<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1998.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
GENERAL ROOFING SERVICES, INC.
(Exact name of registrant as specified in its charter)
-----------------------------------
<TABLE>
<S> <C> <C>
FLORIDA 1761 65-0836979
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
951 SOUTH ANDREWS AVENUE
POMPANO BEACH, FLORIDA 33069
(954) 942-3550
(Address, including zip code, and
telephone number, including area
code, of registrant's principal
executive offices)
GREGG E. WALLICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENERAL ROOFING SERVICES, INC.
951 SOUTH ANDREWS AVENUE
POMPANO BEACH, FLORIDA 33069
(954) 942-3550
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
ANDREW HULSH, ESQ. JEFFREY M. STEIN, ESQ.
BAKER & MCKENZIE KING & SPALDING
701 BRICKELL AVENUE, SUITE 1600 191 PEACHTREE STREET, N.E.
MIAMI, FLORIDA 33131 ATLANTA, GEORGIA 30303
(305) 789-8900 (404) 572-4600
Approximate date of commencement of proposed sale to the public: AS PROMPTLY
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, please 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. [ ]
--------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share........ $69,000,000 $20,355
==================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
---------------------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION DATED MAY 27, 1998
4,000,000 SHARES
GRS(TM)
GENERAL ROOFING SERVICES, INC.
Common Stock
---------------------
All of the 4,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by General
Roofing Services, Inc. ("GRS" or the "Company").
Prior to the Offering there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price will be
between $13.00 and $15.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price of the
Common Stock. The Company has applied for quotation of the Common Stock on the
Nasdaq Stock Market under the symbol "ROOF."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........... $ $ $
Total(3)............ $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to prior sale when, as and if received and accepted by the
Underwriters, subject to their right to reject orders, in whole or in part, and
to certain other conditions. It is expected that delivery of the certificates
will be made against payment therefor at the office of The Robinson-Humphrey
Company, LLC, Atlanta, Georgia, on or about 1998.
THE ROBINSON-HUMPHREY COMPANY
BANCAMERICA ROBERTSON STEPHENS
, 1998
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.
<PAGE> 3
[Map of United States indicating GRS locations]
"GRS," "General Roofing Services" and its logo are service marks of the Company
for which federal service mark registration has been applied. All other service
marks, trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
--------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the related notes thereto, appearing elsewhere
in this Prospectus. Concurrently with, and as a condition to, the Offering, the
Company plans to acquire (the "Combination") 18 companies (the "Founding
Companies"). Unless the context otherwise requires, (i) the "Company" or "GRS"
refers to General Roofing Services, Inc. and the Founding Companies, and assumes
that the Combination has been consummated and (ii) the information in this
Prospectus assumes that the Underwriters' over-allotment option has not been
exercised.
THE COMPANY
General Roofing Services, Inc. (the "Company" or "GRS") was founded in
1998 to become the leading nationwide provider of commercial roofing services.
Concurrently with, and as a condition to, the Offering, GRS plans to acquire 18
leading commercial roofing companies (the "Founding Companies"). The Founding
Companies, which have been in business for an average of approximately 28 years,
had pro forma combined 1997 revenues and income from operations of approximately
$195.9 million and $13.4 million, respectively. Following the Combination and
the Offering, the Company will have operations in 20 cities in 12 states, and
will be one of the largest providers of commercial roofing services in the
United States. Combined historical revenues of the Founding Companies grew at a
compound annual growth rate of 14.7 % from 1995 through 1997. Management
believes that the Company will have certain competitive advantages as the first
public company seeking to consolidate the commercial roofing industry.
The Company offers a broad range of comprehensive roofing services,
which include re-roofing, restoration and repair, and new roof construction.
Approximately 65% of the Company's 1997 pro forma revenues were derived from
re-roofing, restoration and repair services, and 35% were derived from new roof
construction. The Company also offers maintenance services, which provide
recurring revenues and on-going interaction with its customers. The Company
provides services to customers in a broad range of industries, including the
industrial, office, retail, hospitality, government, educational and
entertainment industries. The Company has performed services for a broad range
of companies, including Home Depot, Inc., The Walt Disney Company, United States
Postal Service, NationsBank, N.A., Bass Hotels & Resorts (Holiday Inn Hotels),
Sea World, AMC Entertainment Inc., General Motors Corporation, Rockwell
International Corp., Ford Motor Company, Chrysler Corporation, The Coca-Cola
Company, U.S. Army, U.S. Navy, Simon DeBartolo Group, Inc., Wal Mart Stores,
Inc., Sears Roebuck & Company, Abbott Laboratories, Inc., Trammel Crow Company,
Arvida Company, Cushman & Wakefield, Inc., Columbia/HCA Healthcare Corporation,
and University of Michigan.
The Company believes that its size, geographic diversity of operations,
knowledge of local markets and industry relationships will give the Company
significant competitive advantages. Through increased size, the Company believes
that it will have a greater ability to (i) provide services to customers with
locations in multiple markets, (ii) more effectively allocate resources in
serving customers in each of its markets, (iii) attract, train and retain
skilled roofing labor and (iv) achieve economies of scale in the purchase of
roofing materials. The Company also believes that increased size will provide
operating and cost efficiencies by performing a wide range of functions on a
centralized basis, including administrative functions, such as those relating to
human resources, employee benefits and insurance, as well as purchasing,
accounting and bonding. The Company intends to share best practices among the
Founding Companies and with other companies to be acquired. The Company believes
that the geographic diversity of its operations will diminish the effects of
local market downturns, offer opportunities to pursue growth in its existing
markets and create a base of expertise and relationships to expand into new
markets. In anticipation of the Combination, one of the Founding Companies has
made a substantial investment in a scalable, advanced enterprise information
system to be utilized by the Company, which provides critical project status and
cost information to all employees on a daily basis and provides management with
comprehensive reports on substantially all aspects of the Company's operations.
The Company plans to leverage its experienced management and extensive
relationships within the commercial roofing industry to increase its revenues
through internal growth as well as through the
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<PAGE> 5
acquisition of additional commercial roofing companies. The Company has
extensive relationships within the industry, in part through the Founding
Companies that are all members of the National Roofing Contractor's Association
(the "NRCA"), the largest roofing trade organization with approximately 3,200
commercial roofing companies as members. Gregg E. Wallick, the Company's
President and Chief Executive Officer, with more than 18 years of experience in
the commercial roofing industry, is a member of the Board of Directors of the
NRCA. Mr. Wallick is also a member of the Board of Governors of the Alliance for
Progress and is a member of its Steering Committee. The Alliance for Progress is
an industry organization that invests funds contributed by its membership in
certain programs, such as special training programs, for the benefit of the
roofing industry and the organization's membership.
According to a market survey conducted by the NRCA, total expenditures
for roofing services in the United States in 1997 were approximately $20.0
billion, of which approximately $14.5 billion were for commercial roofing
services. The roofing industry is highly fragmented, and is estimated to be
comprised of more than 25,000 companies, most of which are small,
owner-operated, independent contractors serving a local customer base, with
limited access to capital for investment in infrastructure, technology and
expansion. The Company believes that no single company accounted for more than
1% of total expenditures for roofing services in the United States. According to
the market survey conducted by the NRCA, approximately 75% of roofing
expenditures in 1997 were attributable to re-roofing, restoration and repair,
with the balance attributable to new roof construction.
The Company believes that its business strategy will enable it to
continue its growth in existing markets and, together with its relative size and
recognition within the industry, enable it to achieve its goal of maintaining
and expanding its position as the leading national provider of commercial
roofing services. Key elements of the Company's strategy are to:
Focus on Commercial Roofing Market. The Company intends to
continue to focus on the commercial roofing market because of its size,
the magnitude of individual projects, the diverse and multiple location
customer base, the trend of consolidation in commercial real estate,
recurring revenue opportunities and the potential for long-term
relationships with companies, building owners, property managers,
general contractors and roof consultants.
Establish Regional and National Market Coverage. The Company
believes that the growth of many of the Founding Companies has been
restricted due to the geographic limitations of their existing
operations and that the Company's broad geographic coverage will
increase internal growth opportunities. The Company intends to leverage
its geographic diversity to solicit additional business from existing
customers and new business from new customers that operate on a
regional and national basis, such as real estate investment trusts
("REITs"), contractors, owners of national chains and roof consultants.
The Company believes that significant demand exists from such companies
to utilize the services of a single commercial roofing service provider
and that existing local and regional relationships can be expanded as
the Company develops a nationwide network.
Expand Maintenance Services. The Company intends to further
develop its maintenance service operations, which generally provide
higher gross margins, recurring revenues and ongoing interaction with
customers. The Company has adopted a maintenance-oriented approach,
whereby it performs regularly scheduled maintenance checks and focuses
on increasing customer awareness of the cost-effectiveness of
preventive maintenance and the available repair and restoration
services that can most efficiently prolong the life of a roof. The
Company believes that this approach builds long-term relationships with
customers and encourages them to turn to the Company for all of their
roofing needs.
Apply Certain Functions and Technology to Achieve Operating
and Cost Efficiencies. The Company believes that it will achieve
operating and cost efficiencies by performing a wide range of functions
on a centralized basis, including administrative functions, such as
those relating to human resources, employee benefits and insurance, as
well as purchasing, accounting and bonding. The Company also intends to
leverage its proprietary scalable, advanced enterprise information
system, which will provide management on a daily basis with information
regarding
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<PAGE> 6
project estimates, materials and labor cost, accounts receivable and
accounts payable tracking, project progress and sales, as well as
comprehensive reports on substantially all aspects of the Company's
operations. Management believes that this system, which was developed
by one of the Founding Companies over a five-year period, will provide
the Company with significant competitive advantages through more
accurate job estimates, enhanced cost awareness and uniform control
procedures through the timely flow of comprehensive project
information. Management believes that this advanced enterprise
information system will be fully implemented and accessible on a
Company-wide basis by the end of 1999.
Adopt Best Practices. The Company believes that it will be
able to increase operating efficiencies and enhance internal growth by
identifying and incorporating the operational and marketing strengths
of individual Founding Companies. The Company intends to institute a
"best practices" program, which will evaluate and implement on a
Company-wide basis selected policies, practices and procedures of the
Founding Companies and other companies to be acquired, with the goal of
maximizing service levels and profitability. In order to ensure that
best practices are shared among each of the individual Founding
Companies, the Company has created a Presidents' Council composed of
the president or senior executive of each of the Founding Companies.
The Council has begun meeting on a regular basis as a group and through
smaller working committees, to share operating practices and to develop
additional methods to improve the overall performance of the Company
and the individual operating companies.
Operate on a Decentralized Basis. The Company believes that,
while maintaining strong operating and financial controls, a
decentralized operating structure will retain the entrepreneurial
spirit present in each of the Founding Companies. The Company's
decentralized operating structure will allow it to capitalize on the
considerable local and regional market knowledge and customer
relationships possessed by each Founding Company, as well as by
companies that may be acquired in the future.
Grow through Acquisitions. The Company believes that, due to
the highly fragmented nature of the commercial roofing industry, it has
significant opportunities to pursue an acquisition strategy and expand
in targeted geographic markets. The Company intends to focus on
acquiring profitable companies with an established customer base and a
reputation for quality that will serve as a platform for the
acquisition and integration of smaller companies. The Company will also
seek to acquire companies with entrepreneurial management philosophies
and a willingness to learn and share improved business practices
through open communication. The Company believes that many commercial
roofing businesses that lack the capital necessary to expand operations
will become acquisition candidates. The Company believes that it will
be attractive to these acquisition candidates because it will provide
(i) information on best practices, (ii) expertise to expand in
specialized markets, (iii) the opportunity to focus on customers rather
than administration, (iv) national name recognition, (v) increased
financial flexibility, (vi) existing management the opportunity for a
continued role with the Company and (vii) the opportunity to provide
services to the Company's customers in their respective geographic
markets. All of the Founding Companies participate in professional
associations, including the NRCA. The Company intends to capitalize on
the relationships created within these professional associations and
the combined industry reputation of the Founding Companies to pursue
its acquisition strategy. Through these and other resources, the
Company believes it will be able to identify and attract acquisition
candidates who meet the Company's criteria.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered ..................................... 4,000,000 Shares
Common Stock to be Outstanding after the Offering(1)...... 10,258,667 Shares
Use of Proceeds........................................... To fund the cash
portion of the
purchase price for
the Founding
Companies, to repay
certain outstanding
indebtedness of the
Founding Companies
and for other
general corporate
purposes, including
working capital and
future acquisitions.
See "Use of
Proceeds."
Proposed Nasdaq Symbol.................................... ROOF
</TABLE>
- -------------
(1) Includes 6,258,667 shares to be issued in connection with the acquisition of
the Founding Companies concurrently with the Offering, but excludes 282,222
shares of Common Stock reserved for issuance upon the exercise of stock
options and warrants to be issued to holders of options and warrants of
certain of the Founding Companies in the Combination. In addition,
immediately following the Offering the Company will grant approximately
560,000 options to employees and directors of the Company pursuant to the
Company's 1998 Stock Option and Restricted Stock Purchase Plan. See
"Management -- 1998 Stock Option and Restricted Stock Purchase Plan."
6
<PAGE> 8
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
General Roofing Services, Inc. will acquire the Founding Companies
concurrently with and as a condition to the consummation of the Offering. For
financial statement presentation purposes, General Roofing Industries ("GRI")
has been identified as the "accounting acquirer," and the financial statements
of GRI will be regarded as the historical financial statements of the Company.
The following summary unaudited pro forma combined financial data present
certain data for the Company, as adjusted for (i) the effects of the
Combination, (ii) the effects of certain other pro forma adjustments to
historical financial statements and (iii) the consummation of the Offering and
the application of the net proceeds therefrom. The unaudited pro forma combined
income statement data assume that the Combination, the Offering and related
transactions were consummated on January 1, 1997 and are not necessarily
indicative of the results that the Company would have obtained had these events
actually occurred at that date or indicative of the Company's future results.
During the periods presented below, the Founding Companies were not under common
control or common management, and therefore, the data presented may not be
comparable to or indicative of post-combination results to be achieved by the
Company. The unaudited pro forma combined income statement data are based on
preliminary estimates, available information and certain assumptions that
Company management deems appropriate. The unaudited pro forma combined financial
data should be read in conjunction with the other financial information included
elsewhere in this Prospectus. See "Selected Financial Data," the Unaudited Pro
Forma Combined Financial Statements and notes thereto, and the historical
financial statements for the Founding Companies and the notes thereto, all
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED (1)
----------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues ............................................ $ 195,909 $ 39,584
Cost of Revenues .................................... 153,390 31,701
------------ ------------
Gross Profit ........................................ 42,519 7,883
Selling, General and Administrative Expenses (2) .... 27,497 7,742
Goodwill Amortization (3) ........................... 1,607 402
------------ ------------
Income (Loss) from Operations ....................... 13,415 (261)
Interest and Other Income (Expense), net (4) ........ (499) (126)
------------ ------------
Income (Loss) Before Income Taxes (5) ............... 12,916 (387)
Provision for Income Taxes .......................... (5,664) (7)
------------ ------------
Net Income (Loss) ................................... $ 7,252 $ (394)
============ ============
Basic Earnings (Loss) Per Share ..................... $ 0.71 $ (0.04)
============ ============
Shares Used in Computing Pro Forma Income
(Loss) Per Share (6) .............................. 10,258,667 10,258,667
============ ============
</TABLE>
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<TABLE>
<CAPTION>
PRO FORMA
AS OF MARCH 31, 1998
--------------------
COMBINED AS
COMBINED ADJUSTED (7)
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA: (8)
Working Capital (Deficiency) (4) ............... $ (22,797)(9) $ 19,639
Total assets ................................... 118,557 131,201
Long-term debt, net of current maturities (4) .. 6,054 410
Total stockholders' equity (4) ................. 48,018 96,098
</TABLE>
- --------------
(1) Because of varying weather patterns, the commercial roofing industry is
seasonal in nature. Typically, because of winter weather during the first
calendar quarter of each year, the Founding Companies have experienced
periods of relatively lower revenues and gross profits with no
corresponding decrease in selling, general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations - Combined" for a more detailed discussion
of seasonality.
(2) The pro forma combined income statement data reflect an aggregate of $3.3
million for the year ended December 31, 1997 and $317,000 for the three
months ended March 31, 1998 in pro forma reductions in salaries, bonuses,
and benefits to the owners of the Founding Companies to which they have
agreed prospectively. See "Management - Employment Agreements."
(3) Consists of amortization of goodwill to be recorded as a result of the
Combination over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Several of the Founding Companies are S Corporations. Prior to the
Combination, these Founding Companies will make distributions to their
stockholders totaling $14.6 million, representing substantially all of
their previously taxed undistributed earnings (the "S Corporation
Distributions"). Certain Founding Companies will incur debt of $11.7
million relating to these distributions and, subsequent to the Offering,
such amounts will be repaid by borrowings of the Company. Accordingly, pro
forma interest expense has been increased by $936,000 for the year ended
December 31, 1997 and $234,000 for the three months ended March 31, 1998,
pro forma working capital has been reduced by $2.7 million, pro forma debt
has been increased by $11.7 million and pro forma stockholders' equity has
been reduced by $14.2 million. One of the Founding Companies has declared S
Corporation Distributions of $434,000 which have been recorded as a
dividend payable to shareholder and reduction of stockholders' equity in
the pro forma combined balance sheet data. This $434,000 is included in the
$14.6 million of S Corporation Distributions. The Combination excludes
certain assets and operations of the Founding Companies with a net book
value of $1.0 million, not required for the ongoing operations of the
Company.
(5) Assumes a corporate income tax rate of 39% and the non-deductibility of
goodwill.
(6) Includes 6,258,667 shares to be issued in connection with the acquisition
of the Founding Companies concurrently with the Offering, but excludes
282,222 shares of Common Stock reserved for issuance upon the exercise of
stock options and warrants to be issued to holders of options and warrants
of certain of the Founding Companies in the Combination. In addition,
immediately following the Offering the Company will grant approximately
560,000 options to employees and directors of the Company pursuant to the
Company's 1998 Stock Option and Restricted Stock Purchase Plan. See
"Management -- 1998 Stock Option and Restricted Stock Purchase Plan."
(7) Adjusted for the sale of the 4,000,000 shares of Common Stock offered
hereby at an assumed price of $14.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
(8) The pro forma combined balance sheet data assume that the Combination was
consummated on March 31, 1998.
(9) Includes a $25.8 million note payable to the owners of the Founding
Companies, representing the cash portion of the Acquisition Consideration
to be paid from a portion of the net proceeds of the Offering. Excludes
contingent consideration of up to $7.6 million issuable upon achievement of
certain performance requirements.
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<PAGE> 10
SUMMARY INDIVIDUAL FOUNDING COMPANY HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
The following table presents certain summary historical income
statement data of the Founding Companies and combined summary historical income
statement data for the Founding Companies for each of their three most recent
fiscal years. The historical income statement data below have not been adjusted
for the pro forma adjustments related to contractually agreed reductions in
salaries and benefits, or any other pro forma adjustments reflected in the
Unaudited Pro Forma Combined Financial Statements, included elsewhere in this
Prospectus. The income statement data presented below have been audited for
certain of the Founding Companies and for the periods as reflected in the
historical financial statements of such Founding Companies, included elsewhere
in this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The combined historical financial data of the Founding Companies do not
represent data derived from results of operations presented in accordance with
generally accepted accounting principles, but are only the summation of the
revenues, gross profit, selling, general and administrative expenses and
operating income of the Founding Companies.
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS (1) MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
COMBINED:
Revenue ..................................... $ 152,992 $ 171,510 $ 201,220 $ 40,682 $ 40,746
Gross Profit ................................ 29,390 35,634 42,686 7,576 7,893
Selling, General and Administrative
Expenses.................................... 24,329 28,690 31,194 7,229 8,084
Operating Income (Loss) ..................... 5,061 6,944 11,492 347 (191)
GENERAL ROOFING INDUSTRIES(2):
Revenue ..................................... $ 18,174 $ 24,810 $ 26,792 $ 6,508 $ 7,135
Gross Profit ................................ 4,615 7,552 7,691 1,977 1,827
Selling, General and Administrative
Expenses.................................... 4,955 6,570 6,995 1,715 2,204
Operating Income (Loss) ..................... (340) 982 696 262 (377)
THE C.E.I. COMPANIES(3):
Revenue ..................................... $ 39,694 $ 42,525 $ 45,163 $ 9,653 $ 10,025
Gross Profit ................................ 8,505 9,673 10,264 1,911 2,292
Selling, General and Administrative
Expenses.................................... 7,289 7,699 8,018 1,933 2,105
Operating Income (Loss) ..................... 1,216 1,974 2,246 (22) 187
ANTHONY ROOFING, LTD.:
Revenue ..................................... $ 12,290 $ 12,226 $ 19,778 $ 2,524 $ 2,489
Gross Profit ................................ 3,446 2,719 5,337 282 357
Selling, General and Administrative
Expenses.................................... 1,961 2,086 2,870 372 445
Operating Income (Loss) ..................... 1,485 633 2,467 (90) (88)
SPECIALTY ASSOCIATES, INC. AND AFFILIATE(4):
Revenue ..................................... $ 14,105 $ 15,306 $ 17,197 $ 3,529 $ 2,300
Gross Profit ................................ 1,516 1,647 2,240 326 14
Selling, General and Administrative
Expenses.................................... 1,416 1,236 1,486 272 317
Operating Income (Loss) ..................... 100 411 754 54 (303)
CYCLONE ROOFING COMPANY:
Revenue ..................................... $ 9,243 $ 10,254 $ 16,057 $ 3,085 $ 2,829
Gross Profit ................................ 1,625 1,716 3,534 501 372
Selling, General and Administrative
Expenses.................................... 683 1,157 1,099 227 227
Operating Income ............................ 942 559 2,435 274 145
WRIGHT-BROWN ROOFING COMPANY:
Revenue ..................................... $ 10,923 $ 12,820 $ 15,316 $ 2,135 $ 2,447
Gross Profit ................................ 1,441 2,190 2,496 347 334
Selling, General and Administrative
Expenses.................................... 1,007 1,285 1,393 393 307
Operating Income (Loss) ..................... 434 905 1,103 (46) 27
HARRINGTON-SCANLON ROOFING COMPANY, INC ..........
AND AFFILIATES:
Revenue ..................................... $ 5,067 $ 10,313 $ 11,816 $ 2,654 $ 2,369
Gross Profit ................................ 989 1,636 1,770 468 184
Selling, General and Administrative
Expenses.................................... 839 1,515 1,550 329 377
Operating Income (Loss) ..................... 150 121 220 139 (193)
SLAVIK, BUTCHER & BAECKER CONSTRUCTION
COMPANY, INC.:
Revenue ..................................... $ 7,273 $ 9,322 $ 11,265 $ 2,816 $ 2,858
Gross Profit ................................ 1,087 1,053 1,337 321 555
Selling, General and Administrative
Expenses.................................... 981 1,043 1,215 302 347
Operating Income ............................ 106 10 122 19 208
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C>
FIVE-K INDUSTRIES, INC. AND SUBSIDIARY:
Revenue ..................................... $ 10,402 $ 9,361 $ 11,091 $ 2,117 $ 2,172
Gross Profit ................................ 2,349 2,840 3,212 543 859
Selling, General and Administrative
Expenses.................................... 2,226 2,652 2,775 823 882
Operating Income (Loss) ..................... 123 188 437 (280) (23)
ADVANCED ROOFING, INC. AND AFFILIATES:
Revenue ..................................... $ 12,078 $ 10,682 $ 12,174 $ 2,627 $ 3,097
Gross Profit ................................ 1,740 1,839 2,347 455 630
Selling, General and Administrative
Expenses.................................... 1,219 1,317 1,571 335 400
Operating Income ............................ 521 522 776 120 230
BLACKMORE & BUCKNER ROOFING, INC.:
Revenue ..................................... $ 7,210 $ 7,704 $ 7,739 $ 1,401 $ 1,061
Gross Profit ................................ 1,415 1,756 1,418 128 165
Selling, General and Administrative
Expenses.................................... 1,161 1,326 1,220 206 215
Operating Income (Loss) ..................... 254 430 198 (78) (50)
REGISTER CONTRACTING COMPANY, INC.:
Revenue ..................................... $ 6,533 $ 6,187 $ 6,832 $ 1,633 $ 1,964
Gross Profit ................................ 662 1,013 1,040 317 304
Selling, General and Administrative
Expenses.................................... 592 804 1,002 322 258
Operating Income (Loss) ..................... 70 209 38 (5) 46
</TABLE>
- ---------------
(1) The fiscal years presented above are the years ended December 31, 1995,
1996 and 1997, except for (i) General Roofing Industries for which the
fiscal years presented are the years ended October 31, 1995, 1996 and 1997;
(ii) Anthony Roofing, Ltd. for which the fiscal years presented are October
31, 1995, and December 31, 1996 and 1997; (iii) Specialty Associates, Inc.
and Affiliate for which the fiscal years presented are the year ended June
30, 1995, the 53-week period ended February 2, 1997 and the 52-week period
ended February 1, 1998; (iv) Slavik, Butcher & Baecker Construction
Company, Inc. for which the fiscal years presented are the years ended June
30, 1995, 1996 and 1997; (v) Five-K Industries, Inc. and Subsidiary for
which the fiscal years presented are the years ended March 31, 1996, 1997
and 1998; and (vi) Register Contracting Company, Inc. for which the fiscal
years presented are the years ended September 30, 1995, 1996 and 1997.
(2) Consists of (i) GRI of South Florida, Inc., (ii) GRI of West Florida, Inc.,
(iii) GRI of Orlando, Inc. and (iv) Dakota Leasing, Inc.
(3) Consists of (i) C.E.I. Roofing, Inc., (ii) C.E.I. West Roofing Company,
Inc. and (iii) C.E.I. Florida, Inc.
(4) Consists of Specialty Associates, Inc. and SAI Wholesale Distributors,
Inc.
11
<PAGE> 13
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should consider carefully the
following factors before deciding to invest in the Common Stock. To the extent
this Prospectus contains certain forward-looking statements, actual results
could differ materially from those projected in the forward-looking statements
as a result of any number of factors, including the risk factors set forth below
and elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY
Although each of the Founding Companies has operated for more than 10
years, the business of the Founding Companies will not be operated on a combined
basis until after the Offering. There can be no assurance that the Company will
be able to integrate the operations of the Founding Companies successfully or to
institute the necessary systems and procedures, including accounting and
financial reporting systems, to manage the combined enterprise on a profitable
basis. There can be no assurance that the Company's management group will be
able to manage the combined entity or to implement effectively the Company's
operating strategy, internal growth strategy and acquisition program. The pro
forma and combined historical financial results of the Founding Companies cover
periods when the Founding Companies were not under common control or management
and may not be indicative of the Company's future financial or operating
results. The inability of the Company to integrate and manage the Founding
Companies and such additional businesses as the Company may acquire as a
cohesive, efficient enterprise or to eliminate unnecessary duplication may have
a material adverse effect on the business, financial condition and results of
operations of the Company.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring commercial roofing
companies in its existing and new markets. The Company's acquisition strategy
presents risks that, singularly or in any combination, could materially
adversely affect the Company's business, financial condition and results of
operations. These risks include the possibility of the adverse effect on
existing operations of the Company from the diversion of management attention
and resources to acquisitions, the possible loss of acquired customer bases and
key personnel, possible adverse effect on earnings resulting from amortization
of goodwill created in purchase transactions and the contingent and latent risks
associated with the past operations and other unanticipated problems arising in
the acquired businesses. The success of the Company's acquisition strategy will
depend on the extent to which it is able to identify, acquire, successfully
integrate and profitably manage additional businesses, and no assurance can be
given that the Company's strategy will succeed. Competition for suitable
acquisition targets could limit the Company's ability to locate suitable
acquisition targets and could increase the cost of purchasing such acquisition
targets. See "Business -- Acquisition Strategy."
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
Expansion of the Company through acquisitions and internal growth will
require significant capital. The timing, size and success of the Company's
acquisition efforts and the associated capital commitments cannot be readily
predicted. The Company currently intends to finance future acquisitions by using
shares of its Common Stock for a substantial portion of the consideration to be
paid. If the Common Stock does not maintain a sufficient market value, or if
potential acquisition candidates are otherwise unwilling to accept Common Stock
as part of the consideration for the sale of their businesses, the Company may
be required to utilize more of its cash resources, if available, in order to
initiate and maintain its acquisition program. The Company will have
approximately $12.6 million (at an assumed offering price of $14.00 per share)
of the net proceeds of this Offering remaining for future acquisitions and
working capital after payment of Offering expenses, any indebtedness incurred or
assumed by the Company and the cash
12
<PAGE> 14
portion of the purchase price for the Founding Companies. There can be no
assurance the Company will be able to raise sufficient capital upon terms
acceptable to the Company, or at all. If the Company does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through equity or debt financing. Such indebtedness, if
incurred, would increase the Company's leverage, may make the Company more
vulnerable to economic downturns and may limit its ability to withstand
competitive pressures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SEASONALITY; QUARTERLY FLUCTUATIONS
The Company's results of operations and the demand for its roofing services
can be expected to fluctuate from quarter to quarter due to a variety of
factors, including but not limited to, adverse weather and the timing of
acquisitions. For example, mild, dry weather results in reduced demand for the
number of roofs in need of repair. Conversely, adverse weather increases the
number of roofs in need of repair, but due to the increased demand and the
inability to render services during such periods, severe weather can delay the
time it takes to complete a roofing project. Accordingly, the Company expects
its revenues and operating results generally will be lower in the first and
fourth quarters. Historically, the commercial roofing industry has been highly
cyclical. As a result, the Company's volume of business may be adversely
affected by declines in new installation projects in various geographic regions
of the United States. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality" and "-- Quarterly Financial
Information."
RISKS ASSOCIATED WITH DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF OPERATING
SYSTEMS AND POLICIES
As a rapidly growing provider of commercial roofing services, the Company
is faced with the development, implementation and integration of Company-wide
policies and systems related to its operations. The Company plans to implement
and integrate certain information and operating systems and procedures for the
Founding Companies including, but not limited to, accounting systems, employment
and human resources policies, uniform purchasing programs and certain
centralized marketing programs. Each of the Founding Companies and companies to
be acquired in the future will need to modify certain systems and policies they
have utilized historically to implement the Company's systems and policies. As a
result of the Company's decentralized operating strategy, there can be no
assurance that the Company's operating systems and policies will be successfully
implemented at the subsidiary level or that the Company will be successful in
monitoring the performance of the subsidiaries. The Company may experience
delays, complications and expenses in implementing, integrating and operating
such systems, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Operating Strategy."
DEPENDENCE ON ENTERPRISE INFORMATION SYSTEMS
The Company's operations are dependent on the Company's enterprise
information systems which consist of a proprietary project management system and
a management information system. The Company relies on these information systems
for communications with its operating locations, employee and customers and
information regarding the status of roofing projects, employee productivity,
Company operations, accounting and financial matters, marketing and sales, the
Company's facility management program and a variety of other matters. In
addition, any significant disruption or unavailability of the Company's
information systems for any significant period of time would have a material
adverse effect on the Company's business and results of operations. Although the
Company has taken precautions to protect itself from events that could interrupt
its operations, including the secured storage of back-up data, physical security
systems and an early warning fire detection system, there can be no assurance
that a sustained electrical or communications link outage, fire, flood or other
natural disaster would not disable
13
<PAGE> 15
the information systems or prevent the information systems from communicating
with the Company's branch locations. See "Business -- Enterprise Information
Systems."
VALUATION OF ACQUISITIONS
The initial public offering price of the Common Stock will be determined
based on negotiations between the Company and the representatives of the
Underwriters, and the factors which will be considered in determining such price
include, in addition to prevailing market conditions, the expected results of
operations of the Company, estimates of the business potential and earnings
prospects of the Company and the economy as a whole. See "Underwriting." The
valuation of the Company has not been established on a company-by-company basis,
and no third party appraisals of the Founding Companies were obtained by the
Company for purposes of the Offering nor has a fairness opinion been obtained. A
valuation of the Company determined solely by appraisal of the individual
Founding Companies would likely result in a different valuation of the Company
than that reflected by the initial public offering price of the shares of Common
Stock offered hereby. At the initial public offering price, the aggregate
consideration related to the Founding Companies (other than General Roofing
Industries) will be approximately $101.9 million, which will consist of $58.7
million in Common Stock and $25.8 million in cash, assumed debt of $11.7 million
for the S Corporation Distributions and $5.7 million of assumed existing debt to
be repaid following upon the Offering. There can be no assurance that the
consideration paid or to be paid by the Company for the Founding Companies
accurately reflects the value of the assets of these companies or that the
percentage of Common Stock of the Company owned by the former owners of the
Founding Companies reflects the value of the assets of the Founding Companies.
See "The Combination."
AVAILABILITY OF SKILLED ROOFING LABOR
The timely provision of high-quality maintenance, repair, restoration,
re-roofing and new roof construction services requires an adequate supply of
skilled roofing labor. The supply of roofing labor is sensitive to economic and
competitive conditions and the level of demand for roofing services.
Accordingly, the Company's ability to increase its productivity and
profitability may be limited by its ability to employ, train and retain the
skilled roofing laborers necessary to meet the Company's service requirements.
From time to time, there are shortages of skilled labor, and there can be no
assurance that the Company will be able to maintain an adequate skilled labor
force necessary to operate efficiently, that the Company's labor expense will
not increase as a result of a shortage in the supply of skilled labor or the
unionization of a portion of its labor force, or that the Company will not have
to curtail its planned internal growth as a result of labor shortages. At March
31, 1998, the Company had 1,960 full-time employees, including 1,666 employees
in field operations and 294 managers and administrative employees. Approximately
600 employees in six of the Founding Companies are members of unions and work
under collective bargaining agreements which are subject to renegotiation from
time to time. See "Business--Personnel, Training and Safety."
FACTORS AFFECTING INTERNAL GROWTH
The Company's ability to increase the revenues of the Founding Companies
and any subsequently acquired company will be affected by various factors,
including demand for commercial roofing services, the level of new construction,
the Company's ability to expand the range of services offered to customers of
individual Founding Companies and other acquired businesses, the Company's
ability to develop national accounts and other marketing programs in order to
attract new customers and the Company's ability to attract and retain a
sufficient number of skilled roofing labor and other necessary personnel. Many
of these factors are beyond the control of the Company, and there can be no
assurance that the Company's operating and internal growth strategies will be
successful or that it will be able to generate cash flow adequate for its
operation and to support internal growth. Furthermore, there can be no
14
<PAGE> 16
assurance that management can integrate acquired companies and reduce overhead
expenses. See "Business -- Operating Strategy."
GENERAL ECONOMIC CONDITIONS
The Company believes that the roofing industry is sensitive to economic and
competitive conditions, including national, regional and local slowdowns in
construction, commercial, industrial and/or real estate activity and weakening
demand for roofing services. New roof construction is particularly sensitive to
adverse or other economic conditions. In addition, the Company's operating
results may be adversely affected by increases in interest rates that may lead
to a decline in economic activity. There can be no assurance that adverse or
other economic or competitive conditions will not have a material adverse effect
on the Company's operating results and financial condition.
COMPETITION
The commercial roofing industry is highly fragmented and competitive and is
served principally by small, owner-operated private companies. The Company
competes for sales with numerous roofing companies in each of its markets.
Certain of these smaller competitors have lower overhead cost structures and may
be able to provide their services at lower rates than the Company. There can be
no assurance that the Company will not encounter increased competition from
existing competitors or new market entrants that may be significantly larger and
have greater financial and marketing resources. In addition, to the extent
existing or future competitors seek to gain or retain market share by reducing
prices, the Company may be required to lower its prices, which may adversely
affect operating results. Existing or future competitors also may seek to
compete with the Company for acquisition candidates. Other consolidators of
commercial roofing companies may have greater financial and other resources than
the Company, which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates. See
"Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management of the Founding Companies, and the Company
will depend on the senior management of significant businesses it acquires in
the future. The business of the Company could be affected adversely if any of
these persons does not continue in his or her management role with the Company
or an acquired business and the Company is unable to attract and retain
qualified replacements. Certain shareholders and key managers of the Founding
Companies have entered into employment agreements containing, among other
things, confidentiality and non-competition provisions. See "Management."
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
Upon the consummation of the Offering, the executive officers, directors
and certain former shareholders of the Founding Companies will beneficially own
in the aggregate approximately 61.0% of the outstanding Common Stock (57.6% if
the Underwriters' over-allotment is exercised in full). Accordingly, such
persons will have substantial influence on the Company, which influence might
not be consistent with the interests of other shareholders, and on the outcome
of any matters submitted to the Company's shareholders for approval. In
addition, although there is no current agreement, understanding or arrangement
for these shareholders to act together on any matter, these shareholders may
have economic and business reasons to act together, and would be in a position
to execute significant influence over the affairs of the Company if they were to
act together in the future. If these persons were to act in concert, they might,
as a practical matter, be able to exercise control over the Company's affairs,
including
15
<PAGE> 17
the election of the entire Board of Directors and any matter submitted to a vote
of shareholders. See "Security Ownership of Certain Beneficial Owners and
Management."
REGULATION
The Company's business and the activities of its roofing contractors are
subject to various federal, state, and local laws, regulations and ordinances
relating to, among other things, the licensing and certification of roofing
contractors, OSHA standards, advertising, building and zoning regulations and
environmental laws and regulations relating to the disposal of demolition debris
and other solid wastes. In certain jurisdictions, the Company or one of its
employees is required to be a licensed contractor. In addition, certain
jurisdictions require the Company to obtain a building permit for each roofing
project. The Company is also subject to certain federal, state and local laws
and regulations, which, among other things, regulate the Company's advertising,
warranties and disclosures to customers. Although the Company believes that it
has been and is currently in compliance in all material respects with such laws
and regulations, there can be no assurance that in the future the Company's
results of operations will not be materially adversely affected by existing or
new laws or regulations applicable to the Company's business.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon the closing of the Offering, 10,258,667 shares of Common Stock will be
outstanding. The 4,000,000 shares sold in this Offering (other than shares that
may be 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 pursuant to an available exemption (such as provided by
Rule 144 under the Securities Act following a holding period for previously
unregistered shares) from the registration requirements of the Securities Act.
Upon the closing of the Offering, the Company also will have outstanding
options and warrants to purchase up to a total of 282,222 shares of Common
Stock, none of which will be exercisable until February 1999. The Company
intends to register all the shares subject to these options and warrants under
the Securities Act for public resale. In addition, the Company will grant
options to purchase approximately 560,000 shares of Common Stock to employees
and directors of the Company upon the consummation of the Offering pursuant to
the Company's 1998 Stock Option and Restricted Stock Purchase Plan.
The Company, its directors and executive officers and certain other
shareholders have agreed not to offer or sell any shares for a period of 180
days following the date of this Prospectus without the prior written consent of
The Robinson-Humphrey Company, LLC, except (A) that the Company may issue Common
Stock in the Offering, in connection with acquisitions generally, and pursuant
to the exercise of stock options which are either (i) outstanding on the date of
this Prospectus or (ii) issued under the Company's 1998 Stock Option and
Restricted Stock Purchase Plan and (B) that such directors, executive officers
and shareholders may sell Common Stock pursuant to a cashless exercise of such
stock options or make a bona fide gift of Common Stock, provided that the donee
agrees to be bound by the terms of the donor's lockup agreement. The holders of
Common Stock issued in connection with the Combination have agreed with the
Company that they generally will not sell, transfer or otherwise dispose of any
of their shares for two years following the date of acquisition of such shares.
Sales made pursuant to Rule 144 must comply with its applicable volume
limitations and other requirements.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing form time to time is unpredictable, and no assurance can be given
that the effect will not be adverse. See "Shares Eligible For Future Sale."
16
<PAGE> 18
RESTRICTIONS ON DIVIDENDS; DEPENDENCE ON SUBSIDIARIES
The Company will conduct its operations through subsidiaries, including the
Founding Companies, and is therefore dependent upon the cash flow of and the
transfer of funds by those subsidiaries to the Company in the form of loans,
dividends or otherwise to meet its financial obligations. Each Founding Company
and any future subsidiary of the Company will be distinct legal entities and
will have no obligation, contingent or otherwise, to transfer funds to the
Company. The Company's ability to pay dividends on the Common Stock could be
restricted by the terms of subsequent financings and shares of Preferred Stock
that may be issued in future transactions. See "Description of Capital Stock"
and "Description of Capital Stock -- Common Stock."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiation
between the Company and 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 considered in determining the initial public
offering price. The Company has applied for listing of the Common Stock on the
Nasdaq Stock Market, but no assurance can be given that such application will be
approved, that an active trading market for the Common Stock will develop or, if
it developed, 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 numerous factors, including variations in the
reported financial results of the Company and changing conditions in the economy
in general or in the Company's industry in particular. In addition, stock
markets generally experience significant price and volume volatility form time
to time which may affect the market price of the Common Stock for reasons
unrelated to the Company's performance.
LIABILITY AND INSURANCE
The Company's business exposes it to potential claims for personal injury
or death resulting from injuries to its employees and other persons caused in
connection with the Company's maintenance, repair or installation of roofing
systems. Certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct, are generally not covered by the
Company's insurance. The Company carries comprehensive insurance subject to a
deductible. There can be no assurance that existing or future claims will not
exceed the level of the Company's insurance, or that such insurance will
continue to be available on economically reasonable terms, if at all. See
"Business-- Insurance" and "--Legal Proceedings."
POSSIBLE ANTI-TAKEOVER EFFECTS OF FLORIDA LAW, CHARTER PROVISIONS AND PREFERRED
STOCK
The Company is incorporated under the laws of the State of Florida. Certain
provisions of Florida law may have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, certain provisions
of the Company's Articles of Incorporation ("Articles") and Bylaws may be deemed
to have anti-takeover effects and may delay, defer or prevent a takeover attempt
that a shareholder might consider in its best interest. The Board of Directors
("Board") can, without any vote or action by the holders of the Common Stock,
authorize and issue shares of preferred stock with voting or conversion rights
and other privileges and preferences that could adversely affect the voting or
other rights of holders of the Common Stock. In addition, the issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company. See "Description of Capital Stock --
Anti-takeover Effects of Certain Provisions of Florida Law" and "-- Certain
Provisions of the Company's Articles and Bylaws."
17
<PAGE> 19
IMMEDIATE, 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 $10.90 per
share and (ii) may experience further dilution in that value from issuances of
Common Stock in connection with future acquisitions. See "Dilution."
YEAR 2000 ISSUE
Several of the Founding Companies are not year 2000-compliant. The Company
has plans to prepare its computer systems and related software to accommodate
sensitive information relating to the year 2000. The Company expects that any
additional costs related to ensuring such systems and software to be ready for
the year 2000 will not be material to the financial condition or results of
operations of the Company. In addition, the Company is discussing with its
vendors and customers the possibility of any difficulties which may affect the
Company as a result of its vendors and customers ensuring that their computer
systems and software are year 2000-compliant. To date, no significant concerns
have been identified. However, there can be no assurance that no year
2000-related computer operating problems or expenses will arise with the
Company's computer systems and software or in the computer systems and software
of the Company's vendors and customers.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED COMMON STOCK
Following the Offering, the Company will have 79,741,333 authorized but
unissued shares of Common Stock available for future issuance without
shareholder approval, subject to applicable requirements of the Nasdaq National
Market. These additional shares of Common Stock may be utilized for a variety of
corporate purposes, including acquisitions, future public offerings to raise
additional capital and employee benefits plans and director compensation plans.
The existence of these shares may enable the Board to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger or otherwise, and thereby protect the continuity of the Company's
management. See "Description of Capital Stock."
18
<PAGE> 20
THE COMPANY
The Company was founded in 1998 to create the leading nationwide
provider of commercial roofing services. Concurrently with, and as a condition
to, the Offering, the Company plans to acquire the 18 Founding Companies. The
Founding Companies, which have been in business for an average of approximately
28 years, had pro forma combined 1997 revenues and income from operations of
approximately $195.9 million and $13.4 million, respectively. Following the
Combination and the Offering, the Company will have approximately 1,960
employees at operations in 20 cities in 12 states, and will be one of the
largest providers of commercial roofing services in the United States. The
aggregate consideration (the "Acquisition Consideration") to be paid by the
Company for the Founding Companies consists of approximately $41.3 million in
cash (without giving effect to certain earn-out provisions and distributions to
be made by certain Founding Companies prior to the consummation of the Offering)
and 6,258,667 shares of Common Stock. Certain shareholders and key managers of
the Founding Companies have entered into employment agreements containing, among
other things, confidentiality and non-competition provisions. Certain
information and 1997 revenues for repair, restoration and re-roofing and new
roof construction for the Founding Companies is set forth below.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------
REPAIR,
YEAR RESTORATION NEW ROOF TOTAL
FOUNDING COMPANIES FOUNDED HEADQUARTERS SITE AND RE-ROOFING CONSTRUCTION REVENUES(1)
- ------------------ ------- ----------------- -------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
General Roofing Industries (2)... 1988 Pompano Beach, Florida 52% 48% $26,792
The C.E.I. Companies
C.E.I. Roofing, Inc......... 1969 Dallas, Texas 53 47 17,929
C.E.I. West Roofing
Company, Inc............... 1987 Denver, Colorado 40 60 16,991
C.E.I. Florida, Inc......... 1978 DeBary, Florida 60 40 10,243
Blackmore & Buckner Roofing, Inc. 1919 Indianapolis, Indiana 85 15 7,739
Cyclone Roofing Company.......... 1964 Indian Trail, N.Carolina 70 30 16,057
Anthony Roofing, Ltd............. 1979 Aurora, Illinois 72 28 19,778
Slavik, Butcher & Baecker
Construction Company, Inc........ 1977 Rochester Hills, Michigan 95 5 11,265
Advanced Roofing, Inc. and
Affiliates....................... 1983 Ft. Lauderdale, Florida 95 5 12,174
Five-K Industries, Inc. and
Subsidiary....................... 1942 Smyrna, Georgia 63 37 11,091
Wright-Brown Roofing Company..... 1951 Detroit, Michigan 89 11 15,316
Register Contracting Company,Inc. 1981 Jacksonville, Florida 70 30 6,832
Harrington-Scanlon Roofing
Company, Inc. and Affiliates..... 1983 Kansas City, Kansas 38 62 11,816
Specialty Associates, Inc. and
Affiliate........................ 1975 West Allis, Wisconsin 70 30 17,197
--------
Total....................... 65% 35% $201,220
== == ========
</TABLE>
- ------------------
(1) Several of the individual Founding Companies have fiscal year ends that
differ from December 31. All of the Founding Companies will use the
fiscal year end December 31 upon the consummation of the Offering. In
addition, certain operations of two Founding Companies are not being
acquired in connection with the Combination.
