end of the lease term, in the same condition as when it
took possession, allowing for reasonable use and wear, and damage by acts of
God, including fire and storms. Lessee agrees to remove all business signs or
symbols placed on the
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premises by it before redelivery of the premises to the Lessor, and to restore
the portion of the premises on which they were placed in the same condition as
before their placement.
13. PARTIAL DESTRUCTION OF PREMISES.
Partial destruction of the leased premises shall not render this lease
void or voidable, or terminate it except as herein provided. If the premises are
partially destroyed during the term of this lease, Lessor shall repair them,
when such repairs can be made in conformity with local, state, and federal laws
and regulations, within 180 days of the partial destruction. Rent for the
premises will be reduced proportionally to the extent to which the repair
operations interfere with the normal conduct of Lessee's business on the
premises. If the repairs cannot be so made within the time limited, Lessor has
the option to make them within a reasonable time and continue this lease in
effect with proportional rent rebate to Lessee as provided for herein. If the
repairs cannot be so made in 270 days, and if Lessor does not elect to make them
within a reasonable time, either party hereto has the option to terminate this
lease. If the building on the leased premises is more than one-third destroyed,
Lessor may at its option terminate the lease.
14. LESSOR'S ENTRY FOR INSPECTION AND MAINTENANCE.
Lessor reserves the right to enter on the premises at reasonable times to
inspect them, to perform required maintenance and repair, or to make additions
or alterations to any part of the building, and Lessee agrees to permit Lessor
to do so. Lessor may, in connection with such alterations, additions, or
repairs, erect scaffolding, fences, and similar structures, post relevant
notices, and place moveable equipment without any obligation to reduce Lessee's
rent for the premises during such period, and without incurring liability to
Lessee for disturbance of quiet enjoyment of the premises, or loss of occupation
thereof.
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15. POSTING "FOR SALE", "FOR LEASE" OR "FOR RENT" SIGNS.
Lessor reserves the right to place "For Sale" signs on the premises at any
time during the lease, or "For Lease" or "For Rent" signs on the premises at an
time within 180 days of expiration of the lease.
16. SIGNS, AWNINGS, MARQUEES, ETC.
Lessee agrees that it will not construct or place, or permit to be
constructed or placed, signs, awnings, marquees, or other structures projecting
from the exterior of the premises without Lessor's written consent thereto.
Lessee further agrees to remove signs, displays, advertisements or decorations
it has placed or permitted to be placed, on the premises, which, in Lessor's
opinion are offensive or otherwise objectionable. If Lessee fails to remove such
signs, displays, advertisements, or decorations within 5 days after receiving
written notice from Lessor to remove the same, Lessor reserves the right to
enter the premises and remove them, at Lessee's expense.
17. LESSEE TO CARRY LIABILITY INSURANCE.
Lessee agrees to procure and maintain in force during the term of this
lease and any extension thereof, at its expense, public liability insurance in
companies and through brokers approved by Lessor, adequate to protect against
liability for damage claims through public use of or arising out of accidents
occurring in or around the leased premises, in a minimum amount of $1,000,000
aggregate (single limit). Such insurance policies shall provide coverage for
Lessor's contingent liability on such claims or losses. Copies of the policies
together with Certificates of Insurance issued by the carriers and proof of
payment of premium, shall be delivered to the Lessor, prior to Lessee's taking
possession hereunder. Lessee agrees to obtain a written obligation from the
insurers to notify Lessor in writing at least 30 days prior to cancellation or
refusal to renew any such policies. Lessee agrees that, if such insurance
policies are not kept in force during the entire term of this lease
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and any extension thereof, Lessor may procure the necessary insurance, pay the
premium therefor, and that such premium shall be repaid to Lessor as an
additional rent installment for the month following the date on which such
premiums are paid.
18. LESSEE'S ASSIGNMENT, SUBLEASE, OR LICENSE FOR OCCUPATION BY
OTHER PERSONS.
Lessee agrees not to assign or sublease the premises leased, any part
thereof, or any right or privilege connected therewith, or to allow any other
person, except Lessee's agents and employees, to occupy the premises or any part
thereof, without first obtaining Lessor's written consent, which shall not be
unreasonably withheld. One consent by Lessor shall not be a consent to a
subsequent assignment, sublease, or occupation by other persons. Lessee's
unauthorized assignment, sublease, or license to occupy shall be void, and shall
terminate the lease at Lessor's option. Lessee's interest in this lease is not
assignable by operation of law, nor is any assignment of its interest herein,
without Lessor's written consent.
19. LEASE BREACHED BY LESSEE'S RECEIVERSHIP, ASSIGNMENT FOR
BENEFIT OF CREDITORS, INSOLVENCY, OR BANKRUPTCY.
Appointment of a receiver to take possession of Lessee's assets (except a
receiver appointed at Lessor's request as herein provided), Lessee's general
assignment for benefit of creditors, or Lessee's insolvency or taking or
suffering action under the Bankruptcy Act is a breach of this lease.
20. LESSOR'S REMEDIES ON LESSEE'S BREACH.
If Lessee breaches this lease, Lessor shall have the following remedies in
addition to its other rights and remedies in such event:
a. Reentry. Lessor may reenter the premises immediately, and remove all
Lessee's personnel and property therefrom. Lessor may store the property in a
public warehouse or at another place of its choosing at Lessee's expense or to
Lessee's account.
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b. Termination. After reentry, Lessor may terminate the lease on giving
10 days written notice of such termination to Lessee. Reentry only, without
notice of termination, will not terminate the lease.
c. Reletting Premises. After reentering, Lessor may relet the premises
or any part thereof, for any term, without terminating the lease at such rent
and on such terms as it may choose. Lessor may make alterations and repairs to
the premises.
(1) Liability of Lessee on Reletting. Lessee shall be liable to
Lessor, in addition to its other liability for breach of the lease, for all
expenses of the reletting and of the alterations and repairs made, which Lessor
may incur. In addition Lessee shall be liable to Lessor for the difference
between the rent received by Lessor under the reletting and the rent
installments that are due for the same period under this lease.
(2) Application of Rent on Reletting. Lessor at its option may apply
the rent received from reletting the premises as follows:
(a) To reduce Lessee's indebtedness to Lessor under the
lease, not including indebtedness for rent;
(b) To expenses of the reletting and alterations and repairs
made;
(c) To rent due under this lease;
(d) To payment of future rent under this lease as it becomes
due.
If the new Lessee does not pay a rent installment promptly to Lessor, and
the rent installment has been credited in advance of payment to Lessee's
indebtedness other than rent, or if rentals from the new Lessee have been
otherwise applied by Lessor as provided for herein, and during any rent
installment period are less than the rent payable for the corresponding
installment period under this
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<PAGE>
lease, Lessee agrees to pay Lessor the deficiency separately for each
rent-installment deficiency period, and before the end of that period.
Lessor may at any time after such reletting terminate the lease for the
breach because of which it reentered and relet.
Lessor may recover form Lessee on terminating the lease for Lessee's
breach, including the cost of recovering the premises, and the worth of the
balance of this lease over the reasonable rental value of the premises for the
remainder of the lease term, which sum shall be immediately due Lessor from
Lessee.
(e) Appointment of Receiver. After reentry, Lessor may
procure the appointment of a receiver to take possession of and collect rents
and profits from Lessee's business. If necessary, to collect such rents and
profits the receiver may carry on Lessee's business and take possession of
Lessee's personal property used in the business, including inventory, trade
fixtures, and furnishings, and use them in the business without compensating
Lessee therefor. Proceedings for appointment of a receiver by Lessor, or the
appointment of a receiver and the conducting by him of Lessee's business, shall
not terminate this lease unless Lessor has given Lessee written notice of such
termination as provided herein.
21. LESSEE TO PAY LESSOR'S ATTORNEYS' FEES.
If Lessor files an action to enforce any covenant of this lease, or for
breach of any covenant herein, Lessee agrees to pay Lessor reasonable attorneys'
fees for the services of Lessor's attorney in the action, such fees to be fixed
by the court.
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22. MANNER OF GIVING NOTICE.
Notices given pursuant to the provisions of this lease, or necessary to
carry out its provisions, shall be given in writing, and delivered personally to
the person to whom the notice is to be given, or mailed postage prepaid,
addressed to such person. Lessor's address for this purpose shall be 744
Mountain Boulevard, Watchung, New Jersey, 07060, or such other address as it may
in writing designate to Lessee. Notices to Lessee may be addressed to Lessee at
the premises leased.
23. EFFECT OF LESSOR'S WAIVER.
No right or remedy herein conferred upon or reserved to Lessor is intended
to be exclusive of any other right or remedy, and each and every right and
remedy shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing at law or in equity or by statute. The
failure of Lessor to insist at any time upon the strict performance of any
covenant or agreement or to exercise any option, right, power or remedy
contained in this lease shall not be construed as a waiver or a relinquishment
thereof for the future. A receipt by Lessor, of any Basic Rent, any Additional
Rent or any other sum payable hereunder with knowledge of the breach of any
covenant or agreement contained in this Lease shall not be deemed a waiver of
such breach, and no waiver by Lessor of any provision of this lease shall be
deemed to have been made unless expressed in writing and signed by Lessor. In
addition to other remedies provided in this lease, Lessor shall be entitled, to
the extent permitted by applicable law, to injunctive relief in case of the
violation, or attempted or threatened violation, of any of the covenants,
agreements, conditions or provisions of this lease, or to a decree compelling
performance of any of the covenants, agreements, conditions or provisions of
this lease, or to any other remedy allowed to Lessor at law or in equity.
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24. LEASE APPLICABLE TO SUCCESSORS, ETC.
This lease and the covenants and conditions hereof apply to and are
binding on the heirs, successors, executors, administrators, and assigns of the
parties hereto.
25. TIME OF ESSENCE.
Time is of the essence of this lease.
26. SUBORDINATION TO MORTGAGES, ETC.
This lease is subject and is hereby subordinated to all present and future
mortgages and other encumbrances affecting the leased premises. Lessee agrees to
execute, at no cost to the Lessor, any instrument which may be deemed necessary
or desirable by the Lessor to further the subordination of this lease to any
such mortgage or encumbrance.
IN WITNESS WHEREOF, the said parties have hereunto set their hands and
seals the day and year first above written.
MOUNTAIN BOULEVARD ASSOCIATES, II
(Lessor)
By: /s/ ANTHONY J. SARTOR
Anthony J. Sartor, Partner
ATTEST: PAULUS, SOKOLOWSKI AND SARTOR, INC.,
(Lessee)
______________________ By: /s/ WILLIAM PAULUS, JR.
Secretary William Paulus, Jr., President
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ADDENDUM TO LEASE AGREEMENT
BETWEEN
MOUNTAIN BOULEVARD ASSOCIATES, II
AND
PAULUS, SOKOLOWSKI AND SARTOR, INC.
This is an addendum to the lease dated the 12th day of January, 1981,
between MOUNTAIN BOULEVARD ASSOCIATES, II, and PAULUS, SOKOLOWSKI AND SARTOR,
INC., as follows:
Paragraph 2.1 is amended to read as follows: The rent for the leased
premises for the first lease year of the term shall be $13.30 per square foot or
$313,864 (the base rent) payable monthly ($26,155 per month) in advance on the
first of the month at the office of the Lessor. Said rent shall include real
estate taxes, building insurance including fire insurance, liability and
casualty, elevator, building maintenance and energy supply and costs.
The rent shall increase each year thereafter at the rate of five percent
(5%) per annum as follows:
2nd year: $329,557 per annum, payable $27,463 per month
3rd year: 346,035 per annum, payable 28,836 per month
4th year: 363,337 per annum, payable 30,278 per month
5th year: 381,504 per annum, payable 31,792 per month
6th year: 400,579 per annum, payable 33,382 per month
7th year: 420,608 per annum, payable 35,051 per month
8th year: 441,638 per annum, payable 36,803 per month
9th year: 463,720 per annum, payable 38,643 per month
10th year: 486,906 per annum, payable 40,576 per month
Paragraph 2.1 is further amended and supplemented as follows:
The rent shall be payable to the Lessor by the Lessee without set off or
deduction for any cause or reason.
<PAGE>
Paragraph 2.1 is further amended and supplemented as follows:
To the extent in any given lease year after the first year (the base rent year),
energy costs for the premises described herein exceed the "yearly energy costs"
as defined herein, the same shall be the obligation of the Lessee and Lessee
shall pay same as billed by Lessor.
"Yearly energy costs" are defined as the cost of energy as estimated for
the base rental year, increased by 5% per year for the life of the lease. Thus,
if the energy costs are estimated as $10,000 in the base year, the yearly energy
costs for the second year would be $10,500.
Paragraph 10 is amended to read as follows:
Except as provided in Paragraph 2.1 Lessor shall pay for all electricity, gas
and water utility costs furnished to area occupied by Lessee. Further, Lessor
shall pay for all maintenance and services to the inside of the building, except
for those that are the responsibility of the Lessee pursuant to Article II
hereof. Lessee shall also pay for Lessee's telephone service.
Paragraph 17 is amended to read as follows:
Lessee agrees to procure and maintain in force during the term of this Lease and
any extension thereof, at its expense, public liability insurance for damage
claims through public use of or arising out of accidents occurring in or around
the leased premises, in a minimum amount of $1,000,000 aggregate (single limit).