(2) Consists of (i) GRI of South Florida, Inc., (ii) GRI of West Florida,
Inc., (iii) GRI of Orlando, Inc. and (iv) Dakota Leasing, Inc.
GENERAL ROOFING INDUSTRIES ("GRI") was founded in 1988 by Gregg E.
Wallick and began its initial operations in south Florida. In 1992, GRI acquired
a roofing company in Tampa, Florida and, in 1994, acquired an additional roofing
company in Orlando, Florida. GRI currently operates throughout Florida and is
the largest commercial roofing company in Florida. GRI specializes in commercial
and industrial roofing and sheet metal systems. GRI has approximately 320
employees. GRI has implemented an enterprise information system and centralized
accounting system which will be implemented by the Company following the
consummation of the Offering. GRI was named Roofing, Siding and Installation
19
<PAGE> 21
Magazine ("RSI") Contractor of the Year in 1993. GRI is a member of the NRCA and
the Alliance for Progress. Gregg E. Wallick, its president and chief executive
officer, has signed a three year employment agreement with the Company and
serves as the president and chief executive officer and a director of the
Company.
C.E.I. ROOFING, INC. ("C.E.I. Roofing") was founded in 1982 by George
Cook, John C. Cook and Doug Reader, and operates in Dallas, Texas and Detroit,
Michigan. C.E.I. Roofing specializes in commercial and industrial roofing and
sheet metal systems. C.E.I. Roofing has approximately 210 employees. George
Cook, its executive vice president, and Doug Reader, its president, have signed
three year employment agreements to continue in their present positions with
C.E.I. Roofing upon the consummation of the Offering.
C.E.I. WEST ROOFING COMPANY, INC. ("C.E.I. West") was founded in 1977
by George Cook, John C. Cook and Frederick E. Holland and operates in Denver,
Colorado and Sacramento, California. C.E.I. West specializes in commercial and
industrial roofing and sheet metal systems. C.E.I. West has approximately 200
employees. Frederick E. Holland, its president, and Michael McClane, the vice
president and manager of C.E.I. West's Sacramento, California branch office,
have signed three year employment agreements to continue in their present
positions with C.E.I. West upon the consummation of the Offering.
C.E.I. FLORIDA, INC. ("C.E.I. Florida") was founded in 1978 by George
Cook, John C. Cook and Ron Martin and operates in north and central Florida.
C.E.I. Florida specializes in commercial and industrial roofing and sheet metal
systems. C.E.I. Florida has approximately 100 employees. John Cook, its
president and chief executive officer, has signed a three year employment
agreement to continue in his present position with C.E.I. Florida and will
become a director of the Company upon the consummation of the Offering.
BLACKMORE & BUCKNER ROOFING, INC. ("Blackmore & Buckner") was founded
in 1919 and operates primarily in central Indiana. Blackmore & Buckner
specializes in commercial and industrial roofing and sheet metal systems.
Blackmore & Buckner has approximately 100 employees. Stephen Buckner, its
president, and Donald Parrish its vice president, have each signed a three year
employment agreement to continue in their present positions with Blackmore &
Buckner upon the consummation of the Offering.
CYCLONE ROOFING COMPANY ("Cyclone Roofing") was founded in 1964 and
operates primarily in North Carolina and South Carolina. Cyclone Roofing
specializes in commercial and industrial roofing and sheet metal systems.
Cyclone Roofing has approximately 140 employees. Cyclone Roofing has been
recognized for outstanding work by the U.S. Army and Metal Architecture, a trade
magazine. R. Wayne Cooke, its president, has signed a three year employment
agreement to continue in his present position with Cyclone Roofing upon the
consummation of the Offering.
ANTHONY ROOFING, LTD. ("Anthony Roofing") was founded in 1979 and
operates in Aurora, Illinois, a suburb of Chicago. Anthony Roofing specializes
in commercial and industrial roofing and sheet metal systems. Anthony Roofing
has approximately 130 employees. Joel Thompson, its founder and president, has
signed a three year employment agreement to continue in his present position
with Anthony Roofing and will become a director of the Company upon the
consummation of the Offering.
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC. ("Slavik
Butcher"), was founded in 1977 and operates in east and central Michigan. Slavik
Butcher specializes in re-roofing and restoration, and has expertise in low and
steep-sloped roofing. Slavik Butcher was named Contractor of the Year by RSI in
1994. Slavik Butcher has approximately 65 employees. Patrick Butcher, its
co-founder and President, and Joe Butcher, its co-founder, vice president and
chief financial officer, have signed three year employment agreements to
continue in their present positions with Slavik Butcher upon the consummation of
the Offering.
20
<PAGE> 22
ADVANCED ROOFING, INC. ("Advanced Roofing") was founded in 1983 and
operates in south Florida. Advanced Roofing specializes in commercial and
industrial roofing and sheet metal systems, and has expertise in difficult
re-roofing projects. Advanced Roofing has approximately 100 employees. Robert
Kornahrens, its founder and president, has signed a three year employment
agreement to continue in his present position with Advanced Roofing upon the
consummation of the Offering.
FIVE-K INDUSTRIES, INC., which conducts business under the name of
"Therrel-Kizer," ("Five-K" or "Therrel-Kizer") was founded in 1942 and operates
in Atlanta, Georgia and the surrounding metropolitan area. Therrel-Kizer
specializes in commercial and industrial roofing and sheet metal systems, and
has expertise in large-scale roofing projects. Therrel-Kizer has approximately
100 employees. Herbert J. Kizer III, its president and chief executive officer,
has signed a three year employment agreement to continue in his present position
with Therrel-Kizer upon the consummation of the Offering.
WRIGHT-BROWN ROOFING COMPANY ("Wright-Brown") was founded in 1951 and
operates in the Detroit, Michigan metropolitan area. Wright-Brown specializes in
commercial and industrial roofing sheet metal systems, and has a full service
roof management program. Wright-Brown was named RSI Contractor of the Year in
1990. Wright-Brown has approximately 120 employees. Thomas Brown, Jr., its
chairman and chief executive officer, served as a director of the NRCA. Mr.
Brown has signed a three year employment agreement to continue in his present
position with Wright-Brown and will become a director of the Company upon the
consummation of the Offering.
REGISTER CONTRACTING COMPANY, INC. ("Register Roofing") was founded in
1981 and operates in north Florida. Register Roofing specializes in commercial
and industrial roofing and sheet metal systems, and has experience in working
with architects and owners on various types of roof designs and specifications.
Register Roofing has approximately 85 employees. Gary Register, its founder and
president, has signed a three year employment agreement to continue in his
present position with Register Roofing upon the consummation of the Offering.
HARRINGTON-SCANLON ROOFING COMPANY, INC. ("Harrington-Scanlon") was
founded in 1983 and operates in western Missouri and eastern Kansas.
Harrington-Scanlon specializes in commercial and industrial roofing and sheet
metal systems. Harrington-Scanlon has approximately 90 employees. J.R.
Harrington, its co-founder and president, and Kevin Scanlon, its co-founder and
vice president, have signed three year employment agreements to continue in
their present positions with Harrington-Scanlon upon the consummation of the
Offering. Harrington-Scanlon has a wholly-owned subsidiary which operates in the
Tucson and Phoenix, Arizona areas and specializes in commercial and industrial
roofing and sheet metal systems. This subsidiary has approximately 50 employees.
SPECIALTY ASSOCIATES, INC. ("Specialty Associates") was founded in 1975
and operates in the Milwaukee, Wisconsin area. Specialty Associates specializes
in commercial and industrial roofing and sheet metal systems, and has expertise
in designing and renovating roofing systems. Specialty Associates has
approximately 140 employees. Ronald J. Werowinski, its president, has signed a
three year employment agreement to continue in his present position with
Specialty Associates, upon the consummation of the Offering.
The Company is a Florida corporation with its principal executive
offices located at 951 South Andrews Avenue, Pompano Beach, Florida 33069, and
its telephone number is (954) 942-3550.
21
<PAGE> 23
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock in the Offering are estimated to be approximately $48.1 million ($55.9
million if the over-allotment option is exercised in full) after deduction of
underwriting discounts and Offering expenses payable by the Company. The Company
plans to use $25.8 million to fund the cash portion of the Acquisition
Consideration. The Company intends to use $9.7 million to repay certain
outstanding indebtedness of the Founding Companies with a weighted average
interest of 9.3%, and the remaining proceeds will be used for general corporate
purposes, including working capital and future acquisitions. Any net proceeds
received from the exercise of the Underwriters' over-allotment option will be
used for future acquisitions and for general corporate purposes. See "The
Combination" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." Pending
application of the net proceeds as described above, the Company intends to
invest the net proceeds in short-term investment grade or U.S. government
interest bearing securities.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth the current maturities of long-term debt
and the capitalization as of March 31, 1998 of (i) the Company on a pro forma
combined basis after giving effect to the Combination and related transactions,
and (ii) the Company on a pro forma combined basis after giving effect to the
Combination and related transactions, as adjusted to give effect to the Offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Unaudited Pro Forma
Financial Statements of the Company and the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
AS OF MARCH 31, 1998
----------------------------
COMBINED
COMBINED AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current Maturities of Long-Term Debt (1) (2)..................... $41,756 (3) $11,964
======= ======
Long-Term Debt, net of Current Maturities (1).................... $ 6,054 $ 410
------- -------
Stockholders' Equity:
Preferred Stock: $.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding................... - -
Common Stock: $.01 par value, 90,000,000 shares
authorized; 6,258,667 shares issued and outstanding,
pro forma combined; and 10,258,667 shares issued
and outstanding, pro forma combined as adjusted (4)............ 63 103
Additional Paid-In Capital....................................... 47,507 95,547
Retained Earnings................................................ 448 448
------- -------
Total Stockholders' Equity.................................. 48,018 96,098
------- -------
Total Capitalization........................................ $54,072 $96,508
======= =======
</TABLE>
- ------------------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.
(2) Includes $11.7 million in short-term obligations to reflect that portion of
S Corporation Distributions that will be funded through borrowings.
(3) Includes a $25.8 million note payable to owners of the Founding Companies,
representing the cash portion of the Acquisition Consideration to be paid
from a portion of the net proceeds of the Offering.
(4) Excludes shares of Common Stock subject to options, of which approximately
560,000 shares will be granted to employees and directors of the Company
upon the consummation of the Offering and 216,300 options to be issued in
the Combination in exchange for existing options of GRI. Also, excludes
65,922 warrants that will be issued in exchange for outstanding warrants of
GRI. See "Management - 1998 Stock Option and Restricted Stock Purchase
Plan."
23
<PAGE> 25
DIVIDEND POLICY
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company intends to retain earnings to finance the
expansion of its business, repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the Board
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other relevant factors.
24
<PAGE> 26
DILUTION
At March 31, 1998, after giving effect to the Combination as if it had
occurred at such date, the deficit in pro forma combined net tangible book value
of the Company would have been approximately $16.3 million, or $2.60 per share.
The deficit in pro forma combined net tangible book value is equal to the
aggregate net tangible book value (tangible assets less total liabilities) of
the Company after giving effect to the Combination. The number of shares used
for the per share calculation includes the 6,258,667 shares outstanding after
the Combination but prior to the Offering. After giving effect to the
Combination and the sale by the Company of the 4,000,000 shares of Common Stock
offered hereby and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma combined net
tangible book value of the Company would have been $31.8 million, or $3.10 per
share. This represents an immediate increase in pro forma net tangible book
value of $5.70 per share to existing stockholders and an immediate dilution in
net tangible book value of $10.90 per share to new investors purchasing the
shares of Common Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share.......................... $14.00
Pro forma combined net tangible book value per
share prior to the Offering.............................. (2.60)
Increase in pro forma net tangible book value per share
attributable to new investors............................ 5.70
-----
Pro forma combined net tangible book value per share
after the Offering.................................................. 3.10
------
Dilution per share to new investors...................................... $10.90
======
</TABLE>
The following table sets forth on a pro forma basis, after giving
effect to the Combination as of March 31, 1998, the number of shares of Common
Stock purchased from the Company, the total consideration to the Company and the
average price per share paid to the Company by (i) existing stockholders and
owners of the Founding Companies and (ii) the new investors purchasing Common
Stock from the Company in the Offering (before deducting underwriting discounts
and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED
-------------------- TOTAL AVERAGE PRICE
NUMBER PERCENT CONSIDERATION PER SHARE
------ ------- ------------- -------------
<S> <C> <C> <C> <C>
Existing stockholders and owners of
Founding Companies (1) (2) ... 6,259 61.0% $(16,280) $(2.60)
New investors ..................... 4,000 39.0% 56,000 14.00
------ ----- --------
Total ........................ 10,259 100.0% $ 39,720
====== ===== ========
</TABLE>
- ----------------
(1) See "The Combination" for a discussion of the issuance of Common Stock to
the owners of the Founding Companies.
(2) Total consideration paid by Founding Company owners represents the combined
historical owners' equity of the Founding Companies before the Combination
and the Offering, and has been adjusted to reflect (i) the payment of $25.8
million in cash to the owners of the Founding Companies as part of the
Acquisition Consideration and (ii) the S Corporation Distributions of $14.6
million. The Combination excludes certain assets and operations of the
Founding Companies with a net book value of $1.0 million, not required for
the ongoing operations of the Company.
The foregoing tables assume no exercise of outstanding options and
warrants. Upon consummation of the Offering, there will be 216,300 and 65,922
shares of Common Stock issuable upon exercise of options and warrants to
purchase shares of Common Stock at average exercise prices of $6.38 and $.01 per
share, respectively. In addition, the Company will grant options to purchase
25
<PAGE> 27
approximately 560,000 shares of Common Stock to employees and directors of the
Company pursuant to the Company's 1998 Stock Option and Restricted Stock
Purchase Plan. See "Management - 1998 Stock Option and Restricted Stock Purchase
Plan."
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company will acquire the Founding Companies concurrently with and
as a condition of the consummation of the Offering. For financial statement
presentation purposes GRI has been designated as the "accounting acquirer," and
the financial statements of GRI will be regarded as the historical financial
statements of the Company. The following selected historical financial data for
GRI as of October 31, 1996 and 1997, and for the years ended October 31, 1995,
1996 and 1997, have been derived from audited combined financial statements of
GRI included elsewhere in this Prospectus. The selected historical financial
data for the five months ended March 31, 1997 and 1998, and as of October 31,
1993, 1994 and 1995, and for the years ended October 31, 1993 and 1994, have
been derived from the unaudited combined financial statements of GRI, which have
been prepared on the same basis as the audited financial statements and, in the
opinion of management, reflect all adjustments consisting of normal recurring
items, necessary for a fair presentation of such data. The results of operations
for the periods ended March 31, 1997 and 1998 should not be regarded as
indicative of the results that may be expected for a full year.
The summary unaudited pro forma combined financial data below present
certain financial data for the Company includes (i) the effects of the
Combination and (ii) the effect of certain other pro forma adjustments to the
historical financial statements. The summary unaudited pro forma combined as
adjusted financial data below includes the effects of the consummation of the
Offering and the application of the net proceeds therefrom. The unaudited pro
forma combined income statement data assume that the Combination, the Offering
and related transactions were closed on January 1, 1997, and are not necessarily
indicative of the results that the Company would have obtained had these events
actually occurred at that date or indicative of the Company's future results.
During the periods presented below, the Founding Companies were not under common
control of management and therefore, the data presented may not be comparable to
or indicative of post-combination results to be achieved by the Company. The
unaudited pro forma combined income statement data are based on preliminary
estimates, available information and certain assumptions that Company management
deems appropriate. The unaudited pro forma combined financial data should be
read in conjunction with the other financial information included elsewhere in
this Prospectus. See the Unaudited Pro Forma Combined Financial Statements and
the notes thereto, included elsewhere in this Prospectus.
Because of varying weather patterns, the commercial roofing industry is
seasonal in nature. Typically, because of winter weather during the first
calendar quarter of each year, the Founding Companies have experienced periods
of relatively lower revenues and gross profits with no corresponding decrease in
selling general and administrative expenses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Combined" for a more detailed discussion of seasonality.
26
<PAGE> 28
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED HISTORICAL COMBINED AS
AS ADJUSTED FIVE MONTHS ENDED ADJUSTED
YEAR ENDED OCTOBER 31, (1) YEAR ENDED MARCH 31, THREE MONTHS
-------------------------------------------- DECEMBER 31, --------------- ENDED MARCH 31,
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues .................... $13,649 $18,984 $18,174 $24,810 $26,792 $ 195,909 $11,339 $10,838 $ 39,584
Cost of Revenues ............ 10,249 13,900 13,559 17,258 19,101 153,390 7,738 8,016 31,701
------- ------- ------- ------- ------- ---------- ------- ------- -----------
Gross Profit ................ 3,400 5,084 4,615 7,552 7,691 42,519 3,601 2,822 7,883
Selling, General and
Administrative Expenses
(2) (3) ..................... 3,291 5,498 4,955 6,570 6,995 27,497 2,557 3,244 7,742
Goodwill Amortization (4) ... -- -- -- -- -- 1,607 -- -- 402
------- ------- ------- ------- ------- ---------- ------- ------- -----------
Income (Loss) from
Operations .................. 109 (414) (340) 982 696 13,415 1,044 (422) (261)
Interest and Other, net (5) . 61 (86) (73) (22) (71) (499) 15 (126) (126)
------- ------- ------- ------- ------- ---------- ------- ------- -----------
Income (Loss) Before
Income Taxes ................ 170 (500) (413) 960 625 12,916 1,059 (548) (387)
Income Tax Provision(6) ..... -- -- -- -- -- (5,664) -- -- (7)
------- ------- ------- ------- ------- ---------- ------- ------- -----------
Net Income (Loss) ........... $ 170 $ (500) $ (413) $ 960 $ 625 $ 7,252 $ 1,059 $ (548) $ (394)
======= ======= ======= ======= ======= ========== ======= ======= ===========
Basic Earnings (Loss) per Share $ 0.71 $ (0.04)
========== ===========
Shares Used in Computing Pro Forma
Net Income (Loss) per Share (7) 10,258,667 10,258,667
========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL AS OF MARCH 31, 1998(8)
---------------------------------------------------------- ------------------------
AS OF OCTOBER 31, AS OF MARCH 31, COMBINED
------------------------------------------ --------------- AS
BALANCE SHEET DATA: 1993 1994 1995 1996 1997 1998 COMBINED ADJUSTED(9)
---- ---- ---- ---- ---- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working Capital
(Deficiency)(5)................. $1,562 $1,161 $ 616 $1,093 $ 447 $1,845 $(22,797)(10) $ 19,639
Total Assets.................... 3,750 4,924 5,280 6,591 7,523 9,394 118,557 131,201
Long-Term Debt net of Current
Maturities (5)................. 505 666 494 665 767 3,720 6,054 410
Total Stockholders' Equity (5).. 1,055 683 270 1,140 1,570 1,078 48,018 96,098
</TABLE>
- --------
(1) Concurrent with the Offering, GRI intends to change its year end from
October 31 to December 31.
(2) The pro forma combined income statement data reflect an aggregate of $3.3
million for the year ended December 31, 1997 and $317,000 for the three
months ended March 31, 1998 in pro forma reductions in salaries, bonuses,
and benefits to the owners of the Founding Companies to which they have
agreed prospectively.
(3) Includes $498,000, $331,000, and $215,000 of expenses for the build-up of
corporate management and infrastructure during the year ended October 31,
1997, the five months ended March 31, 1998, and the three months ended
March 31, 1998, respectively.
27
<PAGE> 29
(4) Consists of amortization of goodwill to be recorded as a result of the
Combination over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Several of the Founding Companies are S Corporations. Prior to the
Combination, these Founding Companies will make S Corporation Distributions
totaling $14.6 million. Certain Founding Companies will incur debt of $11.7
million relating to these distributions and, subsequent to the Offering,
such amounts will be repaid from borrowings by the Company. Accordingly,
pro forma interest expense has been increased by $936,000 for the year
ended December 31, 1997 and $234,000 for the three months ended March 31,
1998, pro forma working capital has been reduced by $2.7 million, pro forma
debt has been increased by $11.7 million and pro forma stockholders' equity
has been reduced by $14.2 million. One of the Founding Companies has
declared S Corporation Distributions of $434,000 which have been recorded
as a dividend payable to shareholder and reduction of stockholders' equity
in the pro forma combined balance sheet data. This $434,000 is included in
the $14.6 million of S Corporation Distributions. The Combination excludes
certain assets and operations of the Founding Companies with a net book
value of $1.0 million, not required for the ongoing operations of the
Company.
(6) Assumes a corporate income tax rate of 39% and the non-deductibility of
goodwill.
(7) Includes 6,258,667 shares to be issued in connection with the acquisition
of the Founding Companies concurrently with the Offering, but excludes
282,222 shares of Common Stock reserved for issuance upon the exercise of
stock options and warrants to be issued to holders of options and warrants
of certain of the Founding Companies in the Combination. In addition,
immediately following the Offering the Company will grant approximately
560,000 options to employees and directors of the Company pursuant to the
Company's 1998 Stock Option and Restricted Stock Purchase Plan. See
"Management -- 1998 Stock Option and Restricted Stock Purchase Plan."
(8) The pro forma combined balance sheet data assume that the Combination was
consummated on March 31, 1998.
(9) Adjusted for the sale of the 4,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(10) Includes a $25.8 million note payable to the owners of the Founding
Companies, representing the cash portion of the Acquisition Consideration
to be paid from a portion of the net proceeds of the Offering. Excludes
contingent consideration of up to $7.6 million issuable upon achievement of
certain performance requirements.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Founding Companies' historical financial statements, and related notes thereto,
and "Selected Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived primarily from comprehensive roofing
services provided to commercial, construction, and government customers. The
Company also provides some residential roofing services. Approximately 65% of
the Company's 1997 pro forma revenues were derived from re-roofing, restoration
and repair services, and 35% were derived from new roof construction. The
Company also offers maintenance services, which provide recurring revenues and
on-going interaction with its customers. Because of varying weather patterns,
the commercial roofing industry is seasonal in nature. Revenues from fixed-price
construction and renovation contracts are generally accounted for on a
percentage-of-completion basis, using the cost-to-cost method. The cost-to-cost
method measures the percentage completion of a contract based on total costs
incurred to date compared to total estimated costs at completion. Distribution
revenue is recognized at the time of delivery. Typically, because of winter
weather during the first calendar quarter of each year, the Founding Companies
have experienced periods of relatively lower revenues and gross profits with no
corresponding decrease in selling general and administrative expenses.
Cost of revenues consists primarily of compensation and benefits of
field staff, materials, subcontracted services, parts and supplies,
depreciation, fuel and other vehicle expenses and equipment rentals. The
Company's gross profit percentage, which is gross profit expressed as a
percentage of revenues, depends on the relative proportions of costs related to
labor and materials. On jobs in which a higher percentage of the cost of
revenues consists of labor costs, the Company typically achieves higher gross
margins than on jobs where materials represent more of the cost of revenues.
Margins are also affected by the competitive bidding process and the technical
difficulty of the project. New construction work is more likely to be
competitively bid than repair and re-roofing. Typically, repair and re-roofing
jobs are more labor intensive than new construction and have higher margins than
new construction.
Selling, general and administrative expenses consist primarily of
compensation and related benefits for owners, administrative salaries and
benefits, advertising, office rent and utilities, property taxes and
professional fees. The Founding Companies have operated throughout the periods
presented as privately-owned entities and their results of operations reflect
varying tax structures ("S Corporations" or "C Corporations") which have
influenced the historical level of owners' compensation. Accordingly, selling,
general and administrative expenses as a percentage of revenues may not be
comparable among the individual Founding Companies. Certain owners and certain
key employees of the Founding Companies have
29
<PAGE> 31
contractually agreed to reductions in their compensation and related benefits
totaling approximately $3.3 million in the year ended December 31, 1997 in
connection with the Combination. Such reductions in salaries, bonuses and
benefits have been reflected as a pro forma adjustment in the Unaudited Pro
Forma Combined Statement of Operations presented elsewhere in this Prospectus.
The Company believes that it will realize savings from (i)
consolidation of insurance and bonding programs; (ii) reduction in other general
and administrative expenses, such as training and advertising; (iii) the
Company's ability to borrow at lower interest rates than the Founding Companies;
(iv) consolidation of operations in certain locations; and (v) greater volume
discounts from suppliers of materials, parts and supplies. Offsetting these
savings will be costs related to the Company's new corporate management, costs
of being a public company and costs of integrating the companies acquired in the
Combination.
In July 1996, the Commission 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 acquisition accounting. Under SAB 97, the company
receiving the largest voting position from the shares issued in connection with
the Combination must be designated as the accounting acquirer. Accordingly, GRI
is the company that has been designated as the "accounting acquirer." As a
result of the Combination, the excess of the consideration paid over the fair
value of the net assets to be acquired, will be recorded as goodwill on the
Company's balance sheet. Goodwill will be amortized as a non-cash charge to the
income statement over a 40-year period. The pro forma impact of this
amortization expense, which is non-deductible for tax purposes, is expected to
be approximately $1.6 million per year. See "Certain Transactions - Organization
of the Company."
RESULTS OF OPERATIONS - COMBINED
The combined results of operations of the Founding Companies for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the net sales, cost of sales, and selling, general and
administrative expenses of the individual Founding Companies on a historical
basis. The combined results of operations assume that each of the Founding
Companies was combined from the beginning of each period presented. The combined
results also exclude the effect of pro forma adjustments and, therefore, may not
be indicative of the Company's post-combination results of operations for a
number of reasons, including the following: (i) the Founding Companies were not
under common control or management during the periods presented, (ii) the
Founding Companies used different tax structures ("S Corporations" or "C
Corporations") during the periods presented, (iii) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company, (iv) the Company will use the purchase method of accounting to
record the Combination, resulting in the recording and amortization of goodwill,
and (v) the combined data do not reflect the reductions in compensation paid to
the owners of the Founding Companies, or the potential benefits and cost savings
the Company expects to realize when operating as a combined entity.
The discussion below sets forth the results of operations for the
following Founding Companies: GRI; The C.E.I. Companies; Anthony; Specialty
Associates; Cyclone Roofing; Wright-Brown; Harrington-Scanlon; Slavik Butcher;
Five-K; Advanced Roofing; Blackmore & Buckner; and Register Roofing.
The following table sets forth the combined results of operations of
the Founding Companies on a historical basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR (1) MARCH 31,
---------------- ---------
1995 1996 1997 1997 1998
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED:
Revenue.................. $152,992 100.0% $171,510 100.0% $201,220 100.0% $40,682 100.0% $40,746 100.0%
Cost of Revenues......... 123,602 80.8% 135,876 79.2% 158,534 78.8% 33,106 81.4% 32,853 80.6%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross Profit............. 29,390 19.2% 35,634 20.8% 42,686 21.2% 7,576 18.6% 7,893 19.4%
Selling, General and
Administrative Expenses 24,329 15.9% 28,690 16.7% 31,194 15.5% 7,229 17.8% 8,084 19.8%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Operating Income (Loss).. $ 5,061 3.3% $ 6,944 4.0% $ 11,492 5.7% $ 347 0.9% $ (191) (0.5%)
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
30
<PAGE> 32
(1) The fiscal years presented above are the years ended December 31,
1995, 1996 and 1997, except for GRI for which the fiscal years presented are the
years ended October 31, 1995, 1996 and 1997; Anthony for which the fiscal years
presented are October 31, 1995, and December 31, 1996 and 1997; Specialty for
which the fiscal years presented are the year ended June 30, 1995 and the
52-week periods ended February 2, 1997 and February 1, 1998; Slavik Butcher for
which the fiscal years presented are the years ended June 30, 1995, 1996 and
1997; Five-K for which the fiscal years presented are the years ended March 31,
1996, 1997 and 1998; and Register for which the fiscal years presented are the
years ended September 30, 1995, 1996 and 1997.
Combined Results For The Three Months Ended March 31, 1998 Compared To The
Combined Results For The Three Months Ended March 31, 1997
Although the quarterly results for the three months ended March 31,
1998 remained relatively constant when compared to the three months ended March
31, 1997, the following fluctuations principally contributed to the net $0.1
million increase in revenues: increases of $2.1 million resulting from (i) a
$0.4 million increase in revenues at C.E.I. primarily attributable to improved
sales efforts in the fourth quarter of 1997 and a mild winter in Colorado in
1998, (ii) a $0.3 million increase at Register attributable to contracts with
industrial clients and (iii) combined increases in revenues of $1.7 million at
GRI, Wright-Brown and Advanced as a result of increased volume and marketing
efforts during the fourth quarter of 1997, all of which were offset by (i) a
decrease of $1.2 million at Specialty primarily resulting from reduced demand by
certain of the Company's customers and greater than normal activity during the
1997 period, (ii) a combined $0.6 million decrease at Cyclone and Harrington due
to the effects of unusually adverse weather conditions in Kansas, Missouri,
North Carolina and South Carolina. The overall increase in revenues was less
than expected due to the negative impact of severe weather conditions in
numerous locations from the effect of the climatic condition known as El Nino.
As a result of these weather conditions, the Company experienced delays in
completing scheduled work.
Combined gross profit remained relatively constant during the three
months ended March 31, 1998 when compared to the three months ended March 31,
1997, increasing by approximately $0.3 million. Although a portion of this
increase is attributable to the slight increase in revenues, additional
increases were realized as a result of higher gross margin work, offset by
decreases resulting from severe weather conditions which seriously impacted the
productivity of the field workforce.
Combined selling, general and administrative expenses increased
approximately $0.8 million during the three months ended March 31, 1998 to $8.0
million. This increase is primarily attributable to an increased focus on
consummating the Offering. In addition to substantial costs being incurred
during 1998 for professional service fees, additional key executive personnel,
and expanded facilities to accommodate the Company's intended expansion in
connection with the Combination.
Combined Results For 1997 Compared To Combined Results For 1996
Combined revenues increased approximately $29.7 million, or 17.3% from
$171.5 million in 1996 to $201.2 million in 1997. This increase is attributable
to the following: (i) a $2.0 million increase in revenues at GRI as a result of
improved sales efforts and the addition of new sales personnel, (ii) a $2.6
million increase in revenues at C.E.I. attributable to improved economic
conditions and new construction trends throughout all markets serviced by
C.E.I., (iii) a $7.5 million increase in revenues at Anthony resulting from the
expansion of the sales and work force, local school renovation projects, growth
in service and repair work, continued expansion of the sheet metal division, and
some individually significant projects, (iv) a $1.9 million increase in revenues
at Specialty primarily as a result of increased volume, (v) a $5.8 million
increase in revenues at Cyclone attributable to greater bonding availability,
increased estimating capability, and awards of higher margin commercial
contracts, (vi) a $2.5 million increase in revenues at Wright-Brown due to an
increase in volume primarily as a result of competitive bidding, (vii) a $1.5
million increase in revenues at Harrington
31
<PAGE> 33
resulting from expansion of its Arizona and sheet metal operations, (viii) an
increase in revenues of $1.9 million at Slavik Butcher resulting from favorable
pricing and increased demand, (ix) a $1.7 million increase in revenues at Five-K
attributable to the hiring of additional personnel and aggressive pursuit of new
business, (x) a $1.5 million increase in revenues at Advanced resulting from
revenue of approximately $0.5 million generated by a subsidiary formed in 1996,
a partnership agreement with a supermarket chain, and increased volume resulting
from expanded marketing efforts, and (xi) an increase in revenues of $0.6
million at Register due to an agreement to be the preferred provider to a major
Florida corporation.
Combined gross profit increased approximately $7.1 million, or 19.8%
from $35.6 million in 1996 to approximately $42.7 million in 1997. This increase
is attributable to the following: (i) a $0.2 million increase in gross profit at
GRI as a result of an increase sales volume, (ii) a $0.7 million increase in
gross profit at C.E.I. attributable to a continuing effort to shift more of
C.E.I.'s work to re-roofing, service and repair contracts which generally result
in higher gross profit margins than new construction contracts, (iii) a $2.6
million increase in gross profit at Anthony resulting from the sales expansion
discussed above with a proportionately lower increase in costs, (iv) a $0.6
million increase in gross profit at Specialty primarily as a result of increased
profitability on certain contracts, (v) a $1.8 million increase in gross profit
at Cyclone attributable to increased volume of higher margin commercial
contracts, (vi) a $0.3 million increase in gross profit at Wright-Brown
primarily as a result of the increase in sales, but slightly offset by a
decrease in margins due to competitive bidding, (vii) a $0.3 million increase in
gross profit at Slavik Butcher resulting from favorable pricing related to the
increased demand as well as a significant loss contract included in the 1996
results, (viii) a $0.4 million increase in gross profit at Five-K, consistent
with the increase in sales, (ix) a $0.5 million increase in gross profit at
Advanced as a result of the sales increase, coupled with an increase in gross
margins resulting from higher margin jobs obtained through marketing efforts and
efficiencies in field operations, and (x) no change in Register's gross profit
despite the increase in sales, as lower margins were realized due to three
projects, one of which was underestimated, and two of which experienced
unanticipated difficulties that resulted in losses. These increases were offset
by a decrease in gross profit of $0.3 million at Blackmore and Buckner primarily
as a result of an increase in material cost which was not passed onto the
customer as well as increased projects from public bids which realize lower
margins than negotiated contracts.
Combined selling, general and administrative expenses increased
approximately $ 2.5 million, or 8.7% from $28.7 million in 1996 to approximately
$31.2 million in 1997. This increase is attributable to the following: (i) a
$0.4 million increase at GRI as a result of additional staff hired to enhance
GRI's infrastructure and facilitate the industry consolidation strategy, (ii) a
$0.3 million increase at C.E.I. attributable principally to variable costs
associated with increasing revenues, (iii) a $0.8 million increase at Anthony
resulting from increased owner compensation and additional costs associated with
the increase in business volume, (iv) a $0.3 million increase at Specialty
primarily as a result of increased discretionary bonuses and additional costs
consistent with the increase in revenue, (v) a slight increase of $0.1 million
at each of Wright-Brown and Five-K, both attributable to an increase in
compensation, (vi) a $0.2 million increase at Slavik Butcher resulting from
increased activity and volume, (vii) a $0.3 million increase at Advanced as a
result of increased marketing efforts and staffing levels, and (viii) an
increase of $0.2 million at Register due to the addition of a key level
accounting position and a warehouse/materials coordinator. These increases were
offset by (i) a slight decrease of $0.1 million at each of Cyclone and Blackmore
and Buckner attributable to decreased payroll costs.
Combined Results For 1996 Compared To 1995
Combined revenues increased approximately $18.5 million, or 12.1% from
$ 153.0 million in 1995 to $171.5 million in 1996. This increase is attributable
to the following: (i) a $6.6 million increase in revenues at GRI as a result of
improved sales efforts and additional projects, (ii) a $2.8 million increase in
revenues at C.E.I. primarily attributable to a maturation of the operations in
Michigan and improved economic conditions at all locations, (iii) a $1.2 million
increase in revenues at Specialty primarily as a result of increased demand,
(iv) a $1.0 million increase in revenues at Cyclone attributable to an increase
in bonding availability, (v) a $1.9 million increase in revenues at Wright-Brown
due to increased demand and competitive bidding, (vi) a $5.2 million increase in
revenues at Harrington resulting from increased new construction activity, and
expansion in Arizona where it began operations in 1995, (vii) a $2.0 million
increase in revenues at Slavik Butcher principally resulting from the general
construction business which is excluded from this transaction, and (viii) a
32
<PAGE> 34
$0.5 million increase in revenues at Blackmore and Buckner due to an increase in
volume. These increases were offset by (i) a $1.0 million decrease in revenues
at Five-K attributable to more selective competitive bidding, (ii) a $1.4
million decrease in revenues at Advanced as a result of decreased volume,
coupled with management attention being diverted to the move to new facilities
in late 1995, and (iii) a decrease in revenues of $0.3 million at Register due
to a decline in the re-roofing market in Northeast Florida and the entrance into
the metal roofing market.
Combined gross profit increased approximately $6.2 million, or 21.2%
from $29.3 million in 1995 to approximately $35.6 million in 1996. This increase
is attributable to the following: (i) a $2.9 million increase in gross profit at
GRI as a result of the increase in sales, as well as an increase in margins
attributable to a change in the revenue mix from new construction to re-roofing
and repairs, which generate higher margins, (ii) a $1.2 million increase in
gross profit at C.E.I. primarily attributable to an effort by management to
concentrate on higher margin re-roofing and repair work, coupled with several
large new construction contracts in 1995 that were completed with little or no
gross profit, (iii) a $0.1 million increase in gross profit at Specialty
primarily as a result of increased revenues, (iv) a $0.8 million increase in
gross profit at Wright-Brown due to increased volume at improved margins, (v) a
$0.6 million increase in gross profit at Harrington resulting from increased
revenues, (vi) a $0.5 million increase in gross profit at Five-K resulting from
several highly profitable jobs, (vii) a $0.1 million increase in gross profit at
Advanced, despite the decrease in revenues, as a result of abnormally low
margins attained in 1995 due to the loss of certain personnel and the move to
new facilities in 1995, (viii) a $0.3 million increase in gross profit at
Blackmore and Buckner due to an increase in volume coupled with improved gross
margins, and (ix) an increase in gross profit of $0.4 million at Register due to
management's concentration on fewer projects with higher margins. These
increases were offset by a $0.7 million decrease in gross profit at Anthony
primarily resulting from lower margin projects in 1996.
Combined selling, general and administrative expenses increased
approximately $4.4 million, or 17.9% from $24.3 million in 1995 to approximately
$28.7 million in 1996. This increase is attributable to the following: (i) a
$1.6 million increase at GRI as a result of additional staff hired to manage the
increased volume of projects, as well as costs associated with the development
and installation of a networked enterprise information system developed to
facilitate this increased volume, (ii) a $0.4 million increase at C.E.I.
attributable principally to variable costs associated with increasing revenues,
(iii) a $0.1 million increase at each of Anthony, Slavik Butcher, and Advanced
resulting primarily from increased compensation, (iv) an increase of $0.5
million at Cyclone attributable to an increase in the bonus paid to the
president and employment of additional estimators and salesmen, (v) an increase
of $0.3 million at Wright-Brown consistent with the increase in revenues, (vi) a
$0.7 million increase at Harrington due to expansion in Arizona and increased
volume in the Kansas City area, (vii) a $0.4 million increase at Five-K
attributable to an additional compensation, (viii) a $0.2 million increase at
Blackmore and Buckner attributable to increased commissions, and (ix) a $0.2
million increase in gross profit at Register primarily resulting from the
addition of a new project manager. These increases were offset by a $0.2 million
decrease at Specialty primarily as a result of increased revenues and lower
costs, including reduced owner's compensation.
Combined Liquidity And Capital Resources
On a combined basis, the Founding Companies generated $9.4 million of
net cash from operating activities for the year ended December 31, 1997,
primarily as a result of $10.6 million in net income during the period. Net cash
used in investing activities was $4.3 million primarily for equipment purchases.
Net cash used in financing activities was $2.9 million and consisted of
increases in long-term debt of $6.6 million offset by $6.2 million of debt
repayments and $3.3 million of distributions to stockholders.
The Company's working capital after adjustment for the sale of the
4,000,000 shares of Common Stock offered hereby would be $19.6 million as of
March 31, 1998. The anticipated cash flows subsequent to the Combination are
expected to be sufficient to satisfy the Company's anticipated cash flows for
the 12 months following the Offering.
The net proceeds to the Company from the sale of the shares of Common
Stock in the Offering are expected to be $48.1 million. The Company intends to
use $25.8 million to pay the cash portion of the acquisitions, and $9.7 million
to repay certain outstanding indebtedness of the Founding Companies, with the
33
<PAGE> 35
remaining proceeds of $12.6 million available for general corporate purposes,
including working capital and future acquisitions. The Company expects to
refinance the $11.7 million of debt assumed from the Founding Companies. All
other debt of the Founding Companies is expected to be paid. Pending application
of the net proceeds as described herein, the Company intends to invest the net
proceeds in short-term investment grade or U.S. governmental interest bearing
securities.
Certain of the stock purchase agreements provide for contingent
consideration. During the ensuing 24 months, additional consideration of up to
$7.6 million in cash or shares of Common Stock could be required to be paid. The
Company expects to have available lines of credit sufficient to fund such
consideration, if earned.
Prior to the Combination, certain Founding Companies will make
distributions to their owners totaling $14.6 million, representing substantially
all of their previously taxed undistributed earnings ("S Corporation
Distributions"). The S Corporation Distributions will be funded through
borrowings by the Company subsequent to the Combination.
In addition, the Company intends to pursue acquisition opportunities.
The Company expects to fund future acquisitions through the issuance of
additional Common Stock and borrowings. The Company anticipates that its cash
flow from operations will provide cash in excess of the Company's normal working
capital needs, debt service requirements and planned capital expenditures for
equipment.
Retention is typical on new construction commercial work for both the
sheet metal and roofing operations. Retention typically ranges from 5% to 10% of
the contract, and may be reduced at the time of final billing of the Company's
portion of the contract. The balance may be held until final close-out of the
project including the work of other trades. The amount of retention will vary
based upon the mix and timing of contract completion.
RESULTS OF OPERATIONS - GRI
GRI operates as a provider of comprehensive roofing services to
commercial, construction and government customers. At the present time,
approximately all of the Company's revenues are generated in Florida. GRI
generally experiences lower revenues during the first calendar quarter of each
year, due largely to the general decline in construction-related activity during
the winter months.
The following table sets forth the historical results of operations for
GRI.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED OCTOBER 31, MARCH 31,
------------------------------------------------------------- ----------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................... $ 18,174 100.0% $ 24,810 100.0% $ 26,792 100.0% $ 11,339 100.0% $ 10,838 100.0%
Cost of Revenues .......... 13,559 74.6% 17,258 69.6% 19,101 71.3% 7,738 68.2% 8,016 74.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross Profit .............. 4,615 25.4% 7,552 30.4% 7,691 28.7% 3,601 31.8% 2,822 26.0%
Selling, General and
Administrative Expenses... 4,955 27.3% 6,570 26.5% 6,995 26.1% 2,557 22.6% 3,244 29.9%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating Income (Loss).... $ (340) (1.9%) $ 982 4.0% $ 696 2.6% $ 1,044 9.2% $ (422) (3.9%)
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Five Months Ended March 31, 1998 Compared To The Five Months Ended March 31,
1997
Revenues decreased $501,000, or 4.4%, from $11.3 million for the five
months ended March 31, 1997 to $10.8 million for the five months ended March 31,
1998, primarily as a result of extensive rain experienced throughout the entire
state of Florida as a result of the El Nino weather pattern. This condition
adversely affected the ability of GRI to provide roofing services.
34
<PAGE> 36
Gross profit decreased $779,000 or 21.6%, for the five months ended
March 31, 1998 to $2.8 million, and gross margin decreased to 26.0% in 1998 from
31.8% in 1997. This is primarily a result of extensive rainfall which seriously
impacted the productivity of the workforce in the field. During periods of
intermittent rain, temporary measures must be taken to monitor roof work in
progress for leaks and to secure the roof from leaks, adding to the cost of the
project.
Selling, general and administrative expenses increased 26.9% from $2.6
million to $3.2 million. The increase was attributable to the enhancement of
GRI's infrastructure so as to facilitate their efforts in connection with the
Offering and Combination.
Year Ended October 31, 1997 Compared To The Year Ended October 31, 1996
Revenues increased $2.0 million, or 8.1%, from $24.8 million for the
year ended October 31, 1996 to $26.8 million for the year ended October 31, 1997
primarily as a result of improved sales efforts and the addition of four new
sales associates.
Gross profit increased $139,000 or 1.8%, during the year ended October
31, 1997 to $7.7 million primarily as a result of an increase in sales volume.
Gross margin decreased to 28.7% during the year ended October 31, 1997 from
30.4% during the year ended October 31, 1996 as a result of an increase in
competitive market conditions.
Selling, general and administrative expenses increased 6.5% from $6.6
million during 1996 to $7.0 million during 1997. The increase was primarily
attributable to expenses incurred attributed to the enhancement of GRI's
infrastructure, primarily in the form of executive staff, to facilitate the
industry consolidation strategy. In addition, four sales associates were added
to facilitate revenue growth.
Year Ended October 31, 1996 Compared To The Year Ended October 31, 1995
Revenues increased $6.6 million, or 36.5%, from $18.2 million for the
year ended October 31, 1995 to $24.8 million for the year ended October 31, 1996
primarily due to an overall increase in obtaining new projects as a result of
increased sales efforts.
Gross profit increased $2.9 million, or 63.6%, from $4.6 million for
the year ended October 31, 1995 to $7.6 million for the year ended October 31,
1996. Gross margin increased from 25.4% to 30.4% over these periods. The
increase in gross profit amounts and percentages is primarily attributable to a
change in the combination of work from new construction to re-roofing and
repairs, which result in higher margins.
Selling, general and administrative expenses increased 32.6% from $5.0
million during 1995 to $6.6 million during 1996. The increase was attributable
to the addition of three administrative personnel to manage the additional
volume of projects obtained, and costs associated with the development and
installation of a networked enterprise information system developed to
facilitate the increased revenue volume of GRI. Selling, general and
administrative expenses as a percentage of revenues remained constant during
1996 when compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES - GRI
GRI used $1.4 million of net cash from operating activities for the
five months ended March 31, 1998 as a result of the following: decreases
resulting from (i) a net decrease in operating assets and liabilities of $1.1
million, and (ii) a net loss of $548,000, offset by an increase resulting from
$194,000 of depreciation and amortization. Net cash used in investing activities
of $1.1 million resulted primarily from deferred costs of the Combination and
the Offering of $808,000 and purchases of property and equipment of $303,000.
Net cash generated by financing activities of $2.4 million resulted primarily
from $5.4 million in borrowings of long-term debt, offset by repayments of $2.9
million. At March 31, 1998, GRI had working capital of $1.8 million and total
debt of $4.7 million.
35
<PAGE> 37
RESULTS OF OPERATIONS - C.E.I.
C.E.I. has facilities and operations in Texas, Florida, Colorado,
Michigan and California. C.E.I.'s revenues are derived from providing
maintenance, repair and restoration, re-roofing and new roof construction
services for commercial customers.
The following table sets forth the historical results of operations for
C.E.I.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- -----------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................. $39,694 100.0% $42,525 100.0% $45,163 100.0% $ 9,653 100.0% $10,025 100.0%
Cost of Revenues ........ 31,189 78.6% 32,852 77.3% 34,899 77.3% 7,742 80.2% 7,733 77.1%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit ............ 8,505 21.4% 9,673 22.7% 10,264 22.7% 1,911 19.8% 2,292 22.9%
Selling, General and
Administrative Expenses.. 7,289 18.4% 7,699 18.1% 8,018 17.8% 1,933 20.0% 2,105 21.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating Income (Loss).. $ 1,216 3.1% $ 1,974 4.6% $ 2,246 5.0% $ (22) (0.2%) $ 187 1.9%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
Revenues increased $372,000 or 3.9% from $9.7 million for the three
months ended March 31, 1997 to $10.0 million for the three months ended March
31, 1998, primarily as a result of a significant increase in sales from the
Colorado operations (34%) due primarily to increased sales efforts in the fourth
quarter of 1997 and a mild winter in Colorado in 1998. The revenue gains in
Colorado were offset by revenue declines in Texas and Florida due principally to
record amounts of rainfall in these locations.
Gross profit increased $381,000 or 20.0% during the first three months
of 1998 to $2.3 million as a result of increased revenues from higher gross
profit repair work brought on by the record rainfall in the Texas and Florida
markets. In addition, management has implemented procedures to more closely
monitor jobs in process to control costs.
Selling, general and administrative expenses increased 8.9% from $1.9
million to $2.2 million. The increase was attributable principally to salary
increases of 3-5% and the variable cost increases inherent in higher revenues.
Year Ended December 31, 1997 Compared To The Year Ended December 31, 1996
Revenues increased $2.6 million or 6.2% from $42.5 million for the year
ended December 31, 1996 to $45.2 million for the year ended December 31, 1997,
primarily in the Colorado, Michigan and California operations. Revenue increases
generally resulted from improved economic conditions and new construction trends
throughout all the markets serviced by C.E.I.
Gross profit increased $591,000 or 6.1% during the year ended December
31, 1997 to $10.3 million as a result of a continuing effort to shift more of
C.E.I.'s work to re-roofing, service and repair contracts which generally result
in higher gross profit margins than new construction contracts.
Selling, general and administrative expenses increased 4.1% from $7.7
million to $8.0 million. The increase was attributable principally to variable
costs associated with increasing revenues.
36
<PAGE> 38
Year Ended December 31, 1996 Compared To The Year Ended December 31, 1995
Revenues increased $2.8 million or 7.1% from $39.7 million for the year
ended December 31, 1995 to $42.5 million for the year ended December 31, 1996,
primarily as a result of a maturation of the operations in Michigan and improved
economic conditions in all locations.
Gross profit increased $1.2 million or 13.7% during the year ended
December 31, 1996 to $9.7 million as a result of an effort by management to
concentrate on higher margin re-roofing and repair work. Additionally, the
Colorado operation had several large new construction contracts in 1995 that
were completed with little or no gross profit.
Selling, general and administrative expenses increased 5.6% from $7.3
million to $7.7 million. The increase was attributable primarily to variable
costs associated with increasing revenues.
LIQUIDITY AND CAPITAL RESOURCES - C.E.I.
C.E.I. generated approximately $300,000 of net cash from operating
activities for both the three month periods ended March 31, 1998 and 1997, while
revenues increased 3.9% during the period. Net cash used in financing activities
was $515,000 and was used principally for the payment of dividends to
stockholders in the three months ended March 31, 1998. C.E.I. has various lines
of credit allowing for borrowings up to $1.3 million of which $300,000 was drawn
at March 31, 1998. C.E.I. working capital at March 31, 1998 was $1.3 million.
For the year ended December 31, 1997, C.E.I. generated $1.8 million in
cash from operations on net income of $2.2 million. Cash generated from
operations was less than net income primarily due to an increase in contract
billings and retainage. Cash used by investing activities was $374,000 as a
result of purchases of property and equipment. Cash used in financing activities
of $1.5 million is the result of paying dividends to stockholders during the
year. At December 31, 1997, C.E.I. had working capital of $3.3 million including
$0.3 million drawn under their $1.3 million line of credit.
At December 31, 1996, C.E.I. had working capital of $1.0 million and
had drawn $0.03 million under their $0.9 million line of credit.
RESULTS OF OPERATIONS - ANTHONY
Anthony Roofing Ltd. ("Anthony") was founded in 1979 and is
headquartered in Aurora, Illinois. Anthony operates primarily in Illinois;
however, approximately 20% of its projects are in other geographical regions of
the United States. Anthony operates as a provider of comprehensive roofing
services to commercial, construction, and government customers.
The following table sets forth the historical results of operations for
Anthony.
<TABLE>
<CAPTION>
FOURTEEN MONTH
PERIOD ENDED THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31,
-------------- ------------------------ ---------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue .................. $13,310 100.0% $12,226 100.0% $19,778 100.0% $ 2,524 100.0% $ 2,489 100.0%
Cost of Revenues ......... 9,916 74.5% 9,507 77.8% 14,441 73.0% 2,242 88.8% 2,132 85.7%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit ............. 3,394 25.5% 2,719 22.2% 5,337 27.0% 282 11.2% 357 14.3%
Selling, General and
Administrative Expenses .. 1,915 14.4% 2,086 17.1% 2,870 14.5% 372 14.7% 445 17.9%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating Income (Loss) .. $ 1,479 11.1% $ 633 5.2% $ 2,467 12.5% $ (90) (3.6%) $ (88) (3.5%)
======= ====== ======= ====== ======= ===== ======= ====== ======= =====
</TABLE>
37
<PAGE> 39
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
Revenues decreased $35,000 or 1.4% from the quarter ended March 31,
1997 to the quarter ended March 31, 1998.
Gross profit increased $75,000 or 26.6% during the quarter ended March
31, 1998 to $357,000 and gross profit percentage increased to 14.3% in the
quarter ended March 31, 1998 from 11.2% in the quarter ended March 31, 1997.
This increase was primarily as a result of improved profit margin on contracts
during the first quarter of 1998.
Selling, general and administrative expenses increased 19.6% from
$372,000 in 1997 to $445,000 in 1998. This increase is primarily attributable to
increased salaries for employees, the addition of sales and executive personnel
as part of the Company's growth plan and general increases due to volume
increases.
Year Ended December 31, 1997 Compared To The Year Ended December 31, 1996
Revenue increased by $7.6 million or 61.8% from $12.2 million for the
year ended December 31, 1996 to $19.8 million for the year ended December 31,
1997. This increase primarily resulted from the expansion of the sales and work
force, local school renovation projects, growth in service and repair work, and
continued expansion of the sheet metal division and certain significant
projects. The Company had three projects in 1997 with revenue in excess of $1
million and had a series of contracts with one customer that resulted in $ 2.7
million in revenue in 1997. This activity was increased significantly from 1996.
Gross profit increased $2.6 million or 96.3% to $5.3 million during the
year ended December 31, 1997 compared to 1996. Gross profit was 27.0% of revenue
for the year ended December 31, 1997 compared to 22.2% for the year ended
December 31, 1996, as a result of some large contracts being more profitable
than expected and increased revenue, as discussed above, with a proportionately
smaller increase in costs.
Selling, general and administrative expenses increased 37.6% from $2.1
million for the year ended December 31, 1996 to $2.9 million for the year ended
December 31, 1997. The increase was primarily due to increased owner
compensation and additional costs associated with increased business volume.
Year Ended December 31, 1996 Compared To The Fourteen Month Period Ended
December 31, 1995
Anthony changed its fiscal year end in 1995 from October 31 to December
31. Consequently, the financial results for the period ended December 31, 1995
represent a 14-month period ended December 31, 1995. The unaudited twelve-month
period ended October 31, 1995 revenue and gross profit were $12.3 million and
$3.4 million, respectively. Adjusting for this fiscal year-end change, 1996
revenue was approximately the same as 1995.
Gross profit declined $675,000 in 1996 from $3.4 million in 1995 to
$2.7 million in 1996 and gross profit margin declined from 25.5% in 1995 to
22.2% in 1996 mainly due to lower margin projects in 1996.
Selling, general and administrative expenses increased 8.9% from $1.9
million in 1995 to $2.1 million primarily as a result of increased owner
compensation. Excluding owners' compensation, selling, general and
administrative would have declined 4%. Bad debts in 1996 were $60,000 over 1995.
Excluding owners compensation and the increase in bad debts, selling, general
and administrative expenses would have declined 11% consistent with the
differences in periods.
38
<PAGE> 40
LIQUIDITY AND CAPITAL RESOURCES - ANTHONY
Anthony generated approximately $661,000 of cash from operating
activities for the quarter ended March 31, 1998. Net cash used in investing
activities was approximately $68,000, primarily for the purchase of equipment.
Net cash used in financing activities was nominal. At March 31, 1998, Anthony
had working capital of $4.7 million. At March 31, 1998, Anthony had a line of
credit in the amount of $1.5 million available for liquidity needs. There were
no amounts outstanding under this line at March 31, 1998.
Anthony generated $2.2 million from operating activities for the year
ended December 31, 1997. Net cash used in investing activities was approximately
$158,000, primarily for additions to property and equipment. Net cash used in
financing activities of $976,000 resulted from repayment of bank borrowings of
$803,000 and distribution to shareholder of $173,000. At December 31, 1997,
Anthony had no debt outstanding.
Retention is typical on new construction commercial work for both sheet
metal and roofing contracts. Retention is typically 10% of the contract amount
and is generally reduced to 5% at time of final billing of the Company's portion
of the contract. The final 5% is generally held until final close-out of the
project which can be 30 to 120 days after completion of the sheet metal and
roofing portion of the contract and in some cases the time frame can be longer.
The amount of retention outstanding at any one time is affected by a number of
factors including amount of new work being done, stage of the projects as well
as time of the year. Retention on average can run in the $300,000-$800,000
range. At December 31, 1997 and March 31, 1998 the amount of retention was
$605,000 and $608,000, respectively.
RESULTS OF OPERATIONS - SPECIALTY ASSOCIATES
Specialty Associates and Affiliate were founded in 1975 and 1977,
respectively, and are headquartered in West Allis, Wisconsin. The companies have
common management and facilities and are hereafter referred to collectively as
Specialty Associates. Specialty Associates operates primarily in southeastern
Wisconsin and northern Illinois but has operated throughout the continental
United States. Specialty Associates is a construction contractor whose principal
business is commercial roofing, architectural sheet metal fabrication, and
residential roofing.
The following table sets forth the historical results of operations for
Specialty Associates.
<TABLE>
<CAPTION>
NINE WEEKS ENDED
53-WEEK 52-WEEK ----------------
PERIOD ENDED PERIOD ENDED APRIL 6, APRIL 5,
FEB 2, 1997 FEB 1, 1998 1997 1998
------------ ------------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $15,306 100.0% $17,197 100.0% $2,394 100.0% $1,541 100.0%
Cost of Revenues.......... 13,659 89.2% 14,957 87.0% 2,213 92.4% 1,439 93.4%
------- ----- ------- ----- ------ ----- ------ -----
Gross Profit.............. 1,647 10.8% 2,240 13.0% 181 7.6% 102 6.6%
Selling, General and
Administrative Expenses... 1,236 8.1% 1,486 8.6% 188 7.9% 212 13.8%
------- ----- ------- ----- ------ ----- ------ -----
Operating Income (Loss)... $ 411 2.7% $ 754 4.4% $ (7) (0.3%) $ (110) (7.1%)
======= ===== ======= ===== ====== ====== ====== =====
</TABLE>
Nine Weeks Ended April 5, 1998 Compared To The Nine Weeks Ended April 6, 1997
Revenues decreased $853,000 or 35.6% from $2.4 million for the nine
weeks ended April 6, 1997 to $1.5 million for the nine weeks ended April 5,
1998, primarily as a result of reduced demand by certain of the company's
customers. The first nine weeks of the fiscal year are seasonally slow periods
for the company. 1997 had more than normal activity while 1998 had less than
normal activity for this time of year. Management expects demand to return to
normal levels for the remainder of the fiscal year.
39
<PAGE> 41
Gross profit decreased $79,000 or 43.6% during the nine weeks ended
April 5, 1998 to $102,000 and gross profit percentage decreased to 6.6% in the
nine week period ended April 5, 1998 from 7.6% in the nine week period ended
April 6, 1997, as a result of lower demand and decreased profit on contracts.
Selling, general and administrative expenses increased 12.8% from
$188,000 in 1997 to $212,000 in 1998. This increase is primarily attributable to
an increase in salaries for employees and an increase in professional fees.
52 week period ended February 1, 1998 compared to the 53 week period ended
February 2, 1997
Revenue increased by $1.9 million or 12.4% from $15.3 million for the
53 week period ended February 2, 1997 to $17.2 million for the 52-week year
ended February 1, 1998, primarily as a result of increased demand. This increase
was partially offset by the length of the period being one week less.
Gross profit increased $593,000 or 36.0% during the 52 week period
ended February 1, 1998 to $2.2 million which was 13.0% of revenue in the 52 week
period ended February 1, 1998 compared to 10.8% for the 53 week period ended
February 2, 1997, as a result of increased profitability on certain contracts.
Selling, general and administrative expenses increased 20.2% from $1.2
million during the 53-week period ended February 2, 1997 to $1.5 million for the
52 week period ended February 1, 1998. The increase was attributable to
increased discretionary bonuses, including bonuses to owner-managers and
additional costs associated with increased business volume.
LIQUIDITY AND CAPITAL RESOURCES - SPECIALTY ASSOCIATES
Specialty Associates used approximately $143,000 of cash in operating
activities for the nine-week period ended April 5, 1998, primarily for working
capital. Net cash used in investing activities was approximately $12,000. Net
cash provided from financing activities was $50,000, primarily from net
borrowings on its line of credit. At April 5, 1998 Specialty Associates had
working capital of $219,000. At April 5, 1998, there was $800,000 outstanding on
the $1.0 million line of credit and $671,000 of long-term debt including current
maturities of $202,000.
Specialty Associates generated $777,000 from operating activities for
the 52 week period ended February 1, 1998. Net cash used in investing activities
was approximately $607,000, primarily for additions to property and equipment.
Net cash used in financing activities of $43,000 resulted primarily from the
purchase of treasury stock of $46,000. At February 1, 1998, Specialty Associates
had $700,000 outstanding on its $1 million line of credit and long-term debt of
$721,000 including current maturities of $202,000.
Retention is typical on new construction commercial work for both the
sheet metal and roofing operations. There is no retention on residential or
wholesale business. Retention is typically 10% of the contract and is generally
reduced to 5% at time of final billing of the Company's portion of the contract.
The final 5% is generally held until final close-out of the project which can be
30 to 120 days after completion of the sheet metal and roofing portion of the
contract and in some cases the time frame can be longer. Retention typically
ranges from $300,000 to $500,000, but will vary based on the mix and timing of
completion of contracts.. At February 1, 1998 and April 5, 1998 the amount of
retention was $549,000 and $489,000, respectively.
RESULTS OF OPERATIONS - CYCLONE
Cyclone operates as a provider of comprehensive roofing services to
commercial, industrial, manufacturing, construction and government customers.
The following table sets forth the historical results of operations for
Cyclone.
40
<PAGE> 42
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ---------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue .................. $ 9,243 100.0% $10,254 100.0% $16,057 100.0% $ 3,085 100.0% $ 2,829 100.0%
Cost of Revenues ......... 7,618 82.4% 8,538 83.3% 12,523 78.0% 2,584 83.8% 2,457 86.9%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit ............. 1,625 17.6% 1,716 16.7% 3,534 22.0% 501 16.2% 372 13.1%
Selling, General and
Administrative Expenses.. 683 7.4% 1,157 11.3% 1,099 6.8% 227 7.4% 227 8.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating Income ......... $ 942 10.2% $ 559 5.5% $ 2,435 15.2% $ 274 8.9% $ 145 5.1%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
Revenues decreased $256,000, or 8.3%, from $3.1 million for the three
months ended March 31, 1997, to $2.8 million for the three months ended March
31, 1998, primarily due to the effects of unusually rainy weather in North and
South Carolina.
Gross profit decreased $129,000, or 25.7%, from $501,000 for the three
months ended March 31, 1997 to $372,000 for the three months ended March 31,
1998. Gross margin decreased from 16.2% to 13.1% over these periods. The
decrease in gross profit amounts and percentages is consistent with the decrease
in revenues and a decrease in the amount of higher margin commercial contracts
in relation to the total.
Selling, general and administrative expenses remained constant at
$227,000, or 7.4% and 8.0% of revenues for the three months ended March 31, 1997
and March 31, 1998, respectively.
Year Ended December 31, 1997 Compared To The Year Ended December 31, 1996
Revenues increased $5.8 million, or 56.6%, from $10.3 million for the
year ended December 31, 1996, to $16.1 million for the year ended December 31,
1997, primarily due to the Company's ability to increase the amount of its
bonding availability, an increase in the Company's estimating capacity, and
increased demand for the higher margin commercial projects.
Gross profit increased $1.8 million, or 105.9%, from $1.7 million for
the year ended December 31, 1996 to $3.5 million for the year ended December 31,
1997. Gross margin increased from 16.7% to 22.0% over these periods. The
increase in gross profit amounts and percentages is consistent with the increase
in revenues and the increased demand for the higher margin commercial contracts.
The Company was able to gain contracts on several large and complex commercial
projects with gross profit margins ranging up to 50%.
Selling, general and administrative expenses decreased 5.0% from $1.2
million for the year ended December 31, 1996 to $1.1 million for the year ended
December 31, 1997. The decrease was primarily attributable to a decrease in the
bonus paid to the president.
Selling, general and administrative expenses as a percentage of
revenues decreased from 11.3% for the year ended December 31, 1996 to 6.8% for
the year ended December 31, 1997. Excluding the bonus paid to the president,
selling, general and administrative expenses, as a percentage of revenues would
have been 8% for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared To The Year Ended December 31, 1995
Revenues increased $1.0 million, or 10.9%, from $9.2 million for the
year ended December 31, 1995, to $10.3 million for the year ended December 31,
1996, primarily due to the Company's ability to increase the amount of its
bonding availability.
41
<PAGE> 43
Gross profit increased $91,000, or 5.6%, from $1.6 million for the year
ended December 31, 1995 to $1.7 million for the year ended December 31, 1996.
Gross margin decreased from 17.6% to 16.7% over these periods. The fluctuation
in gross profit amounts and percentages is consistent with the increase in
revenues and the mix of commercial contracts.
Selling, general and administrative expenses increased 69.4% from
$683,000 for the year ended December 31, 1995 to $1.2 million for the year ended
December 31, 1996. The increase was primarily attributable to an increase in the
bonus paid to the president and the hiring of additional estimators and
salesmen. Selling, general and administrative expenses as a percentage of
revenues increased from 7.4% for the year ended December 31, 1995 to 11.3% for
the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES - CYCLONE
Cyclone generated $88,000 of net cash from operating activities for the
three months ended March 31, 1998, which increased compared to the three months
ended March 31, 1997 as a result of net income plus a decrease in contract
receivables and decreases in accounts payable and accrued expenses, partly
offset by increases in costs and estimated earnings in excess of billings on
contracts in progress and a decrease in billings in excess of costs and
estimated earnings. Net cash used in investing activities was $125,000 and
$163,000 the three months ended March 31, 1998 and March 31, 1997, respectively,
primarily for the purchase of fixed assets. Net cash used in financing
activities of $413,000 for the three months ended March 31, 1998 resulted
primarily from distributions to stockholder. Net cash provided by financing
activities of $76,000 for the three months ended March 31, 1997 resulted
primarily from advances on the line of credit. Cyclone had a $250,000 revolving
line of credit as of March 31, 1998 that is due on demand. At March 30, 1998,
Cyclone had no amounts outstanding under its line of credit.
At March 31, 1998, Cyclone had working capital of $3.1 million and
total debt and capitalized lease obligations of $322,000.
Cyclone generated $814,000 of net cash from operating activities for
the year ended December 31, 1997, which increased from $241,000 of net cash
generated from operating activities for the year ended December 31, 1996. Higher
cash flows from operating activities for 1997 resulted from significantly
greater net income with offsetting increases in contract receivables and costs
and estimated earnings in excess of billings on contracts in progress and a
decrease in accounts payable. Net cash used in investing activities was $255,000
and $294,000 for the years ended December 31, 1997 and December 31, 1996,
respectively, primarily for the purchase of fixed assets. Net cash used in
financing activities of $56,000 for the year ended December 31, 1997 resulted
primarily from repayments of long-term debt which were offset by advances on the
line of credit. Net cash used in financing activities of $115,000 for the year
ended December 31, 1996 resulted primarily from distributions to stockholder and
repayments of long-term debt. Cyclone had a $250,000 revolving line of credit as
of December 31, 1997 that is due on demand. At December 31, 1997, Cyclone had no
amounts outstanding under its line of credit.
At December 31, 1997 and December 31, 1996, Cyclone had working capital
of $3.6 million and $1.3 million, respectively, and total debt and capitalized
lease obligations of $352,000 and $407,000, respectively.
Retention is typical for new construction commercial contracts.
However, certain of the company's larger new commercial contracts have no
retention and retention on commercial contracts with the State of North Carolina
are 5% of the contract amount. There is no retention on the residential
business. Retentions are usually 10% of contract revenues and may be reduced to
5% at time of final billing of the company's portion of the contract. The final
retention is generally held until final close-out of the project which can be
30-120 days after completion of the contract and in some cases the time frame
can be longer. The amount of retention outstanding at any one time is affected
by a number of factors including amount of new work being done, stage of the
projects as well as time of the year. Retention on average can run in the
$250,000-$450,000 range. At December 31, 1997 and December 31, 1996, the amount
of retention was $733,000 and $336,000, respectively.
42
<PAGE> 44
RESULTS OF OPERATIONS - WRIGHT-BROWN
Wright-Brown was founded in 1951 and is located in Detroit, Michigan.
It operates exclusively in Michigan. Wright-Brown operates as a provider of
comprehensive roofing services to commercial, construction and government
customers.
The following table sets forth the historical results of operations for
Wright-Brown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------------------
1996 1997 1997 1998
---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue...................... $12,820 100.0% $ 15,316 100.0% $2,135 100.0% $2,447 100.0%
Cost of Revenues............. 10,630 82.9% 12,820 83.7% 1,788 83.7% 2,113 86.4%
------- ----- -------- ----- ------ ----- ------ -----
Gross Profit................. 2,190 17.1% 2,496 16.3% 347 16.3% 334 13.6%
Selling, General and
Administrative Expenses...... 1,285 10.0% 1,393 9.1% 393 18.4% 307 12.5%
------- ----- -------- ----- ------ ----- ------ -----
Operating Income (Loss)...... $ 905 7.1% $ 1,103 7.2% $ (46) (2.1%) $ 27 1.1%
======= ===== ======== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
Contract revenues increased $312,000, or 14.6%, from $2.1 million for
the three months ended March 31, 1997 to $2.4 million for the three months ended
March 31, 1998, primarily due to increased demand.
Gross profit decreased $13,000, or 3.7%, during the first three months
of 1998 to $334,000 and gross profit as a percentage of contract revenues
decreased to 13.6% in 1998 from 16.3% in 1997 as a result of increased labor
costs and the use of subcontractors to meet the increased operations.
Selling, general and administrative expenses decreased 21.9% from
$393,000 to $307,000. This decrease was primarily attributable to reductions in
insurance costs.
Year Ended December 31, 1997 Compared To The Year Ended December 31, 1996
Contract revenues earned increased $2.5 million, or 19.5%, from $12.8
million for the year ended December 31, 1996 to $15.3 million for the year ended
December 31, 1997. This increase was primarily due to an increase in demand and
competitive bidding.
Gross profit increased $306,000, or 14.0%, during 1997 to $2.5 million
from $2.2 million, and gross profit as a percentage of contract revenues earned
decreased to 16.3% in 1997 from 17.1% in 1996. This decrease was primarily a
result of competitive bidding to generate the increase in contract revenues.
Selling, general and administrative expenses increased 8.4% from $1.3
million to $1.4 million. The increase was primarily attributable to an increase
in office salaries due to the addition of two positions.
LIQUIDITY AND CAPITAL RESOURCES - WRIGHT-BROWN
Wright-Brown generated $397,000 of net cash in operating activities for
the three months ended March 31, 1998. Net cash used in investing activities was
approximately $44,000, primarily for the purchase of property and equipment. Net
cash used in financing activities of $285,000 was primarily attributable to
distributions to stockholders. At March 31, 1998, Wright-Brown had working
capital of $808,000 and total debt
43
<PAGE> 45
of $169,000. Additionally, the company had a total of $500,000 available on a
line of credit with no amounts outstanding at March 31, 1998.
Wright-Brown generated $854,000 of net cash in operating activities for
the year ended December 31, 1997. Net cash used in investing activities was
approximately $161,000, primarily for purchases of property and equipment. Net
cash used in financing activities of $950,000 resulted primarily from
distributions to stockholders. At December 31, 1997, Wright-Brown had working
capital of $1.1 million and total debt of $197,000. Additionally, at December
31, 1997, there were no amounts outstanding on the line of credit.
RESULTS OF OPERATIONS - HARRINGTON-SCANLON
Harrington-Scanlon was founded in 1983 in Kansas City, Kansas. In 1993,
Harrington opened a subsidiary with locations in Tucson and Phoenix, Arizona.
Harrington-Scanlon operates as a provider of comprehensive roofing services to
commercial, construction and government customers, as well as sheet metal
operations. The majority of Harrington-Scanlon's operations are conducted in
Kansas, Missouri, and Arizona.
The following table sets forth the historical results of operations for
Harrington-Scanlon.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------------------------
1997 1997 1998
------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue .................. $11,816 100.0% $ 2,654 100.0% $ 2,369 100.0%
Cost of Revenues ......... 10,046 85.0% 2,186 82.4% 2,185 92.2%
------- ----- ------- ----- ------- -----
Gross Profit ............. 1,770 15.0% 468 17.6% 184 7.8%
Selling, General and
Administrative Expenses .. 1,550 13.1% 329 12.4% 377 15.9%
------- ----- ------- ----- ------- -----
Operating Income (Loss) .. $ 220 1.9% $ 139 5.2% $ (193) (8.1%)
======= ===== ======= ===== ======= =====
</TABLE>
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
Revenues for the three months ended March 31, 1998 were $285,000 lower
than March 31, 1997, or 10.7%. The lower revenues in the first quarter or 1998
are primarily attributable to adverse weather conditions in Kansas and Missouri
during early 1998.
Gross profit decreased by $284,000 from March 31, 1997 to March 31,
1998, and as a percent of sales reduced from 17.6% to 7.8%. This decrease is due
to adverse weather conditions in early 1998 which resulted in non-productive
time.
Selling, general and administrative expenses at March 31, 1998
increased $48,000 or 14.6% from 1997. This increase is primarily the result of
increases in salaries.
LIQUIDITY AND CAPITAL RESOURCES - HARRINGTON-SCANLON
Harrington-Scanlon generated $6,000 net cash from operating activities
during the three months ended March 31, 1998. Net cash used in investing
activities was $42,000 related to purchases of property and equipment and net
cash provided by financing activities of $7,000 was a result of net borrowings.
Net working capital at March 31, 1998 was $49,000. Total debt outstanding at
March 31, 1998 was $1.5 million including current maturities of $573,000. The
company has a line of credit in the amount of $500,000. At March 31, 1998,
$75,000 was available under this line.
44
<PAGE> 46
Net cash provided by operations during 1997 was $289,000. Net cash
used in investing activities was $369,000 related to purchases of property and
equipment, and net cash provided by financing activities of $105,000 was
primarily a result of net borrowings. Net working capital at December 31, 1997
was $185,000. Total debt outstanding at December 31, 1997 was $1.5 million
including current maturities of $543,000. Harrington-Scanlon had a line of
credit in the amount of $350,000 of which $342,000 had been borrowed at December
31, 1997.
RESULTS OF OPERATIONS - SLAVIK BUTCHER
Slavik Butcher, was founded in 1977 and is located in Rochester
Hills, Michigan. It operates primarily in southern Michigan with some operations
in Indiana and Ohio, and operates as a provider of comprehensive roofing
services to commercial, construction, and government customers. Slavik Butcher
also provides residential roofing and remodeling services.
The following table sets forth the historical results of operations
for Slavik Butcher.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31,
JUNE 30, ------------------------------
1997 1997 1998
------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ................... $11,265 100.0% $8,495 100.0% $9,492 100.0%
Cost of Revenues .......... 9,928 88.1% 7,477 88.0% 7,744 81.6%
------- ----- ------ ----- ------ -----
Gross Profit .............. 1,337 11.9% 1,018 12.0% 1,748 18.4%
Selling, General and
Administrative Expenses . 1,215 10.8% 897 10.6% 1,075 11.3%
------- ----- ------ ----- ------ -----
Operating Income .......... $ 122 1.1% $ 121 1.4% $ 673 7.1%
======= ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended March 31, 1998 Compared To The Nine Months Ended March 31,
1997
Contract revenues increased $997,000, or 11.7%, from $8.5 million for
the nine months ended March 31, 1997 to $9.5 million for the nine months ended
March 31, 1998. This increase was primarily due to favorable pricing and an
increase in demand. Included in Slavik Butcher's operations is a general
contracting business which will be retained by Slavik Butcher's owners.
Gross profit increased $730,000, or 71.7%, during the first nine months
of fiscal year 1998 to $1.7 million, and as a percentage of contract revenues
increased to 18.4% in 1998 from 12.0% in 1997. These increases were a result of
favorable pricing related to the increased demand and due to a significant loss
contract included in the results for the first nine months of fiscal year 1997.
Selling, general and administrative expenses increased 19.8% from
$897,000 to $1.1 million. The increase is primarily attributable to an increase
in office salaries and related benefits and insurance costs.
LIQUIDITY AND CAPITAL RESOURCES - SLAVIK BUTCHER
Slavik Butcher generated $345,000 of net cash from operating activities
for the nine months ended March 31, 1998. Net cash used in investing activities
was approximately $227,000 was primarily for the purchase of property and
equipment and an advance to a stockholder. Net cash provided by financing
activities of $5,000 resulted from net borrowings. Slavik Butcher had a total of
$350,000 available under lines of credit with $35,000 outstanding at March 31,
1998. The lines of credit are due on demand. At March 31, 1998, Slavik had
working capital of $523,000 and total debt of $224,000 including current
maturities of $106,000.
46
<PAGE> 47
Slavik Butcher generated $74,000 of net cash from operating activities
for the year ended June 30, 1997. Net cash used in investing activities was
approximately $83,000, primarily for the purchase of property and equipment. Net
cash provided by financing activities of $2,000 resulted from net borrowings. At
June 30, 1997 Slavik Butcher had a total of $350,000 available under lines of
credit with $75,000 outstanding. At June 30, 1997, Slavik Butcher had working
capital of $90,000 and total debt of $218,000, including current maturities of
$127,000.
RESULTS OF OPERATIONS - FIVE-K
Five-K (Therrel-Kizer) operates as a provider of comprehensive roofing
services to commercial, construction, and government customers. The company's
principal offices are located in Smyrna, Georgia and the majority of the
company's business is transacted with customers in Georgia.
The following table sets forth the historical results of operations for
Five-K Industries, Inc.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue ................. $10,402 100.0% $9,361 100.0% $11,091 100.0%
Cost of Revenues ........ 8,053 77.4% 6,521 69.7% 7,879 71.0%
------- ----- ------ ----- ------- -----
Gross Profit ............ 2,349 22.6% 2,840 30.3% 3,212 29.0%
Selling, General and
Administrative Expenses 2,226 21.4% 2,652 28.3% 2,775 25.0%
------- ----- ------ ----- ------- -----
Operating Income ........ $ 123 1.2% $ 188 2.0% $ 437 3.9%
======= ===== ====== ===== ======= =====
</TABLE>
Year Ended March 31, 1998 Compared To The Year Ended March 31, 1997
Revenues increased $1.7 million from 1997 to 1998, or 18.5%. This
increase is primarily attributable to the company hiring an additional salesman
during the year and aggressive pursuit of new business.
Gross profit increased $372,000, or 13.1% and as a percent of sales was
consistent with 1997.
Selling, general, and administrative expenses were $123,000 higher in
1998 than 1997, or an increase of 4.6%. This increase was primarily due to
increased compensation.
Year Ended March 31, 1997 Compared To The Year Ended March 31, 1996
Revenues decreased $1.0 million from 1996 to 1997, or 10.0%, as a
result of more selective competitive bidding.
Gross profit increased by $491,000 or 20.9% from 1996 to 1997 and, as a
percentage of sales increased from 22.6% to 30.3%. This increase was primarily
attributable several highly profitable jobs the company completed during 1997.
Selling, general, and administrative expenses were $426,000 higher in
1997 than 1996, or an increase of 19.1%. This increase was primarily due to
increased compensation.
LIQUIDITY AND CAPITAL RESOURCES - FIVE-K (THERREL-KIZER)
47
<PAGE> 48
Cash provided by operating activities in 1998 was $542,000. Cash used
in investing activities totaled $219,000 and was for purchases of property and
equipment. Net cash provided by financing activities was $61,000 which consisted
of net borrowings partially offset by shareholder distributions. Working capital
at March 31, 1998 totaled $946,000. Total borrowings at March 31, 1998 were
$86,000 including current maturities of $40,000. The Company has a line of
credit in the amount of $200,000. There were no borrowings under this line at
March 31, 1998.
Retainage of 10% is generally required on all construction contracts.
The retainage is held on the cumulative cost of the work-to-date, less the
aggregate of previous payments. Retainage is billed and paid upon final
completion of the work and final acceptance by the owner. All final paper work
must be submitted prior to payment. Payment is usually received within 60 to 120
days after billing. Certain contractors reduce retainage to 5% when the contract
is considered substantially complete. Retainage held at March 31, 1998 was
$589,803, and the average for the twelve months was $444,188.
RESULTS OF OPERATIONS - ADVANCED ROOFING
Advanced Roofing was founded in 1983 and is headquartered in Fort
Lauderdale, Florida. It operates primarily in Florida, but has completed
projects in Guantanamo Bay, Cuba and the U.S. Virgin Islands. Advanced Roofing
operates as a provider of comprehensive roofing services to commercial,
construction, and government customers.
The following table sets forth the historical results of operations for
Advanced.
<TABLE>
<CAPTION>
TEN TWO
MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
-------------------------- OCTOBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................... $12,078 100.0% $10,682 100.0% $10,203 $1,971 $12,174 100.0%
Cost of Revenues .......... 10,338 85.6% 8,843 82.8% 8,312 1,515 9,827 80.7%
------- ------ ------- ------ ------- ------ ------- ------
Gross Profit .............. 1,740 14.4% 1,839 17.2% 1,891 456 2,347 19.3%
Selling, General and
Administrative Expenses . 1,219 10.1% 1,317 12.3% 1,206 365 1,571 12.9%
------- ------ ------- ------ ------- ------ ------- ------
Operating Income .......... $ 521 4.3% $ 522 4.9% $ 685 $ 91 $ 776 6.4%
======= ===== ======= ===== ======= ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
---- ----
<S> <C> <C> <C> <C>
Revenue .................... $4,933 100.0% $5,068 100.0%
Cost of Revenues ........... 4,201 85.2% 3,982 78.6%
------ ------ ------ ------
Gross Profit ............... 732 14.8% 1,086 21.4%
Selling, General and
Administrative Expenses .. 676 13.7% 756 14.9%
------ ------ ------ ------
Operating Income ........... $ 56 1.1% $ 330 6.5%
====== ===== ====== =====
</TABLE>
48
<PAGE> 49
Five Months Ended March 31, 1998 Compared To The Five Months Ended March 31,
1997
Revenues increased $135,000, or 2.7%, from $4.9 million for the five
months ended March 31, 1997 to $5.1 million for the five months ended March 31,
1998, primarily as a result of increased marketing efforts toward the end of
1997 along with an increase in demand for roofing services.
Gross profit increased $354,000 or 48.4%, for the five months ended
March 31, 1998 to $1.1 million, and gross margin increased to 21.4% in 1998 from
14.8% in 1997. This is primarily due to a non-recurring workers' compensation
claim of approximately $100,000 that occurred in December 1996 which resulted in
lower than expected margins during that period, and operations of an Affiliate
were commenced during the five-month period ended March 31, 1997, and start-up
losses were incurred during this period.
Selling, general and administrative expenses increased 11.8% from
$676,000 to $756,000. The increase was attributable to an increase in marketing
efforts and increased administrative staffing.
Ten Months Ended October 31, 1997 and the Year Ended December 31, 1997 Compared
to the Year Ended December 31, 1996
Revenues increased $1.5 million, or 14.0%, from $10.7 million for the
year ended December 31, 1996 to $12.2 million for the year ended December 31,
1997, primarily as a result of increased demand, revenue generated by an
Affiliate formed in 1996, expanded marketing efforts and a preferred provider
agreement with a supermarket chain. Revenues for the ten months ended October
31, 1997 were lower than those of the year ended December 31, 1996 due primarily
to October 31, 1997 being a shorter period.
Gross profit increased $508,000 or 27.6%, during the year ended
December 31, 1997 to $2.3 million from the year ended December 31, 1996. This
increase was the result of higher margin jobs obtained through marketing efforts
and efficiencies in field operations. Gross margin for the ten months ended
October 31, 1997 was $52,000 higher than for the year ended December 31, 1996
due primarily to higher margin jobs and efficiencies as discussed above.
Selling, general, and administrative expenses increased 19.3% from $1.3
million in 1996 to $1.6 million in 1997. The increase was attributable to an
increase in marketing efforts, and increased staffing levels. Increases were
also attributable to the start-up of an Affilate and certain new divisions.
Selling, general, and administrative expenses were $111,000 lower in the ten
months ended October 31, 1997 as compared to the year ended December 31, 1996
due primarily to being a shorter period.
Year Ended December 31, 1996 Compared To The Year Ended December 31, 1995
Revenues decreased $1.4 million, or 11.6%, from $12.1 million for the
year ended December 31, 1995 to $10.7 million for the year ended December 31,
1996, primarily as a result of decreased demand, coupled with the company's move
to new facilities in late 1995 which negatively affected revenues in early 1996.
Gross profit increased $99,000 or 5.7%, during the year ended
December 31, 1996 to $1.8 million, and gross margin increased to 17.2% during
the year ended December 31, 1996 from 14.4% during the year ended December 31,
1995. The increase is attributable to abnormally low margins attained in 1995
due to loss of certain personnel and the move to new facilities.
Selling, general and administrative expenses increased 8.0% from $1.2
million during 1995 to $1.3 million during 1996. The increase was attributable
to increased staffing levels and increases in salaries.
LIQUIDITY AND CAPITAL RESOURCES - ADVANCED ROOFING
Advanced Roofing generated $105,000 of net cash from operating
activities for the five months ended March 31, 1998. Cash used in investing
activities of $34,000 relates to purchases of property and equipment.
49
<PAGE> 50
Net cash used in financing activities of $73,000 resulted primarily from
repayments of long-term debt. At March 31, 1998, Advanced Roofing had working
capital of $409,000 and total debt of $1.3 million including current maturities
of $728,000. The company maintains a $500,000 line of credit, of which $400,000
was outstanding at March 31, 1998. The line expires in June 1998.
At October 31, 1997, the company had working capital of $122,000. Total
debt was $1.3 million, including current maturities of $696,000. The company had
a $500,000 line of credit under which $400,000 was outstanding.
Retainage of 10% of each billing is applied to most contracts. However,
this retainage is normally collected within a short period of time, as the
Company has historically collected receivables within 45 days. Additionally, the
Company acts as general contractor for the majority of its projects, whereby
work is performed directly for the owner. Consequently, retainage is generally
not withheld for more than 30 days subsequent to the project's completion.
RESULTS OF OPERATIONS - BLACKMORE & BUCKNER
Blackmore and Buckner was founded in 1919 and is headquartered in
Indianapolis, Indiana. The principal activities of the company include
installing commercial and residential roofing, repair work on existing and newly
constructed buildings, and metal fabrication. The company performs these
construction activities primarily in Indiana for commercial enterprises.
The following table sets forth the historical results of operations for
Blackmore & Buckner.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................... $7,210 100.0% $7,704 100.0% $7,739 100.0% $ 1,401 100.0% $ 1,061 100.0%
Cost of Revenues .......... 5,795 80.4% 5,948 77.2% 6,321 81.7% 1,273 90.9% 896 84.4%
------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Gross Profit .............. 1,415 19.6% 1,756 22.8% 1,418 18.3% 128 9.1% 165 15.6%
Selling, General and
Administrative Expenses . 1,161 16.1% 1,326 17.2% 1,220 15.8% 206 14.7% 215 20.3%
------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Operating Income (Loss) ... $ 254 3.5% $ 430 5.6% $ 198 2.6% $ (78) (5.6%) $ (50) (4.7%)
====== ===== ====== ===== ====== ===== ======= ===== ======= =====
</TABLE>
Three Months Ending March 31, 1997 Compared To The Three Months Ending March 31,
1998
Revenues decreased $340,000 or 24.3% from $1.4 million for the three
months ended March 31, 1997 to $1.0 million for the three months ended March 31,
1998, primarily due to the extensive amount of rain during the month of March
1998.
Gross profit increased 28.9% during the first three months of 1998 and
gross margin increased to 15.6% in 1998 from 9.1% in 1997. This increase was due
to higher margin work during 1998 offset partially by a lower volume of work.
Selling, general, and administrative expenses remained relatively
constant for the three months ended March 1997 and 1998.
Year Ended December 31, 1997 Compared To The Year Ended December 31, 1996
Revenues increased less than 1.0% in 1997, while cost of revenues sold
increased 6.3%, primarily due to an increase in material cost which was not
passed onto the customer, and increased sales from public
50
<PAGE> 51
bids which realizes a lower margins than negotiated contracts. Net income
decreased 54.0% in 1997 from 1996 due to the same factors discussed above.
Selling, general and administrative costs decreased by 8.0% in 1997
from 1996, due primarily to a decrease in commissions paid to salesmen.
Year Ended December 31, 1996 Compared To The Year Ended December 31, 1995
Revenues increased 6.9%, in 1996 from 1995 while cost of revenues
sold increased by 2.6% for the same period. This was due to an increase in the
amount of negotiated contracts completed during 1996 and resulted in an increase
in gross profit for 1996 of 24.1% from 1995. Selling, general and administrative
expenses increased by 14.2% in 1996 from 1995 due to the increase in commission
paid to salesmen.
LIQUIDITY AND CAPITAL RESOURCES - BLACKMORE & BUCKNER
Blackmore & Buckner generated $187,000 of net cash from operating
activities for the three months ended March 31, 1998. Cash used in investing
activities was nominal and cash used in financing activities of $176,000 was
primarily related to distributions to stockholders. At March 31, 1998, the
company had working capital of $706,000 and a total debt of $99,000, including
current maturities of $22,000. Blackmore & Buckner has a $500,000 line of credit
with a bank, which is available for its current working capital needs and an
$85,000 line of credit to be used for capital expenditures. The company had no
borrowings against the working capital line at March 31, 1998 or December 31,
1997. The company had outstanding borrowings of $27,000 under the equipment
line of credit at December 31, 1997.
During 1997, The company generated $567,000 of cash from operating
activities. Cash used in investing activities of $127,000 was primarily related
to purchases of property and equipment and cash used in financing activities of
$269,000 was primarily related to distributions to stockholders. Working capital
at December 31, 1997 was $919,000 and total debt was $108,000 including current
maturities of $23,000.
RESULTS OF OPERATIONS - REGISTER ROOFING
Register Roofing is engaged in the business of general contracting
and commercial roofing throughout the southeastern United States with the
majority of contracts in Florida.