Such insurance policy shall provide coverage for Lessor's contingent liability
on such claims or losses as well as Lessor's permanent lender, Fidelity Banker's
Life Insurance Company and the New Jersey Economic Development Authority.
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<PAGE>
The Lease is further amended and supplemented to add an additional
paragraph, being paragraph 29 as follows:
29. NON-LIABILITY OF LESSOR.
The Lessor shall not be liable for any damage or injury which may be
sustained by the Lessee or any other person as a consequence of the failure,
breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste or
soil pipes, roof, drains, leaders, gutters, valleys, downspout or the like or of
the electrical, gas, power, conveyor, refrigerator, sprinkler, air conditioning
or heating systems, elevators or hoisting equipment; or by reason of the
elements; or resulting from the carelessness, negligence or improper conduct on
the part of any other Lessee or of the Lessor or the Lessor's or this or any
other Lessee's agent, employees, guests, licensees, invitees, subtenants,
assignees or successors; or attributable to any interference with, interruption
of or failure beyond the control of the Lessor, of any services to be furnished
or supplied by the Lessor.
Dated: SEPTEMBER 1, 1981 MOUNTAIN BOULEVARD ASSOCIATES, II
(Lessor)
________________________ By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr.
ATTEST: PAULUS, SOKOLOWSKI AND SARTOR, INC.,
(Lessee)
________________________ By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr.
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EXTENSION OF LEASE AGREEMENT
BETWEEN
MOUNTAIN BOULEVARD ASSOCIATES II
AND
PAULUS, SOKOLOWSKI AND SARTOR, INC.
This is an extension to a lease dated the 12th day of January, 1981 (the
Lease), between MOUNTAIN BOULEVARD ASSOCIATES II, a partnership of the State of
New Jersey, having its principal offices at 67A Mountain Boulevard Extension,
Warren, New Jersey 07060 (Lessor) and PAULUS, SOKOLOWSKI AND SARTOR, INC., a
corporation of the State of New Jersey, having its principal offices at 67A
Mountain Boulevard Extension, Warren, New Jersey 07060 (Lessee) for premises
located at 67 Mountain Boulevard Extension, Warren Township, Somerset County,
New Jersey.
1. EXTENSION OF TERM
In recognition that the term of the Lease will expire on August 31,
1991, the Lessor and Lessee hereby agree to extend the terms of said Lease
(hereinafter the Lease Extension) for an additional ten year period
commencing on September 1, 1991 and expiring on August 31, 2001.
2. RENT
The rent to be paid by Lessee to Lessor during the term of the Lease
Extension shall be as follows:
YEAR ANNUAL RENT MONTHLY RENT
- ---- ----------- ------------
September 1, 1991 to August 31, 1992 511,251 42,604
September 1, 1992 to August 31, 1993 536,814 44,734
September 1, 1993 to August 31, 1994 563,655 46,971
September 1, 1994 to August 31, 1995 591,837 49,320
September 1, 1995 to August 31, 1996 621,429 51,786
September 1, 1996 to August 31, 1997 652,500 54,375
September 1, 1997 to August 31, 1998 685,126 57,094
September 1, 1998 to August 31, 1999 719,382 59,948
September 1, 1999 to August 31, 2000 755,351 62,946
September 1, 2000 to August 31, 2001 793,118 66,093
<PAGE>
3. CONDITION OF AMOUNT
The portions of the Lease entitled Paragraph 2.2 - Condition of
Amount and Paragraph 3 - Condition of Lease shall apply during the term of
the Lease Extension only if the Lessor continues to finance the premises
with funds borrowed under a New Jersey Economic Development Authority Bond
Issue.
4. PROVISIONS OF LEASE TO REMAIN IN EFFECT
All provisions of the Lease and any valid amendments or supplements
thereto, except for those provisions specifically modified herein, shall
remain in full force and effect as applied to this Lease Extension.
5. SUCCESSORS
This Lease Extension shall be binding upon the Lessor, the Lessee
and their respective heirs, successors, executors, administrators, and
assigns.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and
seals on the date set forth below.
Dated: FEBRUARY 28, 1989 LESSOR
MOUNTAIN BOULEVARD ASSOCIATES II
Attest: /s/ DAVID R. ANTES By:/s/ ANTHONY J. SARTOR
David R. Antes Anthony J. Sartor
General Partner
LESSEE
PAULUS, SOKOLOWSKI AND SARTOR, INC.
Attest: /s/ ANTHONY J. SARTOR By:/s/ WILLIAM PAULUS, JR.
Anthony J. Sartor William Paulus, Jr.
Secretary President
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<PAGE>
STATE OF NEW JERSEY )
SS.
COUNTY OF SOMERSET )
BE IT REMEMBERED, that on this 28th day of February, 1989, before me, the
subscriber, personally appeared Anthony J. Sartor a partner of MOUNTAIN
BOULEVARD ASSOCIATES, II, a New Jersey partnership, who, I am satisfied, is the
person named in and who executed the within Instrument, and thereupon he
acknowledged that he signed and delivered the same as the act and deed of said
partnership, for the uses and purposes therein expressed.
/s/ MARILYN A. ANDREWS
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<PAGE>
STATE OF NEW JERSEY )
SS.
COUNTY OF SOMERSET )
BE IT REMEMBERED, that on this 28th day of February, 1989, before me, the
subscriber, personally appeared Anthony J. Sartor, who, being duly sworn on his
oath, deposes and makes proof to my satisfaction, that he is the Secretary of
PAULUS, SOKOLOWSKI AND SARTOR, INC., the Corporation named in the within
Instrument, that WILLIAM PAULUS, JR. is the President of said Corporation; that
the execution, as well as the making of this Instrument, has been duly
authorized by a proper resolution of the Board of Directors of the said
Corporation; that deponent well knows the corporate seal and it was thereto
affixed and said Instrument signed and delivered by said President as and for
the voluntary act and deed of said Corporation, in the presence of the deponent,
who thereupon subscribed his name thereto as attesting witness.
Sworn to and subscribed before me,
the date aforesaid.
/s/ MARILYN A. ANDREWS
- ----------------------
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<PAGE>
LEASE MODIFICATION
This Lease Modification is dated as of December 31, 1995 between MOUNTAIN
BOULEVARD ASSOCIATES II, a partnership, having its principal place of business
at 67A Mountain Boulevard Extension, Warren, New Jersey 07059 (hereinafter
called "Lessor") and PAULUS, SOKOLOWSKI & SARTOR, INC., a New Jersey
corporation, having its principal place of business at 67A Mountain Boulevard
Extension, Warren, New Jersey 07059 (hereinafter called "Lessee").
WHEREAS, Lessor and Lessee entered into a lease dated January 12, 1981
(the "Lease") for certain premises located in the building known and designated
as 67C Mountain Boulevard Extension, Warren, New Jersey 07059 (the "Leased
Premises"); and
WHEREAS, Lessor and Lessee desire to modify the terms of the Lease as
provided for herein.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
Lessor and Lessee agree as follows:
1. TERM. The term of the Lease shall be extended for ten (10) years to
end on August 31, 2011.
2. RENT.
A. Commencing as of January 1, 1996 through and including December
31, 1996, the base rent for the Leased Premises shall be $420,900.00 per year
("Annual Minimum Rent"), payable in equal monthly installments of $35,075.00 per
month.
<PAGE>
B. Commencing as of January 1, 1997 through the end of the term, the
annual base rent for the Leased Premises shall be the greater of the annual base
rent for the immediate preceding twelve (12) months or the adjusted amount as
calculated in subparagraph (c) below. In no event, however, shall there be a
decrease in the annual base rent as established for the immediate preceding
twelve (12) months.
C. The adjusted Annual Minimum Rent shall be determined by applying
fluctuations in the Consumer Price Index to the Annual Minimum Rent as follows:
(i) The Consumer Price Index for purposes of this Lease shall
be the Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics of the United States Department of Labor, New York -
Northeastern New Jersey Area, Housing Component (1982-84=100). If the Consumer
Price Index ceases to be published by the United States Department of Labor,
Bureau of Statistics, then the calculation shall be based on the closest
successor index identified by the United States Department of Labor. If no such
successor exists, the calculation shall be based on an index that is mutually
agreed between Landlord and Tenant.
(ii) The Base Date shall be January, 1996.
(iii) The Adjusted Annual Minimum Rent shall be determined by
multiplying the Annual Minimum Rent by a fraction, the numerator of which shall
be the Consumer Price Index for the month of January, 1997 and each January of
every lease year thereafter, and the denominator of which shall be the Consumer
Price Index for the Base Date. The resulting sum, if greater than the annual
base rent for the immediate preceding twelve (12) months, shall be the Adjusted
Annual Minimum Rent for the next succeeding year payable in twelve (12) equal
monthly
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<PAGE>
installments, commencing in January of that applicable year which follows the
period for which the most recent changes in the Consumer Price Index have been
calculated.
(iv) Since the rent payment for at least the first month after
each rent adjustment, will have been paid prior to the determination of the
applicable rent increase for those years, any increase from months already
elapsed and subject to determination by application of the formula shall then be
added to the next monthly rent payment due and payable, upon determination of
the required monthly rental to be paid for such applicable period.
(v) If the base year (1982-84=100) hereinabove referred to
with respect to the Index shall be changed after the execution of this Lease
Modification, appropriate adjustments based on such new Index shall be made so
as to have a proper application of the cost of living formula.
3. UTILITIES. Lessee shall pay the cost of all potable water, sanitary
sewage, natural gas and electric utility charges to the Leased Premises during
the term of the Lease.
4. TAXES. The term "Base Tax Year" shall mean the calendar year 1996.
From the period between January 1, 1997 through and including the end of the
term hereof, Lessee shall pay to Lessor the amount by which (i) the annual real
estate taxes which are levied or assessed against the premises at 67A Mountain
Boulevard Extension during said period exceed (ii) the real estate taxes levied
or assessed against said premises for the Base Tax Year. Any amount due to
Lessor under the provisions of this paragraph 4 shall be paid upon rendition of
a bill therefor, and Lessor shall, at the time of the rendition of such bill,
submit to Lessee the bill received from the taxing authorities or a photostat
thereof. Lessee shall also pay and discharge all assessments against the
premises at 67A Mountain Boulevard Extension during said period.
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<PAGE>
5. Except as modified and provided herein, all terms and conditions of
the Lease and any existing amendments or extensions thereto, shall remain in
full force and effect and shall be binding upon the parties.
6. This Lease Modification shall be binding upon Lessor and Lessee and
their respective heirs, successors, executors, administrators and assigns.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and
seals as of the date first set forth above.
LESSOR:
WITNESS: MOUNTAIN BOULEVARD ASSOCIATES II
/s/ DOROTHY H. SNYDER By: /s/ PHILIP A. FALCONE
Philip A. Falcone, General Partner
By: /s/ DAVID ANTES
David Antes, General Partner
By: /s/ LOIS PAULUS
Lois Paulus, General Partner
By: /s/ ANTHONY SARTOR
Anthony Sartor, General Partner
LESSEE:
ATTEST: PAULUS, SOKOLOWSKI & SARTOR, INC.
/s/ DOROTHY H. SNYDER By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr., President
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THIRD MODIFICATION TO LEASE AGREEMENT
This Third Modification to Lease Agreement (the "AMENDMENT") is made and
entered into by and between MOUNTAIN BOULEVARD ASSOCIATES II, a
____________________ partnership ("LESSOR"), and PAULUS, SOKOLOWSKI & SARTOR,
INC., a New Jersey corporation ("LESSEE").
WHEREAS, Lessor and Lessee entered into that certain Lease Agreement (the
"LEASE") with an effective date of January 12, 1981, for the lease of certain
office space located at 67C Mountain Boulevard Extension, Warren, New Jersey
(the "LEASED PREMISES"), more particularly described in the Lease; and
WHEREAS, Lessor and Lessee entered into that certain Extension of Lease
Agreement (the "FIRST AMENDMENT") dated effective February 28, 1989, which First
Amendment extended the term of the Lease until August 31, 2001; and
WHEREAS, Lessor and Lessee entered into that certain Lease Modification
(the "SECOND AMENDMENT") dated effective December 31, 1995, which Second
Amendment extended the term of the Lease until August 31, 2011 (hereinafter the
term "LEASE" shall mean the Lease as amended by the First Amendment and the
Second Amendment); and
WHEREAS, Lessor and Lessee desire to further amend the Lease as herein
provided.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby amend the Lease as follows:
1. LEASE TERM. The term of the Lease is hereby amended to terminate ten
years after the date hereof.
2. NO OTHER MODIFICATIONS. Except as expressly amended and modified
hereby, all of the covenants and conditions of the Lease as amended by this
Amendment are ratified and confirmed by Lessor and Lessee.
3. DEFINED TERMS. All terms, definitions and dates contained in the
Lease shall have the same meaning and application in this Amendment except to
the extent there is a conflict, in which event, the terms of this Amendment
shall control.
<PAGE>
4. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
EXECUTED effective the ____ day of ___________, 1998.
LESSOR:
MOUNTAIN BOULEVARD ASSOCIATES II
By:
Philip A. Falcone, General Partner
By:
David Antes, General Partner
By:
Lois Paulus, General Partner
By:
Anthony Sartor, General Partner
LESSEE:
PAULUS, SOKOLOWSKI & SARTOR, INC.