The following table sets forth the historical results of operations
for Register Roofing.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $6,533 100.0% $6,187 100.0% $6,832 100.0% 3,044 100.0% $4,169 100.0%
Cost of Revenues................. 5,871 89.9% 5,174 83.6% 5,792 84.8% 2,537 83.3% 3,443 82.6%
------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Gross Profit..................... 662 10.1% 1,013 16.4% 1,040 15.2% 507 16.7% 726 17.4%
Selling, General and
Administrative Expenses........ 592 9.1% 804 13.0% 1,002 14.7% 431 14.2% 517 12.4%
------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Operating Income................. $ 70 1.1% $ 209 3.4% $ 38 0.6% $ 76 2.5% $ 209 5.0%
====== ===== ====== ===== ====== ===== ===== ===== ====== =====
</TABLE>
Six Months Ended March 31, 1998 Compared To The Six Months Ended March 31, 1997
Contract revenues earned increased $1.1 million, or 37.0%, from $3.0
million for the six months ended March 31, 1997 to $4.2 million for the six
months ended March 31, 1998. This increase was due to
51
<PAGE> 52
contracting with industrial clients which reduced competition and provided the
company substantial revenue increases.
Gross profit increased $219,000, or 43.2%, from $507,000 for the six
months ended March 31, 1997 to $726,000 for the six months ended March 31, 1998.
The contracts with industrial clients provided higher markups, resulting in
higher gross profits.
Selling, general and administrative expenses increased $86,000, or
20.0%, from $431,000 for the six months ended March 31, 1997 to $517,000 for the
six months ended March 31, 1998. This increase correlates with the overall
increase in volume.
Year Ended September 30, 1996 Compared To The Year Ended September 30, 1995
Contract revenues earned increased by $645,000, or 10.4%, from $6.2
million for the fiscal year ended September 30, 1996 to $6.8 million for the
fiscal year ended September 30, 1997. Register Roofing had a strong movement
into the industrial re-roofing market which resulted in being "short-listed" for
proposals. Register started long-term relationships with key industrial clients
which resulted in larger contracts in 1997.
Gross profit increased $27,000, or 2.7%, from 1.0 million for the
fiscal year ended September 30, 1996. Register Roofing had one large project
which had a loss because costs had been underestimated, and two smaller projects
in Central Florida with unanticipated difficulties that caused a loss. These
jobs had an overall affect of substantially reducing gross profits.
Selling, general and administrative expenses increased $198,000 or
24.6% due to the addition of a key level accounting position and a
warehouse/materials coordinator.
Year Ended September 30, 1996 Compared To The Year Ended September 30, 1995
Contract revenues earned decreased $346,000, or 5.3%, from $6.5
million for the fiscal year ended September 30, 1995 to $6.2 million for the
fiscal year ended September 30, 1996. In the first half of fiscal 1996, Register
Roofing experienced a decline in the re-roofing market in Northeast Florida.
Register Roofing chose not to increase or hold its present volume by contracting
out of town projects, which usually result in higher costs and lower profit
margins. Register Roofing also entered into the metal roofing market during this
time period. In the last half of fiscal 1996, the re-roofing market in Northeast
Florida began to rebound.
Gross profit increased $351,000, or 53.0%, from $662,000 for the
fiscal year ended September 30, 1995 to $1.0 million for the fiscal year ended
September 30, 1996, as a result of management concentrating on fewer projects
with higher margins. This initiative coupled with a stronger roofing market
helped to increase profitability.
Selling, general and administrative expenses increased $212,000, or
35.8%. The addition of a manager accounted for a significant portion of this
increase.
LIQUIDITY AND CAPITAL RESOURCES - REGISTER ROOFING
At the end of the fiscal year ended September 30, 1997, Register
Roofing completed numerous jobs and billed final retainage. This timing issue
caused a lower year-end work in progress, and a higher retainage billing of
$336,000. Unbilled retainage also decreased significantly.
Since September 1997, outstanding work in progress increased
significantly, with higher unbilled retainage. The cash position, however,
improved due to the collection of the previous quarter's retainage. The increase
in work in progress trend continued into March 1998. At March 31, 1998, Register
had $177,000 of debt outstanding. Debt increased $77,000 from September 30, 1997
due to financing of new equipment purchases. Net working capital at March 31,
1998 was $692,000, including cash and cash equivalents of
52
<PAGE> 53
$489,000. The company's cash flow from operations is affected by the timing of
collections of contract billings. Although the company generally bills as the
work progresses, contracts may provide for a retainage on payments until the
work is completed and approved. Also, certain large customers of the company may
pay slower than the contractual requirement.
SEASONAL AND CYCLICAL NATURE OF THE COMMERCIAL ROOFING INDUSTRY
The construction industry is cyclical and is influenced by seasonal
factors, as those activities are usually lower during winter months than other
periods. The Founding Companies have a broad geographic, product, and customer
mix, which on a combined basis would have served to mitigate cyclical and
seasonal trends; however, there can be no assurance that period-to-period
differences will not occur in the future or that cyclical or seasonal patterns
will not emerge. Further, the results of operations for any interim period (on a
combined basis and for each of the Founding Companies) are not necessarily
indicative of the results for a full year.
INFLATION
Inflation has not had any significant impact on the results of
operations for any of the Founding Companies during any of the periods presented
herein.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act. All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, statements regarding the Company's competitive strengths, business
strategy, expected benefits of any acquisition, future financial position,
budgets, projected costs and plans and objectives of management for future
operations, are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "should," "intend," "estimate," "anticipate,"
"believe," or "continue" or the negative thereof or variations thereon or
similar terminology. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") are disclosed under "risk factors" and
elsewhere in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to the Company, or
persons acting on its behalf, are expressly qualified in their entirety by the
cautionary statements. The Company undertakes no obligation to update publicly
or revise any forward-looking statements.
YEAR 2000 ISSUE
Several of the Founding Companies are not year 2000-compliant. The
Company has plans to prepare its computer systems and related software to
accommodate sensitive information relating to the year 2000. The Company expects
that any additional costs related to ensuring such systems and software to be
ready for the year 2000 will not be material to the financial condition or
results of operations of the Company. In addition, the Company is discussing
with its vendors and customers the possibility of any difficulties which may
affect the Company as a result of its vendors and customers ensuring that their
computer systems and software are year 2000-compliant. To date, no significant
concerns have been identified. However, there can be no assurance that no year
2000-related computer operating problems or expenses will arise with the
Company's computer systems and software or in the computer systems and software
of the Company's vendors and customers.
53
<PAGE> 54
BUSINESS
GENERAL
The Company was founded in 1998 to become the leading nationwide
provider of commercial roofing services. Concurrently with, and as a condition
to, the Offering, GRS plans to acquire 18 Founding Companies. The Founding
Companies, which have been in business for an average of approximately 28 years,
had pro forma combined 1997 revenues and income from operations of $195.9
million and $13.4 million, respectively. Following the Combination and the
Offering, the Company will have operations in 20 cities in 12 states, and will
be one of the largest providers of commercial roofing services in the United
States. Combined historical revenues of the Founding Companies grew at a
compound annual growth rate of 14.7 % from 1995 through 1997. Management
believes that the Company will have certain competitive advantages as the first
public company seeking to consolidate the commercial roofing industry.
The Company offers a broad range of comprehensive roofing services,
which include re-roofing, restoration and repair, and new roof construction.
Approximately 65% of the Company's 1997 pro forma revenues were derived from
re-roofing, restoration and repair services, and 35% were derived from new roof
construction. The Company also offers maintenance services, which provide
recurring revenues and on-going interaction with its customers. The Company
provides services to customers in a broad range of industries, including the
industrial, office, retail, hospitality, government, educational and
entertainment industries. The Company has performed services for a broad range
of companies, including Home Depot, Inc., The Walt Disney Company, United States
Postal Service, NationsBank, N.A., Bass Hotels & Resorts (Holiday Inn Hotels),
Sea World, AMC Entertainment Inc., General Motors Corporation, Rockwell
International Corp., Ford Motor Company, Chrysler Corporation, The Coca-Cola
Company, U.S. Army, U.S. Navy, Simon DeBartolo Group, Inc., Wal Mart Stores,
Inc., Sears Roebuck & Company, Abbott Laboratories, Trammel Crow Company, Arvida
Company, Cushman & Wakefield, Inc., Columbia/HCA Healthcare Corporation and
University of Michigan.
INDUSTRY OVERVIEW
According to a market survey conducted by the NRCA, total expenditures for
roofing services in the United States in 1997 were approximately $20.0 billion,
of which approximately $14.5 billion were for commercial roofing services. The
roofing industry is highly fragmented, and is estimated to be comprised of more
than 25,000 companies, most of which are small, owner-operated, independent
contractors serving a local customer base, with limited access to capital for
investment in infrastructure, technology and expansion. The Company believes
that no single company accounted for more than 1% of total expenditures for
roofing services in the United States. According to the market survey conducted
by the NRCA, approximately 75% of roofing expenditures in 1997 were attributable
to re-roofing, restoration and repair, with the balance attributable to new roof
construction.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented roofing personnel and providing a full complement of high
quality commercial services. The commercial roofing industry as a whole has been
characterized by low barriers to entry that result from relatively constant
technology and methods, stable construction practices and pricing and
inconsistent quality and reliability. For this reason, the Company believes that
only those companies which are able to differentiate themselves through quality,
scope and consistency of service will be able to maintain a competitive
advantage. In addition, the relatively large expenditures associated with
roofing systems has led to an increased need for qualified personnel to install,
monitor and service these systems. The cost of recruiting, training and
retaining a sufficient number of qualified roofing personnel makes it more
difficult for small commercial roofing companies to expand their businesses. The
Company also believes the highly fragmented nature of the commercial roofing
industry will provide it with significant opportunities to consolidate a large
number of existing commercial roofing businesses nationwide.
The average useful life of a commercial roof is estimated to be
approximately 14 years. Due to a lack of customer awareness of the savings that
can result from a long-term, consistent roof maintenance program, customers and
competitors have traditionally taken an all-or-nothing approach to roofing
expenditures. By
54
<PAGE> 55
taking a maintenance-oriented approach to customer service, the Company will
seek to create a more consistent revenue stream, while providing cost-effective
solutions to its customers.
STRATEGY
The Company believes that its size, geographic diversity of operations,
knowledge of local markets and industry relationships will give the Company
significant competitive advantages. Through increased size, the Company believes
that it will have a greater ability to (i) provide services to customers with
locations in multiple markets, (ii) more effectively allocate resources in
serving customers in each of its markets, (iii) attract, train and retain
skilled roofing labor and (iv) achieve economies of scale in the purchase of
roofing material. The Company also believes that increased size will provide
operating and cost efficiencies by performing a wide range of functions on a
centralized basis, including administrative functions, such as those relating to
human resources, employee benefits and insurance, as well as purchasing,
accounting and bonding. The Company intends to share best practices among the
Founding Companies and with other companies to be acquired. The Company believes
that the geographic diversity of its operations will diminish the effects of
local market downturns, offer opportunities to pursue growth in its existing
markets and create a base of expertise and relationships to expand into new
markets. In anticipation of the Combination, one of the Founding Companies has
made a substantial investment in a scalable, advanced enterprise information
system to be utilized by the Company, which provides critical project status and
cost information to all employees on a daily basis and provides management with
comprehensive reports on substantially all aspects of the Company's operations.
The Company plans to leverage its experienced management and extensive
relationships within the commercial roofing industry to increase its revenues
through internal growth as well as through the acquisition of additional
commercial roofing companies. The Company has extensive relationships within the
industry, in part through the Founding Companies that are all members of the
NRCA, the largest commercial roofing trade organization with approximately 3,200
commercial roofing companies as members. Gregg E. Wallick, the Company's
President and Chief Executive Officer, with more than 18 years of experience in
the commercial roofing industry, is a member of the Board of Directors of the
NRCA. Mr. Wallick is also a member of the Board of Governors of the Alliance for
Progress and is a member of its Steering Committee. The Alliance for Progress is
an industry organization that invests funds contributed by its membership in
certain programs, such as special training programs, for the benefit of the
roofing industry and the organization's membership.
Operating Strategy. The Company believes there are significant
opportunities to increase revenues and profitability of the Founding Companies
and subsequently acquired businesses. The key elements of the Company's
operating strategy are:
Focus on Commercial Roofing Market. The Company intends
to continue to focus on the commercial roofing market because of its
size, the magnitude of individual projects, the diverse and multiple
location customer base, the trend of consolidation in commercial
real estate, recurring revenue opportunities and the potential for
long-term relationships with companies, building owners, property
managers, general contractors and roof consultants.
Establish Regional and National Market Coverage. The
Company believes that the growth of many of the Founding Companies
has been restricted due to the geographic limitations of their
existing operations and that the Company's broad geographic coverage
will increase internal growth opportunities. The Company intends to
leverage its geographic diversity to solicit additional business
from existing customers and new business from new customers that
operate on a regional and national basis, such as REITs contractors,
owners of national chains and roof consultants. The Company believes
that significant demand exists from such companies to utilize the
services of a single commercial roofing service provider and that
existing local and regional relationships can be expanded as the
Company develops a nationwide network.
Expand Maintenance Services. The Company intends to
further develop its maintenance service operations, which generally
provide higher gross margins, recurring revenues and ongoing
interaction with customers. The Company has adopted a
maintenance-oriented approach, whereby it
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<PAGE> 56
performs regularly scheduled maintenance checks and focuses on
increasing customer awareness of the cost-effectiveness of preventive
maintenance and the available repair and restoration services that can
most efficiently prolong the life of a roof. The Company believes that
this approach builds long-term relationships with customers and
encourages them to turn to the Company for all of their roofing needs.
Apply Certain Functions and Technology to Achieve Operating
and Cost Efficiencies. The Company believes that it will achieve
operating and cost efficiencies by performing a wide range of functions
on a centralized basis, including administrative functions, such as
those relating to human resources, employee benefits and insurance, as
well as purchasing, accounting and bonding. The Company also intends to
leverage its proprietary scalable advanced enterprise informations
system, which will provide management on a daily basis information
regarding project estimates, materials and labor costs, accounts
receivable and accounts payable tracking, project progress and sales,
as well as comprehensive reports on substantially all aspects of the
Company's operations. Management believes that this system, which was
developed by one of the Founding Companies over a five-year period,
will provide the Company with significant competitive advantages
through more accurate job estimates, enhanced cost awareness and
uniform control procedures through the timely flow of comprehensive
project information. Management believes that this advanced enterprise
information system will be fully implemented and accessible on a
Company-wide basis by the end of 1999.
Adopt Best Practices. The Company believes that it will be
able to increase operating efficiencies and enhance internal growth by
identifying and incorporating the operational and marketing strengths
of individual Founding Companies. The Company intends to institute a
"best practices" program, which will evaluate and implement on a
Company-wide basis selected adopting policies, practices and procedures
of the Founding Companies and other companies to be acquired, with the
goal of maximizing service levels and profitability. In order to ensure
that best practices are shared among each of the individual Founding
Companies, the Company has created a Presidents' Council composed of
the president or senior executive of each of the Founding Companies.
The Council has begun meeting on a regular basis as a group and through
smaller working committees, to share operating practices and to develop
additional methods to improve the overall performance of the Company
and the individual operating companies. Best practices that result from
the work of the Council will be included in the training and monitoring
programs developed and disseminated to the respective operating
companies.
Operate on a Decentralized Basis. The Company believes that,
while maintaining strong operating and financial controls, a
decentralized operating structure will retain the entrepreneurial
spirit present in each of the Founding Companies. The Company's
decentralized operating structure will allow it to capitalize on the
considerable local and regional market knowledge and customer
relationships possessed by each Founding Company, as well as by
companies that may be acquired in the future.
Acquisition Strategy. The Company believes that due to the highly
fragmented nature of the commercial roofing services industry, it has
significant opportunities to pursue an acquisition strategy and expand in
targeted geographic markets. The Company will also seek to acquire companies
with entrepreneurial management philosophies and a willingness to learn and
share improved business practices through open communications. The Company
believes that many commercial roofing businesses that lack the capital necessary
to expand operations will become acquisition candidates. The Company believes
that it will be attractive to these acquisition candidates because it will
provide (i) information on best practices, (ii) expertise to expand in
specialized markets, (iii) the opportunity to focus on customers rather than
administration, (iv) national name recognition, (v) increased financial
flexibility, (vi) existing management the opportunity for a continued role with
the Company and (vii) the opportunity to provide services to the Company's
customers in their respective geographic markets. All of the Founding Companies
participate in professional associations, including the NRCA. The Company
intends to capitalize on the relationships created within these professional
associations and the combined industry reputation of the Founding Companies to
pursue its strategy. Through these and other resources, the Company believes it
will be able to identify and attract acquisition candidates who meet the
Company's criteria. Key elements of the Company's acquisition strategy are:
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<PAGE> 57
Enter New Geographic Markets. The Company will pursue
acquisitions of companies that are located in new geographic markets,
are financially stable and have the customer base necessary to
integrate with or complement the Company's existing business. The
Company also expects that increasing its geographic presence will allow
it to better serve a growing nationwide base of customers and further
reduce the impact on the Company of local and regional economic cycles,
as well as weather-related or seasonal variations in business.
Expand Within Existing Markets. Once the Company has entered a
new market, it will seek to acquire other well-established commercial
roofing businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost
structure through the integration of such acquisitions into existing
operations as well as to increase revenues through access to additional
specialized markets. Despite the integration opportunities afforded by
such tuck-in acquisitions, the Company intends to maintain existing
business names and identities for marketing purposes.
SERVICES
The Company provides a comprehensive range of commercial roofing services.
The Company employs a knowledgeable and skilled work force utilizing
standardized techniques and practices to determine a customer's optimal roofing
solution which is designed to maximize the 14 average year life of a new roofing
system. Annual maintenance services, which can result in the identification at
an early stage of problems within a roofing system, can add as many as 10 years
to the useful life of a roof through repair and restoration. The following is a
description of the Company's services:
MAINTENANCE. Maintenance involves the physical inspection of
an existing roofing system to determine its current condition, detect
weaknesses and failures and identify any potential future problems.
Through a program of regularly scheduled annual or semi-annual
inspections, the Company's technicians assist owners in protecting
their roofing investments by seeking to identify damage in its early
stages. Early detection of leaks and roofing system failures make it
possible for the Company to repair and extend the life of a roofing
system through repair or restoration, which is significantly less
expensive and time consuming than re-roofing. The Company also intends
to offer its customers a facility management program to coordinate
maintenance, repair, restoration and re-roofing as needed. The Company
believes that the cost-effectiveness of regularly scheduled
maintenance, repair and restoration enables the Company to cultivate
strong relationships with its customers and establish a basis for
recurring revenues.
REPAIR. Repair is a process where an existing roofing system
has additions and adjustments made to it, such as caulking, re-coating,
and repairing penetrations to fix leaks in the roofing system.
RESTORATION. Restoration involves the major repair of the
roofing system, including the repair of all penetrations and
re-surfacing of the roof to restore it to serviceable condition. The
Company is able to inform building owners when a roof is approaching
the end of its 14 year average life cycle through its regularly
scheduled maintenance and repair program. The opportunity to perform
restoration work normally exists two or three years prior to the end of
a roof's life cycle and before significant damage occurs. As many as 10
years can be added to the useful life of the roof through restoration
and typically the cost of restoration is one-half the cost of
re-roofing.
RE-ROOFING. Re-roofing is the process of installing a new roof
when a roofing system fails. Roofing system failure can be caused by a
number of factors, including age, severe weather, poor workmanship,
defective materials, improper specification of a roofing system, abuse
and failure to maintain the roof through inspections. The Company
performs re-roofing only when all repair and restoration alternatives
are deemed incapable of bringing a roof back to serviceable condition,
or at the specific request of a customer.
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<PAGE> 58
NEW CONSTRUCTION. New roof construction involves the
construction of a variety of roofing systems, including metal roofing
systems, built-up roofing membranes and single ply roofing systems. New
roof construction coincides with the construction of a new building.
New commercial roofing work usually begins with either a proposal request
from the owner, general contractor or roof consultant. Initial meetings with the
parties allow the roofing contractor to prepare preliminary and then more
detailed design and product specifications, drawings and cost estimates. Once a
project is awarded, it is conducted in scheduled phases, and progress billings
are rendered to the owner of payment, less a retainage of 5% to 10% of the
construction cost of the project. Actual field work (ordering of equipment and
materials, fabrication or assembly of certain components, delivery of materials
and components to the job site, scheduling of work crews and inspection and
quality control) is coordinated during these phases. The Company generally
provides the materials to be installed as a part of these contracts.
CUSTOMERS
In 1997, the Founding Companies provided commercial roofing services to
more than approximately 5,000 customers, with no one customer accounting for
more than 2% of The Founding Companies' total revenues, and the ten largest
customers representing less than 10% of total revenues. The Founding Companies
provide roofing services to a customers having a local, regional and national
presence in a broad range of industries, some of which are listed below:
<TABLE>
<CAPTION>
INDUSTRIAL OFFICE RETAIL HOSPITALITY GOVERNMENT EDUCATIONAL ENTERTAINMENT
<S> <C> <C> <C> <C> <C> <C>
Abbott Arvida Company Barnes & Bass Hotels & Army Corp. of Dade County AMC Entertainment
Laboratories Noble, Inc. Resorts Engineers Public Schools Inc.
Bell South (Holiday Inn
Anheuser-Busch Telecommunications,Eckerds Hotels) St. Cloud Georgia Institute Harrah's
Companies, Inc. Inc. Corporation Public Library of Technology Entertainment,
Best Western Inc.
Chrysler CB Commercial/ Federated International, U. S Post University of
Corporation Koll Management Department Inc. Office Central Florida Metro-Goldwyn-Mayer
Services Stores, Inc. Studios, Inc.
Ford Motor Embassy U.S. Airforce University of
Company Cushman & Home Depot Suites, Inc. Colorado Planet Hollywood
Wakefield, Inc. U.S. Army International,
General Motors Publix Hilton Hotels University of Inc.
Corporation Grubb & Ellis Co. Supermarkets, Corp. U.S. Navy Miami
Inc. Sea World
Lucent Lincoln Marriott Vero Beach University of
Technologies, Properties Sears Roebuck International, Police Michigan United Artists
Inc. Company & Co. Inc. Department Corporation
University of
The Coca-Cola NationsBank, N.A. Simon-DeBartolo Ramada Inc. South Florida Universal
Company Group, Inc. Studios, Inc.
SunTrust Bank,
N.A. Wal-Mart Walt Disney
Stores, Inc.
Trammel Crow
Company Winn Dixie
Stores, Inc.
</TABLE>
The Company intends to continue its emphasis on developing and maintaining
successful long-term relationships with its customers by providing superior,
high quality service in a professional manner. The Founding Companies currently
serve customers through 22 offices. The Company believes that opportunities
exist to expand its services in other locations through the selective
acquisition of commercial roofing companies and that demand exists for the
Company to provide services to existing customers in other locations where they
are conducting business.
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<PAGE> 59
ENTERPRISE INFORMATION SYSTEMS
In anticipation of the Combination, one of the Founding Companies has made
a substantial investment in a scalable, advanced enterprise information system
to be utilized by the Company, which will provide critical project status and
cost information to all employees on a daily basis and will provide management
with comprehensive reports on substantially all aspects of the Company's
operations. The Company's enterprise information system, which has been
developed over a five-year period and has been operational since 1996, is
integrated with the Company's accounting system. Each of the Company's current
locations will be networked with a commonly configured work station
electronically linked to all other Company locations and the Company's central
databases, resulting in a centrally managed wide area network. The Company has
developed a comprehensive set of management information databases covering
financial performance, roofing projects budgets, employee productivity, sales
and labor and material costs. Company management can access these databases 24
hours-a-day at all locations via the Internet to analyze substantially all
aspects of the Company's operations, including the performance of acquired
businesses. In addition, the job cost and productivity reports generated by the
project management system are posted on bulletin boards at the Company's
headquarters and locations for all personnel to evaluate. Set forth below is a
description of the job cost and productivity reports.
JOB COST REPORTS. Job cost reports convey the status of a roofing
project and are updated daily. These reports provide feedback to
management, project managers, and personnel on project budgets and
enable them to manage and control material, equipment and labor costs
and other project expenses. These reports also include information on
total committed costs (costs recognized from purchase orders and
unposted time cards), budgeted costs and costs incurred to date. Each
cost category in the summary report is shown in bar graph format and
detailed cost reports specify individual cost items as a line item and
highlights the variance between budgeted and actual costs.
PRODUCTIVITY REPORTS (SCORE CARDS). These reports offer a consistent,
accurate and fair method of comparing employees measured by the gross
profit attributable to each employee for a reporting period. Employees
are compared by profit center, division and job classification. These
reports may be generated on a monthly, quarterly and annual basis.
With limited exceptions, in the initial integration stage the Company
intends to continue to operate in the near-term with the existing accounting and
other computer systems currently in place at the various Founding Companies. The
Company has developed regular financial and operational "flash reports" and
other mechanisms to allow for timely management control and oversight. The
Company will utilize this information to establish and monitor performance of
individual Founding Companies against operating benchmarks and ratios. The
Company will, however, cause each of the Founding Companies to adopt a uniform
chart of accounts and to standardize their budgeting process and reports so that
results among the Founding Companies more easily can be compared and integrated.
The Company believes that its substantial investment in advanced information
technology is unique in the commercial roofing industry and will continue to
create profit improvement opportunities. In addition, where a Founding Company
or a future acquired company has a system in place that is inadequate for its
existing or near term needs, the Company will begin the migration to a standard
that will allow for greater consistency (and a longer term change to a
Company-wide, integrated system). Management believes that the Company's
enterprise information system will be fully implemented and accessible on a
Company-wide basis by the end of 1999. See "Risk Factors-Dependence on
Enterprise Information Systems."
SALES AND MARKETING
The Company believes that the reputation of the Founding Companies for
providing high-quality services has enabled them to obtain recurring business
through customer referrals and new business. The Company intends to further
develop its maintenance services, which provide higher margins and ongoing
interaction with customers. The Company intends to capitalize on cross-marketing
and business development opportunities that it believes will be available to the
Company as a national provider of comprehensive commercial roofing services. The
Company intends to leverage the diverse technical and marketing strengths of
individual Founding Companies to expand the overall penetration of services
within those local markets in which two or more Founding Companies are located.
Eventually, the Company intends to offer comprehensive services from all of its
operating locations.
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The Founding Companies use their direct sales force to market their
services in their respective geographic markets. The Company is developing a
marketing and advertising program to establish a national brand identity while
preserving and enhancing the value of the unique and long-standing trade names
and customer identification enjoyed by the individual Founding Companies. The
GRS logo and identifying marks will be featured on service trucks, marketing
materials and advertising of the Founding Companies, but in a manner that does
not detract from the local brand. The Company proposes to develop market-leading
warranty and service programs for the commercial markets, as well as an
aggressive national account sales program focused on national and major
corporations, governmental and private institutions, real estate investment
trusts (REITS), real estate management firms and other multi-location commercial
property owners and managers. The Company has also created a National Accounts
Group, which will be responsible for developing and managing the Company's
relationship with customers having a regional or national presence. The Company
will supplement its sales and marketing activities through participation in
industry trade shows and conferences, direct mail, its Internet website and
advertising in local industry publications and the yellow pages in the markets
it serves.
PERSONNEL, TRAINING AND SAFETY
The Company intends to adopt an extensive training program, which provides
extensive classroom and on-the-job training programs for its personnel based on
the NRCA's model training program, and provide immediate training to roof
laborers in the Company's methods, procedures and standards with an emphasis on
high quality service. These programs will be presented by a special training
team consisting of senior personnel of the Company and the laborers will be
continuously informed of advances in roofing system technology and techniques
and product selection. The Company's training program will also be designed to
ensure that all of its roofing laborers meet safety standards established by the
Company, its insurance carriers and federal, state and local laws and
regulations. The Company has safety supervisors who conduct initial and
continuous comprehensive training classes for all personnel in safety and risk
management. In addition, the safety supervisors work with senior management to
observe and evaluate safety procedures in an effort to constantly improve the
effectiveness of the Company's safety programs. The Company also maintains a
safety report database allowing senior management to oversee safety practices on
a Company-wide level. The Company seeks to have all of its roofing laborers
participate in on-going training seminars and professional education classes.
At March 31, 1998, the Company had 1,960 full-time employees, including
1,666 employees in field operations and 294 managers and administrative
employees. Approximately 600 employees in six of the Founding Companies are
members of unions and work under collective bargaining agreements which are
subject to renegotiation from time to time. The Company has not experienced any
labor-related work stoppage and considers its relations with its employees to be
good.
PURCHASING
The Company believes it will be able to structure volume purchasing
arrangements or otherwise achieve purchasing economies of scale in the following
areas: (i) commercial roofing materials and supplies, (ii) purchase or lease and
maintenance of equipment including service vehicles, (iii) casualty, liability
and health insurance and related benefits and (iv) and accounting and legal
services. Each Founding Company will have the opportunity to order products from
the manufacturers or distributors at the discounted rate negotiated by the
Company and, therefore, benefit from the Company's purchasing power while
maintaining existing supplier relationships.
COMPETITION
The commercial roofing industry is highly fragmented with many roofing
contractors competing intensely with the Company on a local basis. In the
future, competition may be encountered from new entrants on a regional or
national level. The Company believes that purchasing decisions in this industry
are based on (i) price, (ii) reputation for reliability and quality of services
provided, (iii) long-term customer relationships, and (iv) range of services
provided. The Company believes that its strategy of becoming a leading national
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provider of commercial roofing services will enhance its competitive position.
In addition, the Company believes that its enterprise information systems and
standardized operating procedures provide the Company with a distinct
competitive advantage. The Company believes that the market for its services
will expand as it selectively acquires other roofing businesses.
GOVERNMENT REGULATION
The Company's business and the activities of its roofing contractors are
subject to various federal, state, and local laws, regulations and ordinances
relating to, among other things, the licensing and certification of roofing
contractors, OSHA standards, advertising, building and zoning regulations and
environmental laws and regulations relating to the disposal of demolition debris
and other solid wastes. In certain jurisdictions, the Company or one of its
employees is required to be a licensed contractor. In addition, certain
jurisdictions require the Company to obtain a building permit for each roofing
project. The Company is also subject to certain federal, state and local laws
and regulations, which, among other things, regulate the Company's advertising,
warranties and disclosures to customers. Although the Company believes that it
has been and is currently in compliance in all material respects with such laws
and regulations, there can be no assurance that in the future the Company's
results of operations will not be materially adversely affected by existing or
new laws or regulations applicable to the Company's business.
INSURANCE
Upon completion of the Combination, the Company intends to consolidate
insurance policies covering general liability, comprehensive property damage,
workers' compensation, automobile and other risks. The Company believes that
these coverages will be consistent with industry standards and adequate to
insure against the various liability risks of its business. There can be no
assurance, however, that the coverage limits of such insurance policy will be
adequate. A successful claim against the Company in excess of its insurance
coverage could have a material adverse affect on the Company and its financial
condition.
FACILITIES AND VEHICLES
The following table sets forth the principal operating facilities of the
Company:
<TABLE>
<CAPTION>
OWNED/ LEASE
LOCATION SQ. FOOTAGE LEASED EXPIRATION DATE
<S> <C> <C> <C>
Tempe, AZ 4,800 Leased March 2000
Tucson, AZ 4,500 Leased December 1998
Sacramento, CA 10,000 Leased August 2002
Denver, CO 7,000 Owned --
DeBary, FL 10,300 Leased August 1999
Ft. Lauderdale, FL 10,500 Leased December 2001
Jacksonville, FL 6,000 Owned --
Jacksonville, FL 5,000 Leased August 1999
Jacksonville, FL 2,000 Leased December 1999
Orlando, FL 16,000 Leased December 2005
</TABLE>
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<PAGE> 62
<TABLE>
<CAPTION>
OWNED/ LEASE
LOCATION SQ. FOOTAGE LEASED EXPIRATION DATE
<S> <C> <C> <C>
Pompano Beach, FL 17,000 Leased December 2008
Pompano Beach, FL 6,000 Leased December 2008
Tampa, FL 13,000 Leased December 2005
Smyrna, GA 7,500 Leased December 2003
Aurora, IL 26,000 Leased December 2001
Indianapolis, IN 5,200 Owned --
Kansas City, KS 12,500 Owned --
Detroit, MI 26,000 Owned --
Howell, MI 10,400 Leased August 2000
Rochester Hills, MI 13,000 Leased December 2000
Indian Trail, NC 12,000 Owned --
Dallas, TX 11,500 Leased June 2000
West Allis, WI 24,300 Owned --
</TABLE>
The Company operates a fleet of approximately 530 trucks, vans and other
vehicles. A portion of the Company's fleet consists of rebuilt used vehicles.
The Company retrofits these vehicles by increasing the passenger and cargo space
which allows the Company to minimize the number of vehicles which are required
on roofing jobs.
The Company believes that its facilities and vehicles are generally
well-maintained and adequate for the Company's current operations. See "Certain
Transactions -- Leases with the Company."
LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various
litigation matters arising in the normal course of its business, most of which
involve claims for personal injury and property damage incurred in connection
with its operations. The Company is not currently involved in any litigation
that the Company believes, based on its examination of such matters, is likely
to have a material adverse effect on its financial condition or results of
operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company and those persons who will
become directors, executive officers and key employees of the Company prior to
or upon the consummation of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Francis X. Maguire 65 Chairman of the Board Nominee
Gregg E. Wallick 43 President, Chief Executive Officer and Director
Eric B. Levine 61 Senior Vice President of Corporate Development
William A. Abberger III 41 Senior Vice President of Operations
Dale E. Eby 46 Senior Vice President, Chief Financial Officer and Treasurer
Robert Brooker 34 Vice President of Technology
Angela Pettus 31 Vice President of Human Resources Administration
John C. Cook 53 President and Chief Executive Officer of C.E.I. Florida and Director
Nominee
Joel A. Thompson 45 President and Chief Executive Officer of Anthony Roofing and
Director Nominee
Thomas E. Brown, Jr. 51 Chairman and Chief Executive Officer of Wright-Brown and Director
Nominee
Charles "Red" Scott 70 Director Nominee
David C. Willis 66 Director Nominee
Robert G. Shuler 34 Director Nominee
</TABLE>
- --------------
FRANCIS X. MAGUIRE will become the Chairman of the Board of the Company
prior to the consummation of the Offering. Mr. Maguire serves as the president
of Hearth Communication Group and is a key note speaker, trainer and consultant
providing services to Fortune 500 companies. From 1974 to 1984, Mr. Maguire
served as the senior vice president of Industrial Relations at Federal Express.
Mr. Maguire has previously served as the senior vice president of Kentucky Fried
Chicken, director of marketing and public relations of American Airlines,
director of program development at the American Broadcasting Company and as one
of the task force members of the "War on Poverty" initiative during the
Kennedy-Johnson administration.
GREGG E. WALLICK has served as the President and Chief Executive Officer
and a member of the Board of Directors of the Company since its inception. From
1988 until the Company's inception, Mr. Wallick served as the president and
chief executive officer of GRI, one of the Founding Companies. Mr. Wallick has
spearheaded the Company's consolidation effort. Mr. Wallick has more than 18
years of experience in the commercial roofing industry. Mr. Wallick is a
director of the NRCA and a member of the board of governors of the Alliance for
Progress and sits on such organization's steering committee. Mr. Wallick holds a
BBA and a Masters in Business Administration from the University of Miami and is
a former captain of the University of Miami Hurricanes football team.
ERIC B. LEVINE has served as the Senior Vice President of Corporate
Development of the Company's since its inception. From June 1997 until the
Company's inception, Mr. Levine served as the senior vice president of GRI, one
of the Founding Companies. From June 1990 until he joined the Company, Mr.
Levine served as the president of the Chief Executives Organization, an
international business development and strategic planning consulting firm which
he founded. From 1985 to 1989, Mr. Levine served as the vice president of
Cincinnati Bell Information Systems. From 1981 to 1985, Mr. Levine served as the
President of Vorwerk USA, a division of Vorwerk AG, a $2 billion computer
products conglomerate engaged in manufacturing and marketing, and as a director
for 12 years. Mr. Levine was the founder and president of Metlec Sales, Inc., a
franchisee of Vorwerk AG, from 1970 to 1981.
WILLIAM A. ABBERGER III has served as the Senior Vice President of
Operations of the Company since its inception. From November 1997 until the
Company's inception, Mr. Abberger served as the senior vice president
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of operations of GRI, one of the Founding Companies. From 1981 to 1997, Mr.
Abberger served as the Vice President of the Quality and Productivity
Improvement Group of FMI Corporation, a company which has provided construction
consulting services since 1954, where his responsibilities included providing
management consulting and education services in the construction industry. Mr.
Abberger served as a director of FMI Corporation from 1987 to 1997. Mr. Abberger
also currently serves as a member of the Board of Directors of American General
Contractors Association. Mr. Abberger holds a Bachelor of Science degree from
Clarkson College and a Masters of Business Administration from Dartmouth
College.
DALE E. EBY has served as the Senior Vice President, Chief Financial
Officer and Treasurer of the Company since its inception. From July 1997 until
the Company's inception, Mr. Eby served as the chief financial officer and
treasurer of GRI, one of the Founding Companies. From December 1995 until July
1997, Mr. Eby served as the Chief Financial Officer of Gold Coast Media Inc., a
direct marketing company. From April 1987 until May 1995, Mr. Eby served as
Chief Financial Officer and in other financial management positions with
Attwoods Incorporated, a waste management company which was a wholly-owned
subsidiary of Attwoods PLC, a NYSE company, and a company whose securities
traded on the London Stock Exchange. From June 1995 until December 1995, Mr. Eby
served as a consultant to Browning-Ferris Industries, Inc., a NYSE company,
which acquired Attwoods PLC in December 1994. Mr. Eby is a certified public
accountant.
ROBERT BROOKER has served as the Vice President of Technology of the
Company since its inception. From February 1993 until the Company's inception,
Mr. Brooker served as the vice president of technology of GRI, one of the
Founding Companies. From 1988 until February 1993, Mr. Brooker served as the
assistant supervisor of administration for the Palm Beach School District in
south Florida, where he developed a computerized maintenance management system.
From 1981 to 1988, Mr. Brooker served as the general manager of ABA Roofing &
Sheetmetal. Mr. Brooker designed and implemented the Company's enterprise
information system.
ANGELA PETTUS has served as the Vice President of Human Resources
Administration of the Company since its inception. From 1995 until the Company's
inception, Ms. Pettus served as the vice president of human resources
administration of GRI, one of the Founding Companies. Prior thereto, Ms. Pettus
served in various positions with GRI involving its administrative functions. Ms.
Pettus has expertise in resolving worker's compensation issues.
JOHN C. COOK will become a Director of the Company and continue in his
present position as the president and chief executive officer of The C.E.I.
Companies, upon the consummation of the Offering. Mr. Cook is a co-founder of
Cook Enterprises. From 1982 to 1992, Mr. Cook served as a member of the board of
directors of First America Bank.
JOEL A. THOMPSON will become a Director of the Company and continue in his
present position as the president and chief executive officer of Anthony
Roofing, one of the Founding Companies, upon the consummation of the Offering.
Mr. Thompson is the founder of Anthony Roofing. Mr. Thompson has over 27 years
of experience in the roofing industry, and has actively participated in several
industry organizations throughout his career, including the NRCA, the Midwest
Roofing Contractors Association and the Chicago Roofing Contractors Association.
THOMAS E. BROWN, JR. will become a Director of the Company and continue in
his present position as the chairman and chief executive officer of
Wright-Brown, one of the Founding Companies which is one of the oldest
commercial/industrial roofing contractors in Detroit, Michigan. Mr. Brown has
served as a member of the board of directors of the NRCA. Mr. Brown has also
served as chairman and trustee, and as a member of the board of directors of the
Sheetmetal Industry Promotion Fund. Mr. Brown has also served as president of
the Southeast Michigan Roofing Contractors Association.
CHARLES "RED" SCOTT will become a Director of the Company prior to the
consummation of the Offering. Mr. Scott is the chairman and chief executive
officer of TEC Florida, a leadership training organization. From 1991 to
December 1994, Mr. Scott served as the president and chief executive officer of
Actava Group, Inc., a NYSE company. From 1970 until 1991, Mr. Scott served as
the president and chief executive officer of Intermark, a NYSE company. In 1984,
Mr. Scott was the recipient of the Horatio Alger Award of Distinguished
Americans. Mr. Scott currently serves on the board of directors of Pier I
Imports, a NYSE company, Union Bank of California and PSS World Medical, Inc., a
company whose securities on the Nasdaq Stock Market.
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<PAGE> 65
DAVID C. WILLIS will become a Director of the Company prior to the
consummation of the Offering. Mr. Willis is a co-founder and has served as a
senior consultant of FMI Corporation. From 1954 to 1997, Mr. Willis served as a
partner of FMI Corporation. While at FMI Corporation, Mr. Willis developed a
zero injury improvement process and co-developed the total quality management
program for the construction industry. Prior to joining FMI Corporation, Mr.
Willis was a professor for 17 years at North Carolina State University. He
earned a Bachelor of Science at Tennessee Polytechnic Institute and a Master of
Science at North Carolina State University.
ROBERT G. SHULER will become a Director of the Company prior to the
consummation of the Offering. Mr. Shuler is a co-founder of Petra Capital, LLC,
an investment firm, and since 1996, has served as its co-managing partner and a
member of its advisory board, mostly recently as its president, chief executive
officer and a director. From 1993 to 1996, Mr. Shuler was a vice president and a
principal at Sirrom Capital Corporation, a NYSE company. From 1991 to 1993, Mr.
Shuler served as an investment banker at Equitable Securities Corporation. From
1987 to 1989, Mr. Shuler was a corporate finance professional at The
Robinson-Humphrey Company, LLC.
Effective upon the consummation of the Offering, the Board of Directors of
the Company will consist of nine members divided into three classes consisting
of one class of one director, one class of three directors and one class of five
directors serving staggered three-year terms expiring at the annual meeting of
shareholders in 1999, 2000, and 2001, respectively. At each annual meeting of
shareholders, one class of directors will be elected for a full term of three
years to succeed the class of directors whose terms are expiring.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established six committees--the Executive
Committee, Nominating Committee, Audit Committee, Compensation Committee,
Finance Committee and Acquisition Committee. Pursuant to resolutions of the
Board of Directors, these committees have the responsibilities and authority
described below.
Executive Committee. The Executive Committee is authorized, subject to
Florida law, to exercise the power and authority of the Board of Directors in
the management of the business and affairs of the Company between meetings of
the full Board of Directors. The members of the Executive Committee are Messrs.
Wallick and Cook.
Nominating Committee. The Nominating Committee has the responsibility to
propose nominees to the Board of Directors. The members of the Nominating
Committee are Messrs. Maguire, Shuler and Willis.
Audit Committee. The Audit Committee has the responsibility of (i)
recommending the selection of the Company's independent public accountants, (ii)
reviewing and approving the scope of the independent public accountants' audit
activity and extent of non-audit services, (iii) reviewing with management and
the Company's independent public accountants the adequacy of the Company's
accounting system and the effectiveness of the Company's internal audit plan and
activities, (iv) reviewing with management and the Company's independent public
accountants the Company's financial statements and exercising general oversight
of the Company's financial reporting process and (v) reviewing with the Company
litigation and other legal matters that may affect the Company's financial
condition, and monitoring compliance with the Company's business ethics and
other policies. The members of the Audit Committee are Messrs. Maguire, Shuler,
Scott and Willis.
Compensation Committee. The Compensation Committee has the responsibility
of (i) establishing the salary rates of officers and employees of the Company
and its subsidiaries, (ii) examining periodically the compensation structure of
the Company and (iii) supervising the welfare and pension plans and compensation
plans of the Company. The members of the Compensation Committee are Messrs.
Maguire, Shuler, Scott and Willis.
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<PAGE> 66
Finance Committee. The Finance Committee has the responsibility of (i)
monitoring the financial performance of the Company and (ii) reviewing and
making recommendations to the Board of Directors for the Company's annual budget
and financial policies. The members of the Finance Committee are Messrs.
Wallick, Thompson, Brown, and Cook.
Acquisition Committee. The Acquisition Committee has the responsibility of
establishing the profile of the types of companies, geographic area and
valuation formula for the roofing companies to be acquired by the Company. The
members of the Acquisition Committee are Messrs. Cook, Thompson, and Brown.
DIRECTOR COMPENSATION
The Company intends to grant to directors of the Company who are not
employees of the Company or its subsidiaries options to purchase 15,000 shares
of Common Stock at a purchase price per share equal to the fair market value of
the Common Stock on the date of grant. Such options will remain in effect for
ten years after the date of grant and the option will become exercisable in
equal amounts over a three year period. If a director ceases to serve in such
capacity because of his death, disability or retirement, the options granted to
that director will become exercisable for a ten period. Each outside director
also will be paid $1,500 and reimbursed for travel expenses incurred for each
Board meeting attended. Members of committees of the Company will be compensated
$1,000 for each Committee meeting attended.
EXECUTIVE COMPENSATION
The Company was incorporated in May 1998 and, prior to the Offering, has
not conducted any operations other than activities related to the Combination
and the Offering. During 1998, the annualized base salaries of its most highly
compensated executive officers will be: Gregg E. Wallick -- $200,000; Dale E.
Eby -- $120,000; Eric B. Levine -- $120,000; and William A. Abberger III --
$120,000 (collectively, the "Named Executive Officers").
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with uniform terms for
certain of its executive officers and members of management. Each of the
agreements has an initial term of three years, and is terminable after the first
year of the term by either party without cause upon 180 days' prior written
notice. The agreements also generally restrict certain of the Company's
executive officers and members of management from competing with the Company for
a period of two years after the date of termination of employment with the
Company, and prohibit such officers and members of management from disclosing
the Company's confidential information and soliciting employees and former
employees of the Company for employment in another company for a period of one
year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee's function is to recommend to the Board of
Directors compensation decisions for the Company's executive officers and to
administer the Company's 1998 Stock Option and Restricted Stock Purchase Plan.
See "Management -- Committees of The Board of Directors."
1998 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The Company has adopted a 1998 Stock Option and Restricted Stock Purchase
Plan (the "Plan"). An aggregate of 1,500,000 shares of Common Stock are
authorized for issuance under the Plan. As of the date of this Prospectus, after
giving effect to the Combination (pursuant to which options to purchase shares
of capital stock of certain of GRI will be converted into options to purchase
216,300 shares of Common Stock). In addition, the Company will grant options to
purchase approximately 560,000 shares of Common Stock to employees and directors
of the Company upon the consummation of the Offering pursuant to the Plan. The
purpose of the Plan is to attract and retain qualified personnel, to provide
additional incentives to employees,
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<PAGE> 67
officers and directors of the Company and to promote the success of the
Company's business. In furtherance of this purpose, the Plan authorizes (i) the
granting of incentive and non-statutory stock options to purchase shares of
Common Stock to employees, officers and directors of the Company, and (ii) the
granting of rights to purchase shares of Common Stock on a "restricted stock"
basis (the "Awards") to employees, officers and directors of the Company.
Incentive stock options may only be granted to full-time employees of the
Company or its subsidiaries. Non-statutory stock options and Awards may be
granted to directors of the Company and any person employed by the Company or
its subsidiaries. The Plan is administered by the Compensation Committee of the
Board. The Compensation Committee has complete discretion to determine which
eligible individuals are to receive option or Award grants, the number of shares
subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory option, the vesting schedule to be in
effect for the option or Award grant and the maximum term for which any granted
option or Award is to remain outstanding.
Each option granted under the Plan has a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service with the
Company. Options granted under the Plan may be exercised only for fully vested
shares. The exercise price of incentive stock options and non-statutory stock
options granted under the Plan must be at least 100% and 85% of the fair market
value of the stock subject to the option on the date of grant, respectively (or
110% with respect to incentive stock options granted to holders of more than 10%
of the voting power of the Company's outstanding stock). The purchase price is
payable immediately upon the exercise of the option. Such payment may be made in
cash, in outstanding shares of Common Stock held by the participant, through a
promissory note payable in installments over a period of years or any
combination of the foregoing.
The Board may amend or modify the Plan at any time, provided that no such
amendment or modification may adversely affect the rights and obligations of the
participants with respect to their outstanding options, Awards or vested shares
without their consent. In addition, no amendment of the Plan may, without the
approval of the Company's shareholders: (i) modify the class of individuals
eligible for participation; (ii) increase the number of shares available for
issuance, except in the event of certain changes to the Company's capital
structure; or (iii) extend the term of the Plan.
Options granted under the Plan have been structured to provide incentive to
achieve the Company's financial goals and enhance shareholder value. In general,
options granted under the Plan vest ratably over a four year period commencing
one year from the date of grant.
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<PAGE> 68
CERTAIN TRANSACTIONS
Individuals who are or will become executive officers or directors of the
Company will receive the following portions of the Acquisition Consideration in
the Combination for their interests in the Founding Companies.
<TABLE>
<CAPTION>
SHARES OF
COMPANY CASH COMMON STOCK
- ------- ---- ------------
<S> <C> <C>
Gregg E. Wallick .... -- 2,067,596
John C. Cook ........ $2,725,978 237,981
Joel A. Thompson .... 7,514,439 1,022,357
Thomas E. Brown, Jr.. 3,634,064 317,259
</TABLE>
The Company leases its headquarters offices and operating facilities in
Pompano Beach, Tampa, Orlando and Jacksonville, Florida from entities controlled
by Gregg E. Wallick or members of Mr. Wallick's family. None of these leases
expire prior to 2008. The aggregate annual base rent to be paid under these
leases is approximately $260,000 with annual increases based on the consumer
price index. The Company believes that the terms of such leases are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties. At March 31, 1998, Gregg E. Wallick owed General
Roofing Industries $332,286.
Anthony Roofing leases certain office facilities from Molitor, Inc., a
company which is wholly owned by Joel A. Thompson. Lease payments made by
Anthony Roofing to Molitor, Inc. were $195,677 and $135,741 for the years ended
December 31, 1997 and 1996, respectively. The term of the lease expires in 2001
and is subject to a five year renewal option. The minimum annual payments for
the years ended 1998, 1999, 2000 and 2001 are $163,800, $172,000, $180,600 and
$189,700, respectively.
From time to time, Anthony Roofing hires as a subcontractor Uni-Craft,
Inc., a company specializing in interior protection work which is owned by Joel
A. Thompson's brother. Payments to this company for work performed were
approximately $164,000 and $202,000 for the years ended December 31, 1997 and
1996, respectively.
C.E.I. Roofing leases certain office space in Michigan and Texas from
Wheelock & Associates, a partnership owned by Doug Reader, George Cook and John
Cook. Lease payments made by C.E.I. Roofing to Wheelock & Associates were
$164,199 and 148,599 for the years ended December 31, 1997 and 1996. The term of
the leases expire in 2000. The minimum annual payments for the years ending
1998, 1999 and 2000 are $120,000, $120,000 and $60,000, respectively. C.E.I.
Roofing also has granted a corporate guarantee to secure $500,000 of
indebtedness of Wheelock & Associates.
C.E.I. Roofing leases certain employees and laborers from CJRFG, Inc. and
Chris Jon Roofing, Inc., Texas corporations owned by certain children of Doug
Reader. Amounts paid by C.E.I. Roofing to these
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<PAGE> 69
companies were $4.4 and $3.7 million for the years ended December 31, 1997 and
1996, respectively. CJRFG, Inc. and Chris Jon Roofing, Inc. lease the employees
and laborers at cost with no markup. As such, C.E.I. Roofing believes these
leasing arrangements are no less favorable than could have been negotiated by
C.E.I. Roofing with unaffiliated third parties.
General Roofing Industries paid the Chief Executive Officers Organization,
a consulting company wholly owned by Eric B. Levine, $126,716 and $75,633 during
the fiscal years ended October 31, 1997 and 1996, respectively, for certain
consulting services.
In 1998, Petra Capital, LLC ("Petra") loaned General Roofing Industries an
aggregate of $3,000,000. In consideration of this loan (the "Petra Loan"), Petra
received warrants to purchase common stock of General Roofing Industries. Upon
the Combination, such warrant will represent the right to purchase 65,922 shares
of Common Stock at a nominal price. Robert G. Shuler, who will become a director
of the Company prior to the consummation of the Offering, is a co-founder of
Petra and is Petra's co-managing partner.
* * *
Following the Offering, the Company will not enter into any material
transaction with officers or directors, or their family members, without the
approval of a majority of the directors who do not have an interest in such
transaction.
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<PAGE> 70
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus, certain
information known by the Company with respect to the ownership of shares of
Common Stock as to (i) all persons who are expected to be the beneficial owners
of 5% or more of the outstanding shares of Common Stock upon consummation of the
Offering, (ii) each director and each person who has consented to be named as a
director (the "named directors"), (iii) each Named Executive Officer, and (iv)
all executive officers and directors of the Company as a group. Unless otherwise
indicated, each of the following persons may be deemed to have sole voting and
dispositive power with respect to such shares. Information set forth in the
table with respect to beneficial ownership of the Common Stock has been provided
to the Company by such holders. Unless otherwise indicated, each person's
address is c/o the Company's principal executive offices at 951 South Andrews
Avenue, Pompano Beach, Florida 33069.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Outstanding
Ownership of Common Stock
Common Stock (1) After Offering (2)
----------------------- ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER
- ------------------------------------
<S> <C> <C>
Gregg E. Wallick.............................................. 2,067,596 20.15%
Joel A. Thompson (3).......................................... 1,022,357 9.97%
Thomas E. Brown, Jr. (4)...................................... 317,259 3.09%
R. Wayne Cooke................................................ 603,013 5.88%
John C. Cook.................................................. 237,981 2.32%
Frank Maguire................................................. * --
Robert G. Shuler.............................................. * --
David C. Willis............................................... * --
Charles "Red" Scott........................................... * --
-------------- -----
All executive officers and directors of the Company
as a group (__ persons)....................................... %
============== =====
</TABLE>
* Beneficially owns less than 1% of the outstanding shares of Common
Stock.
(1) The shares of Common Stock will be issued to such persons upon
consummation of the Offering.
(2) The above amounts do not include options to purchase shares of Common
Stock held by such individuals which are not exercisable within 60 days
of the date of this Prospectus.
(3) Includes 511,187 shares of Common Stock owned by Joel A. Thompson's
wife.
(4) Such shares of Common Stock are held by the Thomas E. Brown, Jr.
Revocable Trust U/T/A September 16, 1980 for the benefit of such
shareholder.
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<PAGE> 71
THE COMBINATION
In May 1998, the Company entered into separate agreements to acquire
the Founding Companies in exchange for cash, Common Stock or a combination
thereof. The Combination will be effective concurrently with the consummation of
the Offering, and the stockholders of the Founding Companies will receive an
aggregate of 6,258,667 shares of Common Stock (assuming an initial public
offering price of $14.00 per share, which represents the mid-point of the
proposed offering range) and an aggregate of approximately $25.8 million in cash
from the net proceeds of the Offering. The sole shareholder of the Company prior
to the Combination ("Existing Shareholder") will receive the difference between
(i) the 6,258,667 shares of Common Stock to be outstanding after the
Combination, exclusive of the shares sold in the Offering, and (ii) the total
number of shares issued to the shareholders of the Founding Companies other than
the Existing Shareholder. The specific number of shares of Common Stock to be
issued in the Combination to the stockholders of the Founding Companies other
than the Existing Shareholder (the "Stock Consideration") will be determined by
dividing approximately $58.7 million by the initial public offering price of the
Common Stock. The table below illustrates the aggregate number of shares of
Common Stock and the percentage of the total number of shares of Common Stock
after the Offering that will be issued in the Offering, to the shareholders of
the Founding Companies and held by the Existing Shareholder in connection with
the Combination if the initial public offering price of the Common Stock is,
alternatively $13.00, $14.00 or $15.00.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK IF
PRICE TO PUBLIC IS:
----------------------------------------------------------------------------------
$13.00 $14.00 $15.00
-------------------------- -------------------------- --------------------------
SHARES % SHARES % SHARES %
-------------- ----------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
New investors............... 4,000,000 39.0 4,000,000 39.0 4,000,000 39.0
Existing Shareholder........ 1,745,206 17.0 2,067,596 20.2 2,347,001 22.9
Other Founding
Companies.................. 4,513,461 44.0 4,191,071 40.8 3,911,666 38.1
---------- ----- ---------- ----- ---------- -----
Total(1).............. 10,258,667 100.0% 10,258,667 100.0% 10,258,667 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
- ----------------
(1) Excludes 1,500,000 shares of Common Stock reserved for issuance under the
Company's 1998 Stock Option and Restricted Stock Purchase Plan of which
options to purchase approximately 560,000 shares of Common Stock will be
granted to certain directors, executive officers and other employees of
the Company and 282,222 options and warrants are expected to be issued in
exchange for outstanding options and warrants of GRI in the Combination.
See "Management--1998 Stock Option and Restricted Stock Purchase Plan."
The consideration for the Combination was negotiated by the parties and was
based primarily upon the historical earnings before interest and taxes of each
Founding Company. In addition, the Company intends to repay approximately $9.7
million of existing indebtedness of the Founding Companies with proceeds from
the Offering.
The consummation of each acquisition is subject to customary conditions.
These conditions include, among others, the accuracy of the representations and
warranties by the Founding Companies, their stockholders and the Company; the
performance by each of the parties of their respective covenants; and the
nonexistence of a material adverse condition or business of each Founding
Company. There can be no assurance that the conditions to the closing of each
acquisition of the Founding Companies will be satisfied or waived or that the
acquisition agreements will not be terminated.
The following table sets forth for each Founding Company (i) the
approximate portion of the Acquisition Consideration to be paid to the
stockholders of each of the Founding Companies in cash and in shares of Common
Stock (based upon an assumed initial public offering price of $14.00 per share),
which number of shares is subject to adjustment based on the initial public
offering price of the Common Stock offered hereby and (ii) the total debt which
would have been assumed by the Company as of March 31, 1998, which
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<PAGE> 72
represents historical indebtedness, excluding indebtedness transferred to owners
of the Founding Companies. The Combination excludes certain assets and
operations of the Founding Companies with a net book value of $1.0 million not
required for the ongoing operations of the Company.
<TABLE>
<CAPTION>
CASH AND SHARES OF
S CORPORATION COMMON ASSUMED
FOUNDING COMPANIES DISTRIBUTIONS(7) STOCK INDEBTEDNESS
- ------------------------------------------------------ ------------------- ------------------- ---------------------
(In thousands) (In thousands)
<S> <C> <C> <C>
General Roofing Industries Companies (1)............ -- 2,067,596 $ 4,651
The C.E.I. Companies:
C.E.I. Roofing, Inc............................ $ 3,190 278,500 305
C.E.I. West Roofing Company, Inc............... 3,460 302,000 512
C.E.I. Florida, Inc............................ 4,085 356,643 331
Blackmore & Buckner Roofing, Inc. (2)............... 1,481 129,286 100
Cyclone Roofing Company............................. 3,800 603,000 323
Anthony Roofing, Ltd................................ 7,514 1,022,357 --
Slavick, Butcher & Baecker Construction
Company, Inc.(3).................................... 900 192,857 170
Advanced Roofing, Inc. and Affiliates............... 3,596 268,143 660
Five-K Industries, Inc. and Subsidiary.............. 4,747 414,357 87
Wright-Brown Roofing Company........................ 3,825 334,000 168
Register Contracting Company, Inc. (4).............. 3,210 -- 177
Harrington-Scanlon Roofing Company, Inc.
and Affiliates(5).................................. 360 31,428 1,393
Specialty Associates, Inc. and Affiliate (6)........ 1,206 258,500 1,471
-------- --------- ---------
Total.......................................... $ 41,374 6,258,667 $ 10,348
======== ========= =========
</TABLE>
- ----------------
(1) Consists of (i) GRI of South Florida, Inc., (ii) GRI of West Florida,
Inc., (iii) GRI of Orlando, Inc. and (iv) Dakota Leasing, Inc.
(2) An additional cash payment of up to $192,000 may be made to the
stockholders of Blackmore & Buckner based on a multiple of the excess
of its earnings, as defined, in the year following the Combination over
a threshold, as specified in an earn-out provision (the "Earn-Out
Provision") in that certain Stock Purchase Agreement dated May 12, 1998
between Blackmore & Buckner and the Company. The consideration is
payable in cash or common stock at the average market price for the
last five business days of the earn-out period.
(3) An additional cash payment of up to $161,000 may be made to the
stockholders of Slavik Butcher. based on a multiple of the excess of
its earnings, as defined, in the year following the Combination over a
threshold, as specified in an Earn-Out Provision in that certain Stock
Purchase Agreement dated May 13, 1998. The consideration is payable in
cash or common stock at the average market price for the last five
business days of the earn-out period. Slavik Butcher has also warranted
that its earnings as defined for the year ended June 30, 1998 will be
at least a specified amount.
(4) An additional cash payment of up to of $1,019,340 may be made to the
stockholders of Register Contracting Company, Inc. based on seven times
the excess of its average annual earnings, as defined, in the two years
following the Combination over $458,571 as specified in an Earn-Out
Provision in that certain Stock Purchase Agreement dated May 8, 1998.
The consideration is payable in cash or common stock at the average
market price for the last five business days of the earn-out period.
(5) An additional payment of up to $5,820,000 may be made to the
stockholders of Harrington-Scanlon Roofing Company, Inc. based on the
excess of two times its earnings, as defined, in each of two years
following the Combination over $180,000 as specified in an Earn-Out
Provision in that certain Stock Purchase Agreement dated May 12, 1998.
The consideration is payable in cash or common stock at the average
market price for the last five business days of the earn-out period.
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<PAGE> 73
(6) An additional cash payment of up to $420,000 may be made to the
stockholders of Specialty Associates, Inc. based on a multiple of the
excess of its earnings, as defined, in the year following the
Combination over a threshold, as specified in an Earn-Out Provision in
that certain Stock Purchase Agreement dated May 12, 1998.
(7) In lieu of the cash consideration, certain Founding Companies may
distribute cash or certain assets (principally cash surrender value of
life insurance) to owners prior to the Combination.
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<PAGE> 74
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 90,000,000 shares
of Common Stock, $0.01 par value, and 10,000,000 shares of Preferred Stock, $.01
par value. As of the date hereof, there are 10,258,667 shares of Common Stock
outstanding. No shares of Preferred Stock have been issued or are currently
outstanding.
The following description of the capital stock of the Company and certain
provisions of the Company's Articles and Bylaws is a summary and is qualified in
its entirety by the provisions of the Articles and Bylaws which have been filed
as exhibits to the Company's Registration Statement, of which this Prospectus is
a part.
COMMON STOCK
All shares of Common Stock have one vote on all matters to be voted upon by
the shareholders. Subject to preferences that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board out of funds legally available therefor. Holders of Common Stock have no
preemptive, conversion or other registration or subscription rights. There are
no redemption or sinking fund provisions available to the Common Stock. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to the prior distribution rights of Preferred Stock, if
any, then outstanding.
PREFERRED STOCK
The Board has the authority without further action by the shareholders to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the number of shares constituting any such series, the voting powers,
designations, preferences and relative participation, optional or other special
rights and qualifications, limitations or restrictions thereof, including the
dividend rights and dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without further vote or
action by the shareholders. The issuance of Preferred Stock by the Board could
adversely effect the rights of the holders of Common Stock. For example, such
issuance could result in a class of securities outstanding that would have
preferences with respect to voting rights and dividends, and in liquidation,
over the Common Stock, and could (upon conversion or otherwise) enjoy all of the
rights of the Common Stock.
The authority possessed by the Board to issue Preferred Stock could
potentially be used to discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve or more costly. The Board may issue Preferred
Stock with voting or conversion rights that could adversely affect the voting
power of the holders of Common Stock. There are no agreements or understandings
for the issuance of Preferred Stock and the Board has no present intention to
issue Preferred Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to the (i) the Florida Control Share Act, which
generally provides that shares acquired in excess of thresholds equaling 20%,
33% and more than 55% of a corporation's voting power will not possess any
voting rights unless such voting rights are approved by a majority vote of the
Company's disinterested shareholders and (ii) the Florida Fair Price Act which
generally requires approval by the disinterested directors or supermajority
approval by shareholders for certain specified transactions between a
corporation and a holder of more than 10% of the outstanding shares of the
corporation (or their affiliates).
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<PAGE> 75
These provisions could prohibit or delay the accomplishment of mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS
Certain provisions of the Articles and Bylaws summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by shareholders.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Bylaws provide that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for election
as directors at an annual meeting of shareholders, must provide timely notice
thereof in writing. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Company, not less
than 120 days nor more than 150 days prior to the first anniversary of the date
of the Company's notice of annual meeting provided with respect to the previous
year's annual meeting; provided, that if no annual meeting was held in the
previous year or the date of the annual meeting has been changed to be more than
30 calendar days earlier than or 60 calendar days after such anniversary, notice
by the shareholder, to be timely, must be so received not more than 90 days nor
later than the later of (i) 60 days prior to the annual meeting or (ii) the
close of business on the 10th day following the date on which notice of the date
of the meeting is given to shareholders or made public, whichever first occurs.
The Bylaws also specify certain requirements for a shareholder's notice to be in
proper written form. These provisions may preclude shareholders from bringing
matters before the shareholders at an annual meeting or from making nominations
for directors at an annual meeting.
Authorized but Unissued Shares. The authorized but unissued shares of
Common Stock and Preferred Stock are available for future issuance without
shareholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate Combination and employee benefit plans. The existence of
authorized but unissued and unreserved Common Stock and Preferred Stock may
enable the Board to issue shares to persons friendly to current management which
could render more difficult or discourage an attempt to obtain control of the
Company by means of a proxy contest, tender offer, merger or otherwise, and
thereby protect the continuity of the Company's management.
LIMITED LIABILITY AND INDEMNIFICATION
Under the Florida Business Corporation Act ("FBCA"), a director is not
personally liable for monetary damages to the corporation or any other person
for any statement, vote, decision, or failure to act unless (i) the director
breached or failed to perform his duties as a director and (ii) a director's
breach of, or failure to perform, those duties constitutes (1) a violation of
the criminal law, unless the director had reasonable cause to believe his
conduct was lawful or had no reasonable cause to believe his conduct was
unlawful, (2) a transaction from which the director derived an improper personal
benefit, either directly or indirectly, (3) a circumstance under which an
unlawful distribution is made, (4) in a proceeding by or in the right of the
corporation to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the corporation or
willful misconduct, or (5) in a proceeding by or in the right of someone other
than the corporation or a shareholder, recklessness or an act or omission which
was committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property. A corporation
may purchase and maintain insurance on behalf of any director or officer against
any liability asserted against him and incurred by him in his capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the FBCA.
The Articles and Bylaws of the Company provide that the Company shall, to
the fullest extent permitted by applicable law, as amended from time to time,
indemnify all directors of the Company, as well as any officers or employees of
the Company to whom the Company has agreed to grant indemnification.
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<PAGE> 76
Prior to this Offering, the Company will enter into separate
indemnification agreements with its executive officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in the Company's Bylaws. The indemnification agreements may
require the Company, among other things, to indemnify such directors and
officers against certain liabilities that may arise by reason of their status as
directors and officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to provide
directors' and officers' insurance, if available on reasonable terms. The
Company believes these agreements are necessary to attract and retain qualified
persons as executive officers and directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
10,258,667 shares of Common Stock (10,858,667 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 4,000,000
shares (4,600,000 shares if the Underwriters' over-allotment option is exercised
in full) sold in the Offering will be freely tradable in the public market
without restriction or limitation under the Securities Act, except for any
shares held by an "affiliate" (as defined in the Securities Act) of the Company.
The 2,067,596 shares of Common Stock held by existing shareholders of the
Company immediately prior to the Offering and the 4,191,071 shares of Common
Stock to be issued in connection with the acquisition of the Founding Companies
will be "restricted securities" within the meaning of Rule 144.
In addition, certain of the Company's directors, executive officers and
principal shareholders, who hold an aggregate of _____ shares of Common Stock,
have entered into lock-up agreements with the Representatives of the
Underwriters. These persons have agreed not to offer, sell, contract to sell,
grant any option with respect to, pledge, hypothecate or otherwise dispose of,
any shares of Common Stock owned by them until the date occurring 180 days after
the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC. All such ______ shares will become available for
sale 180 days after the date of this Prospectus upon expiration of these lock-up
agreements, subject to compliance with Rule 144 promulgated under the Securities
Act. Furthermore, the shareholders of the Founding Companies, who collectively
will hold 6,258,667 shares of Common Stock, have entered or will enter into
Stock Transfer Restriction Agreements that impose restrictions of the
transferability of their shares. See "--Transfer Restrictions."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock that does not exceed the greater of (i) one percent of the number of the
then outstanding shares or (ii) the average weekly reported trading volume of
the Common Stock during the four calendar weeks preceding the sale. Sales under
Rule 144 are also subject to certain notice requirements and to the availability
of current public information about the Company and must be made in unsolicited
brokers' transactions or to a market maker. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company under the Securities
Act during the three months preceding a sale and who has beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the information, volume, manner of sale and notice provisions
of such Rule. At the date of this Prospectus, 6,258,667 "restricted" shares of
Common Stock will be eligible for resale within one year of the date of this
Prospectus pursuant to Rule 144, subject to the volume, manner of sale and other
limitations thereof.
All of the purchasers of Common Stock in the Combination of the Founding
Companies have agreed that they will not offer, sell, contract to sell, announce
their intention to sell, pledge or otherwise dispose of, directly
76
<PAGE> 77
or indirectly, without the prior written consent of the Company and the
Underwriters for a period of two years after the date of this Prospectus.
Prior to this Offering, there has been no active trading market for the
Common Stock. No predictions can be made of the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of Common Stock could adversely affect the prevailing market
price of Common Stock, as well as impair the ability of the Company to raise
capital through the issuance of additional equity securities.
TRANSFER RESTRICTIONS
Purchasers of Common Stock in the Combination of the Founding Companies
have agreed not to transfer, sell or otherwise dispose of the shares of Common
Stock received in connection with such acquisition for a period of two years
from the closing of the Offering.
77
<PAGE> 78
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom The Robinson-Humphrey
Company, LLC and BancAmerica Robertson Stephens are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company the
number of shares of Common Stock set forth below opposite their respective
names. The Underwriters are committed to purchase all of such shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER OF
Underwriters SHARES
------------ -------------
<S> <C>
The Robinson-Humphrey Company, LLC.....................................
BancAmerica Robertson Stephens.........................................
-------------
Total.............................................................
=============
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $____ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $____ per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to 600,000 additional shares of Common Stock at
the initial public offering price less the underwriting discount. Such option,
which expires 30 days after the date of this Prospectus, may be exercised solely
to cover over-allotments. To the extent the Representatives exercise such
option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase approximately the same percentage of the option shares
as the number of shares to be purchased initially by that Underwriter bears to
the total number of shares to be purchased initially by the Underwriters.
Prior to this Offering, there has been no established trading market for
the Common Stock. The initial price to the public for the Common Stock offered
hereby was determined by negotiations among the Company and the Representatives.
Among the factors considered in determining the initial price to the public were
the history of and the prospects for the industry in which the Company competes,
the past and present operations of the Company and the historical results of
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the Offering, and the
recent market prices of securities of generally comparable companies. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate
78
<PAGE> 79
short positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when shares of Common Stock originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq Stock Market or otherwise and,
if commenced, may be discontinued at any time.
In connection with the Offering, the Company's officers and directors
and certain of its shareholders have agreed that, during a period of 180 days
from the date of this Prospectus, such holders will not, without the prior
written consent of The Robinson-Humphrey Company, LLC, directly or indirectly,
offer, sell, contract to sell, grant any option with respect to, pledge,
hypothecate or otherwise dispose of, any shares of Common Stock except for a
cashless exercise of stock options or a bona fide gift provided that the donee
agrees to be bound by the terms of the donor's lockup agreement. In addition,
the Company has agreed that, during a period of 180 days from the date of this
Prospectus, the Company will not, without the prior written consent of The
Robinson-Humphrey Company, LLC, directly or indirectly, offer, sell, contract to
sell, grant any option with respect to, pledge, hypothecate or otherwise dispose
of any shares of Common Stock except for shares of Common Stock to be issued in
the Offering, in connection with acquisitions generally, and upon the exercise
of the stock options which are either (i) outstanding on the date of this
Prospectus or (ii) issued under the Plan.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Baker & McKenzie, Miami, Florida, and for the Underwriters by King &
Spalding, Atlanta, Georgia.
EXPERTS
The financial statements of General Roofing Services, Inc., the
combined financial statements of GRI of South Florida, Inc., GRI of Orlando,
Inc., GRI of West Florida, Inc. and Dakota Leasing, Inc., the combined financial
statements of Advanced Roofing, Inc., Advanced Leasing, Inc., K&M Warehouse,
Inc. and Hi-Rise Crane, Inc., the combined financial statements of Harrington -
Scanlon Roofing Company, Inc. and Affiliates, the combined financial statements
of Specialty Associates, Inc. and Affiliate, the financial statements of
Register Contracting Company, Inc. and Slavik, Butcher and Baecker Construction
Company, Inc., Anthony Roofing, Ltd. as of December 31, 1997 and for the year
then ended, Wright-Brown Roofing Company, Cyclone Roofing Company, and Blackmore
& Buckner Roofing, Inc. as of December 31, 1997 and for the year then ended,
and the consolidated financial statements of Five-K Industries, Inc. and
Subsidiary as of March 31, 1998 and for the year then ended included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The combined financial statements of C.E.I. Roofing, Inc., C.E.I.
Florida, Inc. and C.E.I. West Roofing Company, Inc., included in this Prospectus
have been audited by Belew Averitt LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of Anthony Roofing, Ltd. as of December 31,
1996 and for the fourteen month period ended December 31, 1995 and the year
ended December 31, 1996 included in this Prospectus have been audited by Dugan &
Lopatka CPAs, PC, independent auditors, as stated in their reports appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Blackmore & Buckner Roofing, Inc. as of
December 31, 1996 and for the two years in the period ended December 31, 1996
included in this Prospectus have been audited by Blue & Co. LLC, independent
auditors, as stated in their reports appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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<PAGE> 80
The consolidated financial statements of Five-K Industries, Inc. and
Subsidiary as of March 31, 1997 and for each of the two years in the period
ended March 31, 1997 included in this Prospectus have been audited by Bearden &
Smith PC, independent auditors, as stated in their reports appearing herein, and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term encompasses any and all amendments thereto) under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is filed as
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which were omitted in accordance with the rules and regulations
of the Commission. Statements made in this Prospectus concerning the contents of
any contract, agreement or other document referred to are summaries of the terms
of such contract, agreement or other document and are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any portion of the Registration Statement may be obtained from the Public
Reference facilities of the Commission, upon payment of the prescribed fees. The
Registration Statement is also available on the Internet at the Commission's
World Wide Web site at http://www.sec.gov. The Company has applied for listing
the Common Stock on Nasdaq, and reports, proxy statements and other information
concerning the Company can be inspected and copied at Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
As a result of the Offering, the Company will be subject to the reporting
requirements under the Exchange Act and, in accordance therewith, will file
reports, proxy statements, information statements and other information with the
Commission. The Company intends to furnish annual reports to its shareholders
containing audited financial statements reported on by an independent certified
public accounting firm and quarterly reports containing unaudited summary
financial information for each of the first three quarters of each year.
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<PAGE> 81
<TABLE>
<S> <C>
- ---------------------------------------------------------- ----------------------------------------------------------
- ---------------------------------------------------------- ----------------------------------------------------------
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 MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR 4,000,000 Shares
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER
THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A GRS(TM)
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON
STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER GENERAL ROOFING SERVICES, INC.
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS COMMON STOCK
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
-------------------
Prospectus Summary.................................. 3 P R O S P E C T U S
Summary Pro Forma Combined Financial Data........... 7 -------------------
Summary Individual Founding Company
Historical Financial Data......................... 9
Risk Factors........................................ 12
The Company......................................... 19
Use of Proceeds..................................... 22
Capitalization...................................... 23
Dividend Policy .................................... 24
Dilution............................................ 25
Selected Historical and Pro Forma Financial
Data.............................................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 29 THE ROBINSON-HUMPHREY
Business............................................ 54 COMPANY
Management.......................................... 63
Certain Transactions................................ 68 BANCAMERICA
Security Ownership of Certain Beneficial ROBERTSON STEPHENS
Owners and Management............................ 70
The Combination..................................... 71
Description of Capital Stock........................ 74
Shares Eligible for Future Sales.................... 76
Underwriting........................................ 78
Legal Matters....................................... 79
Experts............................................. 79
Available Information............................... 80
Index to Financial Statements....................... F-1
, 1998
UNTIL 1998, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, 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 OR SUBSCRIPTIONS.
- ---------------------------------------------------------- ----------------------------------------------------------
- ---------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL ROOFING SERVICES, INC. (UNAUDITED) PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements F-4
Unaudited Pro Forma Combined Balance Sheet F-5
Unaudited Pro Forma Combined Statements of Operations F-7
Notes to Unaudited Pro Forma Combined Financial Statements F-9
GENERAL ROOFING SERVICES, INC.
Independent Auditors' Report F-13
Balance Sheet F-14
Notes to Financial Statement F-15
FOUNDING COMPANIES HISTORICAL FINANCIAL STATEMENTS
GENERAL ROOFING INDUSTRIES
Independent Auditors' Report F-17
Combined Balance Sheets F-18
Combined Statements of Operations F-19
Combined Statements of Stockholder's Equity F-20
Combined Statements of Cash Flows F-21
Notes to Combined Financial Statements F-22
CEI ROOFING, INC., CEI FLORIDA, INC., AND CEI WEST ROOFING COMPANY, INC.
(THE C.E.I. COMPANIES)
Independent Auditors' Report F-30
Combined Balance Sheets F-31
Combined Statements of Income F-33
Combined Statements of Stockholders' Equity F-34
Combined Statements of Cash Flows F-35
Notes to Combined Financial Statements F-37
ANTHONY ROOFING, LTD.
Independent Auditors' Report F-45
Balance Sheets F-47
Statements of Operations F-48
Statements of Stockholders' Equity F-49
Statements of Cash Flows F-50
Notes to Financial Statements F-51
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
Independent Auditors' Report F-57
Combined Balance Sheets F-58
Combined Statements of Operations F-59
Combined Statements of Stockholders' Equity F-60
Combined Statements of Cash Flows F-61
Notes to Combined Financial Statements F-62
</TABLE>
F-1
<PAGE> 83
<TABLE>
<S> <C>
CYCLONE ROOFING COMPANY
Independent Auditors' Report F-69
Balance Sheets F-70
Statements of Operations F-71
Statements of Stockholders' Equity F-72
Statements of Cash Flows F-73
Notes to Financial Statements F-74
WRIGHT-BROWN ROOFING COMPANY
Independent Auditors' Report F-81
Balance Sheets F-82
Statements of Operations F-83
Statements of Stockholder's Equity F-84
Statements of Cash Flows F-85
Notes to Financial Statements F-86
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
Independent Auditors' Report F-93
Combined Balance Sheets F-94
Combined Statements of Operations F-95
Combined Statements of Stockholders' Equity F-96
Combined Statements of Cash Flows F-97
Notes to Combined Financial Statements F-98
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
Independent Auditors' Report F-107
Balance Sheets F-108
Statements of Operations F-109
Statements of Stockholders' Equity F-110
Statements of Cash Flows F-111
Notes to Financial Statements F-112
FIVE-K INDUSTRIES, INC. AND SUBSIDIARY
Independent Auditors' Report F-120
Consolidated Balance Sheets F-122
Consolidated Statements of Operations F-123
Consolidated Statements of Stockholder's Equity F-124
Consolidated Statements of Cash Flows F-125
Notes to Consolidated Financial Statements F-126
ADVANCED ROOFING, INC. AND AFFILIATES
Independent Auditors' Report F-133
Combined Balance Sheets F-134
Combined Statements of Operations F-135
Combined Statements of Stockholders' Equity F-136
Combined Statements of Cash Flows F-137
Notes to Combined Financial Statements F-138
</TABLE>
F-2
<PAGE> 84
<TABLE>
<S> <C>
BLACKMORE AND BUCKNER ROOFING, INC.
Independent Auditors' Report F-145
Balance Sheets F-147
Statements of Operations F-148
Statements of Stockholders' Equity F-149
Statements of Cash Flows F-150
Notes to Financial Statements F-151
REGISTER CONTRACTING COMPANY, INC.
Independent Auditors' Report F-157
Combined Balance Sheets F-158
Combined Statements of Operations F-159
Combined Statements of Stockholders' Equity F-160
Combined Statements of Cash Flows F-161
Notes to Combined Financial Statements F-162
</TABLE>
F-3
<PAGE> 85
GENERAL ROOFING SERVICES AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
(i) the acquisitions by General Roofing Services, Inc. ("GRS") (the
"Combination"), of the outstanding capital stock and other equity interests of
GRI, Advanced Roofing, Anthony Roofing, Blackmore and Buckner, The C.E.I.
Companies, Cyclone Roofing, Five-K Industries, Harrington-Scanlon, Register,
Slavik-Butcher, Specialty Associates, and Wright-Brown (together, the "Founding
Companies"), and related transactions, and (ii) GRS' initial public offering.
The Combination will occur concurrently with the closing of the Offering and
will be accounted for using the purchase method of accounting. GRI has been
reflected as the accounting acquirer for financial statement presentation
purposes.
The unaudited pro forma combined balance sheet gives effect to the Combination
and related transactions, and the Offering, as if they had occurred on March 31,
1998. The unaudited pro forma combined statements of operations gives effect to
these transactions as if they had occurred on January 1, 1997.
GRS has preliminarily analyzed the savings that it expects to be realized from
reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Founding Companies have contractually agreed to
prospective changes in salary, bonuses, benefits and lease payments, these
changes have been reflected in the unaudited pro forma combined statements of
operations. With respect to other anticipated cost savings, GRS will not be able
to accurately quantify these savings until completion of the Combination. It is
expected that these savings will be partially offset by costs related to GRS'
new corporate management and by the costs associated with being a public
company. However, because these costs cannot be quantified at this time, they
have not been included in the pro forma combined financial information of GRS.
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. The pro forma
financial data do not purport to represent what GRS' combined 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 GRS'
combined financial position or combined results of operations for any future
period. Since the Founding 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 historical financial statements and notes
thereto included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-4
<PAGE> 86
GENERAL ROOFING SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WRIGHT- ANTHONY SPECIALTY CYCLONE
GRI CEI BROWN ROOFING ASSOCIATES ROOFING
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 156 $ 294 $ 253 $ 2,531 $ 31 $ 487
Receivables, net 5,548 9,549 2,239 2,736 1,753 3,514
Inventories 347 370 198 107 800 12
Prepaid Expenses 241 77 -- 28 24 --
Deferred Tax Assets -- -- -- -- 31 --
-------- -------- -------- -------- -------- --------
Total Current Assets 6,292 10,290 2,690 5,402 2,639 4,013
Property and Equipment, net 1,754 2,008 790 696 1,565 837
Goodwill -- -- -- -- -- --
Life Insurance - CSV -- 420 56 -- -- --
Other Noncurrent Assets 1,348 -- 162 -- 162 37
-------- -------- -------- -------- -------- --------
Total Assets $ 9,394 $ 12,718 $ 3,698 $ 6,098 $ 4,366 $ 4,887
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 2,329 $ 4,560 $ 1,087 $ 449 $ 824 $ 281
Accrued Expenses 692 564 610 174 389 173
Billings in Excess of Costs and Profit 494 744 98 50 205 236
Distributions Payable and Accrued -- 434 -- -- -- --
Deferred Income Taxes -- -- -- -- -- --
Notes Payable -- 328 -- -- 800 --
Current Portion of Long-Term Debt 774 387 33 -- 202 185
Current Portion of Capitalized Leases 157 -- 55 -- -- 26
Due to Related Parties -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total Current Liabilities 4,446 7,017 1,883 673 2,420 901
Long-Term Debt 3,445 433 58 -- 469 78
Long-Term Capitalized Leases 275 -- 22 -- -- 34
Deferred Income Taxes -- -- -- -- 139 --
Other Non-Current Liabilities 150 -- -- -- -- --
Stockholders' Equity:
Common Stock 1 335 5 1 34 25
Additional Paid In Capital 629 85 24 -- 216 --
Retained Earnings 448 4,848 1,706 5,424 1,246 3,849
Treasury Stock -- -- -- -- (158) --
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity 1,078 5,268 1,735 5,425 1,338 3,874
-------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 9,394 $ 12,718 $ 3,698 $ 6,098 $ 4,366 $ 4,887
======== ======== ======== ======== ======== ========
<CAPTION>
TOTAL
OTHER PRO FORMA
ACQUISITION PRO FORMA PRO FORMA OFFERING COMBINED
COMPANIES COMBINED ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 1,829 $ 5,581 $ (3,176) $ 2,405 $ 12,644 $ 15,049
Receivables, net 11,200 36,539 (488) 36,051 -- 36,051
Inventories 537 2,371 -- 2,371 -- 2,371
Prepaid Expenses 99 469 (13) 456 -- 456
Deferred Tax Assets 38 69 -- 69 -- 69
-------- -------- -------- -------- -------- --------
Total Current Assets 13,703 45,029 (3,677) 41,352 12,644 53,996
Property and Equipment, net 4,752 12,402 (1,315) 11,087 -- 11,087
Goodwill -- -- 64,298 64,298 -- 64,298
Life Insurance - CSV 85 561 (561) -- -- --
Other Noncurrent Assets 259 1,968 (148) 1,820 -- 1,820
-------- -------- -------- -------- -------- --------
Total Assets $ 18,799 $ 59,960 $ 58,597 $118,557 $ 12,644 $131,201
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 4,181 $ 13,711 $ (434) $ 13,277 $ -- $ 13,277
Accrued Expenses 2,428 5,030 (181) 4,849 -- 4,849
Billings in Excess of Costs and Profit 1,528 3,355 (64) 3,291 -- 3,291
Distributions Payable and Accrued -- 434 (434) -- -- --
Deferred Income Taxes 546 546 430 976 -- 976
Notes Payable -- 1,128 11,696 12,824 (1,128) 11,696
Current Portion of Long-Term Debt 1,584 3,165 (267) 2,898 (2,898) --
Current Portion of Capitalized Leases 30 268 -- 268 -- 268
Due to Related Parties -- -- 25,766 25,766 (25,766) --
-------- -------- -------- -------- -------- --------
Total Current Liabilities 10,297 27,637 36,512 64,149 (29,792) 34,357
Long-Term Debt 1,771 6,254 (610) 5,644 (5,644) --
Long-Term Capitalized Leases 79 410 -- 410 -- 410
Deferred Income Taxes 47 186 -- 186 -- 186
Other Non-Current Liabilities -- 150 -- 150 -- 150
Stockholders' Equity:
Common Stock 70 471 (408) 63 40 103
Additional Paid In Capital 1,165 2,119 45,388 47,507 48,040 95,547
Retained Earnings 5,475 22,996 (22,548) 448 -- 448
Treasury Stock (105) (263) 263 -- -- --
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity 6,605 25,323 22,695 48,018 48,080 96,098
-------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 18,799 $ 59,960 $ 58,597 $118,557 $ 12,644 $131,201
======== ======== ======== ======== ======== ========
</TABLE>
F-5
<PAGE> 87
GENERAL ROOFING SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
OTHER
SLAVIK- HARRINGTON- FIVE-K BLACKMORE ACQUISITION
ADVANCED REGISTER BUTCHER SCANLON INDUSTRIES AND BUCKNER COMPANIES
-------- -------- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 210 $ 489 $ 186 $ 1 $ 696 $ 247 $ 1,829
Receivables, net 2,436 1,545 1,905 2,495 1,769 1,050 11,200
Inventories 95 88 -- 242 36 76 537
Prepaid Expenses 23 34 18 -- -- 24 99
Deferred Tax Assets -- -- -- 38 -- -- 38
-------- -------- -------- -------- -------- -------- --------
Total Current Assets 2,764 2,156 2,109 2,776 2,501 1,397 13,703
Property and Equipment, net 2,063 549 366 1,057 374 343 4,752
Goodwill -- -- -- -- -- -- --
Life Insurance - CSV -- -- -- -- -- 85 85
Other Noncurrent Assets -- 46 31 80 97 5 259
-------- -------- -------- -------- -------- -------- --------
Total Assets $ 4,827 $ 2,751 $ 2,506 $ 3,913 $ 2,972 $ 1,830 $ 18,799
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 713 $ 590 $ 817 $ 1,342 $ 428 $ 291 $ 4,181
Accrued Expenses 565 504 272 227 605 255 2,428
Billings in Excess of Costs and Profit 249 256 194 586 121 122 1,528
Distributions Payable and Accrued -- -- -- -- -- -- --
Deferred Income Taxes -- 69 117 -- 360 -- 546
Notes Payable -- -- -- -- -- -- --
Current Portion of Long-Term Debt 828 45 105 543 40 23 1,584
Current Portion of Capitalized Leases -- -- -- 30 -- -- 30
Due to Related Parties -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Current Liabilities 2,355 1,464 1,505 2,728 1,554 691 10,297
Long-Term Debt 563 132 118 834 47 77 1,771
Long-Term Capitalized Leases -- -- -- 79 -- -- 79
Deferred Income Taxes -- 22 10 -- 15 -- 47
Other Non-Current Liabilities -- -- -- -- -- -- --
Stockholders' Equity:
Common Stock 1 20 10 2 8 29 70
Additional Paid In Capital 673 73 -- 19 30 370 1,165
Retained Earnings 1,340 1,040 863 251 1,318 663 5,475
Treasury Stock (105) -- -- -- -- -- (105)
-------- -------- -------- -------- -------- -------- --------
Total Stockholders' Equity 1,909 1,133 873 272 1,356 1,062 6,605
-------- -------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 4,827 $ 2,751 $ 2,506 $ 3,913 $ 2,972 $ 1,830 $ 18,799
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-6
<PAGE> 88
GENERAL ROOFING SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
OTHER PRO FORMA
WRIGHT- ANTHONY SPECIALTY CYCLONE FOUNDING PRO FORMA COMBINED
GRI CEI BROWN ROOFING ASSOCIATES ROOFING COMPANIES ADJUSTMENTS AS ADJUSTED
------- -------- -------- -------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 7,135 $ 10,025 $ 2,447 $ 2,489 $ 2,300 $ 2,829 $ 13,521 $ (1,162) $ 39,584
Cost of Revenues 5,308 7,733 2,113 2,132 2,286 2,457 10,824 (1,152) 31,701
------- -------- -------- -------- -------- -------- -------- -------- -----------
Gross Profit 1,827 2,292 334 357 14 372 2,697 (10) 7,883
SG&A Expenses 2,204 2,105 306 445 317 227 2,479 61 8,144
------- -------- -------- -------- -------- -------- -------- -------- -----------
Income (Loss) From Operations (377) 187 28 (88) (303) 145 218 (71) (261)
Other Income (Expense) (97) (58) (17) 56 (32) 7 (43) 58 (126)
------- -------- -------- -------- -------- -------- -------- -------- -----------
Income (Loss) Before Taxes (474) 129 11 (32) (335) 152 175 (13) (387)
Income Tax (Provision) Benefit -- (3) -- -- 131 -- 24 (159) (7)
------- -------- -------- -------- -------- -------- -------- -------- -----------
Net Income (Loss) $ (474) $ 126 $ 11 $ (32) $ (204) $ 152 $ 199 $ (172) $ (394)
======= ======== ======== ======== ======== ======== ======== ======== ===========
Basic Loss Per Share $ (0.04)
===========
Net Loss Per Share 10,258,667
===========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
OTHER
SLAVIK- HARRINGTON- FIVE-K BLACKMORE FOUNDING
ADVANCED REGISTER BUTCHER SCANLON INDUSTRIES AND BUCKNER COMPANIES
-------- -------- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,097 $ 1,964 $ 2,858 $ 2,369 $ 2,172 $ 1,061 $ 13,521
Cost of Revenues 2,467 1,660 2,303 2,185 1,313 896 10,824
-------- -------- -------- -------- -------- -------- --------
Gross Profit 630 304 555 184 859 165 2,697
SG&A Expenses 400 258 347 377 882 215 2,479
-------- -------- -------- -------- -------- -------- --------
Income (Loss) From Operations 230 46 208 (193) (23) (50) 218
Other Income (Expense) (31) 8 (1) (27) 8 -- (43)
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before Taxes 199 54 207 (220) (15) (50) 175
Income Tax (Provision) Benefit -- (17) (59) 94 6 -- 24
-------- -------- -------- -------- -------- -------- --------
Net Income (Loss) $ 199 $ 37 $ 148 $ (126) $ (9) $ (50) $ 199
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-7
<PAGE> 89
GENERAL ROOFING SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
OTHER PRO FORMA
WRIGHT- ANTHONY SPECIALTY CYCLONE FOUNDING PRO FORMA COMBINED
GRI CEI BROWN ROOFING ASSOCIATES ROOFING COMPANIES ADJUSTMENTS AS ADJUSTED
------- ------- ------- ------- ---------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $26,792 $45,163 $15,316 $19,778 $17,198 $16,058 $61,865 $(6,261) $ 195,909
Cost of Revenues 19,101 34,899 12,820 14,441 14,957 12,524 50,311 (5,663) 153,390
------- ------- ------- ------- ------- ------- ------- ------- -----------
Gross Profit 7,691 10,264 2,496 5,337 2,241 3,534 11,554 (598) 42,519
SG&A Expenses 6,995 8,018 1,393 2,870 1,487 1,099 9,431 (2,189) 29,104
------- ------- ------- ------- ------- ------- ------- ------- -----------
Income From Operations 696 2,246 1,103 2,467 754 2,435 2,123 1,591 13,415
Other Income (Expense) (71) 7 (147) 103 (134) (13) (106) (138) (499)
------- ------- ------- ------- ------- ------- ------- ------- -----------
Income Before Taxes 625 2,253 956 2,570 620 2,422 2,017 1,453 12,916
Income Tax (Provision) Benefit -- (27) -- (50) (285) -- (467) (4,835) (5,664)
------- ------- ------- ------- ------- ------- ------- ------- -----------
Net Income $ 625 $ 2,226 $ 956 $ 2,520 $ 335 $ 2,422 $ 1,550 $(3,382) $ 7,252
======= ======= ======= ======= ======= ======= ======= ======= ===========
Basic Earnings Per Share $ 0.71
===========
Weighted Average Shares Outstanding 10,258,667
===========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
OTHER
SLAVIK- HARRINGTON- FIVE-K BLACKMORE FOUNDING
ADVANCED REGISTER BUTCHER SCANLON INDUSTRIES AND BUCKNER COMPANIES
-------- -------- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 12,174 $ 6,832 $ 12,213 $ 11,816 $ 11,091 $ 7,739 $ 61,865
Cost of Revenues 9,827 5,792 10,446 10,046 7,879 6,321 50,311
-------- -------- -------- -------- -------- -------- --------
Gross Profit 2,347 1,040 1,767 1,770 3,212 1,418 11,554
SG&A Expenses 1,571 1,002 1,314 1,549 2,775 1,220 9,431
-------- -------- -------- -------- -------- -------- --------
Income From Operations 776 38 453 221 437 198 2,123
Other Income (Expense) (124) 90 (19) (102) 32 17 (106)
-------- -------- -------- -------- -------- -------- --------
Income Before Taxes 652 128 434 119 469 215 2,017
Income Tax (Provision) Benefit -- (82) (147) (28) (210) -- (467)
-------- -------- -------- -------- -------- -------- --------
Net Income $ 652 $ 46 $ 287 $ 91 $ 259 $ 215 $ 1,550
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-8
<PAGE> 90
GENERAL ROOFING SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
General Roofing Services, Inc. (GRS), was founded to create a leading
national provider of roofing contracting and maintenance services to
the commercial, government and new construction markets. GRS has
conducted no operations to date and will acquire the Founding Companies
(the Combination) concurrently with and as a condition to the closing
of the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from
the respective Founding Companies' financial statements. The periods
included in these financial statements for the individual Founding
Companies are as of and for the year ended December 31, 1997, except
for GRI for which the period is for the year ended October 31, 1997,
Register, for which the period is for the year ended September 30 1997,
Specialty Associates, for which the period is for the year ended
February 2, 1998, and Five-K Industries for which the period is for the
year ended March 31, 1998. The audited historical financial statements
included elsewhere herein have been included in accordance with
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No.