By:
William Paulus, Jr., President
-2-
Exhibit 10.12
L E A S E A G R E E M E N T
BY AND BETWEEN:
MOUNTAIN BOULEVARD ASSOCIATES III
"Landlord"
-and-
PAULUS, SOKOLOWSKI & SARTOR, INC.
"Tenant"
PREMISES: 67A Mountain Boulevard Extension
Warren Township, New Jersey
DATE: DECEMBER 29, 1986
<PAGE>
<TABLE>
<CAPTION>
INDEX
ARTICLE HEADINGS PAGE
- ------- -------- ----
<S> <C>
I Lease of Property - Term of Lease...................................................1
II Rent................................................................................1
III Payment of Taxes, Assessments, Utility Charges, Etc.................................5
IV Use, Maintenance, Alterations, Repairs, Etc.........................................7
V Non-Liability of Landlord; Indemnification of Landlord.............................13
VI Insurance..........................................................................15
VII Damage or Destruction..............................................................20
VIII Condemnation, Taking by Eminent Domain.............................................22
IX Assignment, Subletting.............................................................25
X Default Provisions.................................................................25
XI Late Payment.......................................................................30
XII Landlord's Right to Perform; Cumulative Remedies; Waivers;
Attorney's Fees; Default by Landlord...............................................31
XIII Quiet Enjoyment; Transfer of Landlord's Interest...................................33
XIV Landlord's Right to Enter Premises.................................................34
XV Surrender By Tenant At End of Term.................................................35
XVI Security Deposit...................................................................37
XVII Subordination......................................................................38
XVIII Certificates.......................................................................40
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XIX Waiver of Landlord's Liability.....................................................41
XX Broker.............................................................................41
XXI Waiver of Distraint................................................................42
XXII Covenant of Further Assurances.....................................................42
XXIII Rules and Regulations..............................................................43
XXIV Memorandum of Lease................................................................43
XXV Notices............................................................................43
XXVI Force Majeure......................................................................44
XXVII Covenants and Conditions...........................................................44
XXVIII Waiver of Trial by Jury............................................................44
XXIX Entire Agreement...................................................................45
XXX Article Headings...................................................................45
XXXI Covenants Binding..................................................................45
XXXII Situs..............................................................................45
</TABLE>
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This is a Lease, dated the 29th day December, 1986 between MOUNTAIN
BOULEVARD ASSOCIATES III (the "Landlord") having its principal office at 67A
Mountain Boulevard Extension, Warren, New Jersey 07060, and PAULUS, SOKOLOWSKI &
SARTOR, INC. (the "Tenant") having its principal office at 67A Mountain
Boulevard Extension, Warren, New Jersey 07060.
W I T N E S S E T H:
ARTICLE I
LEASE OF PROPERTY - TERM OF LEASE
SECTION 1.01. Landlord, for and in consideration of the rents to be paid
and of the covenants and agreements hereinafter contained to be kept and
performed by the Tenant, hereby leases to the Tenant, and the Tenant hereby
hires from the Landlord all that certain parcel of land, known and designated as
67A Mountain Boulevard Extension, in the Township of Warren, County of Warren,
State of New Jersey (the "Premises") and more particularly described in Exhibit
A hereto, and all buildings and improvements thereon.
SECTION 1.02. The term of this Lease shall be for a period of thirty
(30) years beginning August 1, 1987, and ending July 31, 2017.
ARTICLE II
RENT
SECTION 2.01. The Tenant covenants and agrees to pay to the Landlord
during the initial term of this Lease, without notice or demand, and without
abatement, set-off or deduction of any kind, the annual rental (herein sometimes
referred to a the "fixed rental") payable in advance in equal
<PAGE>
monthly installments of one-twelfth of the annual rental on the first day of
each calendar month during said period shall be as follows:
YEAR ANNUAL RENT MONTHLY RENT
---- ----------- ------------
8/1/97 to 7/31/88 $576,000.00 $48,000.00
8/1/88 to 7/31/89 $604,800.00 $50,400.00
8/1/89 to 7/31/96 $635,040.00 $52,920.00
8/1/90 to 7/31/91 $666,792.00 $55,566.00
8/1/91 to 7/31/92 $700,131.60 $58,344.30
During the years August 1, 1992 through July 31, 2017, the remaining
term of this Lease, Tenant shall pay the annual fixed rent, which annual fixed
rent shall increase each year an amount equal to the greater of (x) five (5%)
percent per year or (y) the increase in the consumer price index as determined
in the following manner:
(a) As promptly as practicable after the end of each lease year
after 1992 during the time when this Lease shall be in effect, the Landlord
shall compute by the method hereinafter set forth the percentage increase, if
any, in the cost of living for such period based upon the "Consumers Price
Index--Urban Wage Earners and Clerical Workers (revised) (1967=100)"
(hereinafter called the "Index") published by the Bureau of Labor Statistics of
the United States Department of Labor.
(b) The Index number indicated in the column for the New
York-Northeast New Jersey Metropolitan area, entitled "All Items," for the month
of August, 1991 shall be the "base Index number" and the corresponding Index for
the month of January for each year during the term, shall be the "current Index
number" for the rent for said year.
(c) The current Index number as determined hereinabove shall be
divided by the base Index number and the resulting quotient shall be deemed to
be the "Factor".
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(d) The Factor multiplied by the annual fixed rental of SEVEN
THOUSAND ONE HUNDRED THIRTY-ONE AND SIXTY HUNDREDTHS ($700,131.60) DOLLARS shall
be the annual fixed rental for each such year during the term of this Lease.
(e) The Landlord shall within a reasonable time after obtaining
the appropriate data necessary for computing such increase in the fixed rental,
give the Tenant notice of any increase so determined.
(f) The fixed rental, as so determined, shall be due and payable
to the Landlord in twelve (12) equal monthly installments, in advance, without
notice or demand, and without abatement, set-off or deduction of any kind, on
the first day of each calendar month, commencing with the first day of the first
month of the additional term. Any additional rent due for any months prior to
notification of such increase by the Landlord to the Tenant shall be paid on the
first day for the payment of rent after the mailing of a statement by the
Landlord to the Tenant showing the computation thereof as above provided and
upon default in payment thereof, Landlord shall have the same rights and
remedies for the collection thereof as for unpaid rent.
(g) In the event that the United States Government shall cease to
publish the Consumers Price Index at any time during the period from 1991
through the end of the term of this Lease, then the increase in cost of living
for the purposes of this Lease shall be determined by reference to the
publication of the United States Government which replaces the Consumers Price
Index as a measure of cost of living. If no such replacement publication is
created and maintained by the United States Government, then the parties shall
mutually agree upon a substitute method to determine the fixed rental and, upon
the failure to reach such agreement, the Landlord may terminate this Lease on
sixty (60) days prior written notice.
3
<PAGE>
SECTION 2.02. This is a "net lease"; and the rent reserved hereunder
shall be paid to the Landlord without any claim on the part of the Tenant for
diminution or abatement; and the fact that the Tenant's use and occupancy of the
Premises shall be disturbed or prevented from any cause whatsoever except
Landlord's acts, shall not in any way suspend, abate or reduce the rental to be
paid hereunder, except as otherwise specifically provided in this Lease. It is
the purpose and intent of Landlord and Tenant that the rent shall be absolutely
net to Landlord, so that this Lease shall yield, net, to Landlord, the rent
specified in Section 2.01 hereof in each month during the term of this Lease
without any abatement, deduction, set-off or counterclaim, and that all costs,
expenses and obligations of every kind and nature whatsoever relating to the
Premises which may arise or become due during the term of this Lease (except
interest, amortization or any other charges or obligations arising in connection
with any mortgage placed on the Premises by Landlord, unless such charges or
obligations arise as a result of default by Tenant hereunder) shall be paid by
Tenant.
SECTION 2.03. Whenever under the terms of this Lease any sum of money is
required to be paid by the Tenant in addition to the rental reserved, and said
additional amount so to be paid is not designated as "additional rent", then
said amount shall nevertheless, at the option of the Landlord, if not paid when
due, be deemed "additional rent" and collectible as such with any installment of
rental thereafter falling due hereunder. Nothing herein contained shall be
deemed to suspend or delay the payment of any sum at the time the same becomes
due and payable hereunder, or limit any other remedy of the Landlord.
4
<PAGE>
ARTICLE III
PAYMENT OF TAXES, ASSESSMENTS, UTILITY CHARGES, ETC.
SECTION 3.01. The term "base tax year" shall mean the calendar year
1987. From the period between the commencement of this Lease through and
including the calendar year ending December 31, 1992, the Tenant shall pay to
the Landlord as additional rent, the amount by which (i) the annual real estate
taxes which are levied or assessed against the Premises during said period
exceed (ii) the real estate taxes levied or assessed against the Premises for
the base tax year. Any amount due to the Landlord under the provisions of this
Section 3.01 shall be paid upon rendition of a bill therefor, and Landlord shall
at the time of the rendition of such bill submit to Tenant the bill received
from the taxing authorities or a photostat thereof. Tenant shall also pay and
discharge, as additional rent, all assessments against the Premises during said
period.
SECTION 3.02. The Tenant, as additional rent, shall pay and discharge
all charges for water meter costs (including any expense incident to the
installing, repairing or replacing of any water system), gas, electricity or
other public utility service or services furnished to the Premises during the
term hereof, and all fees and charges of the state, county or city government or
of any municipal, governmental or lawful authority, whatsoever, for the
construction, maintenance, or use during the term hereof of any vault,
passageway or space, in or over or under any street or sidewalk adjacent to the
Premises, or for the construction, maintenance, use of occupancy during the term
hereof, of any part of any building on the Premises.
SECTION 3.03. The Tenant shall also pay and discharge, as additional
rent, all taxes and assessments which shall or may during the term of this Lease
be charged, laid, levied, assessed or
5
<PAGE>
imposed upon, or become a lien upon the personal property of the Landlord or
Tenant in the operation of the Premises or in connection with the Tenant's
business conducted on the Premises.
SECTION 3.04. The Tenant shall be deemed to have complied with the
foregoing covenants of this Article if payment of any such taxes, assessments or
other governmental impositions, duties and charges is made by the Tenant within
the period within which payment is permitted without penalty or interest.
SECTION 3.05. The Tenant may contest, in good faith, by appropriate
proceedings, at the Tenant's expense, any such taxes, assessments, water meter
charges or similar items, provided that the Tenant shall deposit with the
Landlord a sum which shall be equal to the amount of the item so contested and
also, from time to time, on demand of the Landlord, such additional sums as may
be reasonably required to cover interest or penalties accrued or to accrue on
any such item or items. The Landlord, upon reasonable notice to the Tenant, may
pay such contested item or items out of any sum deposited in case of undue delay
in the prosecution of such proceedings; or, if the protection of the property or
of the Landlord's interest therein shall, in the reasonable judgment of the
Landlord, require such payment; or at its option, where such procedure is
provided for by law, the Tenant may pay such items under protest or make proper
deposit in court. When any such contested items shall have been paid or
cancelled, any sums so deposited to cover them, and not applied by the Landlord
as aforesaid, shall be repaid to the Tenant.
SECTION 3.06. If at any time during the term of this Lease the method or
scope of taxation prevailing at the commencement of the Lease term shall be
altered, modified or enlarged so as to cause the method of taxation to be
changed, in whole or in part, so that in substitution for the real estate taxes
now assessed there may be, in whole or in part, a capital levy or other
imposition based
6
<PAGE>
on the value of the Premises, or the rents received therefrom, or some other
form of assessment based in whole or in part on some other valuation of the
Landlord's real property comprising the Premises, then and in such event, such
substituted tax or imposition shall be payable and discharged by the Tenant.
SECTION 3.07. Anything herein contained to the contrary notwithstanding,
in the event during the term of the Lease the Landlord's then mortgagee shall
require, as a condition of said mortgage, that there be monthly tax payments
deposited with mortgagee in order that mortgagee may pay annual tax obligations
in accordance with the law, then and in that event, Tenant agrees that it will,
upon written notice by the Landlord to Tenant, pay to the Landlord together with
the monthly rent, one-twelfth (1/12th) of the annual taxes as may be required by
such mortgagee.
ARTICLE IV
USE, MAINTENANCE, ALTERATIONS, REPAIRS, ETC.
SECTION 4.01. The Tenant has leased the Premises after a full and
complete examination thereof, as well as the title thereto and its present uses
and nonuses. The Tenant accepts the same "as is" and without any representation
or warranty, express or implied in fact or by law, by the Landlord and without
recourse to the Landlord, as to the title thereto, the nature, condition or
usability thereof or the use or uses to which the Premises or any part thereof
may be put.
SECTION 4.02. Throughout the term of this Lease the Landlord shall not
be required to furnish any services or facilities or to make any repairs or
alterations in or to the Premises, the Tenant hereby assuming the full and sole
responsibility for the condition, operation, repair, replacement, maintenance
and management of the entire Premises; provided, however, that the Landlord
shall be responsible for any structural repairs to the building. Said structural
repairs shall
7
<PAGE>
include (a) roof maintenance and repair and (b) replacement but not the
maintenance and repair of the HVAC System.
SECTION 4.03. The Premises shall be used as an office; which use by
Tenant, however, is and shall continue to be expressly subject to all
appropriate zoning ordinances and rules and regulations of any governmental
instrumentality, board or bureau having jurisdiction thereof. Tenant shall not
keep or use or permit to be kept or used any inflamable fluids, red labels or
explosives at the Premises, nor keep or use or permit or suffer to be kept or
used at the Premises any hazardous substances, as said term is defined under the
New Jersey Environmental Cleanup Responsibility Act ("ECRA"), N.J.S.A. 13:1K ET
SEQ. as may be amended from time to time, or any successor statute, or any rules
or regulations now or hereafter issued thereunder.
SECTION 4.04. The Tenant shall not use or occupy or permit the Premises
to be used or occupied, nor do or permit anything to be done in or on the
Premises, in whole or in part, in a manner which would violate any certificate
of occupancy affecting the Premises or make void or voidable any insurance then
in force with respect thereto, or which may make it impossible to obtain fire or
other insurance thereof required to be furnished by the Tenant hereunder, or as
will cause or be apt to cause structural injury to the improvements on the
Premises or any part thereof, or as will constitute a public or private nuisance
and shall not use or occupy or permit the Premises to be used or occupied, in
whole or in part, in a manner which may violate any present or future, ordinary
or extraordinary, foreseen or unforeseen laws, regulations, ordinances or
requirements of the federal, state or municipal governments, or of any
departments, subdivisions, bureaus or offices thereof, or any other
governmental, public or quasi-public authorities now existing or hereafter
created, having jurisdiction over and applicable to the structure, use, contents
and occupancy of, the Premises and
8
<PAGE>
shall promptly comply with any such laws, regulations, ordinances and
requirements, including but not limited to the making of any structural repairs
or the removal or cleanup of hazardous or toxic materials that may be required
to comply with such laws, regulations, ordinances and requirements. Upon request
of the Landlord, Tenant shall at its cost and expense, timely and promptly
complete all applications and forms in connection with ECRA, or any successor or
similar statute, and cause all tests and inspections to be made by appropriate
testing firms (acceptable to Landlord and all governmental authorities) in
connection therewith, and promptly perform or cause to be performed, any cleanup
plans. The Tenant will indemnify and save harmless the Landlord against any
recovery or loss to which the Landlord may be subject or which the Landlord may
sustain, including reasonable attorney's fees and expenses incurred by the
Landlord arising from any breach of this covenant or by reason of any action or
proceedings which may be brought against the Landlord or against the Premises,
or any part thereof, by virtue of any such laws, regulations, ordinances or
requirements. In addition, Tenant shall effect the correction, prevention and
abatement of nuisances, violations or other grievances in, upon or connected
with the Premises and shall also promptly comply with all rules, orders and
regulations of the Board of Fire Underwriters. The Tenant will remedy any
violations of the covenants contained in this Section 4.04 and will pay the cost
of the same.
SECTION 4.05. Tenant expressly covenants and agrees to indemnify,
defend, and save Landlord harmless from and against any claim, damage,
liability, cost, fees, expenses of cleanup plans, penalty, or fine that Landlord
may suffer or incur as a result of air, noise, ground or water pollution
including, without limitation, any hazardous waste, hazardous substances, sewage
discharges and sewage sludge (collectively, "pollution") relating to, or caused
by any use of, the
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Premises. Tenant covenants and agrees to notify Landlord immediately of any
claim or notice served upon it containing any allegation that there may be
pollution on, or caused by any use of, the Premises. Tenant, in any event, at
its sole cost and expense, will take immediate steps to halt, remedy or cure any
pollution, or comply with and perform any cleanup plan, related to the Premises.
Tenant's obligations pursuant to this Section 4.05 shall survive the termination
of this Lease.
SECTION 4.06. Tenant shall, on an "as needed" basis, and at its sole
cost and expense, keep and maintain the interior of the Premises in a good and
complete state of repair and condition, except for ordinary wear and tear
resulting from use and occupancy. Landlord shall, at its sole cost and expense,
make all exterior repairs and replacements, structural and nonstructural,
ordinary and extraordinary, foreseen and unforeseen, including but not limited
to the roof, loading dock, exterior windows and doors, the air conditioning and
heating plan plumbing, pipes and fixtures belonging thereto; and shall replace
all mechanical systems and working parts used in connection with the air
conditioning, electrical, heating and plumbing plants, fixtures and systems,
including ballasts and fluorescent fixtures; and shall keep the water and sewer
pipes and connections free from ice and other obstructions and shall generally
maintain, repair and replace the gutters, leaders, flashings, metal gravel stops
and roof drains, stanchions and fences, if any, and the sidewalks and paved
areas, necessary to preserve and maintain the Premises and appurtenances
belonging thereto and shall generally maintain and repair the exterior of the
Premises. Tenant covenants and agrees that it shall not cause or permit any
waste (other than reasonable wear and tear), damage or disfigurement to the
Premises, or any overloading of the floors of the buildings constituting part of
the Premises. All repairs and replacements shall (a) be performed in a good and
workmanlike manner, (b) be at least substantially equal in quality and
usefulness to the original work, (c) be of first-class modern
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<PAGE>
character, and (d) not diminish the overall value of the Premises. All repairs
and replacements and other property attached to or used in connection with the
Premises by or on behalf of Tenant shall be and become the property of Landlord
without payment therefor immediately upon completion or installation thereof
except as otherwise herein expressly provided. Notwithstanding the above, no
work shall be performed involving repairs and replacements having an aggregate
cost in excess of TEN THOUSAND ($10,000) DOLLARS without the express prior
written consent of Landlord, which consent may be granted or withheld in
Landlord's sole discretion.
SECTION 4.07. The Tenant, at its cost and expense, shall (a) maintain,
repair and replace the lawns, shrubbery, driveways and parking areas within the
Premises (b) keep the parking area and driveways, sidewalks and steps of the
Premises free and clear of ice and snow and all defects, obstructions and
encumbrances and (c) keep the exterior of the Premises free and clear of paper
and other debris so as to keep same in a neat, good and orderly condition.
SECTION 4.08. Tenant covenants and agrees that it will not make any
improvements, changes, installations, renovations, additions or alterations in
and about the Premises without the prior written consent of Landlord, which
consent may be granted or withheld in the sole discretion of Landlord. Any
consent which Landlord may give shall be conditioned upon Tenant furnishing to
Landlord detailed plans and specifications with respect to any such changes, to
be approved by Landlord in writing. All such alterations, additions or
improvements shall be only in conformity with applicable governmental and
insurance company requirements and regulations applicable to the Premises. In
the event Tenant installs or makes any improvements, additions, installations,
renovations, changes or alterations in the Premises, with the approval of
Landlord, then and in such event, either (a) all of such improvements, changes,
additions, installations, renovations or alterations (except trade
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fixtures) shall be and remain in the Premises and be surrendered upon the
expiration of the term hereof, or (b) at the option of Landlord, exercised by
thirty (30) days advance notice to Tenant, either before or after the
termination date of this Lease or Tenant's removal from or abandonment of the
Premises, whichever is applicable, Tenant shall remove forthwith such
improvements, additions, installations, renovations, changes or alterations and
restore the Premises to the condition thereof as at the commencement date of
this Lease and be responsible for the repair of any damage or disfigurement
which may occur to any walls, ceilings, floor or any other part of the Premises
by reason of the installation or removal of the same.
SECTION 4.09. Tenant shall not, without the consent of Landlord, erect
and maintain any signs advertising its business which signs are to be displayed
in the interior of the building on the Premises or on the exterior thereof. The
Landlord shall have the absolute right to deny his consent to any sign based
upon the size, color, shape or location of said sign. All signs must comply with
all laws, ordinances and regulations of any governmental authority having
jurisdiction. The erection of such signs shall riot cause any structural damage
to the Premises, nor shall the Tenant erect any roof signs. Upon the termination
of this Lease, Tenant shall remove such sign or signs and shall repair any
damage to the Premises caused by the erection or removal thereof.
SECTION 4.10. Tenant agrees that it shall not encumber, or suffer or
permit to be encumbered, the Premises or the fee thereof by any lien, charge or
encumbrance.
SECTION 4.11. In the event that any mechanic's lien is filed against the
Premises as a result of alterations, additions or improvements made by the
Tenant, then the Landlord, at its option, after ten (10) days' notice to the
Tenant, may terminate this Lease and may pay the said lien, without inquiring
into the validity thereof, and the Tenant shall forthwith reimburse the Landlord
for the total
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expenses, including but not limited to attorney's fees, incurred by the Landlord
in discharging the same, unless within said ten (10) day period Tenant shall
either cause said lien to be discharged or shall appropriately bond said lien in
a manner satisfactory to Landlord.
SECTION 4.12. The Landlord reserves the right, easement and privilege to
enter on the Premises in order to install, at its own cost and expense, any
storm drains and sewers and/or utility lines in connection therewith as may be
required by the Landlord. It is understood and agreed that if such work as may
be required by Landlord requires an installation which may displace any paving,
lawn, seeded area or shrubs, the Landlord, shall, at its own cost and expense,
restore said paving, lawn, seeded area or shrubs. The Landlord covenants that
the foregoing work shall not unreasonably interfere with the normal operation of
Tenant's business, and the Landlord shall exercise his best efforts to minimize
any inconvenience to the Tenant in connection with such installations.
ARTICLE V
NON-LIABILITY OF LANDLORD; INDEMNIFICATION OF LANDLORD
SECTION 5.01. The Landlord shall not be responsible or liable for any
damage or injury to any property, fixtures, merchandise or decorations of Tenant
or any other person, or to any person or persons at any time on the Premises as
a consequence of the failure, breakage, leakage or obstruction of the water,
plumbing, steam, gas, sewer, waste or spoil pipes, roof drains, leaders,
gutters, valleys, downspouts or the like, or the electrical, ventilation, air
conditioning, gas, power, conveyor, refrigeration, sprinkler, heating or other
systems, elevators or hoisting equipment, if any, in the Premises; or by reason
of the elements; or resulting from acts, conduct or omissions on the part of
Tenant or of Tenant's agents, employees, guests, licensees, invitees, assignees
or successors, or on the part of any other person or party; nor shall the
Landlord be in any way responsible or liable
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<PAGE>
in case of any accident or injury including death to any of the Tenant's
servants, employees, agents, or to any person or persons in or about the
Premises or the streets, sidewalks or vaults adjacent thereto; and the Tenant
agrees that it will not hold the Landlord in any way responsible or liable
therefor.
SECTION 5.02. (a) In addition to Tenant's obligation to provide
insurance pursuant to Article VI hereof, the Tenant covenants and agrees that it
will indemnify, defend and save harmless the Landlord from and against any and
all liabilities, obligations, damages, penalties, claims, costs, charges and
expenses, including without limitation reasonable attorneys' fees, which may be
imposed upon or incurred by Landlord by reason of any of the following occurring
during the term of this Lease:
(i) Any matter, cause or thing arising out of use,
occupancy, control or management of the Premises and any part
thereof;
(ii) Any negligence on the part of the Tenant or any of
its agents, contractors, servants, employees, licensees or
invitees;
(iii) Any accident, injury, damage to any person or
property occurring in or about the Premises;
(iv) Any failure on the part of Tenant to perform or
comply with any of the covenants, agreements, terms or
conditions contained in this Lease on its part to be performed
or complied with.
(b) Landlord shall promptly notify Tenant of any such claim
asserted against it for which Landlord is entitled to indemnification
pursuant to this Section 5.02 and shall promptly send to Tenant copies
of all papers or legal process served upon it in connection with any
action or
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proceeding brought against Landlord by reason of any such claim. The
Landlord reserves the right, at its cost and expense, to join in the
defense of any such action or claim with co-counsel of its choosing,
which co-counsel shall cooperate with Tenant's counsel in the defense of
any such action.
SECTION 5.03. The liability of the Tenant to indemnify the Landlord as
set forth in Section 5.02 shall not extend to any matter against which the
Landlord shall be protected by insurance, provided, however, that if any such
liability shall exceed the amount of the effective and collectible insurance in
question, the said liability of Tenant shall apply to such excess.
ARTICLE VI
INSURANCE
SECTION 6.01. During the term of this Lease, the Tenant, at its sole
cost and expense, and for the mutual benefit of the Landlord and the Tenant,
shall carry and maintain the following types of insurance in the amounts
specified:
(a) Fire and extended coverage insurance covering the Premises
against loss or damage by fire and against loss or damage by vandalism
and malicious mischief and by other risks now or hereafter embraced by
the standard "All Risk" extended coverage endorsement used in New
Jersey, in amounts at all times sufficient to prevent the Landlord or
the Tenant from becoming a co-insurer under the terms of the applicable
policies and not less than the full replacement value of the insurable
improvements to the Premises. The term "full replacement value" shall
mean actual replacement value (exclusive of cost of excavation,
foundations and footings). Such "full replacement value" shall be
determined from time to time at the request of Landlord, by one of the
insurers or, at the option of Tenant, by an appraiser, engineer,
architect or contractor approved in writing by Landlord (which approval
shall not be unreasonably withheld) and paid by Tenant. No
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omission on the part of Landlord to request any such determination shall
relieve Tenant of any of its obligations under this Article.