80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of the Offering,
GRS will acquire all of the outstanding capital stock and other equity
interests of the Founding Companies. The Combination will be accounted
for using the purchase method of accounting with GRI being reflected as
the accounting acquirer.
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 each of
the Founding Companies, other than the accounting acquirer (GRI). For
purposes of computing the estimated purchase price for accounting
purposes, the value of the shares was determined using an estimated
fair value of $11.20 per share (or $46.9 million), which is less than
the initial public offering price of $14.00 per share due primarily to
restrictions on the sale and transferability of the shares issued. This
discount represents a 20% reduction from the Offering price. The
Company is currently in process of obtaining a valuation which
management believes will support this discount. The total purchase
price, including cash consideration of $41.4 million, is $88.3 million.
The following table is reflected net of estimated purchase price
adjustments of $799,000 and net transfers of $14.6 million which
represents previously undistributed earnings (dollars in thousands):
F-9
<PAGE> 91
<TABLE>
<CAPTION>
SHARES OF ASSUMED
CASH COMMON STOCK INDEBTEDNESS
----------- ------------ ------------
<S> <C> <C> <C>
CEI $ 8,630 937,143 $ 3,267
Wright-Brown 1,440 334,000 2,065
Anthony Roofing 2,466 1,022,357 2,717
Specialty Associates 1,068 258,500 1,471
Cyclone Roofing (268) 603,000 3,836
Advanced 2,596 268,143 1,660
Register 3,210 -- 177
Slavik-Butcher 900 192,857 170
Harrington-Scanlon 360 31,428 1,393
Therrel-Kizer 4,747 414,357 87
Blackmore and Buckner 848 129,286 550
----------- ----------- -----------
$ 25,997 4,191,071 $ 17,393
=========== =========== ===========
</TABLE>
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
A) Records the S Corporation Distributions of $14.6 million, of
which $2.7 million is expected to be paid using cash on hand
and $0.2 million using other net assets of the applicable
company and the incurrence of debt in the amount of $11.7
million.
B) Records the deferred income tax liabilities associated with
converting all acquired companies taxed under Subchapter S of
the Internal Revenue Code (the Code) to corporations taxed
under Subchapter C of the Internal Revenue Code.
C) Records the payment of S Corporation Distributions established
above in adjustment A through borrowings.
D) Records the elimination of all non-operating assets and
liabilities to be retained by the owners of the Founding
Companies as well as affiliated businesses to be retained by
the owners of the Founding Companies.
E) Records the elimination of the historical equity accounts of
the Founding Companies.
F) Records the acquisition of the Founding Companies, including
the cash and common stock due to those companies, and records
all fair value adjustments necessary in purchase accounting.
In connection with the combination of certain of the General
Founding Companies, the Company has agreed to make contingent
payments, if earned, to the former owners over periods up to
two years based on formulas in their respective acquisition
agreements. These payments will be made through a combination
of cash and shares of Common Stock. Amounts earned under these
terms will be recorded as additional goodwill at the time the
amounts are known and will be amortized over the remaining
amortization period.
G) Records net proceeds from the issuance of 4,000,000 shares of
General Roofing Services' Common Stock at $14.00 per share,
net of estimated offering costs of $7.9 million. Offering
costs consist primarily of underwriting discounts and
commissions, accounting fees, legal fees, and printing
expenses.
F-10
<PAGE> 92
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS TOTAL OFFERING
-------------------------------------------------------- PRO FORMA ADJUSTMENT
(A) (B) (C) (D) (E) (F) ADJUSTMENTS (G)
-------- ---- -------- ------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash $ (2,718) $ -- $ -- $ (458) $ -- $ -- $ (3,176) $ 12,644
Receivables, net -- -- -- (488) -- -- (488) --
Prepaid Expenses -- -- -- (13) -- -- (13) --
Property and Equipment, net -- -- -- (1,815) -- 500 (1,315) --
Goodwill -- 300 -- -- (8,634) 72,632 64,298 --
Cash Surrender Value of Life Insurance -- -- -- (561) -- -- (561) --
Other Noncurrent Assets -- -- -- (148) -- -- (148) --
Accounts Payable -- -- -- (434) -- -- (434) --
Accrued Expenses -- -- -- (181) -- -- (181) --
Billings in Excess of Costs and Estimated Profit -- -- -- (64) -- -- (64) --
Distributions Payable and Accrued (434) -- -- -- -- -- (434) --
Deferred Income Taxes -- 300 -- (65) -- 195 430 --
Notes Payable -- -- 12,294 (598) -- -- 11,696 (1,128)
Current Portion of Long-Term Debt -- -- -- (267) -- -- (267) (2,898)
Due to Related Parties 12,294 -- (12,294) (231) -- 25,997 25,766 (25,766)
Long-Term Debt -- -- -- (610) -- -- (618) (5,644)
Common Stock -- -- -- (5) (465) 63 (408) 40
Additional Paid In Capital (14,578) -- -- (667) 13,755 46,877 45,387 48,040
Retained Earnings -- -- -- (361) (22,187) -- (22,548) --
Treasury Stock -- -- -- -- 263 -- 263 --
-------- ---- -------- ------- -------- ------- -------- --------
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
======== ==== ======== ======= ======== ======= ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
A) Records the prospective reduction in salaries, bonuses, and
benefits to the owners of the General Roofing Companies to
which they have agreed. These reductions in salaries, bonuses,
and benefits are in accordance with the terms of employment
agreements. Such employment agreements are generally for two
years, contain restrictions related to competition and provide
severance for termination of employment in certain
circumstances.
The salaries, bonuses, and benefits and other compensation
items recorded in the individual financial statements of each
of the acquired companies amounted to $5.9 million and $1.0
million in the twelve month period ended at or near December
31, 1997 and the three month period ended March 31, 1998,
respectively. The contractually agreed upon compensation and
benefits for these same companies, on a going forward basis,
amount to $2.6 million and $0.7 million for the twelve month
period ended at or near December 31, 1997 and the three month
period ended March 31, 1998. The differences between these
amounts for the periods noted herein equate to $3.3 million
and $0.3 million, respectively, and are reflected as pro forma
adjustments.
B) Records reductions in historical interest expense of the
Founding Companies related to debt paid with proceeds of the
Offering.
C) Records interest expense incurred on borrowings used to fund
the S Corporation Distributions.
D) Records statement of operations effect of the elimination of
all non-operating assets and liabilities to be retained by the
owners of the Founding Companies as well as affiliated
businesses to be retained by the owners of the Founding
Companies.
E) Records amortization of goodwill to be recorded as a result of
the Combination over an estimated life of 40 years.
F-11
<PAGE> 93
F) Records the incremental provision for federal and state income
taxes related to pro forma adjustments as well as income taxes
on S Corporation earnings.
The following tables summarize unaudited pro forma combined statements of
operations adjustments at March 31, 1998:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------------------------------
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $(1,162) $ -- $ -- $(1,162)
Cost of Revenues -- -- -- (1,152) -- -- (1,152)
------- ------- ------- ------- ------- ------- -------
Gross Profit -- -- -- (10) -- -- (10)
Selling, General and Administrative (317) -- -- (24) 402 -- 61
------- ------- ------- ------- ------- ------- -------
Income From Operations 317 -- -- 14 (402) -- (71)
Other Income (Expense) -- 273 (234) 19 -- -- 58
------- ------- ------- ------- ------- ------- -------
Income Before Taxes 317 273 (234) 33 (402) -- (13)
Income Tax (Provision) Benefit -- -- -- (1) -- (158) (159)
------- ------- ------- ------- ------- ------- -------
Net Income $ 317 $ 273 $ (234) $ 32 $ (402) $ (158) $ (172)
======= ======= ======= ======= ======= ======= =======
</TABLE>
The following tables summarize unaudited pro forma combined statements of
operations adjustments at December 31, 1997:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------------------------------
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $(6,261) $ -- $ -- $(6,261)
Cost of Revenues -- -- -- (5,663) -- -- (5,663)
------- ------- ------- ------- ------- ------- -------
Gross Profit -- -- -- (598) -- -- (598)
Selling, General and Administrative (3,262) -- -- (534) 1,607 -- (2,189)
------- ------- ------- ------- ------- ------- -------
Income From Operations 3,262 -- -- (64) (1,607) -- 1,591
Other Income (Expense) -- 711 (936) 87 -- -- (138)
------- ------- ------- ------- ------- ------- -------
Income Before Taxes 3,262 711 (936) 23 (1,607) -- 1,453
Income Tax (Provision) Benefit -- -- -- 44 -- (4,879) (4,835)
------- ------- ------- ------- ------- ------- -------
Net Income $ 3,262 $ 711 $ (936) $ 67 $(1,607) $(4,879) $(3,382)
====================================================================================
</TABLE>
F-12
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
To the Stockholder of General Roofing Services, Inc.:
We have audited the accompanying balance sheet of General Roofing Services, Inc.
(the "Company") as of May 8, 1998 (date of formation). This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company as of May 8, 1998 (date of formation) in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
May 26, 1998
F-13
<PAGE> 95
GENERAL ROOFING SERVICES, INC.
BALANCE SHEET
MAY 8, 1998 (DATE OF FORMATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
TOTAL ASSETS $ --
-------------
LIABILITIES $ --
STOCKHOLDER'S EQUITY:
Common stock, 90,000,000 shares authorized,
no shares issued or outstanding; $0.01 par value --
Preferred stock, no shares issued or outstanding --
-------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ --
-------------
</TABLE>
F-14
<PAGE> 96
GENERAL ROOFING SERVICES, INC.
NOTES TO BALANCE SHEET
MAY 8, 1998 (DATE OF FORMATION)
- --------------------------------------------------------------------------------
1. BUSINESS AND ORGANIZATION
General Roofing Services, Inc. (referred to herein as "GRS" or the
"Company") was formed on May 8, 1998 to become a holding company of
entities that provide commercial roofing services. GRS intends to acquire
a number of such companies (the "Combination"), 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 operations on a national basis. GRS has not
conducted any operations to date and has not yet been capitalized.
GRS has signed a definitive agreement to acquire by Combination certain
companies that are wholly-owned by GRS' stockholder (the "General Roofing
Industries"). These acquisitions will be accounted for as a reorganization
of entities under common control which is similar to the pooling of
interests method of accounting for business combinations. The General
Roofing Industries have been identified as the accounting acquirer of the
unrelated entities described below for financial statement presentation
purposes.
GRS has signed definitive agreements to acquire by Combination certain
unrelated companies. The acquisition of these unrelated companies will be
accounted for under the purchase method of accounting for business
combinations.
GRS is dependent upon the Offering to execute the pending Combination.
There is no assurance that the pending Offering or Combination will be
completed.
2. STOCK OPTION PLAN
1998 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN - The Company has
adopted a 1998 Stock Option and Restricted Stock Purchase Plan (the
"Option Plan"). As of May 26, 1998, no options have been granted. After
the mergers with the General Roofing Industries are consummated, GRS
expects to convert options issued by the General Roofing Industries into
options to purchase shares of GRS' common stock. The number of GRS options
that are to be outstanding as a result of the conversion will be in direct
proportion to the number of shares of GRS that will be issued to the
General Roofing Industries' stockholder in the reorganization. It is
anticipated to amount to options to acquire approximately 216,300 shares
of GRS common stock with an aggregate exercise price of approximately $1.4
million. Further it is anticipated that an additional 560,000 options will
be granted at the date of the Offering at the initial public offering
price. A reserve of 1,500,000 shares of the Company's common stock has
been established for issuance under the Option Plan.
The Option Plan is administered by the Compensation Committee of the
Board. The Compensation Committee has complete discretion to determine
which eligible individuals are to receive option grants, the number of
shares subject to each such grant, the status of any granted option as
either an incentive stock option or a non-statutory option, the vesting
schedule to be in effect for the option grant and the maximum term for
which any granted option is to remain outstanding.
F-15
<PAGE> 97
Each option granted under the Option Plan has a maximum term of 10 years,
subject to earlier termination following the optionee's cessation of
service with the Company. Options granted under the Option Plan may be
exercised only for fully vested shares. The exercise price of incentive
stock options and non-statutory stock option's granted under the Option
Plan must be at least 100% and 85% of the fair market value of the stock
subject to the option on the date of grant, respectively (or 110% with
respect to incentive stock options granted to holders of more than 10% of
the voting power of the Company's outstanding stock). The Board or the
Compensation Committee has the authority to determine the fair market
value of the stock. The purchase price is payable immediately upon the
exercise of the option.
Options granted under the Option Plan have been structured to provide
incentive to achieve the Company's financial goals. In general, options
granted under the Option Plan will vest ratably over a four-year period
commencing one year from the date of grant.
F-16
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
GRi of South Florida, Inc.,
GRi of Orlando, Inc.,
GRi of West Florida, Inc. and
Dakota Leasing, Inc.:
We have audited the accompanying combined balance sheets of GRi of South
Florida, Inc., GRi of Orlando, Inc., GRi of West Florida, Inc. and Dakota
Leasing, Inc., all of which are under common ownership and common management, as
of October 31, 1996 and 1997, and the related combined statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of the
companies' 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, such financial statements present fairly, in all material
respects, the combined financial position of GRi of South Florida, Inc., GRi of
Orlando, Inc., GRi of West Florida, Inc. and Dakota Leasing, Inc. as of October
31, 1996 and 1997, and the combined results of their operations and their
combined cash flows for each of the three years in the period ended October 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
December 12, 1997,
(January 20, 1998 as to the final paragraph of Note 6)
(February 16, 1998 as to Note 11)
F-17
<PAGE> 99
GENERAL ROOFING INDUSTRIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
OCTOBER 31, 1998
ASSETS 1996 1997 (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 106,783 $ 240,679 $ 155,634
Contract receivables, net of an allowance for doubtful
accounts of $7,054, $36,345 and $36,345, respectively 4,580,183 4,011,561 4,924,733
Due from stockholder 172,317 326,679 332,286
Costs and estimated earnings in excess of billings 264,573 428,791 290,957
Inventory 304,742 320,889 347,285
Other current assets 51,327 104,645 240,515
---------- ---------- ----------
Total current assets 5,479,925 5,433,244 6,291,410
PROPERTY AND EQUIPMENT - net 1,111,263 1,605,369 1,754,506
DEFERRED COSTS 483,972 1,348,466
---------- ---------- ----------
TOTAL $6,591,188 $7,522,585 $9,394,382
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $2,986,574 $2,693,636 $2,328,722
Accrued workers' compensation 265,000 409,782 354,822
Accrued payroll 166,771 266,637 294,898
Other accrued expenses and current liabilities 6,113 42,319
Billings in excess of costs and estimated earnings 718,171 237,316 493,660
Current portion of long-term debt 157,739 1,227,326 774,270
Current portion of capitalized lease obligations 86,627 151,114 157,499
---------- ---------- ----------
Total current liabilities 4,386,995 4,985,811 4,446,190
LONG-TERM DEBT, net of current portion 420,725 485,429 3,445,463
CAPITALIZED LEASE OBLIGATIONS, net of current portion 243,895 281,659 274,594
OTHER LIABILITIES 400,000 200,000 150,000
---------- ---------- ----------
Total 5,451,615 5,952,899 8,316,247
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY:
Common stock 1,200 1,200 1,200
Additional paid-in capital 572,825 572,825 628,967
Retained earnings 565,548 995,661 447,968
---------- ---------- ----------
Total 1,139,573 1,569,686 1,078,135
---------- ---------- ----------
TOTAL $6,591,188 $7,522,585 $9,394,382
========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE> 100
GENERAL ROOFING INDUSTRIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
YEAR ENDED OCTOBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES EARNED $ 8,174,012 $24,810,346 $26,792,268 $11,338,671 $ 10,838,123
COSTS OF CONTRACT REVENUES EARNED 13,559,134 17,258,133 19,100,850 7,737,795 8,015,732
----------- ----------- ----------- ----------- ------------
GROSS PROFIT 4,614,878 7,552,213 7,691,418 3,600,876 2,822,391
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,954,614 6,570,209 6,995,095 2,556,510 3,244,448
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS (339,736) 982,004 696,323 1,044,366 (422,057)
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 26,184 81,216 81,338 69,690 24,280
INTEREST EXPENSE (99,332) (103,134) (152,548) (54,641) (149,916)
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS) $ (412,884) $ 960,086 $ 625,113 $ 1,059,415 $ (547,693)
=========== =========== =========== =========== ============
</TABLE>
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
F-19
<PAGE> 101
GENERAL ROOFING INDUSTRIES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 $ 1,200 $ 197,825 $ 483,949 $ 682,974
Net loss (412,884) (412,884)
Contribution from stockholder 175,000 175,000
Distributions to stockholder (175,000)
------- ---------- ------------- --------------
(175,000)
BALANCE, OCTOBER 31, 1995 1,200 372,825 (103,935) 270,090
Net income
960,086 960,086
Contribution from stockholder 200,000 200,000
Distributions to stockholder (290,603) (290,603)
------- ---------- ------------- --------------
BALANCE, OCTOBER 31, 1996 1,200 572,825 565,548 1,139,573
Net income
625,113 625,113
Distributions to stockholder (195,000) (195,000)
------- ---------- ------------- --------------
BALANCE, OCTOBER 31, 1997 $ 1,200 $ 572,825 $ 995,661 $ 1,569,686
Net loss (unaudited) (547,693) (547,693)
Issuance of warrants (unaudited) 56,142 56,142
------- ---------- ------------- --------------
BALANCE, MARCH 31, 1998 (unaudited) $ 1,200 $ 628,967 $ 447,968 $ 1,078,135
======= ========== ============= ==============
</TABLE>
See notes to combined financial statements.
F-20
<PAGE> 102
GENERAL ROOFING INDUSTRIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five Months Ended
Year Ended October 31, March 31,
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (412,884) $ 960,086 $ 625,113 $1,059,415 $ (547,693)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 175,356 214,319 380,010 161,357 194,467
LOSS (GAIN) ON DISPOSAL OF ASSETS (9,001) 5,747 (23,667) (7,554)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
CONTRACT RECEIVABLES, NET (452,728) (958,375) 568,622 (265,330) (913,172)
COSTS AND ESTIMATED
EARNINGS IN EXCESS OF BILLINGS (134,699) (38,407) (164,218) 114,771 137,834
INVENTORY (1,042) (68,576) (16,147) 33,049 (26,396)
OTHER CURRENT ASSETS 36,752 (49,765) (53,318) (166,166) (135,870)
ACCOUNTS PAYABLE 1,025,163 509,524 (292,938) (942,348) (364,914)
ACCRUED WORKERS' COMPENSATION, PAYROLL AND OTHER (119,340) 193,151 238,535 500,326 15,620
BILLINGS IN EXCESS OF COSTS
AND ESTIMATED EARNINGS 93,180 (12,975) (480,855) (204,831) 256,344
OTHER LIABILITIES 200,000 (100,000) $ (200,000) (50,000)
---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 400,757 654,729 581,137 290,243 (1,441,334)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT (49,391) (404,319) (651,248) (436,754) (302,679)
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT 145,821 40,000 23,616 34,566
ADVANCES TO STOCKHOLDER (205,252) (58,613) (154,362) (5,607)
DEFERRED COSTS INCURRED (483,972) (808,350)
---------- ---------- ---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (108,822) (462,932) (1,249,582) (413,138) (1,082,070)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM THE ISSUANCE OF LONG-TERM DEBT 1,049,287 1,594,597 3,570,043 625,300 5,433,895
REPAYMENT OF LONG-TERM DEBT (1,098,897) (1,953,863) (2,435,752) (68,616) (2,926,915)
PRINCIPAL PAYMENTS UNDER CAPITAL LEASE OBLIGATIONS (10,857) (68,387) (136,950) (40,760) (68,617)
CONTRIBUTIONS FROM STOCKHOLDER 175,000 200,000
DISTRIBUTIONS TO STOCKHOLDER (175,000) (290,603) (195,000) (88,660)
---------- ---------- ---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (60,467) (518,256) 802,341 427,264 2,438,363
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 231,468 (326,459) 133,896 304,369 (85,041)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 201,774 433,242 106,783 106,783 240,679
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 433,242 $ 106,783 $ 240,679 $ 411,152 $ 155,638
========== ========== ========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
AND INVESTING ACTIVITIES:
EQUIPMENT ACQUIRED THROUGH CAPITAL LEASES,
NET OF DISPOSALS $ 130,289 $ 279,477 $ 239,201 $ 201,218 $ 67,937
========== ========== ========== ========== ==========
</TABLE>
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
F-21
<PAGE> 103
GENERAL ROOFING INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - GRi of South Florida, Inc., GRi of Orlando, Inc., GRi of West
Florida, Inc., and Dakota Leasing, Inc. (collectively referred to herein
as "General Roofing Industries," "GRi" or the "Company"), all of which are
S Corporations wholly-owned by the same stockholder and are under common
management. The Company operates in one segment as a provider of
comprehensive roofing services to commercial, construction and government
customers. At the present time, primarily all of the Company's revenues
are generated in Florida.
The capital structure of each entity as of October 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
<S> <C> <C>
GRI OF SOUTH FLORIDA, INC.
(500 SHARES AUTHORIZED, 100 SHARES
ISSUED AND OUTSTANDING; $1 PAR VALUE) $100 $ 371,925
GRI OF ORLANDO, INC.
(100 SHARES AUTHORIZED, ISSUED
AND OUTSTANDING; $1 PAR VALUE) 100 400
GRI OF WEST FLORIDA, INC.
(500 SHARES AUTHORIZED, ISSUED
AND OUTSTANDING; $1 PAR VALUE) 500 200,500
DAKOTA LEASING, INC.
(500 SHARES AUTHORIZED, ISSUED
AND OUTSTANDING; $1 PAR VALUE) 500
------- ----------
$ 1,200 $ 572,825
======= ==========
</TABLE>
PRINCIPLES OF COMBINATION - The combined financial statements include all of the
accounts of GRi of South Florida, Inc., GRi of Orlando, Inc., GRi of West
Florida, Inc. and Dakota Leasing, Inc. All significant intercompany balances and
transactions have been eliminated in combination.
F-22
<PAGE> 104
INTERIM FINANCIAL INFORMATION - The interim financial statements and information
as of March 31, 1998 and for the five months ended March 31, 1997 and 1998 are
unaudited and certain information and footnote disclosures normally included in
annual 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 items, 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 are not necessarily indicative of the results
for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the amounts
it deems to be collectible. Accordingly, the Company provides allowances for
contract receivables it deems to be uncollectible based on management's best
estimates. Recoveries are recognized in the period they are received. The
ultimate amount of contract receivables that become uncollectible could differ
from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides credit to
its customers and does not generally require collateral. The Company principally
deals with recurring customers, state and local governments and well known local
companies whose reputation is known to the Company. Advance payments and
progress payments are generally required for significant projects. Credit checks
are performed for significant new customers that are not known to the Company.
The Company generally has the ability to file liens against the property if it
is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies and are
valued at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Property and equipment are reviewed for impairment and
a provision recorded, if necessary, whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. Routine repairs and
maintenance are expensed as incurred; improvements are capitalized at cost.
Depreciation is recorded using accelerated and straight-line methods over the
estimated useful lives of the related assets. Depreciation and amortization is
provided over the following estimated useful lives.
<TABLE>
<S> <C>
Service equipment 5 to 7 years
Capitalized leased equipment 3 to 5 years
Leasehold improvements 3 to 31 years
Machinery and equipment 3 to 10 years
Computer equipment 5 to 10 years
</TABLE>
F-23
<PAGE> 105
Leases that transfer substantially all the benefits and risks of ownership to
the Company are accounted for as an acquisition of assets and incurrence of
obligations. Accordingly, capitalized leased assets are recorded as property and
equipment and the present value of the future minimum lease payments are
recorded as capitalized lease obligations. Amortization of such assets is
computed using the straight-line method over the shorter of the estimated useful
lives of the respective assets or the lease agreement.
WARRANTIES - The Company provides for future estimated warranty obligations in
the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under the
percentage of completion method measured by the ratio of contract costs incurred
to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance such as indirect labor, supplies, and
tools. Selling, general, and administrative costs are charged to expense as
incurred. Costs for materials incurred at the inception of a project which are
not reflective of effort are excluded from the percentage of completion
calculation for purposes of determining profits earned on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to change as the
project progresses and better estimates of project costs become available.
Revisions in cost and profit estimates during the course of the work are
reflected in the period in which the facts requiring revision become known.
Where a loss is forecasted for a contract, the full amount of the anticipated
loss is recognized in the period in which it is determined that a loss will
occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on uncompleted
contracts, represents revenue recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings" on uncompleted
contracts, represents billings in excess of revenues recognized.
DEFERRED COSTS - Included in deferred costs are certain costs incurred in
connection with the Company's proposed mergers and acquisitions described in
Note 13 and certain costs incurred in connection with obtaining related debt or
equity financing. The deferred acquisition costs will become part of the
Company's basis of the acquired businesses and the deferred financing and
offering costs will be either amortized as interest expense over the term of
debt instruments or charged as a cost of raising capital as appropriate. Should
the transactions not be consummated, the amounts will be charged to operations.
INCOME TAXES - The Company is an S Corporation for federal income tax purposes.
As such, the income tax effects of the results of operations of the Company
accrue directly to the Shareholder. Accordingly, the accompanying combined
balance sheets do not include a provision for income taxes.
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board
("FASB") issued 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 ("SFAS No. 121"). This statement establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS No. 121 requires
that long-lived assets to be held and used by the Company be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment is recognized to the extent that
the sum of undiscounted estimated future cash flows expected to result from the
assets used is less than the carrying value. The Company has evaluated its asset
base, and determined that no impairment was required.
F-24
<PAGE> 106
NEW ACCOUNTING PRONOUNCEMENT - In June 1997, SFAS No. 130, Reporting
Comprehensive Income, was issued. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that a company (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company has not determined
the effects, if any, that SFAS No. 130 will have on its combined financial
statements.
2. CONTRACT RECEIVABLES
Contract receivables consisted of the following as of October 31, 1996 and 1997:
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Current accounts $1,273,283 $1,806,993
Retention 563,481 418,943
---------- ----------
Subtotal 1,836,764 2,225,936
---------- ----------
Contracts in progress:
Current accounts 2,440,096 1,579,273
Retention 310,377 242,697
---------- ----------
Subtotal 2,750,473 1,821,970
---------- ----------
4,587,237 4,047,906
Less: allowance for doubtful accounts (7,054) (36,345)
---------- ----------
Contract receivables, net $4,580,183 $4,011,561
========== ==========
</TABLE>
F-25
<PAGE> 107
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of October 31, 1996 and 1997:
<TABLE>
<CAPTION>
October 31,
1996 1997
<S> <C> <C>
Service equipment $ 543,753 $ 826,809
Capitalized leased equipment 409,766 648,967
Leasehold improvements 249,164 251,227
Machinery and equipment 295,946 459,057
Computer equipment 96,341 279,360
----------- -----------
Subtotal 1,594,970 2,465,420
Less accumulated depreciation (including $68,387
and $122,599 on capital leased equipment) (483,707) (860,051)
----------- -----------
Property and equipment, net $ 1,111,263 $ 1,605,369
=========== ===========
</TABLE>
4. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
October 31,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $6,458,979 $5,211,664
Estimated earnings 2,178,635 1,259,043
---------- ----------
Total 8,637,614 6,470,707
Less billings to date 9,091,212 6,279,232
---------- ----------
Net (over) under billings $ (453,598) $ 91,475
========== ==========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 264,573 $ 428,791
Billings in excess of costs and estimated earnings 718,171 237,316
---------- ---------
Total $ (453,598) $ 191,475
========== =========
</TABLE>
5. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease arrangements which expire through the
year 2002 and accrue interest on a monthly basis using a variable rate of
interest which is based on the prime interest rate for certain vehicles
(see Note 3). Such arrangements transfer to the Company substantially all
of the risks and benefits of ownership of the related assets. The assets
have been capitalized and the obligations have been recorded as
capitalized lease obligations. As of October 31, 1997, approximate future
F-26
<PAGE> 108
minimum lease payments (excluding interest) under capitalized lease
obligations were as follows for the year ended October 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 151,114
1999 150,740
2000 90,455
2001 37,640
2002 2,824
---------
Present value of net future minimum lease payments 432,773
Less current portion of capitalized lease obligations (151,114)
---------
Long-term portion of capitalized lease obligations $ 281,659
=========
</TABLE>
6. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Note payable due on April 21, 2000, bearing interest
at a variable rate based on the lender's index rate
(9.5% and 9% at October 31, 1996 and 1997, respectively).
Note is payable in monthly payments of $10,537 of principal
and interest. Secured by contract receivables and equipment $ 374,403 $ 275,983
Various loans payable due through the year 2001, bearing
interest rates ranging from 9.0% to 9.75%. Secured by
service and other equipment 204,061 440,786
Revolving credit lines due on demand, bearing
interest at a variable rate based on the lender's
index rate (9% at October 31, 1997). Secured by
contract receivables and equipment 995,986
--------- ---------
Total 578,464 1,712,755
Less current portion (157,739) (1,227,326)
---------- ----------
Total long term portion $ 420,725 $ 485,429
========== =========
</TABLE>
Maturities of long-term debt are as follows at October 31, 1997:
<TABLE>
<S> <C>
1998 $ 1,227,326
1999 258,646
2000 198,785
2001 27,998
-----------
Total $ 1,712,755
===========
</TABLE>
On January 20, 1998, the Company obtained a subordinated loan in the
amount of $3 million. Proceeds from the loan are to be used for general
working capital needs and to complete the transactions described in Note
12. The subordinated loan is payable on or before January 20, 2003 with
interest payable monthly at the rate of 13% per year. In accordance with
the terms of the subordinated loan, the Company issued warrants at fair
value which are convertible at a nominal amount into an initial 3.183% of
the Company's fully diluted ownership with annual increases of 2%, as the
loan remains outstanding,
F-27
<PAGE> 109
up to an aggregate of 10.75% of the Company's fully diluted ownership.
The loan is subordinate to other bank financing and is secured by a
second lien on the assets of the Company. The balance due under the
subordinated loan at March 31,1998 amounted to $3 million.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, debt and capitalized
lease obligations. The carrying value of these financial instruments
approximates fair value because of their short duration or current
interest rates. The Company places its temporary cash investments with
financial institutions and limits the amount of credit exposure with any
one financial institution. The carrying value of debt and capitalized
lease obligations approximates their fair value based on current rates for
borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Florida
market. The Company believes this concentration of credit risk is
mitigated by the diversity of industries represented by the Company's
customer base.
8. 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. Each year, participants may contribute up to 15% of pretax
annual compensation, not to exceed $9,500, as defined in the plan. The
Company shall contribute and allocate to each participant's account an
amount equal to the amount withheld from the compensation of such
participant pursuant to his or her salary savings agreement. Discretionary
matching amounts may be contributed at the Company's option, not to exceed
6% of the participant's compensation. During the year ended October 31,
1997, the Company contributed $22,763. No amounts were contributed by the
Company during the year ended October 31,1996.
9. RELATED PARTY TRANSACTIONS
The Company has entered into long-term lease arrangements (expiring
through 2004) with entities controlled by and related to the Company's
stockholder. The following are the Company's commitments with respect to
these leases:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
OCTOBER 31,
<S> <C>
1998 $ 293,548
1999 314,319
2000 334,495
2001 201,151
2002 120,964
2003 and thereafter 335,249
-----------
Total $ 1,599,726
===========
</TABLE>
Rent expense related to these arrangements were $216,756, $219,509 and
$261,091 during the years ended October 31, 1995, 1996 and 1997,
respectively.
F-28
<PAGE> 110
In addition, the Company has entered into a long-term consulting
agreement (expiring through 2003) with a party related to the Company's
stockholder. The following are the Company's commitments with respect to
this agreement.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
OCTOBER 31,
<S> <C>
1998 $ 97,024
1999 91,256
2000 85,487
2001 79,718
2002 73,950
2003 and thereafter 78,984
---------
Total $ 506,419
=========
</TABLE>
The Company paid consulting fees related to this arrangement of $54,187,
$75,633 and $126,715 during the years ended October 31, 1995, 1996 and
1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate liability
associated with such claims, if any, will not have a material adverse
effect on the Company's financial position or results of operations.
11. STOCK OPTIONS
The Company issued options to purchase an aggregate of approximately 10.5%
of the Company's outstanding common stock to certain key employees. The
options were issued on February 16, 1998 at an aggregate exercise price of
approximately $1.4 million. Based on the results of an independent
appraisal, the Company believes such exercise price to approximate the
fair value on the date of grant of the shares issuable upon exercise of
the options.
12. SUBSEQUENT EVENT
The Company expects to sign a merger agreement with General Roofing
Services, Inc. ("GRS"). GRS is a newly-formed holding company and is
presently wholly-owned by the Company's stockholder. Therefore the merger
will be accounted for as a reorganization of entities under common control
which is similar to a pooling of interests business combination. GRS plans
to acquire a number of unrelated commercial roofing companies and complete
an initial public offering of a portion of its shares of common stock to
effect these acquisitions. GRS is dependent upon the initial public
offering to execute the acquisitions and the Company will be reflected as
the accounting acquiror for financial reporting purposes.
* * * * * *
F-29
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CEI Roofing, Inc., CEI Florida, Inc. and CEI West Roofing Company, Inc.:
We have audited the accompanying combined balance sheets of CEI Roofing, Inc.,
CEI Florida, Inc. and CEI West Roofing Company, Inc. (collectively, the
Companies) as of December 31, 1996 and 1997, and the related combined statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These combined financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits the combined financial statements referred
to above present fairly, in all material respects, the combined financial
position of CEI Roofing, Inc., CEI Florida, Inc. and CEI West Roofing Company,
Inc. as of December 31, 1996 and 1997, and the results of their combined
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
BELEW AVERITT LLP
Dallas, Texas
February 18, 1998, except for
Note 13, as to which the date
is May 13, 1998
F-30
<PAGE> 112
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
December 31, March 31,
1996 1997 1998
--------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 617,173 $ 539,852 $ 293,589
Accounts receivable (Notes 4 and 5):
Contract billings 5,252,952 5,934,232 5,376,629
Contract retainage 2,114,346 2,751,702 2,852,934
Other 36,656 34,333 91,832
--------------- -------------- ---------------
7,403,954 8,720,267 8,321,395
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 2) 748,584 791,908 1,227,407
Inventory (Notes 4 and 5) 686,955 521,629 370,656
Prepaid expenses and other current assets 118,464 137,206 76,619
--------------- -------------- ---------------
Total current assets 9,575,130 10,710,862 10,289,666
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
(Notes 3, 4 and 5) 1,922,458 2,054,701 2,008,508
OTHER ASSETS 395,559 429,124 419,475
--------------- -------------- ---------------
$ 11,893,147 $ 13,194,687 $ 12,717,649
=============== ============== ===============
</TABLE>
(Continued)
F-31
<PAGE> 113
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS (CONT.)
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, MARCH 31,
1996 1997 1998
--------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines-of-credit (Note 4) $ 80,000 $ 300,000 $ 327,615
Accounts payable, trade 3,241,044 4,209,856 4,560,085
Accrued payroll 474,551 433,881 245,732
Accrued insurance 502,420 157,495 151,615
Other accrued liabilities 73,691 144,888 166,333
Distributions payable (Note 6) 328,126 797,651 434,482
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 2) 1,333,731 1,010,559 744,478
Current portion of long-term (Note 5) 395,079 399,393 387,040
--------------- -------------- ---------------
Total current liabilities 6,428,642 7,453,723 7,017,380
LONG-TERM DEBT, net of current portion (Note 5) 520,519 535,474 433,424
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9) - - -
STOCKHOLDERS' EQUITY (Notes 9 and 10)
Common stock, voting 3,315 3,315 3,315
Common stock, nonvoting 331,346 331,346 331,346
Paid-in capital 84,499 84,499 84,499
Retained earnings 4,524,826 4,786,330 4,847,685
--------------- -------------- ---------------
Total stockholders' equity 4,943,986 5,205,490 5,266,845
--------------- -------------- ---------------
$ 11,893,147 $ 13,194,687 $ 12,717,649
=============== ============== ===============
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE> 114
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
1995 1996 1997 1997 1998
------------- -------------- ------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTACT REVENUE $ 39,693,912 $ 42,525,236 $ 45,163,485 $ 9,652,618 $ 10,025,121
DIRECT CONTRACT COSTS 31,188,523 32,851,735 34,899,406 7,741,858 7,733,485
------------- -------------- ------------- ------------- --------------
GROSS PROFIT 8,505,389 9,673,501 10,264,079 1,910,760 2,291,636
GENERAL AND ADMINISTRATIVE
EXPENSES (Note 11) 7,289,281 7,699,302 8,018,064 1,932,600 2,105,173
------------- -------------- ------------- ------------- --------------
INCOME FROM OPERATIONS 1,216,108 1,974,199 2,246,015 (21,840) 186,463
OTHER INCOME (EXPENSE)
Interest income 2,286 14,507 12,885 417 1,101
Interest expense (112,674) (102,341) (131,289) (24,341) (66,421)
Gain (loss) on sale of assets (6,772) 3,388 18,109 (2,493) (1,254)
Miscellaneous 198,161 97,213 107,384 20,720 9,222
------------- -------------- ------------- ------------- --------------
81,001 12,767 7,089 (5,697) (57,352)
------------- -------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 1,297,109 1,986,966 2,253,104 (27,537) 129,111
STATE INCOME TAXES (Note 7) 12,668 31,243 27,195 853 2,729
------------- -------------- ------------- ------------- --------------
NET INCOME (LOSS) $ 1,284,441 $ 1,955,723 $ 2,225,909 $ (28,390) $ 126,382
============= ============== ============= ============= ==============
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE> 115
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK
---------------------------------------------
OUTSTANDING SHARES AMOUNT ADDITIONAL
------------------- ---------------------- PAID-IN RETAINED
VOTING NON-VOTING VOTING NON-VOTING CAPITAL EARNINGS TOTAL
------ ---------- ------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 3,315 338,416 $3,315 $ 338,416 $ 84,499 $3,372,963 $ 3,799,193
STOCK REDEMPTION
(Note 9) - (7,070) - (7,070) - (269,734) (276,804)
DISTRIBUTIONS - - - - - (640,500) (640,500)
NET INCOME - - - - - 1,284,441 1,284,441
------ ---------- ------ ---------- ---------- ---------- -----------
BALANCE AT
DECEMBER 31, 1995 3,315 331,346 3,315 331,346 84,499 3,747,170 4,166,330
DISTRIBUTIONS - - - - - (1,178,067) (1,178,067)
NET INCOME - - - - - 1,955,723 1,955,723
------ ---------- ------ ---------- ---------- ---------- -----------
BALANCE AT
DECEMBER 31, 1996 3,315 331,346 3,315 331,346 84,499 4,524,826 4,943,986
DISTRIBUTIONS - - - - - (1,964,405) (1,964,405)
NET INCOME - - - - - 2,225,909 2,225,909
------ ---------- ------ ---------- ---------- ---------- -----------
BALANCE AT
DECEMBER 31, 1997 3,315 331,346 3,315 331,346 84,499 4,786,330 5,205,490
DISTRIBUTIONS
(Unaudited) - - - - - (65,027) (65,027)
NET INCOME (Unaudited) - - - - - 126,382 126,382
------ ---------- ------ ----------- ---------- ---------- -----------
BALANCE AT
DECEMBER 31, 1998 3,315 331,346 $3,315 $ 331,346 $ 84,499 $4,847,685 $ 5,266,845
====== ========== ====== =========== ========== ========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE> 116
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
YEAR ENDED DECEMBER 31, ----------------------------
1995 1996 1997 1997 1998
------------- -------------- ------------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 1,284,441 $ 1,955,723 $ 2,225,909 $ (28,390) $ 126,382
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 436,366 432,447 486,063 105,431 107,945
(Gain) loss on sale of assets 6,772 (3,388) (18,109) 2,493 1,254
Net (increase) decrease in:
Contract billings and retainage 931,198 (925,593) (1,318,636) (44,013) 456,371
Accounts receivable, other 132,273 13,875 2,323 (30,114) (57,499)
Costs and estimated earnings in
excess of billings on
uncompleted contracts 375,350 (314,971) (43,324) (178,636) (435,499)
Inventory (129,183) (143,762) 165,326 240,592 150,973
Prepaid expenses and other
current assets 55,230 (30,321) (18,742) 107,081 60,587
Net increase (decrease) in:
Accounts payable and accrued
liabilities (538,015) (465,727) 654,414 215,363 177,645
Billings in excess of costs and
estimated earnings on
uncompleted contracts 117,597 579,270 (323,172) (87,707) (266,081)
------------- -------------- ------------- ------------- --------------
Net cash provided by operating
activities 2,672,029 1,097,553 1,812,052 302,100 322,078
CASH FLOWS FROM INVESTING
ACTIVITIES
Increase in other assets (53,554) (51,661) (33,565) (7,927) 9,649
Proceeds from sale of equipment 44,350 18,343 49,717 - -
Purchases of property and equipment (314,790) (338,565) (390,090) (93,128) (63,006)
------------- -------------- ------------- ------------- --------------
Net cash used in investing activities (323,994) (371,883) (373,938) (101,055) (53,357)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from lines-of-credit and
long-term debt 217,709 426,852 1,202,665 464,381 596,878
Payments on lines-of-credit (366,700) - - (265,000) (635,000)
Principal payments on long-term debt (720,028) (576,152) (1,223,220) (61,009) (48,666)
Distributions paid (590,607) (1,069,541) (1,494,880) (458,545) (428,196)
Redemption of stock (100,000) - - - -
------------- -------------- ------------- ------------- --------------
Net cash used in financing activities (1,559,626) (1,218,841) (1,515,435) (320,173) (514,984)
------------- -------------- ------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH 788,409 (493,171) (77,321) (119,128) (246,263)
CASH AT BEGINNING OF YEAR 321,935 1,110,344 617,173 617,173 539,852
------------- -------------- ------------- ------------- --------------
CASH AT END OF YEAR $ 1,110,344 $ 617,173 $ 539,852 $ 498,045 $ 293,589
============= ============== ============= ============= ==============
</TABLE>
(Continued)
F-35
<PAGE> 117
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (CONT.)