(b) Fire and extended coverage insurance insuring all
improvements, additions, fixtures and contents installed or owned by
Tenant in, on or at the Premises, against loss or damage by fire and
against loss or damage by vandalism and malicious mischief and by other
risks now or hereafter embraced by the standard "All Risk" extended
coverage endorsement used in the State of New Jersey, in amounts equal
to the full replacement value of such improvements, alterations,
additions, fixtures and contents. Said insurance shall be deemed to
cover Tenant's property and not Landlord's.
(c) Comprehensive general public liability insurance, insuring
the Landlord and the Tenant against liability for injury and death to
persons, or property damage, including water damage and legal liability,
occurring in or about the Premises or arising out of the ownership,
maintenance, use or occupancy thereof including, without limitation,
damage to natural resources or other properties caused by releases of
hazardous substances or any other form of pollution. The liability under
such insurance shall not be less than TWO MILLION ($2,000,000) DOLLARS
combined single limit in respect of personal injury or death to any
person or persons and/or property damage. Such liability policy shall
include a Broad Form Comprehensive General Liability endorsement.
(d) Plate glass insurance.
(e) Flood insurance if required by Landlord's mortgagee.
(f) Boiler and pressure vessel insurance including pressure
pipes.
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(g) Rental income insurance covering the fixed annual rent, and
real estate taxes and insurance costs for a period of one year.
(h) If a sprinkler system shall be located in
(i) Such other insurance on the Premises and in such amounts as
may from time to time be reasonably required by Landlord against other
insurable hazards which at the time are commonly insured against in the
case of premises similarly situated.
SECTION 6.02. (a) All insurance provided for in Section 6.01 hereof, if
readily obtainable, shall be effected under standard form policies issued by
insurers of recognized responsibility, authorized to do business in the State of
New Jersey which are well rated by national rating organizations and have been
approved in writing by Landlord, such approval not to be unreasonably withheld.
(b) All policies of insurance (except liability insurance, fire
and casualty insurance on Tenant's Property and rental income insurance)
shall provide by endorsement that any loss shall be adjusted with
Landlord, Tenant and any mortgagee of the Premises and payable to the
Landlord or Tenant or any mortgagee as their respective interests may
appear. The rental income insurance policy shall be payable to the
Landlord and the fire and casualty insurance on Tenant's Property shall
be payable to Tenant and Tenant's lender, if any.
(c) Each policy of insurance required to be obtained by Tenant
as herein provided and each certificate therefor issued by the insurer
shall contain an agreement by the insurer that such policy shall not be
cancelled or modified without at least thirty (30) days prior written
notice to Landlord and to any mortgagee to whom a loss thereunder may be
payable.
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SECTION 6.03. By the fifteenth (15th) day of January during each
calendar year of the initial term and any additional term of this Lease, the
Tenant shall deliver to the Landlord evidence of the above-mentioned insurance
coverage satisfactory to counsel for the Landlord. Upon the Tenant's failure to
comply in full with this Article VI, the Landlord shall have the immediate right
to obtain the aforesaid insurance coverage, to pay the premiums therefor and to
add the said premiums together with interest at the rate of eighteen (18%)
percent per annum or the highest lawful rate, whichever is less, to the monthly
installment of rent next due, which amount shall be paid by the Tenant to
Landlord as additional rent, in addition to said monthly installment.
SECTION 6.04. Tenant shall not take out separate insurance (other than
personal liability insurance) concurrent in form or contributing in the event of
loss with that required in this Article to be furnished by, or which may
reasonably be required to be furnished by Tenant unless Landlord is included
therein as an insured, with loss payable as in this Lease provided. Tenant shall
immediately notify Landlord of the taking out of any such separate insurance and
shall deliver the policy or policies as provided in Section 6.03 hereof.
SECTION 6.05. The parties hereto mutually covenant and agree that each
party, in connection with insurance policies required to be furnished in
accordance with the terms and conditions of this Lease, or in connection with
insurance policies which they obtain insuring such insurable interest as
Landlord or Tenant may have in its own properties, whether personal or real,
shall expressly waive any right of subrogation on the part of the insurer
against the Landlord or Tenant as the same may be applicable, and Landlord and
Tenant each mutually waive all right of recovery against each other, their
officers, directors, agents or employees for any loss, damage or injury of any
nature whatsoever to property or person for which either party is required by
this Lease to carry insurance,
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even if the loss, damage or injury shall have been caused by the fault or
negligence of the other party or anyone for whom such party may be responsible.
SECTION 6.06. If for any reason it shall be impossible to obtain fire
and other hazard insurance on the Premises in an amount and in the form and with
insurance companies acceptable to the Landlord, the Landlord may, if the
Landlord so elects at any time thereafter, either (a) terminate this Lease and
the term hereof, upon giving to the Tenant fifteen (15) days notice of the
Landlord's intention so to do, and upon the giving of such notice, this Lease
and the term hereof shall terminate or (b) obtain such insurance and the Tenant
shall pay the premium for such insurance upon demand. as additional rent. Such
payment shall be paid with the next installment of rent but in no event later
than one (1) month after such demand, whichever occurs sooner. If by reason of
the use to which the Premises are put by the Tenant or the character of or the
manner in which the Tenant's business is carried on, the insurance rates for
fire and other hazards shall be increased, the Tenant shall upon demand, pay to
the Landlord, as additional rent, the amounts by which the premiums for such
insurance are increased. Such payment shall be paid with the next installment of
rent but in no event later than one (1) month after such demand, whichever
occurs sooner.
SECTION 6.07. Anything hereinabove contained to the contrary
notwithstanding, in the event, during the term of the Lease, the Landlord's then
mortgagee shall require, as a condition of said mortgage, that there be a
monthly escrow for insurance renewal purposes, Tenant agrees that it will, upon
written notice by Landlord to Tenant, pay to the Landlord, together with the
monthly rent, one-twelfth (1/12) of the applicable insurance premiums required
to be furnished by Tenant as herein provided in this Article VI, said sum to be
paid together with the monthly rent required to be paid in accordance with
Article II of this Lease.
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ARTICLE VII
DAMAGE OR DESTRUCTION
SECTION 7.01. If any time during any term of this Lease the Premises
shall be totally or substantially destroyed or damaged by fire or other casualty
(including any casualty for which insurance coverage was not obtained) of any
kind or nature, ordinary or extraordinary, foreseen or unforeseen, then the
Landlord shall have the option to terminate this Lease. Said option shall be
exercised by the Landlord on or before sixty (60) days after the occurrence of
any such damage or destruction by written notice given to Tenant. In the event
Landlord shall exercise such option the rentals due hereunder shall be
apportioned as of the date of such destruction and any balance of the prepaid
rentals shall be immediately repaid to Tenant. All proceeds of insurance
collected by Landlord or Tenant on account of the destruction of the Premises
(but not as a result of destruction of furniture, moveable trade fixtures,
machinery and equipment owned by Tenant) shall be the property of the Landlord
and shall be promptly paid over to the Landlord upon receipt of same by the
Tenant from the insurance company.
SECTION 7.02. In the event that either (x) the Premises shall be totally
or substantially destroyed and the Landlord shall not exercise its option as set
forth in Section 7.01 or (y) the Premises be only partially destroyed, then and
in either such event, the Tenant shall promptly replace, repair and rebuild the
damaged or destroyed Premises, at least to the extent of the value of the
building and as nearly as practicable to the character of the building or
improvements existing immediately prior to such occurrence. Such rebuilding
shall be made in accordance with plans and specifications therefor which shall
be submitted to the Landlord for its approval. No such work shall commence
unless the Landlord gives its prior written approval to such plans and
specifications.
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SECTION 7.03. (a) In the event that the Tenant shall rebuild in
accordance with Section 7.02 all insurance money collected by the Landlord on
account of such destruction or damages on any policy of insurance, less the
cost, if any, incurred in connection with the adjustment of the loss and the
collection thereof and any amounts applied toward the payment of any mortgage on
the Premises (herein sometimes referred to as the insurance proceeds"), shall be
applied to the payment of the cost of the rebuilding to the extent such
insurance proceeds shall be sufficient for the purpose, and shall be paid out to
or for the account of the Tenant from time to time as such work progresses. All
sums so paid to the Tenant and any other insurance proceeds received or
collected by or for the account of the Tenant (other than by way of
reimbursement to the Tenant for sums theretofore paid by the Tenant) shall be
held by the Tenant in trust for the purpose of paying the cost of such
reconstruction.
(b) Upon receipt of the Landlord of evidence reasonably
satisfactory to it that the reconstruction has been completed and paid for in
full and that there are no liens on the Premises as a result thereof, the
Landlord shall pay to the Tenant any remaining balance of said insurance
proceeds. If the insurance proceeds received by the Landlord shall be
insufficient to pay the entire cost of the reconstruction, the Tenant shall
supply the amount of any such deficiency and shall first apply the same to the
payment of the cost of the reconstruction before requiring the Landlord to
disburse insurance proceeds held by the Landlord.
(c) Under no circumstances shall the Landlord be obligated to
make any payment, disbursement or contribution towards the cost of the work
except to the extent of the insurance proceeds actually received by the
Landlord.
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SECTION 7.04. The Tenant shall not be entitled to any abatement,
allowance, reduction or suspension of rent during the course of construction
except to the extent covered by rental insurance in favor of the Landlord;
PROVIDED, HOWEVER, that in the event that the insurance company issuing the
policy with respect to rent insurance as provided herein shall be delayed in
forwarding the amount due thereunder following the occurrence of the fire or
other casualty, so that the Landlord does not receive said proceeds in time to
make any payment(s) to the holder(s) of any mortgages(s) on the Premises, the
Tenant shall advance to the Landlord such amount(s) as are required to make all
payments in a timely manner to any such mortgagee(s), in which event the Tenant
shall be deemed automatically to have been appointed attorney-in-fact by the
Landlord (and upon request by the Tenant, the Landlord shall execute such
documents appointing the Tenant attorney-in-fact) for purposes of endorsing any
check for insurance proceeds, so that the Tenant may reimburse itself for such
advance(s).
ARTICLE VIII
CONDEMNATION, TAKING BY EMINENT DOMAIN
SECTION 8.01. If the entire Premises shall be taken under the exercise
of the power of eminent domain by any competent governmental authority, this
Lease shall terminate as of the date of such taking; and, in that event, the
rentals due hereunder shall be apportioned as of the date of such taking and any
balance of the prepaid rentals not theretofore applied towards the payment of
accrued installments of rent in accordance with the provisions hereof shall be
immediately repaid to the Tenant.
SECTION 8.02. If less than the entire Premises shall be taken under the
exercise of the power of eminent domain, then the Landlord shall have the option
to terminate this Lease by a written
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notice given to the Tenant on or before forty-five (45) days after such taking
or the vacating of possession by the Tenant, whichever is later. If the Landlord
shall exercise such option the rentals due hereunder shall be apportioned as of
the date of the exercise of such option and any balance of the prepaid rentals
not theretofore applied towards the payment of accrued installments in
accordance with the provisions hereof shall be immediately repaid to Tenant.
SECTION 8.03. If the Landlord shall not exercise the option set forth in
Section 8.02, the Tenant, if the Landlord so desires, shall make such repairs
and restorations as may be necessary fully to restore the remaining portion of
the Premise to a condition as good as that prior to the taking and there shall
be no reduction in the rent to be paid hereunder. The Tenant shall have the
right to use any award for such partial taking for reconstruction, and the
Tenant shall be liable for the expenses of reconstruction in excess of such
award.
SECTION 8.04. Except as provided in the following sentence, in the event
of any taking, whether total or partial, the Tenant shall have no claim in or to
any award of damages for such taking except to the extent that the proceeds of
any partial taking may be used by the Tenant for any reconstruction of the
Premises and Tenant hereby expressly grants unto the Landlord the entire amount
of said award or compensation, hereby expressly disclaiming all rights, title
and interest therein and agrees that it shall have no claim for any damages or
loss against Landlord by reason of such condemnation or taking. Without
affecting Landlord's claim thereunder, Tenant shall have the right to make such
independent claim as the law may allow for moving and relocation expenses and
Tenant's improvements which are not owned by the Landlord pursuant to Section
4.08, provided that Tenant shall make no claim for damages resulting from loss
of leasehold in connection with the foregoing.
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SECTION 8.05. If the temporary use of the whole or any part of the
Premises shall be taken by any lawful power or authority by the exercise of the
right of condemnation, eminent domain or otherwise, or by agreement between
Tenant and those authorized to exercise such right, Tenant shall give prompt
notice thereof to Landlord. In such event the term of this Lease shall not be
reduced or affected in any way and Tenant shall continue to pay in full the
fixed rent, additional rent and other charges herein reserved without reduction
or abatement and Tenant shall be entitled to receive for itself any award or
payment made for such use, provided, however, that in the event such period of
temporary use shall extend beyond the termination date of this Lease, the award
or payment shall be ratably apportioned between Landlord and Tenant.
SECTION 8.06. The terms "condemnation", "taking" or similar terms as
herein used shall mean the acquisition by a public or quasi-public authority
having the right to take the same by condemnation or eminent domain or
otherwise, regardless of whether such taking is the result of actual
condemnation or of voluntary conveyance by Landlord.