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
YEAR ENDED DECEMBER 31, -----------------------------
1995 1996 1997 1997 1998
------------- -------------- ------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid $ 110,223 $ 91,842 $ 141,126 $ 24,341 $ 66,421
============= ============== ============= ============= ==============
State income taxes paid $ 38,281 $ 25,142 $ 18,892 $ - $ -
============= ============== ============= ============= ==============
SUMMARY OF NON-CASH
TRANSACTIONS
Redemption of stock:
For note payable $ 165,000 $ - $ - $ - $ -
============= ============== ============= ============= ==============
For insurance policy $ 11,804 $ - $ - $ - $ -
============= ============== ============= ============= ==============
Financed equipment purchases $ 221,708 $ 166,443 $ 259,824 $ - $ -
============= ============== ============= ============= ==============
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE> 118
CEI ROOFING, INC., CEI FLORIDA, INC. AND
CEI WEST ROOFING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CEI Roofing, Inc. (CEI), was incorporated in Texas on May 14, 1981, and
operates as a roofing and sheet metal contractor engaged in the
installation of new roofs and reroofing of existing commercial, industrial
and residential buildings. CEI has offices in Dallas, Texas and Howell,
Michigan.
CEI Florida, Inc. (Florida), was incorporated in Florida on May 10, 1982,
and operates as a roofing contractor engaged in the installation of new
roofs and reroofing of existing commercial, industrial and residential
buildings, primarily in the southern United States. Florida has an office
located in DeBary, Florida.
CEI West Roofing Company, Inc. (West), was incorporated in Colorado on
August 24, 1977, and operates as a roofing contractor engaged in the
installation of new roofs and reroofing of existing commercial, industrial
and residential buildings, primarily in the western United States. West
has offices located in Denver, Colorado and Sacramento, California.
COMBINATION POLICY
The accompanying combined financial statements include the accounts of CEI
Roofing, Inc., CEI Florida, Inc. and CEI West Roofing Company, Inc.
(collectively, the Companies), all of which have some common ownership.
All significant intercompany transactions and balances have been
eliminated in combination.
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 items, 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 an entire fiscal year.
ACCOUNTING 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, liabilities,
revenues and expenses during the reporting period. Actual results could
differ from management's estimates.
F-37
<PAGE> 119
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
INVENTORY
Inventory of construction materials is carried at the lower of cost or
market value under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line and
accelerated methods for financial statement purposes and accelerated
methods for Federal income tax purposes over estimated useful lives
ranging from 3 to 39 years.
Maintenance and repairs of a routine nature are expensed as incurred.
Renewals and betterments, which substantially extend the useful life of an
existing asset, are capitalized and depreciated over the asset's estimated
useful life.
RECOGNITION OF CONTRACT REVENUE
Generally, the work performed by CEI, Florida and West is done so under
fixed-price contracts of durations less than one year.
Contract revenue is recognized using the percentage-of-completion method.
Under this method, the percentage of contract revenue to be recognized
currently is computed as the percentage of estimated total revenue that
incurred costs to date bear to total estimated costs, after giving effect
to the most recent estimate of costs to complete.
Revisions in costs and revenue estimates are reflected in the period in
which the facts requiring revision become known. When revised cost
estimates indicate a loss on an individual contract, the total estimated
loss is provided for currently without regard to the
percentage-of-completion. Revenues recognized in excess of amounts billed
are classified under current assets as costs and estimated earnings in
excess of billings on uncompleted contracts. Amounts billed in excess of
revenue recognized to date on contracts are classified under current
liabilities as contract billings in excess of costs and estimated earnings
on uncompleted contracts.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Companies to
concentrations of credit risk, consist principally of cash, contract
billings and retainage. The Companies deposit cash with reliable financial
institutions which management considers to be of high credit quality.
Concentration of credit risk with respect to contract billings and
retainage is limited due to the large number of customers comprising the
Companies' customer bases. In addition, the Companies review a customer's
credit history before extending credit and generally obtain liens to
ensure payment. Management of the Companies does not anticipate
significant credit losses from such financial instruments.
F-38
<PAGE> 120
ADVERTISING
The Companies expense the costs of advertising as the costs are incurred.
Advertising expense was approximately $50,300, $74,200 and $62,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
EARNINGS PER SHARE
The Companies calculate earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
SFAS 128 requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of income for all entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS calculations are
based on the weighted-average number of common shares outstanding during
the period, while diluted EPS calculations are based on the
weighted-average common shares and dilutive potential common shares
outstanding during each period. The Companies had no dilutive potential
common shares outstanding and, therefore, only basic EPS is presented.
2. CONTRACTS IN PROGRESS
Costs and estimated earnings on uncompleted contracts at December 31, 1996
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 20,780,460 $ 24,133,642
Estimated earnings 4,710,518 6,416,367
--------------- ----------------
25,490,978 30,550,009
Less billings to date (26,076,125) (30,768,660)
--------------- ----------------
$ (585,147) $ (218,651)
=============== ================
</TABLE>
Included in the accompanying balance sheets at December 31, 1996 and 1997
are the following captions and amounts:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 748,584 $ 791,908
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,333,731) (1,010,559)
--------------- ----------------
$ (585,147) $ (218,651)
=============== ================
</TABLE>
F-39
<PAGE> 121
The Companies' backlog of signed contracts at December 31, 1996 and 1997,
amounted to $12,205,250 and $11,414,215, respectively, which represented
work not yet commenced and uncompleted construction in progress.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Leasehold improvements $ 308,758 $ 368,620
Building and improvements 437,019 439,268
Land 141,724 141,724
Land improvements 87,749 89,048
Equipment 1,540,200 1,409,748
Autos and trucks 2,651,253 2,884,473
Furniture and fixtures 810,842 708,158
--------------- ----------------
5,977,545 6,041,039
Less accumulated depreciation
and amortization (4,055,087) (3,986,338)
--------------- ----------------
$ 1,922,458 $ 2,054,701
=============== ================
</TABLE>
4. LINES-OF-CREDIT
The Companies have various lines-of-credit which allow for combined
borrowings, at December 31, 1997, of up to $1,325,000 with interest at the
bank's prime rate plus 1%. The lines-of-credit are collateralized by
accounts receivable, inventory, property and equipment, and limited
personal guarantees of certain stockholders. The lines-of-credit mature
during the first six months of 1998. At December 31, 1996 and 1997, the
Companies had been advanced $80,000 and $300,000, respectively, under the
lines-of-credit. The bank's prime rate at December 31, 1996 and 1997 was
8.25% and 8.5%, respectively. The Companies had $845,000 and $1,025,000
available under the lines-of-credit at December 31, 1996 and 1997,
respectively.
F-40
<PAGE> 122
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Equipment loans, due in monthly installments ranging from $293 to
$2,479 including interest at rates ranging from 2.9% to 12.5%,
maturing on various dates through May 2002; collateralized by
equipment and vehicles $ 568,000 $ 643,106
Mortgage note payable, due in monthly installments of $1,600, including
interest at 8.75%, with a balloon payment due at maturity in June
1999; collateralized by real property 146,102 139,144
Note payable to former stockholder, payable in five annual installments
of $33,000, plus interest at 6.0%, commencing June 1996 (see Note 9) 132,000 99,000
Notes payable, due in monthly installments ranging from $1,308 to
$12,349, including interest at 7.5%, unsecured, paid-in full
subsequent to December 31, 1997 50,097 50,075
Note payable to bank, due on demand, but if no demand is made, then due
in monthly installments of $2,500, plus interest at the bank's base
lending rate plus 2% (10.5% at December 31, 1997), maturing in October
1998; collateralized by inventory, equipment and accounts receivable 7,369 3,542
Note payable to insurance company, due in monthly installments of
$1,135, non-interest bearing and unsecured, paid-in full subsequent to
December 31, 1996 3,987 -
Notes payable to stockholder, due in monthly installments of $410 to
$759, including interest at 7.0%, maturing in December 1997,
collateralized by insurance policy 8,043 -
------------ ----------------
915,598 934,867
Less current portion (395,079) (399,393)
------------ ----------------
$ 520,519 $ 535,474
============ ================
</TABLE>
F-41
<PAGE> 123
Scheduled maturities of long-term debt as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 $ 399,393
1999 340,880
2000 134,188
2001 48,303
2002 12,103
----------------
$ 934,867
================
</TABLE>
6. DISTRIBUTIONS TO STOCKHOLDERS
The Companies' declared distributions to stockholders of $1,178,067 and
$1,964,405 during 1996 and 1997, respectively, of which $328,126 and
$797,651 were payable at December 31, 1996 and 1997, respectively.
7. INCOME TAXES
The Companies have elected S Corporation status and as a result, the
Companies' taxable income is included in the Federal income tax returns of
the stockholders. Accordingly, no provision has been made for Federal
income taxes.
The Companies are obligated to pay state income taxes to certain states in
which they do business. Provisions for state income taxes are computed at
statutory rates for each state in which a return is filed.
8. COMMITMENTS AND CONTINGENCIES
The Companies lease office space and operating equipment under agreements
which are accounted for as operating leases. The leases require monthly
payments ranging from approximately $43 to $4,700 and expire on various
dates through December 2002.
Approximate minimum rental commitments for operating leases in effect at
December 31, 1997, with initial or remaining lease terms in excess of one
year, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 $ 346,014
1999 315,153
2000 160,612
2001 99,132
2002 70,512
----------------
$ 991,423
================
</TABLE>
F-42
<PAGE> 124
Rent expense for office facilities and operating equipment for the years
ended December 31, 1995, 1996 and 1997 was approximately $411,991,
$438,439 and $499,115, respectively.
CEI has guaranteed two bank loans of a partnership owned by the
stockholders of CEI. The loans are due in monthly installments of
approximately $8,200, but vary based upon the prime rate. The remaining
principal and interest are due at maturity in September 1998 and July
2002. CEI was contingently liable for $501,013 as guarantor of the
indebtedness at December 31, 1997. The loans are collateralized by real
estate.
Approximately 12% of CEI's non-management employees are covered by
collective bargaining agreements, which expire within the next year. If
CEI and the unions representing such workers are unable to agree on a new
contract prior to the expiration of the current contract, a work stoppage
may occur which could adversely affect the results of operations.
Management anticipates successful renegotiations of the contracts.
9. STOCK PURCHASE AND OTHER AGREEMENTS
The individual companies have agreements with the stockholders to provide
for the acquisition of stock in the event of the death, disability or
withdrawal of a stockholder. The Companies have obtained life insurance to
fund all or part of the redemption. The purchase price of the stock is to
be determined by the net book value of the individual companies at a
designated date.
Effective May 1, 1995, West agreed to purchase all of the non-voting
common stock (7,070 shares) held by a stockholder for $276,804. The
redemption of the stock was paid by the transfer of a life insurance
policy with a value of $11,804, cash payments in 1995 totaling $100,000
and the issuance of a promissory note for $165,000 (see Note 5).
The Companies have consulting and non-compete agreements with a former
stockholder. Terms of the agreements call for monthly payments of $6,400
through December 1999 for specific services to be performed.
10. COMMON STOCK
Common stock of the Companies consisted of the following:
<TABLE>
<S> <C>
CEI:
----
Common Stock - Voting $1 par value, 10,000 shares authorized; 750 shares issued and
outstanding.
Common Stock - Nonvoting $1 par value; 150,000 shares authorized; 132,416 shares issued
and outstanding.
Florida:
-------
Common Stock - Voting $1 par value; 10,000 shares authorized; 2,250 shares issued and
outstanding.
Common Stock - Nonvoting $1 par value; 250,000 shares authorized; 174,500 shares issued
and outstanding.
</TABLE>
F-43
<PAGE> 125
<TABLE>
<S> <C>
WEST:
-----
Common Stock - Voting $1 par value; 10,000 shares authorized; 315 shares issued and
outstanding.
Common Stock - Nonvoting $1 par value; 50,000 shares authorized; 24,430 shares issued and
outstanding.
</TABLE>
11. RELATED PARTY TRANSACTIONS
CEI and Florida lease office space from two different partnerships owned
by stockholders of CEI and Florida, respectively. The lease agreements
require combined monthly payments of approximately $14,000 through June
2000. Total rent paid to the related partnerships for the years ended
December 31, 1995, 1996 and 1997 was $152,524, $148,599 and $164,199,
respectively.
The Companies use numerous labor and material subcontractors on an ongoing
basis, as needed. Two such labor providers are companies owned by trusts
whose beneficiaries are children of one of the company's stockholders.
Amounts paid to the related company during 1995, 1996 and 1997 were
approximately $3,140,000, $3,681,000 and $4,388,000, respectively.
12. EMPLOYEE BENEFIT PLANS
The Companies have retirement plans (Plans) for all employees meeting
certain eligibility requirements. The Plans qualify under Section 401(k)
of the Internal Revenue Code. The Plans allow employee contributions of
agreed-upon salary reductions equal to a percentage of the employees'
annual compensation, subject to limitations. Employer contributions may be
made at the discretion of the employer in each year the Companies have
accumulated earnings. The Companies contributed $104,361, $122,650 and
$57,265 to the Plans for the years ended December 31, 1995, 1996 and 1997,
respectively.
13. SUBSEQUENT EVENT
Effective May 13, 1998, the stockholders of the Companies executed a stock
purchase agreement to sell all of their outstanding common stock to
General Roofing Services, Inc. (GRS) for cash and common shares of GRS.
F-44
<PAGE> 126
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Anthony Roofing Ltd.:
We have audited the accompanying balance sheet of Anthony Roofing Ltd. (the
"Company") as of December 31, 1997, and the related statements of operations,
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Anthony Roofing Ltd. as of December 31, 1997
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 23, 1998
(May 13, 1998 as to Note 11)
F-45
<PAGE> 127
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Anthony Roofing Ltd.:
We have audited the accompanying balance sheet of Anthony Roofing Ltd. as of
December 31, 1996 and the related statements of operations, stockholder's equity
and cash flows for the fourteen month period ended December 31, 1995 and the
year ended December 31, 1996. 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, such financial statements present fairly, in all material
respects, the financial position of Anthony Roofing Ltd. and the results of its
operations and its cash flows for the fourteen month period ended December 31,
1995 and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
DUGAN & LOPATKA CPA'S, P.C.
Wheaton, Illinois
May 22, 1998
F-46
<PAGE> 128
ANTHONY ROOFING LTD.
<TABLE>
<CAPTION>
BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
ASSETS 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 922,347 $1,939,026 $2,531,185
Contract receivables 2,732,086 3,499,477 1,815,320
Costs and estimated earnings in excess of billings 583,485 460,548 920,018
Other receivables 4,084 16,265 796
Due from related parties 273,868
Inventories 68,713 46,369 106,881
Prepaid expenses and other current assets 61,068 22,365 27,687
Refundable income taxes 33,933
---------- ---------- ----------
Total current assets 4,679,584 5,984,050 5,401,887
PROPERTY AND EQUIPMENT, net 416,255 683,677 695,897
---------- ---------- ----------
TOTAL $5,095,839 $6,667,727 $6,097,784
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable $ 803,086
Accounts payable 814,339 $ 445,406 449,016
Accrued salaries and wages 136,434 222,620 76,355
Accrued pension 40,872 63,322 23,669
Accrued expenses and other current liabilities 57,328 98,483 73,633
Billings in excess of costs and estimated earnings 133,922 381,066 50,388
---------- ---------- ----------
Total current liabilities 1,985,981 1,210,897 673,061
COMMITMENTS (Note 11)
STOCKHOLDER'S EQUITY:
Common stock 1,000 1,000 1,000
Retained earnings 3,108,858 5,455,830 5,423,723
---------- ---------- ----------
Total 3,109,858 5,456,830 5,424,723
---------- ---------- ----------
TOTAL $ 5,095,839 $ 6,667,727 $ 6,097,784
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-47
<PAGE> 129
ANTHONY ROOFING LTD.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD
NOVEMBER 1,
1994 TO THREE MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES EARNED $ 13,310,048 $12,226,082 $19,777,750 $2,523,732 $2,488,841
COSTS OF CONTRACT
REVENUES EARNED 9,916,484 9,507,011 14,440,829 2,242,095 2,132,006
------------ ----------- ----------- ---------- ----------
GROSS PROFIT 3,393,564 2,719,071 5,336,921 281,637 356,835
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,915,034 2,086,484 2,869,800 371,818 444,744
------------ ----------- ----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 1,478,530 632,587 2,467,121 (90,181) (87,909)
------------ ----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 47,916 30,922 32,912 27,181
Interest expense (5,371) (35,591) (10,452) (3,598) (1,676)
Other income (expense), net (5,133) (17,279) 79,979 1,500 30,873
------------ ----------- ----------- ---------- ----------
37,412 (21,948) 102,439 (2,098) 56,378
INCOME (LOSS) BEFORE
INCOME TAXES 1,515,942 610,639 2,569,560 (92,279) (31,531)
INCOME TAX PROVISION (5,200) (10,400) (50,000)
------------ ------------ ----------- ---------- ----------
NET INCOME (LOSS) $ 1,510,742 $ 600,239 $ 2,519,560 $ (92,279) $ (31,531)
============ ============ =========== ========== ==========
</TABLE>
See notes to financial statements.
F-48
<PAGE> 130
ANTHONY ROOFING LTD.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
SHARES RETAINED
STATED VALUE $10 AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1994 100 $ 1,000 $2,864,110 $ 2,865,110
Net income 1,510,742 1,510,742
Distribution to stockholder (614,164) (614,164)
------ ------- ---------- -----------
BALANCE, DECEMBER 31, 1995 100 1,000 3,760,688 3,761,688
Net income 600,239 600,239
Distributions to stockholder (1,252,069) (1,252,069)
------ ------- ---------- -----------
BALANCE, DECEMBER 31, 1996 100 1,000 3,108,858 3,109,858
Net income 2,519,560 2,519,560
Distributions to stockholder (172,588) (172,588)
------ ------- ---------- -----------
BALANCE, DECEMBER 31, 1997 100 1,000 5,455,830 5,456,830
Net loss (unaudited) (31,531) (31,531)
Distributions to stockholder (unaudited) (576) (576)
------ ------- ---------- -----------
BALANCE, MARCH 31, 1998
(unaudited) 100 $ 1,000 $5,423,723 $ 5,424,723
====== ======= ========== ===========
</TABLE>
See notes to financial statements.
F-49
<PAGE> 131
ANTHONY ROOFING LTD.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
PERIOD
NOVEMBER 1,
1994 TO THREE MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,510,742 $ 600,239 $2,519,560 $(92,279) $ (31,531)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 188,417 165,177 219,578 42,939 57,000
Loss (gain) on disposal of assets 5,133 24,539 (55,534) (740)
Changes in operating assets and liabilities:
Contract receivables, net 763,867 (257,545) (767,391) 706,571 1,684,157
Costs and estimated earnings in excess of billings 254,581 35,634 122,937 (292,407) (459,470)
Inventories (68,713) 22,344 (36,258) (60,512)
Other current assets (58,577) 79,930 60,455 10,059 10,147
Accounts payable and accrued expenses (570,645) 664,182 (219,142) (327,447) (207,158)
Billings in excess of costs and estimated earnings (335,587) (112,227) 247,144 (85,095) (330,678)
------------ ---------- ---------- -------- ----------
Net cash provided by (used in) operating activities 1,757,931 1,131,216 2,149,951 (73,917) 661,215
------------ ---------- ---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (217,615) (260,869) (506,197) (23,579) (69,997)
Due from related parties (273,868) 273,868 273,868
Proceeds from sale of property and equipment 12,086 14,500 74,731 1,517
Other 1,370
------------ ---------- ---------- -------- ----------
Net cash provided by (used in) investing activities (204,159) (520,237) (157,598) 250,289 (68,480)
------------ ---------- ---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable to bank (450,000) 803,086 (803,086) (803,086)
Distributions to stockholder (614,164) (1,152,069) (172,588) (576)
------------ ---------- ---------- -------- ----------
Net cash used in financing activities (1,064,164) (348,983) (975,674) (803,086) (576)
------------ ---------- ---------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 489,608 261,996 1,016,679 (626,714) 592,159
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 170,743 660,351 922,347 922,347 1,939,026
------------ ---------- ---------- -------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 660,351 $ 922,347 $1,939,026 $295,633 $2,531,185
============ ========== ========== ======== ==========
CASH PAYMENTS FOR:
Interest $ 5,371 $ 35,591 $ 5,613 $ 3,356 $ 168
Taxes 31,365 22,449 35,100 25,532 47,000
NONCASH FINANCING ACTIVITY - Note
receivable distributed to shareholder $ 100,000
</TABLE>
See notes to financial statements.
F-50
<PAGE> 132
ANTHONY ROOFING LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Anthony Roofing Ltd. (the "Company") operates as a provider of
comprehensive roofing services to commercial, construction and government
customers. The work is generally performed under fixed-price contracts.
The lengths of the Company's contracts vary, but generally are less than
one year. The Company's offices are located in Aurora, Illinois and the
majority of the Company's business is transacted with customers in
Illinois. A majority of the Company's employees are covered by collective
bargaining agreements.
CHANGE IN FISCAL YEAR - Prior to 1995, the Company had a fiscal year of
October 31. In 1995, the year-end was changed to December 31, and the
Company's financial statements include the fourteen-month period ended
December 31, 1995. On an unaudited basis, for the months of November and
December 1995, revenues were $1,019,845, loss from operations was ($5,898)
and net loss was ($8,476).
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 annual 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 items,
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 are not
necessarily indicative of the results for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based on
management's best estimates. Recoveries are recognized in the period they
are received. The ultimate amounts of contract receivables that become
uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and local companies whose reputation is known to the Company.
The Company generally has the ability to file liens against the property
if it is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies and
are valued at the lower of first-in, first-out cost or market.
F-51
<PAGE> 133
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the remaining
useful life of the related asset. Depreciation is recorded using
accelerated and straight-line methods over the estimated useful lives of
the related assets. Depreciation and amortization are provided over the
following estimated useful lives:
<TABLE>
<S> <C> <C>
Leasehold improvements 7 to 39 years
Machinery and equipment 3 to 7 years
Computer equipment 3 to 7 years
</TABLE>
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract
costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies and tools. Selling, general and administrative costs are charged
to expense as incurred. Costs for materials incurred at the inception of a
project which are not reflective of effort are excluded from the
percentage of completion calculation for purposes of determining profits
earned on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to change
as the project progresses and better estimates of project costs become
available. Revisions in cost and profit estimates during the course of the
work are reflected in the period in which the facts requiring revision
become known. Where a loss is forecast for a contract, the full amount of
the anticipated loss is recognized in the period in which it is determined
that a loss will occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated
earnings" on uncompleted contracts, represents billings in excess of
revenues recognized.
INCOME TAXES - The Company is an S Corporation for federal income tax
purposes. Accordingly, the current taxable income of the Company is
taxable to the shareholder, who is responsible for the payment of taxes
thereon. The income tax provision and related deferred income tax balances
are for state income and franchise taxes. The tax basis of assets and
liabilities of the Company differs from the financial statement basis
principally due to the use of the completed contract method of reporting
revenues for income tax purposes and due to accelerated depreciation of
assets for tax purposes.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. There are no
differences between comprehensive income and net income as reported in the
statement of operations.
RECLASSIFICATION - Certain amounts in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation.
F-52
<PAGE> 134
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Current accounts $1,265,792 $1,192,346
Retention 18,923 205,904
Contracts in progress:
Current accounts 1,165,709 1,701,751
Retention 281,662 399,476
---------- ----------
Contract receivables, net $2,732,086 $3,499,477
========== ==========
</TABLE>
There is no allowance for doubtful accounts recorded at December 31, 1997
and 1996; management believes all amounts are collectible.
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $3,284,673 $ 6,367,687
Estimated earnings 1,199,215 2,274,900
---------- -----------
4,483,888 8,642,587
Activity in prior years on contracts in progress 447,380
---------- -----------
Total 4,483,888 9,089,967
Less: billings to date (4,034,325) (9,010,485)
---------- -----------
Net under billings $ 449,563 $ 79,482
========== ===========
</TABLE>
The foregoing is included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 583,485 $ 460,548
Billings in excess of costs and estimated earnings (133,922) (381,066)
--------- ---------
Total $ 449,563 $ 79,482
========= =========
</TABLE>
F-53
<PAGE> 135
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Leasehold improvements $ 42,112 $ 69,614
Machinery and equipment 1,474,459 1,853,457
Computer equipment 162,279 181,238
------------ ------------
Subtotal 1,678,850 2,104,309
Less: accumulated depreciation (1,262,595) (1,420,632)
------------ ------------
Property and equipmen, net $ 416,255 $ 683,677
============ ============
</TABLE>
5. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
$1,250,000 revolving line of credit due May 31, 1998, bearing Interest at a
variable rate based on the LIBOR rate plus 2.75% (8.5% and 8.25% at December
31, 1996 and 1997, respectively). Secured by contract receivables, inventories
and equipment. The Company must retain a compensating Balance of $70,000 in
the bank at all times. $803,086 $ 0
$200,000 revolving line of credit due May 31, 1998, bearing interest at a
variable rate based on the LIBOR rate plus 2.75%. Secured by contract
receivables, inventories and equipment.
-------- ----
$803,086 $ 0
======== ====
</TABLE>
At December 31, 1997, the Company had unused lines of credit totalling
$1,450,000 to provide for additional borrowings.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, and debt. The carrying
value of these financial instruments approximates fair value because of
their short duration or current interest rates. The Company places its
temporary cash investments with financial institutions and limits the
amount of credit exposure with any one financial institution.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Illinois
market. The Company believes this concentration of credit risk is
mitigated by the diversity of industries represented by the Company's
customer base.
F-54
<PAGE> 136
7. MAJOR CUSTOMERS
Sales to three customers were 18%, 13% and 10% of total sales,
respectively, for the fourteen month period ended December 31, 1995. Sales
to two customers were 16% and 12% of total sales, respectively, for the
year ended December 31, 1996, and sales to one customer was 14% of total
sales for the year ended December 31, 1997.
8. MAJOR SUPPLIERS
Purchases from each of two suppliers exceeded 10% of materials purchased
for the fourteen month period ended December 31, 1995, aggregating 26%,
purchases from each of three suppliers exceeded 10% of materials purchased
for the year ended December 31, 1996 aggregating 48% and purchases from
each of four suppliers exceeded 10% of materials purchased for the year
ended December 31, 1997, aggregating 64%.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution money purchase plan covering
substantially all full-time, nonunion employees who have completed at
least one year of service. Participants vest 20% per year over a five-year
period until 100% vested. The plan requires the Company to contribute 10%
of an employee's compensation to the plan annually. The Company's
contribution to the plan for the fourteen month period ended December 31,
1995 and the years ended December 31, 1996 and 1997 was $61,598, $40,872
and $63,322, respectively.
The Company contributes monthly to multi-employer defined benefit union
plans based upon hours worked by each eligible employee. Pension expense
for these plans was approximately $429,000, $209,000 and $340,000 for the
fourteen month period ended December 31, 1995 and the years ended December
31, 1996 and 1997, respectively.
10. RELATED PARTY TRANSACTIONS
The Company has entered into a long-term lease arrangement (with an
initial term expiring in December 2001 and options to extend through 2016)
with an entity controlled by and related to the Company's stockholder. The
following are the Company's commitments with respect to the lease for the
years ending December 31:
<TABLE>
<S> <C>
1998 $ 164,000
1999 172,000
2000 181,000
2001 190,000
-----------
Total $ 707,000
===========
</TABLE>
Total rent expense with related entities was $140,182, $135,741 and
$195,677 during the fourteen month period ended December 31, 1995 and the
years ended December 31, 1996 and 1997, respectively.
During the fourteen month period ended December 31, 1995 and the years
ended December 31, 1996 and 1997, the Company purchased $74,000, $200,000
and $164,000, respectively, of subcontractor services from a company owned
by a relative of the Company's stockholder.
F-55
<PAGE> 137
The Company has entered into an employment agreement with the
officer/shareholder which includes a nonqualified deferred compensation
program. There was no deferral required under the plan at December 31,
1996 and 1997. A deduction for income tax purposes is allowed at the time
the deferred compensation is paid to the employee.
11. SUBSEQUENT EVENT
On May 13, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. ("GRS") whereby GRS will acquire the Company in a
merger for a combination of cash and common shares of GRS concurrent with
the consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including the approval by Directors of both
companies.
* * * * * *
F-56
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Specialty Associates, Inc.
and to the Stockholder of
SAI Wholesale Distributors, Inc.
We have audited the accompanying combined balance sheets of Specialty
Associates, Inc. and Affiliate both of which are under common ownership and
common management (the "Company") as of February 1, 1998 and February 2, 1997,
and the related combined statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended February 1, 1998. The
combined financial statements include the accounts of Specialty Associates, Inc.
and SAI wholesale Distributors, Inc., which are affiliates under common
ownership and common management. 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, such financial statements present fairly, in all material
respects, the combined financial position of Specialty Associates, Inc. and
Affiliate, and the combined results of operations and combined cash flows for
each of the two years in the period ended February 1, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 27, 1998
(May 12,1998 as to Note 12)
F-57
<PAGE> 139
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1, APRIL 5,
ASSETS 1997 1998 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,318 $ 135,781 $ 30,544
Contract receivables, net of an allowance for doubtful accounts
of $25,000, $25,000 and $26,000, respectively 2,058,528 1,877,343 1,699,082
Costs and estimated earnings in excess of billings 45,677 49,524 53,835
Inventories 708,430 657,131 800,374
Prepaid expenses and other current assets 14,623 24,382
Deferred income taxes 31,000 31,000 31,000
----------- ----------- -----------
Total current assets 2,867,576 2,750,779 2,639,217
PROPERTY AND EQUIPMENT, net 1,279,129 1,599,824 1,564,724
OTHER ASSETS 85,127 149,823 161,823
----------- ----------- -----------
TOTAL $ 4,231,832 $ 4,500,426 $ 4,365,764
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 700,000 $ 700,000 $ 800,000
Accounts payable 1,115,813 906,488 824,074
Accrued expenses and other current liabilities 233,752 453,362 389,240
Billings in excess of costs and estimated earnings 261,994 162,254 204,717
Current portion of long-term debt 183,736 202,000 202,000
----------- ----------- -----------
Total current liabilities 2,495,295 2,424,104 2,420,031
LONG-TERM DEBT, net of current portion 533,297 518,696 468,933
DEFERRED INCOME TAXES 73,000 139,000 139,000
----------- ----------- -----------
Total 3,101,592 3,081,800 3,027,964
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11)
STOCKHOLDERS' EQUITY:
Common stock 34,488 34,488 34,488
Additional paid-in capital 216,175 216,175 216,175
Retained earnings 991,379 1,326,245 1,245,419
Treasury stock (111,802) (158,282) (158,282)
----------- ----------- -----------
Total 1,130,240 1,418,626 1,337,800
----------- ----------- -----------
TOTAL $ 4,231,832 $ 4,500,426 $ 4,365,764
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-58
<PAGE> 140
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE WEEK PERIOD
ENDED
---------------------------
FEBRUARY 2, FEBRUARY 1, APRIL 6, APRIL 5,
1997 1998 1997 1998
(53 WEEKS) (52 WEEKS) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Construction revenues $ 14,211,377 $ 16,148,375 $ 2,336,771 $ 1,486,539
Product sales 1,095,261 1,049,214 57,415 54,885
COSTS OF SALES AND CONSTRUCTION:
Cost of construction 12,919,520 14,276,016 2,177,734 1,400,766
Cost of product sold 740,117 680,965 34,623 38,240
------------ ------------ ----------- -----------
GROSS PROFIT 1,647,001 2,240,608 181,829 102,418
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,235,738 1,486,581 188,739 212,371
------------ ------------ ----------- -----------
INCOME (LOSS) FROM
OPERATIONS 411,263 754,027 (6,910) (109,953)
OTHER INCOME (EXPENSE):
Interest expense (144,817) (136,428) (23,776) (22,358)
Other income, net 2,195 2,267 303 485
------------ ------------ ----------- -----------
(142,622) (134,161) (23,473) (21,873)
INCOME (LOSS) BEFORE
INCOME TAXES 268,641 619,866 (30,383) (131,826)
INCOME TAX (PROVISION)
BENEFIT (132,000) (285,000) 12,000 51,000
------------ ------------ ----------- -----------
NET INCOME (LOSS) $ 136,641 $ 334,866 $ (18,383) $ (80,826)
============ ============ =========== ===========
</TABLE>
See notes to combined financial statements.
F-59
<PAGE> 141
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN TREASURY RETAINED
AMOUNT CAPITAL STOCK EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 28, 1996 $ 34,488 $ 216,175 $(109,960) $ 854,738 $ 995,441
Net income 136,641 136,641
Stock repurchase (100 shares) (1,842) (1,842)
--------- --------- --------- ---------- ----------
BALANCE, FEBRUARY 2, 1997 34,488 216,175 (111,802) 991,379 1,130,240
Net income 334,866 334,866
Stock repurchase (1,495 shares) (46,480) (46,480)
--------- --------- --------- ---------- ----------
BALANCE, FEBRUARY 1, 1998 34,488 216,175 (158,282) 1,326,245 1,418,626
Net loss (unaudited) (80,826) (80,826)
--------- --------- --------- ---------- ----------
BALANCE, APRIL 5, 1998
(unaudited) $ 34,488 $ 216,175 $(158,282) $1,245,419 $1,337,800
========= ========= ========= ========== ==========
</TABLE>
See notes to combined financial statements.
F-60
<PAGE> 142
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED NINE WEEK PERIOD ENDED
------------------------- -----------------------
FEBRUARY 2, FEBRUARY 1, APRIL 6, APRIL 5,
1997 1998 1997 1998
(53 WEEKS) (52 WEEKS) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 136,641 $ 334,866 $ (18,383) $ (80,826)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 202,457 222,072 37,235 35,100
Deferred income taxes 29,000 66,000
Changes in operating assets and liabilities:
Contract receivables, net (496,309) 181,185 147,393 178,261
Costs and estimated earnings in excess of billings (13,625) (3,847) (27,517) (4,311)
Inventories (72,260) 51,299 9,262 (143,243)
Prepaid expenses and other current assets (5,352) 14,623 (13,406) (24,382)
Accounts payable and accrued expenses 353,268 10,285 113,178 (146,536)
Billings in excess of costs and estimated earnings 119,532 (99,740) (41,622) 42,463
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 253,352 776,743 206,140 (143,474)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (183,926) (536,363) (135,245)
Other 1,032 (71,100) (10,000) (12,000)
--------- --------- --------- ---------
Net cash used in investing activities (182,894) (607,463) (145,245) (12,000)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury shares (1,842) (46,480)
Net proceeds from (payments on) line of credit (100,000) 100,000
Proceeds from the issuance of long-term debt 498,170 247,037 106,449
Repayments of long-term debt (580,968) (243,374) (32,183) (49,763)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (84,640) (42,817) (25,734) 50,237
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (14,182) 126,463 35,161 (105,237)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 23,500 9,318 9,318 135,781
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 9,318 $ 135,781 $ 44,479 $ 30,544
========= ========= ========= =========
CASH PAYMENTS FOR:
Interest $ 147,436 $ 135,469 $ 24,768 $ 22,358
Taxes 42,302 103,680
</TABLE>
See notes to combined financial statements.
F-61
<PAGE> 143
SPECIALTY ASSOCIATES, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Specialty Associates, Inc. is a construction contractor whose
principal business is commercial and residential roofing, including
architectural sheet metal fabrication, primarily in the Midwest United
States. SAI Wholesale Distributors, Inc. distributes roofing material
primarily to Specialty Associates, Inc. and other roofing contractors.
The Company has general office facilities in West Allis, Wisconsin.
FISCAL YEAR - The Company operates on a 52-53 week fiscal year ending
on the Sunday nearest to January 31.
BASIS OF PRESENTATION - The combined financial statements include the
accounts of Specialty Associates, Inc. and SAI Wholesale Distributors,
Inc. (collectively, the "Company"). The companies have common
ownership, share management and facilities, and accordingly, the
financial statements have been combined. Significant intercompany
transactions have been eliminated in the accompanying combined
financial statements.
The capital structure of each entity as of February 1, 1998 and
February 2, 1997 is as follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
<S> <C> <C>
SAI Wholesale Distributors, Inc., 2,200 shares authorized, 1,000
issued and outstanding no par value common stock $ 2,288
Specialty Associates, Inc., 100,000 shares authorized and no par
value common stock, and outstanding 91,304
shares in 1998 and 92,799 shares in 1997 32,200 $ 216,175
-------- -----------
$ 34,488 $ 216,175
======== ===========
</TABLE>
INTERIM FINANCIAL INFORMATION - The interim financial statements as of
April 5, 1998 and for the nine week period ended April 6, 1997 and
April 5, 1998 are unaudited, and certain information and footnote
disclosures normally included in annual 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 items, 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 are not necessarily indicative of the
results for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
F-62
<PAGE> 144
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based
on management's best estimates. Recoveries are recognized in the period
they are received. The ultimate amounts of contract receivables that
become uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and local companies whose reputation is known to the
Company. Advance payments and progress payments are generally required
for significant projects. Credit checks are performed for significant
new customers that are not known to the Company. The Company generally
has the ability to file liens against the property if it is not paid on
a timely basis.
INVENTORIES - Inventories are valued at the lower of first-in,
first-out cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the
remaining useful life of the related asset. Depreciation is recorded
using accelerated and straight-line methods over the estimated useful
lives of the related assets. Depreciation and amortization are provided
over the following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements 5 to 39 years
Machinery and equipment 4 to 10 years
Furniture and fixtures 10 years
</TABLE>
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized
under the percentage of completion method measured by the ratio of
contract costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs related to
contract performance. Indirect costs are included in total construction
costs but are not allocated to specific contracts. Selling, general and
administrative costs are charged to expense as incurred. Costs for
materials incurred at the inception of a project which are not
reflective of effort are excluded from costs incurred for purposes of
increasing revenue recognition and profits.
Estimates made with respect to uncompleted projects are subject to
change as the project progresses and better estimates of project costs
become available. Revisions in cost and profit estimates during the
course of the work are reflected in the period in which the facts
requiring revision become known. Where a loss is forecast for a
contract, the full amount of the anticipated loss is recognized in the
period in which it is determined that a loss will occur, regardless of
the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings" on uncompleted contracts, represents billings in
excess of revenues recognized.
INCOME TAXES - The Company reports income taxes pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Under SFAS No. 109, income taxes are provided for the tax
effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related to certain
income and expenses recognized in different periods
F-63
<PAGE> 145
for financial and income tax reporting purposes. Deferred tax assets
and liabilities represent the future tax consequences of those
differences. Deferred taxes are also recognized for operating losses
and tax credits that are available to offset future taxable income and
income taxes, respectively. A valuation allowance is provided if it is
more likely than not that some portion or all of the deferred tax
assets will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS - Effective February 2, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. There are no significant differences between
comprehensive income and net income as reported in the Company's
statements of operations.
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Trade $ 1,590,632 $ 1,352,844
Retention 492,896 549,499
----------- -----------
Subtotal 2,083,528 1,902,343
Less: allowance for doubtful accounts (25,000) (25,000)
----------- -----------
Contract receivables, net $ 2,058,528 $ 1,877,343
=========== ===========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Costs incurred on uncompleted contracts $ 2,174,756 $ 1,511,001
Estimated earnings 556,235 437,097
----------- -----------
Total 2,730,991 1,948,098
Less: billings to date (2,947,308) (2,060,828)
----------- -----------
Net over billings $ (216,317) $ (112,730)
=========== ===========
</TABLE>
The foregoing is included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 45,677 $ 49,524
Billings in excess of costs and estimated earnings (261,994) (162,254)
--------- ---------
Total $(216,317) $(112,730)
========= =========
</TABLE>
F-64
<PAGE> 146
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Land $ 125,000 $ 125,000
Building and improvements 616,145 659,445
Machinery and equipment 2,155,729 2,648,792
---------- ----------
Subtotal 2,896,874 3,433,237
Less: accumulated depreciation (1,617,745) (1,833,413)
---------- ----------
Property and equipment, net $ 1,279,129 $ 1,599,824
=========== ===========
</TABLE>
5. LINE OF CREDIT, LONG-TERM DEBT AND NOTES PAYABLE
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Mortgage note payable to bank, due in monthly
installments of $5,297, including interest at prime plus
1.5% (10% at February 1, 1998) to September 2001 when
the unpaid balance is due
$447,318 $407,831
Notes payable collateralized by equipment and vehicles,
payable in monthly installments ranging from $322 to
$3,896, including interest ranging from 8.50% to 12.25%
to various dates through 2002
269,715 312,865
-------- --------
Total debt 717,033 720,696
Less: current maturities 183,736 202,000
-------- --------
Total long-term debt $533,297 $518,696
======== ========
</TABLE>
At February 1, 1998, the Company has a $1,000,000 revolving credit
agreement with a bank which expires June 1, 1998. Advances on the
credit agreement bear interest at the prime rate plus .75% (9.25% at
February 1, 1998), are due on demand, and are secured by a General
Business Security Agreement covering substantially all assets of the
Company and by a second mortgage on real estate owned by the Company.
The agreement is further secured by a guaranty of the majority
stockholder. In addition, the agreement requires the Company to meet
certain financial covenants. Advances may not exceed 80% of qualified
receivables and 50% of qualified inventory. As of February 1, 1998 and
February 2, 1997, $700,000 was drawn on the line.
F-65
<PAGE> 147
Aggregate maturities of long-term debt for years ending February 1 are
as follows:
<TABLE>
<S> <C>
1999 $202,000
2000 111,563
2001 72,900
2002 334,233
--------
Total $720,696
========
</TABLE>
6. INCOME TAXES
The Company's provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Current:
Federal $ 92,000 $176,000
State 11,000 43,000
-------- --------
103,000 219,000
-------- --------
Deferred:
Federal 29,000 66,000
-------- --------
$132,000 $285,000
======== ========
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Statutory federal tax rate 34.0 % 34.0 %
State tax, net of federal benefit 5.1 5.1
Other 9.9 6.9
---- ----
Effective rate 49.0 % 46.0 %
==== ====
</TABLE>
During 1997 and 1998, the Company increased the estimated effective
rate for temporary differences as a result of increased taxable income.
F-66
<PAGE> 148
Components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1,
1997 1998
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 10,000 $ 10,000
Accrual for unpaid self-insurance claims 10,000 10,000
Impact on gross profit for uninstalled contract materials 16,000 8,000
Other temporary differences, net 3,000 3,000
--------- ---------
39,000 31,000
--------- ---------
Deferred tax liabilities:
Accelerated depreciation for income tax purposes (73,000) (139,000)
Prepaid expenses (8,000) 0
--------- ---------
(81,000) (139,000)
--------- ---------
Net deferred income tax liability $ (42,000) $(108,000)
========= =========
</TABLE>
The components of deferred income taxes included in the February 2,
1997 and February 1, 1998 balance sheet are as follows:
<TABLE>
<S> <C> <C>
Net current assets $ 31,000 $ 31,000
Net non-current liabilities (73,000) (139,000)
--------- ---------
$ (42,000) $(108,000)
========= =========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, contract receivables, and accounts and notes payable. The
carrying value of these financial instruments approximates fair value
because of their short duration or current interest rates. The Company
places its temporary cash investments with financial institutions and
limits the amount of credit exposure with any one financial
institution. The carrying value of debt approximates fair value based
on current rates for borrowings of similar quality and terms.
8. PENSION AND PROFIT SHARING/401(K) PLANS
The Company contributes to various union-sponsored, multi-employer
pension and benefit plans and trust funds on behalf of the union
employees. The total amount contributed to these union plans and trusts
was approximately $429,000 and $476,000 in fiscal 1997 and 1998,
respectively. If the Company's employees were to vote to withdraw from
the union, certain amounts may be due for under-funded pension
obligations.