SECTION 8.07. Tenant agrees to execute and deliver any instruments as
may be deemed necessary by Landlord to expedite any condemnation proceeding or
to effectuate a proper transfer of title to such governmental or other public
authority, agency, body or public utility seeking to take or acquire the
Premises or any portion thereof.
SECTION 8.08. In the event that notwithstanding the terms and conditions
hereof Tenant shall nevertheless assert a claim or right to claim to any portion
of any amount which may be awarded as damages or paid as the result of such
condemnation proceedings or paid to Landlord as the purchase price for an
option, sale or conveyance in lieu of formal condemnation proceedings, Tenant
shall be liable to Landlord for all damages sustained and all expenses incurred
by Landlord, including
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counsel fees and costs of legal proceedings, as a result of the assertion by
Tenant of any such claim or claims.
ARTICLE IX
ASSIGNMENT, SUBLETTING
SECTION 9.01. The Tenant shall not assign, mortgage, pledge, encumber,
or in any manner transfer this Lease, or any part thereof, or sublease any part
of the Premises without the prior written consent of the Landlord, which consent
shall not be unreasonably withheld.
SECTION 9.02. In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, or if Tenant
shall request the consent of Landlord for any act that Tenant proposes to do,
then Tenant shall pay Landlord's reasonable attorney's fees incurred in
connection therewith.
ARTICLE X
DEFAULT PROVISIONS
SECTION 10.01. This Lease and the term and estate hereby granted are
subject to the limitation that:
(a) whenever the Tenant shall default in the payment of any
installment of rent or of any other sum payable by the Tenant to the Landlord,
on any day upon which the same ought to be paid and if such default shall
continue for ten (10) days; or
(b) whenever the Tenant shall do, or permit anything to be done,
whether by action or inaction, contrary to any covenant or agreement on the part
of the Tenant herein contained or contrary to any of the covenants, agreements,
terms or provisions of this Lease, or shall fail in the keeping or performance
of any of the covenants, agreements, terms or provisions contained in this
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Lease which on the part or behalf of the Tenant are to be kept or performed
(other than those referred to in the foregoing subsection (a) of this Section),
and the Tenant shall fail to commence to take steps to remedy the same within
ten (10) days after the Landlord shall have given to the Tenant a written notice
specifying the same, or having so commenced shall thereafter fail to proceed
diligently to remedy the same; or
(c) whenever an involuntary petition shall be filed against the
Tenant under any bankruptcy or insolvency law or under the reorganization
provision of any law of like import, or a receiver of the Tenant or of or for
the property of the Tenant shall be appointed without the acquiescence of the
Tenant, or whenever this Lease or the estate hereby granted or the unexpired
balance of the term would, by operation of law or otherwise, except for this
provision, devolve upon or pass to any person, firm or corporation other than
the Tenant and such situation under this subsection (c) shall continue and shall
remain undischarged or unstayed for an aggregate period of sixty (60) days
(whether or not consecutive) or shall not be remedied by the Tenant within sixty
(60) days; or
(d) whenever the Tenant shall make an assignment of the property
of the Tenant for the benefit of creditors or shall file a voluntary petition
for an arrangement or reorganization under the provisions of the United Stated
Bankruptcy Act or under the provisions of any law of like import, whether State
or Federal; or whenever the Tenant shall desert or abandon the Premises; or
(e) whenever the Tenant shall record or attempt to record this
Lease; then regardless of, and notwithstanding the fact that, the
Landlord has or may have some
remedy under this Lease or by virtue hereof, or in law or in equity, the
Landlord may either (1) give Tenant notice of termination of this Lease, or (2)
without terminating this Lease, give Tenant notice
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of Landlord's intention to re-enter and take possession of the Premises, with or
without legal process. The giving of either of such notices to Tenant shall
terminate Tenant's right to possession of the Premises under this Lease without
prejudice, however, to the rights of Landlord to exercise all other available
legal remedies and without discharging Tenant from any of its liabilities
hereunder.
SECTION 10.02. In the event that Landlord elects to terminate Tenant's
right to possession of the Premises under Section 10.01 Landlord may re-enter
and take possession of the Premises, with or without legal process, and Tenant
hereby waives any claim for damages as a result thereof, and Tenant shall be
obligated to pay to Landlord as damages upon demand, and Landlord shall be
entitled to recover of and from Tenant, in addition to any remedy Landlord may
have (a) all fixed rent and additional rent payable to the date of termination
of Tenant's right to possession, plus (b) the cost to Landlord of all reasonable
legal and other expenses and costs (including, without limitation attorney's
fees, disbursements, court costs and fees for experts' reports including
appraisals and testimony) incurred by Landlord in obtaining possession of the
Premises, in enforcing any provision of this Lease, in preserving the Premises
during any period of vacancy, in making such alterations and repairs as Landlord
may reasonably deem necessary or advisable in operating and maintaining the
Premises, and in reletting the Premises, including all reasonable brokerage
commissions therefor, plus (c) either
(1) in the event of Landlord's giving notice of its intention to
re-enter and take possession without terminating this Lease, damages (payable in
monthly installments, in advance, on the first day of each calendar month
following the giving of such notice and continuing until the date originally
fixed herein for the expiration of the then current term of this
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Lease) in amounts equal to the fixed rent and additional rent herein reserved,
less the net amount of fixed rent or additional rent, if any, which may be
collected and received by Landlord from the Premises for and during the balance
of the term hereof; Landlord may relet the Premises, or any part or parts
thereof (but in no event shall Landlord be obligated to do so), for a term or
terms which may at Landlord's option be less than or exceed the period
constituting the balance of the term hereof, and Landlord may grant concessions
or charge a rental in excess of that provided in this Lease (Tenant shall have
no right to any excess but shall remain liable for any deficiency); or
(2) in the event of Landlord's giving notice of termination of
this Lease, an award for liquidated damages under this Lease in an amount which,
at the time of such termination, is equal to the excess, if any, of the
installments of fixed rent and the aggregate of all sums payable hereunder as
additional rent (for such purpose considering the annual amount of such
additional rent to equal the amount thereof payable for the twelve (12) months
immediately preceding such termination, or the annualized portion of additional
rent payable from the commencement date of this Lease to the date of such
termination if this Lease then shall have been in effect for less than twelve
(12) months, reserved hereunder for the period which would otherwise have
constituted the unexpired portion of the then current term of this Lease, plus
the value of all other considerations to be paid or performed by Tenant during
such period, over the fair rental value of the Premises, as of the date of such
termination, for such unexpired portion of the then current term of this Lease;
if the Premises, or any part thereof be relet by Landlord for the unexpired term
of this Lease, or any part thereof, before presentation of proof of such
liquidated damages to any court, commission or tribunal, the amount of rent
reserved upon such reletting shall be deemed to be the fair and reasonable
rental value for the part or the whole of the Premises so relet during the
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term of the reletting; prior to Tenant's full payment of any liquidated damages
awarded to Landlord, Tenant shall continue to pay punctually to Landlord all
fixed rent and additional rent to the same extent and at the same time as if
this Lease had not been terminated and receive full credit for such payments
against the award for liquidated damages.
If Landlord shall elect to re-enter and take possession without terminating this
Lease, Landlord shall have the right at any time thereafter to terminate this
Lease for such previous default, whereupon the provisions of this Section 10.02
with respect to termination will thereafter apply.
SECTION 10.03. Landlord may sue for and collect any amounts which may be
due pursuant to the provisions of Section 10.02 above from time to time as
Landlord may elect, but no such suit shall bar or in any way prejudice the
rights of Landlord to enforce the collection of amounts due at any time or time
thereafter by a like or similar proceeding.
SECTION 10.04. No remedy herein conferred upon or reserved to Landlord
is intended to be exclusive of any other remedy herein, under any other
agreement or document or of by law or in equity; rather, each shall be
cumulative and shall be in addition to every other remedy given hereunder, under
any other agreement or document now or hereafter existing at law or in equity or
by statute. The receipt and acceptance by Landlord of rent with knowledge of the
default by Tenant in any of Tenant's obligations under this Lease shall not be
deemed a waiver by Landlord of such default. Nothing contained in this Lease
shall limit or prejudice the right of Landlord to prove for and obtain in
proceedings for bankruptcy or insolvency an amount equal to the maximum allowed
by any statute or rule of law in effect at the time when, and governing the
proceedings in which, the
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damages are to be proved, whether or not the amount be greater, equal to, or
less than the amount of the loss or damages referred to above.
SECTION 10.05. Should the rights and remedies granted to the Landlord
hereunder be less than those permitted by the provisions of any State or Federal
statute, rule of law or regulation applicable thereto, the rights and remedies
offered to the Landlord hereunder shall be extended and conform with the rights
and remedies granted thereby.
SECTION 10.06. The Tenant, for the Tenant, and on behalf of any and all
persons claiming through or under the Tenant, including creditors of all kinds,
does hereby waive and surrender all right and privilege which they or any of
them might have under or by reason of any present or future law, to redeem the
Premises or to have a continuance of this Lease for the term hereby demised
after being disposed or ejected therefrom by process of law or after the
termination of this Lease as herein provided.
ARTICLE XI
LATE PAYMENT
The Tenant agrees that as a material inducement to the Landlord to enter
into this Lease, it will pay the rent and other charges as herein provided,
promptly on the first day of each and every month or as otherwise in this Lease
provided as to the additional rent and charges as herein provided. Without
waiving any of Landlord's other remedies for failure to pay rent as in this
Lease contained, the Tenant agrees that any rent not paid by the tenth (10th)
day of any month shall require payment by Tenant of a late charge of five cents
($.05) for each dollar of rental payment required, which payment shall be made
in such event by Tenant with the required payment of rent, if late, which
payment in any event shall be made by Tenant upon demand if not otherwise
theretofore paid.
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Anything hereinabove contained to the contrary notwithstanding, it is expressly
understood and agreed that any pattern of consecutive late payment of rent or
other charges as required in this Lease shall be deemed a default pursuant to
the terms and conditions of this Lease, for which the Landlord shall have such
rights or remedies as in this Lease provided.
ARTICLE XII
LANDLORD'S RIGHT TO PERFORM; CUMULATIVE REMEDIES; WAIVERS;
ATTORNEY'S FEES; DEFAULT BY LANDLORD
SECTION 12.01. If the Tenant shall fail to pay any taxes or make any
other payment required to be made under this Lease or shall default in the
performance of any other covenant, agreement, term, provision or condition
herein contained, the Landlord, without being under any obligation to do so and
without thereby waiving such default, may make such payment and/or remedy such
other default for the account and at the expense of the Tenant, immediately and
without notice in the case of emergency, or in any other case only provided the
Tenant shall fail to make such payment or remedy such default with all
reasonable dispatch after the Landlord shall have notified the Tenant in writing
of such default. The Tenant shall reimburse the Landlord for all of the said
payments made for the account of the Tenant, together with interest at the rate
of eighteen (18%) percent per annum, (or the highest lawful rate, whichever is
less) at the time for the payment of the monthly installment of rent next due,
which amount shall be paid by the Tenant to Landlord, as additional rent, in
addition to said monthly installment of rent.
SECTION 12.02. The Landlord may restrain by injunction or otherwise any
breach or threatened breach of any covenant, agreement, term, provision or
condition herein contained, but the mention herein of any particular remedy
shall not preclude the Landlord from any other remedy it
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might have, either in law or in equity. The failure of the Landlord to insist
upon the strict performance of any one of the covenants, agreements, terms,
provisions or conditions of this Lease or to exercise any right, remedy or
election herein contained or permitted by law shall not constitute or be
construed as a waiver or relinquishment for the future of such covenant,
agreement, term, provision, condition, right, remedy or election, but the same
shall continue to remain in full force and effect. Any right or remedy of the
Landlord in this Lease specified or any other right or remedy that the Landlord
may have at law, in equity or otherwise upon breach of any covenant, agreement,
term, provision or condition in this Lease contained upon the part of the Tenant
to be performed, shall be distinct, separate and cumulative rights or remedies
and no one of them whether exercised by the Landlord or not, shall be deemed to
be in exclusion of any other. No covenant, agreement, term, provision or
condition of this Lease shall be deemed to have been waived by the Landlord
unless such waiver be in writing, signed by the Landlord or the Landlord's agent
duly authorized in writing. Receipt or acceptance of rent by the Landlord shall
not be deemed to be a waiver of any default under the covenants, agreements,
terms, provisions and conditions of this Lease, or of any right which the
Landlord may be entitled to exercise under this Lease. No payment by Tenant or
receipt by Landlord of a lesser amount than the rent stipulated in this Lease
shall be deemed to be other than on account of the earliest stipulated rent, nor
shall any endorsement or statement on any check or payment, or any writing
accompanying any check or payment of such rent, be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or purse any other remedy
in this Lease provided. No receipt of money by the Landlord, from any receiver,
trustee or custodian, debtor in possession, or any permitted subtenant, shall
reinstate, continue or extend the term of this Lease or
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affect any notice theretofore given to the Tenant, or to any such receiver,
trustee or custodian, debtor in possession, or any permitted subtenant, or
operate as a waiver or estoppel of the right of the Landlord to recover
possession of the Premises for any of the causes therein enumerated by any
lawful remedy; and the failure of the Landlord to enforce any covenant or
condition by reason of its breach by the Tenant shall not be deemed to void or
affect the right of the Landlord to enforce the same covenant or condition on
the occasion of any subsequent default or breach.
SECTION 12.03. In the event of any default by the Tenant under this
Lease, the Landlord shall be entitled in addition to any other rights and
remedies hereunder, to the reimbursement by the Tenant of all costs and
reasonable attorney's fees incurred by the Landlord in the exercise of its
rights and remedies.
SECTION 12.04. Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after written notice by Tenant to Landlord and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
ARTICLE XIII
QUIET ENJOYMENT; TRANSFER OF LANDLORD'S INTEREST
SECTION 13.01. The Landlord covenants that if and so long as the Tenant
keeps and performs each and every covenant, agreement, term, provision and
condition herein contained on the part and
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on behalf of the Tenant to be kept and performed, the Tenant shall quietly enjoy
the Premises without hindrance or molestation by the Landlord, subject to the
covenants, agreements, terms, provisions and conditions of this Lease.
SECTION 13.02. It is expressly understood and agreed that the term
"Landlord," as used in this Lease, means only the owner for the time being of
the Premises, and in the event of the sale, assignment or transfer by such owner
of its interest in all or part of the Premises, such owner shall thereupon be
released and discharged from all covenants and obligations of the Landlord
thereafter accruing with respect to the portion of the Premises so transferred;
but such covenants and obligations shall be binding upon each new owner for the
time being of the Premises or any part thereof.
ARTICLE XIV
LANDLORD'S RIGHT TO ENTER PREMISES
The Landlord may enter upon the Premises, or any part thereof, for the
purpose of ascertaining the condition of the Premises or whether the Tenant is
observing and performing the obligations assumed by it under this Lease, or for
exhibiting the same to prospective tenants and purchasers all without hindrance
or molestation from the Tenant. Where the Tenant shall fail, after written
notice, to make repairs or perform work required of the Tenant hereunder, the
Landlord shall also have the right to enter upon the Premises for the purpose of
making such repairs or performing such work, in which event the Tenant shall
pay, as additional rent upon demand therefor, the cost of the Landlord of such
repairs and/or such work. The above mentioned rights of entry shall be
exercisable at reasonable times, at reasonable hours and on reasonable notice.
Nothing contained herein, however, shall impose or imply any duty on the part of
the Landlord to make any such repairs
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or perform any such work. Tenant shall permit the usual "To Let" or "For Sale"
signs to be placed by Landlord on the Premises and to remain there without
hinderance or molestation.
ARTICLE XV
SURRENDER BY TENANT AT END OF TERM
SECTION 15.01. Tenant will surrender possession of the Premises and
remove all goods and chattels and other personal property in the possession of
Tenant, by whomsoever owned, at the end of the term of this Lease, or at such
other time as Landlord may be entitled to re-enter and take possession of the
Premises pursuant to any provision of this Lease, and leave the Premises broom
clean and free of occupants and in as good order and condition as they were at
the beginning of the term, reasonable wear and tear excepted, together with all
alterations, additions and improvements in, to or on the Premises made by Tenant
as permitted under the Lease, subject to Landlord's right, under Section 4.08 of
this Lease, to require the Tenant at its cost and expense to remove any
alterations or improvements installed by the Tenant and not permitted or
consented to by the Landlord pursuant to the terms and conditions of the Lease,
so as to restore the Premises to the condition found at the inception of the
Lease term, which covenant by Tenant shall survive the surrender and the
delivery of the Premises as provided hereunder. For purposes of this Article XV,
ordinary wear and tear is deemed not to include conditions created by the Tenant
due specifically to its operation within the Premises, including but not limited
to foreign substances emitted by its machinery and equipment or other conditions
specifically produced by Tenant's operations and use of the Premises. In default
of such surrender of possession and removal of goods and chattels at the time
aforesaid, Tenant will pay to Landlord the rent reserved by the terms of this
Lease for such period as Tenant either holds over possession of the Premises or
allows its goods and chattels or
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other personal property in its possession at such time to remain in the
Premises, and in addition thereto, statutory penalties and all other damages
which Landlord shall suffer by reason of Tenant holding over in violation of the
terms and provisions of this Lease, including all reasonable claims for damages
made by any succeeding tenant or purchaser of the Premises against Landlord
which may be founded upon delay by Landlord in giving possession of the Premises
to such succeeding tenant or purchaser, so far as such damages are occasioned by
the holding over of Tenant.
SECTION 15.02. In the event Tenant fails to remove all goods and
chattels and other personal property in possession of Tenant, by whomsoever
owned, at the end of the term of this Lease, or at such other time as Landlord
may be entitled to re-enter and take possession of the Premises pursuant to any
provision of this Lease, Tenant hereby irrevocably makes, constitutes and
appoints Landlord as the agent and attorney-in-fact of Tenant to remove all
goods and chattels and other personal property, by whomsoever owned, from the
Premises to a reasonably safe place of storage, such moving and storage to be at
the sole cost and expense of Tenant, and Tenant covenants and agrees to
reimburse and pay to Landlord all expenses which Landlord incurs for the removal
and storage of all such goods and chattels. Alternatively, at the option of
Landlord, Tenant shall be deemed to have abandoned such goods, chattels and
other personal property and the same shall become the property of Landlord. The
provisions of this Section 15.02 shall survive the termination of this Lease.
SECTION 15.03. Upon any surrender of the Premises by Tenant, at the end
of the term of this Lease or at such other time as Landlord may be entitled to
re-enter and take possession of the Premises pursuant to any provision of this
Lease, Tenant shall fully comply with ECRA, or any successor or similar statute,
and the regulations then in effect thereunder, and complete any
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environmental and pollution cleanup plan required, and produce evidence thereof
to the Landlord. No surrender shall be deemed to have occurred and the term of
this Lease shall continue (or if such term has expired, the Tenant shall be
deemed to be a hold-over tenant) until such time as Tenant has fully complied
with ECRA, or any successor or similar statute, and the regulations then in
effect thereunder, and all applicable clean-up plans, and provide evidence
thereof, and Tenant will pay Landlord the rent reserved by the terms of this
Lease until such compliance has occurred, and in addition thereto, statutory
penalties and all other damages which Landlord shall suffer by reason of Tenant
holding over in violation of the terms and provisions of this Lease, including
all reasonable claims for damages made by any succeeding tenant or purchaser of
the Premises against Landlord which may be founded upon delay by Landlord in
giving possession of the Premises to such succeeding tenant or purchaser, so far
as such damages are occasioned by the holding over of Tenant. The provisions of
this Section 15.03 shall survive the termination of this Lease.
SECTION 15.04. Neither acceptance of the keys nor any other act or thing
done by Landlord or any agent or employee of Landlord shall be deemed an
acceptance of the surrender of the Premises unless Landlord shall execute a
written release of Tenant. Tenant's liability hereunder shall not be terminated
by the execution by Landlord of a new lease of the Premises.
ARTICLE XVI
SECURITY DEPOSIT
The Tenant has this day deposited with the Landlord the sum of
FORTY-EIGHT THOUSAND ($48,000) DOLLARS as security for the payment of the rent
hereunder and the full and faithful performance by the Tenant of the covenants
and conditions on the part of the Tenant to be performed. Said sum shall be
returned to the Tenant, without interest, after the expiration of the
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term hereof, provided that the Tenant has fully and faithfully performed all
such covenants and conditions (including but not limited to ECRA, or any
successor or similar statute, and the regulations then issued thereunder, and
any required environmental or pollution clean-up plans) and is not in arrears in
rent. During the term hereof, the Landlord may, if the Landlord so elects, have
recourse to such security, to make good any default by the Tenant, in which
event the Tenant shall, on demand, promptly restore said security to its
original amount. It is expressly understood and agreed that the Landlord shall
have the right to co-mingle the security deposit with its general funds and said
security shall not be required to be segregated. The Landlord shall assign or
transfer said security, for the benefit of the Tenant, to any subsequent owner
or holder of the reversion or title to the Premises, in which case the assignee
shall become liable for the repayment thereof as herein provided, and the
assignor shall be deemed to be released by the Tenant from all liability to
return such security. This provision shall be applicable to every alienation or
change in title and shall in no way be deemed to permit the Landlord to retain
the security after termination of the Landlord's ownership of the reversion or
title. The Tenant shall not mortgage, encumber or assign said security without
the written consent of the Landlord.
ARTICLE XVII
SUBORDINATION
SECTION 17.01. This Lease shall be subject and subordinate at all times
to the lien of any mortgages or ground rents or other encumbrances now or
hereafter placed on the Premises without the necessity of any further instrument
or act on the part of Tenant to effectuate such subordination, but Tenant
covenants and agrees to execute and deliver upon demand such further instrument
or instruments evidencing such subordination of this Lease to the lien of any
such mortgage or ground
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rent or other encumbrances as shall be desired by a mortgagee or proposed
mortgagee or by any person. Tenant hereby irrevocably appoints Landlord the
attorney-in-fact of the Tenant to execute and deliver any such instrument or
instruments for and in the name of Tenant.
SECTION 17.02. The foregoing provisions of this Article XVII shall be
effective only in the event that any such mortgagee or holder of other
encumbrance provides, or the holder thereof agrees with Tenant, as follows:
(a) That this Lease is and shall be subject and subordinate to the
mortgage insofar as it affects the Premises, and to all
renewals, modifications, consolidations, replacements and
extensions thereof, to the full extent of the principal sum
secured thereby and interest thereon.
(b) That in the event it should become necessary to foreclose the
mortgage, the mortgagee thereunder will not join the tenant in
summary or foreclosure proceedings so long as the Tenant is not
in default under any of the terms, covenants, or conditions of
this Lease.
(c) That in the event the mortgagee shall, in accordance with the
foregoing, succeed to the interest of the Landlord under this
Lease, the mortgagee agrees to be bound to the Tenant under all
of the terms, covenants and conditions of this Lease, and the
Tenant agrees, from and after such event, to attorn to the
mortgagee and/or purchaser at any foreclosure sale of the
Premises, all rights and obligations under this Lease to
continue as though the interest of Landlord had not terminated
or such foreclosure proceedings had not been brought, and the
Tenant shall have the same remedies against the mortgagee for
the breach of an agreement contained in this Lease that the
Tenant might have had under this Lease against the Landlord if
the mortgagee had not succeeded to the interest of the Landlord;
provided, however, that the mortgagee shall not be
(i) liable for any act or omission of any prior Landlord; or
(ii) subject to any offsets or defenses which the Tenant may
have against the Landlord; or
(iii) bound by any rent or additional rent which the Tenant
might have paid for more than the current month to any
prior Landlord; or
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(iv) bound by any amendment or modification of this Lease
made after the date of the mortgage, without its
consent; or
(v) obligated for the return of any security not otherwise
in the possession of the mortgagee.
ARTICLE XVIII
CERTIFICATES
SECTION 18.01. Landlord and Tenant shall, at any time and from time to
time, within ten (10) business days following notice by the other party,
execute, acknowledge and deliver to the other party which gave such notice, a
statement in writing certifying that this Lease is unmodified and in full force
and effect, or if there shall have been any modifications stating the same, and
the date to which all rent has been paid in advance hereunder, and whether or
not, to the best knowledge of the signer of such certificate, the other party is
in default hereunder, and, if so, specifying such default; it being intended
that any such statement delivered pursuant to this Article may be relied upon as
to the facts contained therein.
SECTION 18.02. Tenant's failure to deliver the statement referred to in
Section 18.01 within such time shall be conclusive upon Tenant (a) that this
Lease is in full force and effect, without modification except as may be
represented by Landlord, (b) that there are no uncured defaults in Landlord's
performance, and (c) that not more than one (1) month's rent has been paid in
advance, or such failure may be considered by Landlord as a default by Tenant
under this Lease.
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ARTICLE XIX
WAIVER OF LANDLORD'S LIABILITY
Notwithstanding any provision to the contrary, Tenant shall look solely
to the equity of Landlord in and to the portion of the Premises then owned by
Landlord or, if there shall be any ground or underlying lease, the equity of
Landlord in and to the leasehold interest of Landlord under such ground or
underlying lease, in the event of a breach or default by Landlord pursuant to
the provisions of this Lease, and Tenant agrees that the liability of Landlord
under this Lease shall not exceed the value of such equity of Landlord in the
Premises or in said leasehold interest, as the case may be. No other properties
or assets of Landlord shall be subject to levy, execution or other enforcement
procedures for the satisfaction of any judgment (or other judicial process)
arising out of, or in connection with, this Lease; and if Tenant shall acquire a
lien on any such other properties or assets by judgment or otherwise, Tenant
shall promptly release such lien on such other properties and assets by
executing, acknowledging and delivering to Landlord an instrument to that effect
prepared by Landlord's attorneys.
ARTICLE XX
BROKER
The parties hereto acknowledge that no broker was utilized in connection
with this Lease. Tenant and Landlord mutually agree to indemnify and hold each
other harmless from and against any claim by any broker with whom he has dealt
for any commission, finder's fee or other compensation in connection with this
Lease.
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ARTICLE XXI
WAIVER OF DISTRAINT
Landlord hereby expressly waives any and all rights granted by or under
any present or future laws to distrain for rent upon the goods, fixtures,
furniture and equipment of Tenant in the Premises, and Landlord waives any right
it may have to assert similar liens which may now or hereafter be granted to it
for rent.