The Company has two profit sharing/401(k) plans covering eligible
employees. One plan is for non-union employees and one is for union
employees. Contributions to these plans are discretionary based on
approval of the Board of Directors. Currently, the Company is matching
30% of the first 6% of compensation contributed by the employees for
the non-union plan, and 10% of the first 6% of compensation for union
employees. In addition, certain non-union employees receive an
additional
F-67
<PAGE> 149
$1.45 per hour worked as a contribution from the Company. Contributions
made by the Company for the years ended February 2, 1997 and February
1, 1998 to the plans were approximately $26,000 and $48,000,
respectively.
9. SELF-INSURANCE PLAN
The Company, in an effort to reduce health and dental insurance
premiums, participates in a partial self-funding insurance program. The
maximum annual liability of the Company under this plan is $30,000 per
employee for the years ended February 2, 1997 and February 1, 1998. The
Company has purchased insurance to cover claims in excess of this
amount.
Total expenses under this plan, including insurance premiums and
administration costs, aggregated approximately $187,000 and $155,000
for the years ended February 2, 1997 and February 1, 1998,
respectively. Approximately $25,000 had been recorded as an accrued
liability for claims incurred but unpaid.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate
liability associated with such claims, if any, will not have a material
adverse effect on the Company's financial position or results of
operations.
11. MAJOR MATERIAL SUPPLIER
Purchases from one material supplier comprised approximately 33% and
31% of material purchases in fiscal years 1997 and 1998. Amounts to
from this supplier represented approximately 35% and 20% of outstanding
accounts payable at February 2, 1997 and February 1, 1998,
respectively.
12. SUBSEQUENT EVENT
On May 12, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. ("GRS") whereby GRS will acquire the Company in
a merger for a combination of cash and common shares of GRS concurrent
with the consummation of an initial public offering of the common stock
of GRS, subject to certain conditions including the approval by
Directors of both companies.
* * * * * *
F-68
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Cyclone Roofing Company:
We have audited the accompanying balance sheets of Cyclone Roofing Company (the
"Company") as of December 31, 1996 and 1997, and the related statements of
operations, stockholder's 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, such financial statements present fairly, in all material
respects, the financial position of Cyclone Roofing Company 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.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 19, 1998
F-69
<PAGE> 151
CYCLONE ROOFING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 432,718 $ 935,952 $ 486,531
Contract receivables, net of an allowance for doubtful
accounts of $5,000 1,408,108 2,179,878 2,020,074
Costs and estimated earnings in excess of billings 419,247 1,190,001 1,377,515
Other receivables from stockholder and employees 98,114 126,909 116,670
Inventories 12,247 9,691 12,003
Prepaid expenses and other current assets 39,889 675 xx
---------- ---------- ----------
Total current assets 2,410,323 4,443,106 4,012,793
PROPERTY AND EQUIPMENT, net 664,056 754,585 837,179
OTHER ASSETS 37,006 37,006 37,006
---------- ---------- ----------
TOTAL $3,111,385 $5,234,697 $4,886,978
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 583,445 $ 251,797 $ 281,427
Accrued payroll and payroll taxes 48,212 81,950 125,672
Accrued workmen's compensation 37,793 14,546 45,904
Accrued interest 42,400 1,389 1,325
Billings in excess of costs and estimated earnings 307,844 427,354 236,330
Current portion of long-term debt 103,736 48,822 184,473
Current portion of capitalized lease obligations 32,299 29,596 26,128
---------- ---------- ----------
Total current liabilities 1,155,729 855,454 901,259
LONG-TERM DEBT, net of current portion 203,163 235,450 77,964
CAPITALIZED LEASE OBLIGATIONS,
net of current portion 68,216 37,691 33,619
---------- ---------- ----------
Total 1,427,108 1,128,595 1,012,842
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 100,000 shares authorized;
25,000 shares issued and outstanding 25,000 25,000 25,000
Retained earnings 1,659,277 4,081,102 3,849,136
---------- ---------- ----------
Total 1,684,277 4,106,102 3,874,136
---------- ---------- ----------
TOTAL $3,111,385 $5,234,697 $4,886,978
========== ========== ==========
</TABLE>
See notes to financial statements.
F-70
<PAGE> 152
CYCLONE ROOFING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES
EARNED $ 9,242,737 $ 10,254,249 $ 16,057,460 $ 3,084,923 $ 2,828,887
COSTS OF CONTRACT
REVENUES EARNED 7,618,135 8,537,692 12,523,599 2,583,706 2,457,334
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 1,624,602 1,716,557 3,533,861 501,217 371,553
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 682,572 1,157,109 1,099,068 226,520 227,397
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 942,030 559,448 2,434,793 274,697 144,156
OTHER INCOME (EXPENSE):
Interest income 4,448 16,200 2,576 6,709
Interest expense (29,161) (32,789) (40,847) (8,136) (5,799)
Other income, net 11,208 94,005 11,679 1,122 6,968
------------ ------------ ------------ ------------ ------------
NET INCOME $ 924,077 $ 625,112 $ 2,421,825 $ 270,259 $ 152,034
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-71
<PAGE> 153
CYCLONE ROOFING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1995 25,000 $25,000 $ 450,088 $ 475,088
Net income 924,077 924,077
Distributions to
stockholder (250,000) (250,000)
------ ------- ----------- -----------
BALANCE,
DECEMBER 31, 1995 25,000 25,000 1,124,165 1,149,165
Net income 625,112 625,112
Distributions to
stockholder (90,000) (90,000)
------ ------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 25,000 25,000 1,659,277 1,684,277
Net income 2,421,825 2,421,825
------ ------- ----------- -----------
BALANCE,
DECEMBER 31, 1997 25,000 25,000 4,081,102 4,106,102
Net income (unaudited) 152,034 152,034
Distributions to
stockholder (unaudited) (384,000) (384,000)
------ ------- ----------- -----------
BALANCE,
MARCH 31, 1998
(Unaudited) 25,000 $25,000 $ 3,849,136 $ 3,874,136
====== ======= =========== ===========
</TABLE>
See notes to financial statements.
F-72
<PAGE> 154
CYCLONE ROOFING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 924,077 $ 625,112 $ 2,421,825 $ 270,259 $ 152,034
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 76,774 120,582 154,225 38,077 41,944
Loss (gain) on disposal of assets 10,602 (1,077)
Changes in operating assets and liabilities:
Contract receivables, net (25,579) (588,273) (771,770) (566,163) 159,804
Costs and estimated earnings in excess of billings (235,517) (115,695) (770,754) 66,573 (187,514)
Other receivables from stockholder and employees (95,960) 2,831 (28,795) (16,875) 10,239
Inventories 3,889 392 2,556 (10,080) (2,312)
Prepaid expenses and other current assets 10,597 (19,496) 39,214 28,492 675
Accounts payable (117,499) 395,358 (331,648) 266,375 29,630
Accrued expenses 24,892 48,327 (30,520) (34,084) 75,016
Billings in excess of costs and estimated earnings 116,273 (228,095) 119,510 (139,251) (191,024)
--------- --------- ----------- --------- ---------
Net cash provided by (used in) operating activities 681,947 241,043 814,445 (97,754) 88,492
--------- --------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (191,889) (293,896) (296,094) (179,092) (124,538)
Proceeds from sale of property and equipment 40,738 16,500
--------- --------- ----------- --------- ---------
Net cash used in investing activities (191,889) (293,896) (255,356) (162,592) (124,538)
--------- --------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 40,000 23,177 590,000 120,000
Repayments of long-term debt (31,085) (42,787) (613,556) (36,561) (21,835)
Principal payments under capital lease obligations (5,314) (32,299) (7,933) (7,540)
Distributions to stockholder (250,000) (90,000) (384,000)
--------- --------- ----------- --------- ---------
Net cash provided by (used in) financing activies (241,085) (114,924) (55,855) 75,506 (413,375)
--------- --------- ----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 248,973 (167,777) 503,234 (184,840) (449,421)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 351,522 600,495 432,718 432,718 935,952
--------- --------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 600,495 $ 432,718 $ 935,952 $ 247,878 $ 486,531
========= ========= =========== ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Equipment acquired through capital leases $ 111,646
=========
CASH PAYMENTS FOR:
Interest $ 19,391 $ 22,052 $ 81,858 $ 48,404 $ 5,863
========= ========= =========== ========= =========
</TABLE>
See notes to financial statements.
F-73
<PAGE> 155
CYCLONE ROOFING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Cyclone Roofing Company (the "Company") operates as a
provider of comprehensive roofing services to commercial, industrial,
manufacturing, construction and government customers. The Company also
provides residential roofing and remodeling services. The work is
generally performed under fixed-price contracts. The length of the
Company's contracts varies, but generally are less than one year. The
Company's principal offices are located in Matthews, North Carolina and
the majority of the Company's business is transacted with customers in
North Carolina and South Carolina.
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 annual 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 items, 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 are not necessarily indicative of the results for an
entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based
on management's best estimates. Recoveries are recognized in the period
they are received. The ultimate amount of contract receivables that
become uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and well known local companies whose reputation is known to
the Company. Advance payments and progress payments are generally
required for significant projects. Credit checks are performed for
significant new customers that are not known to the Company. The
Company generally has the ability to file liens against the property if
it is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies
and are valued at the lower of cost, using the first-in, first-out
method, or market.
F-74
<PAGE> 156
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amounts of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the
remaining useful life of the related asset. Depreciation is recorded
using straight-line methods over the estimated useful lives of the
related assets. Amortization of assets under capitalized leases is
computed using the straight-line method over the shorter of the
estimated useful lives of the respective assets or the lease agreement.
Depreciation and amortization is provided over the following estimated
useful lives:
<TABLE>
<S> <C>
Building and improvements 25 years
Service equipment 5 years
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 years
Computer equipment 5 to 7 years
Equipment under capitalized leases 7 years
</TABLE>
WARRANTIES - The Company provides for future estimated warranty
obligations in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized
under the percentage of completion method measured by the ratio of
contract costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project which are not reflective of effort are excluded
from the percentage of completion calculation for purposes of
determining profits earned on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to
change as the project progresses and better estimates of project costs
become available. Revisions in cost and profit estimates during the
course of the work are reflected in the period in which the facts
requiring revision become known. Where a loss is forecast for a
contract, the full amount of the anticipated loss is recognized in the
period in which it is determined that a loss will occur, regardless of
the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings" on uncompleted contracts, represents billings in
excess of revenues recognized.
INCOME TAXES - The Company is an S Corporation for federal and state
income tax purposes. Accordingly, the current taxable income of the
Company is taxable to the shareholder who is responsible for the
payment of taxes thereon.
NEW ACCOUNTING PRONOUNCEMENT - Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income. There are no significant differences between
comprehensive income and net income as reported in the Company's
Statements of Operations.
F-75
<PAGE> 157
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Retention $ 194,254 $ 134,094
Contracts in progress:
Current accounts 1,076,720 1,451,861
Retention 142,134 598,923
---------- ----------
Subtotal 1,413,108 2,184,878
Less: allowance for doubtful accounts 5,000 5,000
---------- ----------
Contract receivables, net $1,408,108 $2,179,878
========== ==========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $ 5,223,203 $10,257,311
Estimated earnings 2,109,782 3,662,170
----------- -----------
Total 7,332,985 13,919,481
Less: billings to date 7,221,582 13,156,834
----------- -----------
Net under billings $ 111,403 $ 762,647
=========== ===========
</TABLE>
Included in the accompanying balance sheets under the following
captions:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 419,247 $ 1,190,001
Billings in excess of costs and estimated earnings (307,844) (427,354)
----------- -----------
Total $ 111,403 $ 762,647
=========== ===========
</TABLE>
F-76
<PAGE> 158
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Land $ 40,000 $ 40,000
Building and improvements 154,702 154,702
Service equipment 544,384 608,089
Machinery and equipment 525,544 706,056
Furniture and fixtures 18,871 18,871
Computer equipment 29,288 29,288
---------- ----------
Subtotal 1,312,789 1,557,006
Less: accumulated depreciation 648,733 802,421
---------- ----------
Property and equipment, net $ 664,056 $ 754,585
========== ==========
</TABLE>
Included in property and equipment are the following assets under
capitalized leases:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Equipment $104,900 $104,900
Less: accumulated depreciation 7,975 23,924
-------- --------
Leased equipment, net $ 96,925 $ 80,976
======== ========
</TABLE>
F-77
<PAGE> 159
5. LONG-TERM DEBT AND NOTES PAYABLE
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Mortgage payable due on February 11, 1999, bearing interest
at a fixed rate of 7.25%. Note is payable in monthly
payments of $1,734 of principal and interest and a balloon
payment of $149,468. Secured by land and building. $167,005 $159,003
Loan payable to stockholder dated June 1992 with annual
interest payments at 10%. Unsecured. 75,000 8,746
Note payable due on July 10, 1999, bearing interest at a fixed
rate of 8.5%. Note is payable in monthly payments of $618
of principal and interest. Secured by equipment. 17,036 10,828
Note payable due on March 26, 1998, bearing interest at a
fixed rate of 8.99%. Note is payable in monthly payments of
$1,059 of principal and interest. Secured by vehicle. 14,968 3,129
Note payable due on January 15, 2002, bearing interest at a
fixed rate of 10.49%. Note is payable in monthly payments
of $2,582 of principal and interest. Secured by equipment. 102,566
Note payable due on May 5, 2000, bearing interest at a fixed
rate of 9.75%. Note is payable in monthly payments of $848
of principal and interest. Secured by vehicle. 29,971
Note payable due on October 26, 1997, bearing interest at a
fixed rate of 8.79%. Note is payable in monthly payments
of $304 of principal and interest. Secured by vehicle. 2,919
-------- --------
Total 306,899 284,272
Less: current portion 103,736 48,822
-------- --------
Total $203,163 $235,450
======== ========
Revolving line of credit for $250,000 due on demand, bearing
interest at a variable rate based on the prime rate plus 0.5%
(9.0% at December 31, 1997). Secured by property and cash
balances. $ --
========
</TABLE>
Interest accrued and unpaid on the loan payable to stockholder was
$41,125 and $474 at December 31, 1996 and 1997, respectively. Interest
expense on the loan payable to stockholder was approximately $9,530,
$10,560, and $3,720 for the years ended December 31, 1995, 1996 and
1997, respectively.
F-78
<PAGE> 160
Aggregate maturities of long-term debt for years ending December 31 are
as follows:
<TABLE>
<S> <C>
1998 $ 48,822
1999 177,683
2000 26,163
2001 29,044
2002 2,560
--------
Total $284,272
========
</TABLE>
6. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease arrangements for certain equipment
which expire through the year 2000 with interest rates from 6.55% to
7.01%. The assets have been capitalized and the obligations have been
recorded as capitalized lease obligations. As of December 31, 1997,
approximate future minimum lease payments (excluding interest) under
capitalized lease obligations were as follows for the years ending
December 31:
<TABLE>
<S> <C>
1998 $ 29,596
1999 19,358
2000 18,333
--------
Present value of net future minimum lease payments 67,287
Less: current portion of capitalized lease obligations 29,596
Long-term portion of capitalized lease obligations $ 37,691
========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts and notes payable, debt, and
capitalized lease obligations. The carrying value of these financial
instruments approximates fair value because of their short duration or
current interest rates. The Company places its temporary cash
investments with one financial institution. The carrying value of debt
and capitalized lease obligations approximates their fair value based
on current rates for borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the North
Carolina and South Carolina markets. The Company believes this
concentration of credit risk is mitigated by the diversity of
industries represented by the Company's customer base.
F-79
<PAGE> 161
8. MAJOR CUSTOMERS
At December 31, 1996, $178,223 was due from one customer of the
Company. At December 31, 1997, $69,529, $103,429, and $408,420 was due
from three customers of the Company. For the years ended December 31,
1995 and 1996, sales of 21% and 16%, respectively, of total sales were
made to one customer of the Company. For the year ended December 31,
1997, sales of 12%, 10%, and 13% of total sales were made to three
customers of the Company.
9. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate
liability associated with such claims, if any, will not have a material
adverse effect on the Company's financial position or results of
operations.
10. SUBSEQUENT EVENT
In May 1998, the Company signed a merger agreement with General Roofing
Services, Inc. (GRS) whereby GRS will acquire the Company in a merger
for a combination of cash and common shares of GRS concurrent with the
consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including consummation of the offering.
* * * * * *
F-80
<PAGE> 162
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Wright-Brown Roofing Company:
We have audited the accompanying balance sheets of Wright-Brown Roofing Company
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1997, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 29, 1998
(May 13, 1998 as to Note 12)
F-81
<PAGE> 163
WRIGHT-BROWN ROOFING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 441,430 $ 184,424 $ 252,882
Contract receivables, net of an allowance for doubtful
accounts of $13,000, $15,000, and $10,000, respectively 2,119,649 2,803,378 1,945,348
Costs and estimated earnings in excess of billings 189,451 367,816 291,221
Other receivables 3,562 2,500 3,250
Inventories 199,725 184,165 198,313
---------- ---------- ----------
Total current assets 2,953,817 3,542,283 2,691,014
PROPERTY AND EQUIPMENT, net 821,755 803,576 789,537
OTHER ASSETS 162,307 157,069 217,725
---------- ---------- ----------
TOTAL $3,937,879 $4,502,928 $3,698,276
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,179,690 $1,571,688 $1,086,870
Accrued expenses and other current liabilities 494,612 630,851 609,873
Billings in excess of costs and estimated earnings 123,450 123,316 97,813
Current portion of long-term debt 21,600 34,096 33,657
Current portion of capitalized lease obligations 71,748 62,953 54,855
---------- ---------- ----------
Total current liabilities 1,891,100 2,422,904 1,883,068
LONG-TERM DEBT, net of current portion 63,001 66,705 58,339
CAPITALIZED LEASE OBLIGATIONS, net of current portion 76,005 33,386 22,025
---------- ---------- ----------
2,030,106 2,522,995 1,963,432
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 50,000 shares authorized,
5,000 shares issued and outstanding 5,000 5,000 5,000
Additional paid-in capital 24,470 24,470 24,470
Retained earnings 1,878,303 1,950,463 1,705,374
---------- ---------- ----------
1,907,773 1,979,933 1,734,844
---------- ---------- ----------
TOTAL $3,937,879 $4,502,928 $3,698,276
========== ========== ==========
</TABLE>
See notes to financial statements.
F-82
<PAGE> 164
WRIGHT-BROWN ROOFING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
CONTRACT REVENUES EARNED $ 12,819,966 $ 15,316,153 $ 2,134,788 $ 2,446,532
COSTS OF CONTRACT
REVENUES EARNED 10,629,771 12,820,307 1,787,799 2,112,995
------------ ------------ ------------ ------------
GROSS PROFIT 2,190,195 2,495,846 346,989 333,537
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,284,843 1,392,972 393,121 306,439
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 905,352 1,102,874 (46,132) 27,098
OTHER INCOME (EXPENSE):
Interest income 495 5,400 463 6
Interest expense (68,383) (76,928) (15,306) (15,923)
Other income (expense), net (50,108) (75,678) 2,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 787,356 $ 955,668 $ (58,975) $ 11,181
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-83
<PAGE> 165
WRIGHT-BROWN ROOFING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 5,000 $5,000 $24,470 $ 1,945,088 $ 1,974,558
Net income 787,356 787,356
Distributions to stockholders (854,141) (854,141)
----- ------ ------- ----------- -----------
BALANCE, DECEMBER 31, 1996 5,000 5,000 24,470 1,878,303 1,907,773
Net income 955,668 955,668
Distributions to stockholders (883,508) (883,508)
----- ------ ------- ----------- -----------
BALANCE, DECEMBER 31, 1997 5,000 5,000 24,470 1,950,463 1,979,933
Net income (unaudited) 11,181 11,181
Distributions to
stockholders (unaudited) (256,270) (256,270)
----- ------ ------- ----------- -----------
BALANCE, MARCH 31, 1998
(Unaudited) 5,000 $5,000 $24,470 $ 1,705,374 $ 1,734,844
===== ====== ======= =========== ===========
</TABLE>
See notes to financial statements.
F-84
<PAGE> 166
WRIGHT-BROWN ROOFING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 787,356 $ 955,668 $ (58,975) $ 11,181
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 185,615 206,450 47,880 58,421
Loss (gain) on disposal of assets (800) 4,310 (2,000)
Changes in operating assets and liabilities:
Contract receivables, net 864,820 (683,729) 261,934 858,030
Costs and estimated earnings in excess of billings (55,041) (178,365) (73,112) 76,595
Inventories (27,600) 15,560 3,721 (14,148)
Other receivables (3,562) 1,062 (467) (750)
Other assets (275) 5,238 958 (60,656)
Accounts payable and accrued expenses (132,479) 528,237 (191,852) (505,796)
Billings in excess of costs and estimated earnings 8,320 (134) (39,559) (25,503)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 1,626,354 854,297 (51,472) 397,374
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (177,476) (178,438) (23,193) (44,382)
Proceeds from sale of property and equipment 800 17,036 12,736
----------- ----------- ----------- -----------
Net cash used in investing activities (176,676) (161,402) (10,457) (44,382)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 37,800
Repayments of long-term debt (190,177) (21,600) (5,400) (8,805)
Principal payments under capital lease obligations (70,508) (82,593) (24,813) (19,459)
Distributions to stockholders (854,141) (883,508) (109,668) (256,270)
----------- ----------- ----------- -----------
Net cash used in financing activities (1,114,826) (949,901) (139,881) (284,534)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 334,852 (257,006) (201,810) 68,458
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 106,578 441,430 441,430 184,424
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 441,430 $ 184,424 $ 239,620 $ 252,882
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Equipment acquired through capital leases $ 81,052 $ 31,179 $ 20,897 $
CASH PAYMENTS FOR:
Interest $ 68,383 $ 76,928 $ 15,306 $ 16,489
</TABLE>
See notes to financial statements.
F-85
<PAGE> 167
WRIGHT-BROWN ROOFING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Wright-Brown Roofing Company (the "Company") operates as a
provider of comprehensive roofing services to commercial, industrial,
manufacturing, construction and government customers. The Company also
provides residential roofing and remodeling services. The work is
generally performed under fixed-price contracts. The lengths of the
Company's contracts vary, but generally are less than one year. The
Company's principal offices are located in Detroit, Michigan and the
majority of the Company's business is transacted with customers in
Michigan.
A majority of the Company's hourly employees are covered under a
collective bargaining agreement which expires June 1, 1998.
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 annual 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 items, 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 are not necessarily indicative of the results for an
entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based
on management's best estimates. Recoveries are recognized in the period
they are received. The ultimate amount of contract receivables that
become uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and well known local companies whose reputation is known to
the Company. Advance payments and progress payments are generally
required for significant projects. Credit checks are performed for
significant new customers that are not known to the Company. The
Company generally has the ability to file liens against the property if
it is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies
and are valued at the lower of cost, using the first-in, first-out
method, or market.
F-86
<PAGE> 168
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Routine repairs and maintenance are expensed
as incurred. Property and equipment are reviewed for impairment and a
provision recorded, if necessary, whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable.
Significant improvements are capitalized at cost and are amortized over
the remaining useful life of the related asset. Depreciation is
recorded using the straight-line method over the estimated useful lives
of the related assets. Amortization of assets under capitalized leases
is computed using the straight-line method generally over the estimated
useful lives of the respective assets. Depreciation and amortization is
provided over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings 15 to 31.5 years
Machinery and equipment 3 to 7 years
Transportation equipment 5 years
Equipment under capitalized leases 5 years
Office furniture and equipment 5 to 7 years
</TABLE>
WARRANTIES - The Company provides for future estimated warranty
obligations in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized
under the percentage of completion method measured by the ratio of
contract costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project which are not reflective of effort are excluded
from the percentage of completion calculation for purposes of
determining profits on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to
change as the project progresses and better estimates of project costs
become available. Revisions in cost and profit estimates during the
course of the work are reflected in the period in which the facts
requiring revision become known. Where a loss is forecast for a
contract, the full amount of the anticipated loss is recognized in the
period in which it is determined that a loss will occur, regardless of
the stage of completion.
The asset, "Costs and estimated earnings in excess of billings,"
represents revenue recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized.
INCOME TAXES - The Company is an S Corporation for federal income tax
purposes. Accordingly, the current taxable income of the Company is
taxable to the shareholders who are responsible for the payment of
taxes thereon.
NEW ACCOUNTING PRONOUNCEMENT - Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income. There are no significant differences between
comprehensive income and net income as reported in the Company's
statement of operations.
F-87
<PAGE> 169
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Current accounts $ 844,910 $1,418,118
Retention 69,576 131,503
Contracts in progress:
Current accounts 1,147,061 1,126,041
Retention 71,102 142,716
---------- ----------
Subtotal 2,132,649 2,818,378
Less: allowance for doubtful accounts 13,000 15,000
---------- ----------
Contract receivables, net $2,119,649 $2,803,378
========== ==========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $1,613,639 $4,130,038
Estimated earnings 313,657 801,315
---------- ----------
Total 1,927,296 4,931,353
Less: billings to date 1,861,295 4,686,853
---------- ----------
Net under-billings $ 66,001 $ 244,500
========== ==========
</TABLE>
Included in the accompanying balance sheets under the following
captions:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 189,451 $ 367,816
Billings in excess of costs and estimated earnings (123,450) (123,316)
--------- ---------
Total $ 66,001 $ 244,500
========= =========
</TABLE>
F-88
<PAGE> 170
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Land $ 34,770 $ 34,770
Buildings 257,220 257,220
Machinery and equipment 820,003 665,182
Transportation equipment 789,384 714,651
Office furniture and equipment 188,177 136,112
---------- ----------
Subtotal 2,089,554 1,807,935
Less: accumulated depreciation 1,267,799 1,004,359
---------- ----------
Property and equipment, net $ 821,755 $ 803,576
========== ==========
</TABLE>
Included in property and equipment are the following assets under
capitalized leases:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Equipment $254,544 $213,926
Less: accumulated depreciation 77,111 85,033
-------- --------
Leased equipment, net $177,433 $128,893
======== ========
</TABLE>
5. LONG-TERM DEBT AND NOTES PAYABLE
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Note payable to a bank due November 2000, bearing
interest at 7.85%. Note is payable in monthly principal
payments of $1,800 plus interest. Secured by any
items deposited in any account with the bank $84,601 $ 63,001
Notes payable to a financial institution due November 2000, bearing interest at
2.9%. Notes are payable in total monthly principal and interest payments of
$1,118. Secured by transportation equipment 37,800
------- --------
Total 84,601 100,801
Less: current portion 21,600 34,096
------- --------
Long-term debt, net of current portion $63,001 $ 66,705
======= ========
</TABLE>
F-89
<PAGE> 171
Aggregate maturities of long-term debt for years ending December 31 are
as follows:
<TABLE>
<S> <C>
1998 $ 34,096
1999 34,464
2000 32,241
--------
Total $100,801
========
</TABLE>
The Company also has a $500,000 revolving line of credit with a bank,
bearing interest at the bank's prime rate. The line is secured by any
items deposited in any account with the bank. At December 31, 1997, no
amount was outstanding under this line of credit.
6. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease arrangements for certain transportation
equipment which expire through November 2000 with interest at fixed rates.
The assets have been capitalized and the obligations have been recorded as
capitalized lease obligations. As of December 31, 1997, approximate future
minimum lease payments (excluding interest) under capitalized lease
obligations are as follows for each of the years ending December 31:
<TABLE>
<S> <C>
1998 $62,953
1999 31,710
2000 1,676
-------
Present value of net future minimum lease payments 96,339
Less: current portion of capitalized lease obligations 62,953
-------
Long-term portion of capitalized lease obligations $33,386
=======
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, debt, and capitalized
lease obligations or current interest rates. The carrying value of these
financial instruments approximates fair value because of their short
duration. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure with any one
financial institution. The carrying value of debt and capitalized lease
obligations approximates their fair value based on current rates for
borrowings of similar quality and terms.
Other financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist primarily of contract
receivables. The Company's customers are concentrated in the Michigan
market. The Company believes this concentration of credit risk is
mitigated by the diversity of industries represented by the Company's
customer base.
8. MAJOR CUSTOMERS
At December 31, 1996, contract receivables of $227,914 and $233,820,
respectively, were due from two customers of the Company. At December 31,
1997, contract receivables of $351,536 were due from one other customer of
the Company. During the year ended December 31, 1997, sales of 11.5% of
total sales were made to one customer.
F-90
<PAGE> 172
9. 401(k) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering substantially all
non-union employees. Each year, participants may contribute up to 10% of
pretax annual compensation, not to exceed amounts allowable by the IRS.
Discretionary matching amounts may be contributed at the Company's option.
During the years ended December 31, 1996 and 1997, the Company contributed
$10,556 and $19,386, respectively.
10. EMPLOYMENT AGREEMENT
The Company maintains an employment agreement (the "Agreement") with a
certain officer of the Company. Under the terms of the Agreement, the
employee is entitled to an annual bonus of 5% of the Company's profits, if
such profits are in excess of specified limits, prior to any other
employee bonus and prior to the computation of income taxes, if any.
In addition, the Agreement provides for the awarding and potential
repurchase of Phantom Stock Rights, as defined. Under this provision, as
of each December 1, the employee shall receive common stock rights
("Phantom Stock") equal to 2-1/2% of the sum of the issued and outstanding
common stock, the Phantom Stock to be awarded and any previously awarded
Phantom Stock. The total aggregate amount of Phantom Stock to be awarded
shall not exceed 25% of the sum of the issued and outstanding common stock
and Phantom Stock. Such shares of Phantom Stock shall be converted to
shares of common stock upon the employee's attainment of the age of 60 or
the occurrence of the death or permanent disability, as defined, of the
principle stockholder. The Agreement also provides for the repurchase of
the Phantom Stock in the event of the employee's death or permanent
disability, a change of control, as defined, or termination of employment,
other than termination for cause, as defined. In the event of repurchase,
the purchase price of each share of Phantom Stock is to be determined by
dividing the Net Book Value of the Company, as defined, as of the last day
of the Company's fiscal year immediately prior to any such event, by the
sum of the issued and outstanding common stock and Phantom Stock.
The Company awarded 128 shares and 132 shares of Phantom Stock during the
years ended December 31, 1996 and 1997, respectively. The Company also
recorded compensation expense of $47,694 and $49,498 related to these
awards in the years ended December 31, 1996 and 1997, respectively. Should
the Company be required to repurchase the Phantom Stock prior to December
1, 1998, due to any of the events described above (see also Note 12), the
Company would be potentially liable for such repurchase in the amount of
$97,759.
11. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate liability
associated with such claims, if any, will not have a material adverse
effect on the Company's financial position or results of operations.
The Company has entered into long-term operating lease arrangements
(expiring through December 1998) for certain automobiles. Rental expense
for the years ended December 31, 1996 and 1997 was $18,474 and $13,216,
respectively. The total commitment under these leases for the year ending
December 31, 1998 is $8,019.
F-91
<PAGE> 173
12. SUBSEQUENT EVENT
On May 13, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. (GRS) whereby GRS will acquire the Company in a
merger for a combination of cash and common shares of GRS concurrent with
the consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including consummation of the offering.
F-92
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
To the Stockholders of:
Harrington - Scanlon Roofing Company, Inc.
H&S Investments, LLC
Architectural Sheet Metal, Inc.:
We have audited the accompanying combined balance sheet of Harrington - Scanlon
Roofing Company, Inc. and affiliates (the "Company"), as of December 31, 1997,
and the related combined statements of operations, owners' equity and cash flows
for the year ended December 31, 1997. The combined financial statements include
the accounts of Harrington - Scanlon Roofing Company, Inc. and subsidiary and
affiliate companies, H&S Investments, LLC and Architectural Sheet Metal, Inc.,
which are under common control and management. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Harrington - Scanlon
Roofing Company, Inc. and affiliates, and the results of their operations and
their cash flows for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 1998
F-93
<PAGE> 175
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1998
ASSETS 1997 (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 29,838 $ 1,386
Contract receivables, net of an allowance for doubtful
accounts of $45,000 and $45,000, respectively 3,095,651 2,376,687
Costs and estimated earnings in excess of billings 42,112 118,537
Inventories 237,888 241,731
Deferred income tax assets 38,000 38,000
---------- ----------
Total current assets 3,443,489 2,776,341
PROPERTY AND EQUIPMENT, net 1,074,877 1,057,025
OTHER ASSETS 73,417 79,795
---------- ----------
TOTAL $4,591,783 $3,913,161
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 1,664,018 1,341,597
Accrued expenses and other current liabilities 344,528 226,722
Billings in excess of costs and estimated earnings 706,601 586,524
Current portion of long-term debt 512,175 542,675
Current portion of capitalized lease obligations 30,904 30,000
---------- ----------
Total current liabilities 3,258,226 2,727,518
LONG-TERM DEBT, net of current portion 848,936 833,867
CAPITALIZED LEASE OBLIGATIONS, net of current portion 86,646 79,500
---------- ----------
Total 4,193,808 3,640,885
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
OWNERS' EQUITY:
Common stock 2,000 2,000
Additional paid-in capital 19,000 19,000
Retained earnings and members equity 376,975 251,276
---------- ----------
Total 397,975 272,276
---------- ----------
TOTAL $4,591,783 $3,913,161
========== ==========
</TABLE>
See notes to combined financial statements.
F-94
<PAGE> 176
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------- --------------------------
1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CONTRACT REVENUES EARNED $ 11,815,850 $ 2,653,978 $ 2,368,456
COSTS OF CONTRACT
REVENUES EARNED 10,046,144 2,186,058 2,184,737
------------ ----------- -----------
GROSS PROFIT 1,769,706 467,920 183,719
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,549,380 328,809 377,009
------------ ----------- -----------
INCOME (LOSS) FROM
OPERATIONS 220,326 139,111 (193,290)
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 3,234
Interest expense (144,775) (22,007) (29,768)
Other income, net 40,249 42,154 3,063
------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 119,034 159,258 (219,995)
------------ ----------- -----------
INCOME TAX PROVISION
(BENEFIT) 28,553 56,977 (94,296)
------------ ----------- -----------
NET INCOME (LOSS) $ 90,481 $ 102,281 $ (125,699)
============ =========== ===========
</TABLE>
See notes to combined financial statements.
F-95
<PAGE> 177
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------------- PAID-IN AND MEMBERS'
SHARES AMOUNT CAPITAL CAPITAL TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 2,000 $ 2,000 $19,000 $343,863 $ 364,863
Net income 90,481 90,481
Distributions to
stockholders 57,369 57,369
-------- --------- ------- -------- ---------
BALANCE,
DECEMBER 31, 1997 2,000 2,000 19,000 376,975 397,975
Net loss (unaudited) (125,699) (125,699)
-------- --------- ------- -------- ---------
BALANCE,
MARCH 31, 1998
(unaudited) 2,000 $ 2,000 $19,000 $251,276 $ 272,276
======== ========= ======= ======== =========
</TABLE>
See notes to combined financial statements.
F-96
<PAGE> 178
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 90,481 $102,2811 $(125,699)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 253,535 37,900 59,612
Deferred taxes (38,000) (2,000)
Changes in operating assets and liabilities:
Contract receivables, net (133,884) 503,096 718,964
Costs and estimated earnings in excess billings (35,008) (334,458) (76,425)
Inventories (76,279) 39,003 (3,843)
Other current assets (134) (4,391) (6,378)
Accounts payable and accrued expenses (116,387) (207,892) (440,227)
Billings in excess of costs and estimated earnings 344,734 (154,919) (120,077)
--------- --------- ---------
Net cash provided by operating activities 289,058 (21,380) 5,927
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (369,622) (201,508) (41,760)
--------- --------- ---------
Net cash used in investing activities (369,622) (201,508) (41,760)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 356,490 225,519
Repayments of long-term debt (192,497) (51,591) (67,794)
Principal payments under capital lease obligations (43,163) (1,788) (7,500)
Net borrowings under line of credit 42,032 50,000 82,675
Distributions to stockholders (57,369)
--------- --------- ---------
Net cash provided by financing activities 105,493 222,140 7,381
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 24,929 (748) (28,452)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,909 4,909 29,838
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 29,838 $ 4,161 $ 1,386
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES -
Equipment acquired through capital leases $ 148,146 $ 8,884
========= =========
CASH PAYMENTS FOR:
Interest $ 125,033 $ 22,007 $ 53,486
Taxes 34,738
</TABLE>
See notes to combined financial statements.
F-97
<PAGE> 179
HARRINGTON - SCANLON ROOFING COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The combined financial statements include the consolidated
financial statements of Harrington - Scanlon Roofing Company, Inc. and its
wholly-owned subsidiary Harrington - Nissen Roofing Company, Inc., ("H -
S"), H & S Investments, LLC which is owned by the stockholders in H - S
and Architectural Sheet Metal, Inc. owned by the spouses of the
stockholders of H - S (collectively, the "Company"). The combined Company
is under common management. The Company operates as a provider of
comprehensive roofing services to commercial, construction and government
customers. The work is generally performed under fixed-price contracts.
The length of the Company's contracts varies, but generally are less than
one year. The Company's principal offices are located in Kansas City,
Kansas and the majority of the Company's business is transacted with
customers in Missouri, Kansas and Arizona. A majority of the Company's
employees are covered by collective bargaining agreements.
The financial statements of the individual companies are combined for
presentation purposes. The capital structure of each entity as of December
31, 1997 is as follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
<S> <C> <C>
Harrington - Scanlon Roofing Company, Inc. and subsidiary
common stock, par value $1: authorized 50,000 shares, $ 1,000 $10,000
issued and outstanding 1,000 shares
Architectural Sheet Metal, Inc. common stock, par value $1:
authorized 1,000 shares, issued and outstanding 1,000 shares 1,000 9,000
------- -------
$ 2,000 $19,000
======= =======
</TABLE>
PRINCIPLES OF COMBINATION - The combined financial statements include all
of the accounts of the Company. All significant intercompany balances and
transactions have been eliminated in combination.
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 annual 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 items,
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 are not
necessarily indicative of the results for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-98
<PAGE> 180
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based on
management's best estimates. Recoveries are recognized in the period they
are received. The ultimate amount of contract receivables that become
uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and well known local companies whose reputation is known to
the Company. Advance payments and progress payments are generally required
for significant projects. The Company generally has the ability to file
liens against the property if it is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies and
are valued at the lower of cost or market using the first-in, first-out
method.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the remaining
useful life of the related asset. Depreciation is recorded using
accelerated and straight-line methods over the estimated useful lives of
the related assets. Amortization of assets under capitalized leases is
computed using the straight-line method over the shorter of the estimated
useful lives of the respective assets or the lease agreement. Depreciation
and amortization is provided over the following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements 31.5 years
Vehicles 3 to 5 years
Furniture and fixtures 5 to 7 years
Machinery and equipment 5 to 7 years
Computer equipment 5 years
Equipment under capitalized leases 3 to 5 years
</TABLE>
WARRANTIES - The Company provides for future estimated warranty
obligations in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract
costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project which are not reflective of effort are excluded
from costs incurred for purposes of profit recognition.
F-99
<PAGE> 181
Estimates made with respect to uncompleted projects are subject to change
as the project progresses and better estimates of project costs become
available. Revisions in cost and profit estimates during the course of the
work are reflected in the period in which the facts requiring revision
become known. Where a loss is forecast for a contract, the full amount of
the anticipated loss is recognized in the period in which it is determined
that a loss will occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated
earnings" on uncompleted contracts, represents billings in excess of
revenues recognized.
INCOME TAXES - H&S Investments is a limited liability company for federal
income tax purposes. Accordingly, the current taxable income of H&S
Investments is taxable to the shareholders who are responsible for the
payment of taxes thereon.
Harrington - Scanlon, Inc. and subsidiary and Architectural Sheet Metal,
Inc. reports income taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109,
income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred tax
assets and liabilities represent the future tax consequences of those
differences. A valuation allowance is provided if it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
NEW ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income. There are no significant differences
between comprehensive income and net income as reported in the Company's
statements of operations.
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Current accounts $2,309,024
Retention 831,627
----------
Subtotal 3,140,651
Less: allowance for doubtful accounts 45,000
----------
Contract receivables, net $3,095,651
==========
</TABLE>
F-100
<PAGE> 182
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
<S> <C>
Costs incurred on uncompleted contracts $ 3,365,291
Estimated earnings 670,063
-----------
Total 4,035,354
Less: billings to date 4,699,843
-----------
Net over billings $ (664,489)
===========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
<S> <C>
Costs and estimated earnings in excess of billings $ 42,112
Billings in excess of costs and estimated earnings (706,601)
---------
Total $(664,489)
=========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Land $ 205,997
Building and improvements 304,950
Vehicles 793,472
Furniture and fixtures 62,272
Machinery and equipment 681,973
Computer equipment 57,552
----------
Subtotal 2,106,216
Less: accumulated depreciation 1,031,339
----------
Property and equipment, net $1,074,877
==========
</TABLE>
F-101
<PAGE> 183
Included in property and equipment are the following assets under
capitalized leases:
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
Equipment $155,719
Less: accumulated depreciation 32,652
--------
Leased equipment, net $123,067
========
</TABLE>
Property and equipment are reviewed for impairment and a provision
recorded if necessary whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable.
5. NOTES PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Harrington - Scanlon
--------------------
Note payable - line of credit $ 342,032
Note payable to bank due in June 2001, bearing interest at 8.5% at
December 31, 1997. Note is payable in monthly principal and
interest payments of $558 and is secured by equipment 20,328
Notes payable to finance institutions due between 1998 and 2001 bearing
interest between 2.7% and 8.0%. Notes are payable in monthly payments of
$1,728 of principal and interest and are
secured by property and equipment 41,189
Note payable to bank due in March 2000, bearing interest at 7.9% at December
31, 1997. Note is payable in monthly principal and interest payments of
$7,523 and is secured by contract receivables,
inventory and equipment 179,786
Harrington - Nissen
-------------------
Notes payable to banks due between 2000 and 2001, bearing interest between
8.5% and 9.5% at December 31, 1997. Notes are payable in monthly principal
and interest payments of $1,205 and are secured by property and equipment 42,741
Note payable to finance institution due in 2001 bearing interest
at 9.0%. Note is payable in monthly payments of $351 of principal
and interest and is secured by equipment 13,696
</TABLE>
F-102
<PAGE> 184
<TABLE>
<S> <C>
H&S Investments
---------------
Notes payable to banks due between 1999 and 2026, bearing interest between
7.75% and 9.75% at December 31, 1997. Notes are payable in monthly principal
and interest payments of $7,456 and are secured by property and equipment 381,063
Notes payable to finance institutions due between 1998 and 2002 bearing
interest between 8.75% and 10.5%. Notes are payable in monthly payments of
$2,426 of principal and interest and are secured by property and equipment 53,062
Note payable - land contract due in May 2000 bearing interest at prime plus 2%
(10.5% at December 31, 1997). Note is payable in monthly installments of
$5,269 and is secured by the related land 60,972
Architectural Sheet Metal
-------------------------
Notes payable to banks due between 2001 and 2002, bearing interest between
7.75% and 10.25% at December 31, 1997. Notes are payable in monthly
principal and interest payments of $3,268 and are secured by property
and equipment 144,497
Note payable to finance institution due in December 2001 bearing
interest at 8.5%. Note is payable in monthly payments of $1,668
of principal and interest and is secured by equipment 81,745
----------
Total 1,361,111
Less: current portion 512,175
----------
Total $ 848,936
==========
</TABLE>
At December 31, 1997 Harrington - Scanlon had a line of credit for
$350,000 bearing interest at Prime plus 2% (10.5% at December 31, 1997)
and collateralized by a first security interest in accounts receivable, a
second security interest in inventory and certain equipment and personal
guarantees of the Company's stockholders. The Small Business
Administration ("SBA") guarantees 75% of the loan for an additional 0.25%
fee on the outstanding balance. Borrowings on the line were $342,032 at
December 31, 1997.
Aggregate maturities of long-term debt for years ending December 31 are as
follows:
<TABLE>
<S> <C>
1998 $ 512,175
1999 312,477
2000 321,302
2001 88,060
2002 28,466
Thereafter 98,630
----------
Total $1,361,110
==========
</TABLE>
F-103
<PAGE> 185
The loan includes certain restrictive covenants including limitations on
dividends, capital stock transactions, affiliated transactions and
distributions of assets, see Note 13 for additional line of credit made
available subsequent to December 31, 1997.
6. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease arrangements for certain vehicles which
expire through the year 2002 with interest at variable rates which are
based on changes in the prime interest rate (see Note 4). The assets have
been capitalized and the obligations have been recorded as capitalized
lease obligations. As of December 31, 1997, approximate future minimum
lease payments (excluding interest) under capitalized lease obligations
were as follows for the years ending December 31:
<TABLE>
<S> <C>
1998 $ 30,904
1999 30,000
2000 28,850
2001 27,796
--------
Present value of net future minimum lease payments 117,550
Less: current portion of capitalized lease obligations 30,904
--------
Long-term portion of capitalized lease obligations $ 86,646
========
</TABLE>
7. INCOME TAXES
The Company's provisions for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Current:
Federal $ 56,570
State 9,983
--------
66,553
--------
Deferred:
Federal (32,300)
State (5,700)
--------
(38,000)
--------
$ 28,553
========
</TABLE>
F-104
<PAGE> 186
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C> <C>
Statutory federal tax rate $ 40,460 34%
State tax, net of federal benefit 7,140 6
H&S Investments LLC Tax allocation (20,843) (18)
Net operating loss utilized (5,909) (5)
Other 7,705 7
-------- ---
Effective rate $