ARTICLE XXII
COVENANT OF FURTHER ASSURANCES
SECTION 22.01. If, in connection with obtaining financing for the
improvements on the Premises, an institutional lender shall request reasonable
modifications in this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not in Tenant's reasonable judgment increase the obligations of
Tenant hereunder or materially adversely affect the leasehold interest hereby
created or Tenant's use and enjoyment of the Premises.
SECTION 22.02. As a condition of this Lease, Tenant agrees to deliver to
Landlord a satisfactory certified current financial statement and balance sheet
on which Landlord may rely as to the present financial status of Tenant, to be
utilized by Landlord in connection with Landlord's financial requirements.
Tenant, upon Landlord's request, shall provide annual financial statements
during the term of this Lease and any renewals thereof.
SECTION 22.03. Tenant agrees that if requested by Landlord at any time
during the term of this Lease, it will execute, deliver and acknowledge any
forms, affidavits or other documents required in order for Landlord br Tenant to
comply with ECRA or any successor or similar statute,
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or the regulations now or hereafter issued thereunder, and complete any
environmental or pollution clean-up plan required in connection therewith.
ARTICLE XXIII
RULES AND REGULATIONS
Landlord shall have the right to promulgate reasonable rules and
regulations applicable to all tenants at the Premises from time to time, which
rules and regulations shall be deemed covenants of this Lease to be undertaken
by Tenant.
ARTICLE XXIV
MEMORANDUM OF LEASE
It is understood between the parties hereto that this Lease will not be
recorded, but Landlord agrees, at Tenant's written request to execute and
acknowledge a Memorandum of Lease, describing the Premises, giving the term of
this Lease, and referring to this Lease, and making particular mention of the
special clauses herein contained, which Memorandum of Lease will be recorded in
accordance with the laws governing and regulating the recording of such
documents in the State of New Jersey. It is understood that such Memorandum of
Lease is for the purpose of recording only and is not intended and shall not in
any way modify, amend, supersede or otherwise affect this Lease.
ARTICLE XXV
NOTICES
All notices, demands, requests or other communications which may be or
are required to be given, served or sent by either party to the other shall be
in writing and shall be deemed to have been given properly if hand-delivered or
mailed by registered or certified mail, return receipt requested,
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to the addresses of the parties heretofore set forth or to such address as a
party shall notify the other in like manner.
ARTICLE XXVI
FORCE MAJEURE
Except for the obligation of the Tenant to pay rent and other charges as
in this Lease provided, the period of time during which the Landlord or Tenant
is prevented from performing any act required to be performed under this Lease
by reason of fire, catastrophe, strikes, lockouts, civil commotion, acts of God
or the public enemy, government prohibitions or preemptions, embargoes,
inability to obtain material or labor by reason of governmental regulations or
prohibitions, the act or default of the other party, or other events beyond the
reasonable control of Landlord or Tenant, as the case may be, shall be added to
the time for performance of such act.
ARTICLE XXVII
COVENANTS AND CONDITIONS
All of the terms and provisions of this Lease shall be deemed and
construed to be "covenants" and "conditions" to be performed by the respective
parties as though words specifically expressing or importing covenants and
conditions were used in each separate term and provision hereof.
ARTICLE XXVIII
WAIVER OF TRIAL BY JURY
Landlord and Tenant hereby mutually waive their rights to trial by jury
in any action, proceeding or counter claim brought by either of the parties
hereto against the other on any matters
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whatsoever arising out of or in any way connected with this Lease, Tenant's use
or occupancy of the Premises, and any claim of injury or damage.
ARTICLE XXIX
ENTIRE AGREEMENT
This Lease contains the entire agreement between the parties and shall
not be modified in any manner except by an instrument in writing executed by the
parties.
ARTICLE XXX
ARTICLE HEADINGS
The article headings in this Lease Agreement are for convenience of
reference only and shall not be deemed to define, limit, or describe the scope
and intent of this Agreement, or alter or affect any provisions.
ARTICLE XXXI
COVENANTS BINDING
The covenants, agreements, terms, provisions and conditions of this
Lease shall be binding upon and inure to the benefit of the heirs, legal
representatives, successors and assigns of the Landlord and, except as otherwise
provided herein, the heirs, legal representatives, successors and assigns of the
Tenant.
ARTICLE XXXII
SITUS
This Lease shall be interpreted and construed in accordance with, and
the rights of the parties hereto shall be determined by, the Laws of the State
of New Jersey.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals, or caused these presents to be signed by their proper corporate officers
and their proper corporate seal to be hereto affixed, the day and year first
above written.
WITNESS: MOUNTAIN BOULEVARD ASSOCIATES III
By: /s/ ANTHONY SARTOR
Anthony Sartor, Partner
ATTEST: PAULUS, SOKOLOWSKI & SARTOR, INC.
By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr., President
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STATE OF NEW JERSEY )
SS.
COUNTY OF SOMERSET )
BE IT REMEMBERED, that on this 10th day of December, 1986, before me,
the subscriber, personally appeared Anthony Sartor who, being by me duly swore
on his oath, deposes and makes proof to my satisfaction, that he is the
Secretary of PAULUS, SOKOLOWSKI & SARTOR, INC., the Corporation named in the
within Instrument, that WILLIAM PAULUS, JR. is the President of said
Corporation; that the execution, as well as the making of this Instrument, has
been duly authorized by a proper resolution of the Board of Directors of the
said Corporation; that deponent well knows the corporate seal and was thereto
affixed and said Instrument signed and delivered by said President as and for
the voluntary act and deed of said Corporation, in presence of deponent, who
thereupon subscribed his name thereto as attesting witness.
Sworn to and subscribed before me, the date aforesaid.
/s/ LORRAINE E. COLEMAN
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STATE OF NEW JERSEY )
SS.
COUNTY OF SOMERSET )
BE IT REMEMBERED, that on this 10th day of December, 1986, before me,
the subscriber, personally appeared Anthony Sartor, a partner of MOUNTAIN
BOULEVARD ASSOCIATES, III, a New Jersey partnership, who, I am satisfied, is the
person named in and who executed the within Instrument, and thereupon he
acknowledged that he signed and delivered the same as the act and deed of said
partnership, for the uses and purposes therein expressed.
/s/ LORRAINE E. COLEMAN
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LEASE MODIFICATION
This Lease Modification is dated as of December 31, 1995 between
MOUNTAIN BOULEVARD ASSOCIATES III, a partnership, having its principal place of
business at 67A Mountain Boulevard Extension, Warren, New Jersey 07059
(hereinafter called "Lessor") and PAULUS SOKOLOWSKI & SARTOR, INC., a New Jersey
corporation, having its principal place of business at 67A Mountain Boulevard
Extension, Warren, New Jersey 07059 (hereinafter called "Lessee").
WHEREAS, Lessor and Lessee entered into a lease dated December 29, 1986
(the "Lease") for certain premises located in the building known and designated
as 67B Mountain Boulevard Extension, Warren, New Jersey 07059 (the "Leased
Premises"); and
WHEREAS, Lessor and Lessee desire to modify the terms of the Lease as
provided for herein.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Lessor and Lessee agree as follows:
1. RENT.
A. Commencing as of January 1, 1996 through and including
December 31, 1996, the base rent for the Leased Premises shall be $603,900.00
per year ("Annual Minimum Rent"), payable in equal monthly installments of
$50,325.00 per month.
B. Commencing as of January 1, 1997 through the end of the term,
the annual base rent for the Leased Premises shall be the greater of the annual
base rent for the immediate preceding twelve (12) months or the adjusted amount
as calculated in subparagraph (c) below. In
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no event, however, shall there be a decrease in the annual base rent as
established for the immediate preceding twelve (12) months.
C. The adjusted Annual Minimum Rent shall be determined by
applying fluctuations in the Consumer Price Index to the Annual Minimum Rent as
follows:
(i) The Consumer Price Index for purposes of this Lease
shall be the Consumer Price Index for All Urban Consumers published by the
Bureau of Labor Statistics of the United States Department of Labor, New York -
Northeastern New Jersey Area, Housing Component (1982-84=100). If the Consumer
Price Index ceases to be published by the United States Department of Labor,
Bureau of Statistics, then the calculation shall be based on the closest
successor index identified by the United States Department of Labor. If no such
successor exists, the calculation shall be based on an index that is mutually
agreed between Landlord and Tenant.
(ii) The Base Date shall be January, 1996. (iii) The
Adjusted Annual Minimum Rent shall be determined by
multiplying the Annual Minimum Rent by a fraction, the numerator of which shall
be the Consumer Price Index for the month of January, 1997 and each January of
every lease year thereafter, and the denominator of which shall be the Consumer
Price Index for the Base Date. The resulting sum, if greater than the annual
base rent for the immediate preceding twelve (12) months, shall be the Adjusted
Annual Minimum Rent for the next succeeding year payable in twelve (12) equal
monthly installments, commencing in January of that applicable year which
follows the period for which the most recent changes in the Consumer Price Index
have been calculated.
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(iv) Since the rent payment for at least the first month
after each rent adjustment, will have been paid prior to the determination of
the applicable rent increase for those years, any increase from months already
elapsed and subject to determination by application of the formula shall then be
added to the next monthly rent payment due and payable, upon determination of
the required monthly rental to be paid for such applicable period.
(v) If the base year (1982-84=100) hereinabove referred to
with respect to the Index shall be changed after the execution of this Lease
Modification, appropriate adjustments based on such new Index shall be made so
as to have a proper application of the cost of living formula.
2. UTILITIES. Lessee shall pay the cost of all potable water, sanitary
sewage, natural gas and electric utility charges to the Leased Premises during
the term of the Lease.
3. TAXES. The term "Base Tax Year" shall mean the calendar year 1996.
From the period between January 1, 1997 through and including the end of the
term hereof, Lessee shall pay to Lessor the amount by which (i) the annual real
estate taxes which are levied or assessed against the premises at 67A Mountain
Boulevard Extension during said period exceed (ii) the real estate taxes levied
or assessed against said premises for the Base Tax Year. Any amount due to
Lessor under the provisions of this paragraph 3 shall be paid upon rendition of
a bill therefor, and Lessor shall, at the time of the rendition of such bill,
submit to Lessee the bill received from the taxing authorities or a photostat
thereof. Lessee shall also pay and discharge all assessments against the
premises at 67A Mountain Boulevard Extension during said period.
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4. Except as modified and provided herein, all terms and conditions of
the Lease and any existing amendments or extensions thereto, shall remain in
full force and effect and shall be binding upon the parties.
5. This Lease Modification shall be binding upon Lessor and Lessee and
their respective heirs, successors, executors, administrators and assigns.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and
seals as of the date first set forth above.
LESSOR:
WITNESS: MOUNTAIN BOULEVARD ASSOCIATES III
/s/ DOROTHY H. SNYDER By: /s/ PHILIP A. FALCONE
Philip A. Falcone, General Partner
By: /s/ DAVID ANTES
David Antes, General Partner
By: /s/ LOIS PAULUS
Lois Paulus, General Partner
By: /s/ ANTHONY SARTOR
Anthony Sartor, General Partner
LESSEE:
ATTEST: PAULUS, SOKOLOWSKI & SARTOR, INC.
/s/ DOROTHY H. SNYDER By: /s/ WILLIAM PAULUS, JR.
William Paulus, Jr., President
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SECOND MODIFICATION TO LEASE AGREEMENT
This Second Modification to Lease Agreement (the "AMENDMENT") is made
and entered into by and between MOUNTAIN BOULEVARD ASSOCIATES III, a
____________________ partnership ("LESSOR"), and PAULUS, SOKOLOWSKI & SARTOR,
INC., a New Jersey corporation ("LESSEE").
WHEREAS, Lessor and Lessee entered into that certain Lease Agreement
(the "LEASE") with an effective date of December 29, 1986, for the lease of
certain office space located at 67B Mountain Boulevard Extension, Warren, New
Jersey (the "LEASED PREMISES"), more particularly described in the Lease; and
WHEREAS, Lessor and Lessee entered into that certain Lease Modification
(the "FIRST AMENDMENT") dated effective December 31, 1995, which First Amendment
adjusted certain rental terms (hereinafter the term "LEASE" shall mean the Lease
as amended by the First Amendment); and
WHEREAS, Lessor and Lessee desire to further amend the Lease as herein
provided.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby amend the Lease as follows:
1. LEASE TERM. The term of the Lease is hereby amended to terminate ten
years after the date hereof.
2. NO OTHER MODIFICATIONS. Except as expressly amended and modified
hereby, all of the covenants and conditions of the Lease as amended by this
Amendment are ratified and confirmed by Lessor and Lessee.
3. DEFINED TERMS. All terms, definitions and dates contained in the
Lease shall have the same meaning and application in this Amendment except to
the extent there is a conflict, in which event, the terms of this Amendment
shall control.
4. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
EXECUTED effective the ____ day of __________, 1998.
LESSOR:
MOUNTAIN BOULEVARD ASSOCIATES III
By:
Philip A. Falcone, General Partner
By:
David Antes, General Partner
By:
Lois Paulus, General Partner
By:
Anthony Sartor, General Partner
LESSEE:
PAULUS, SOKOLOWSKI & SARTOR, INC.
By:
William Paulus, Jr., President
-2-
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
June 1, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN & CO.
Al Khobar, Saudi Arabia
June 1, 1998
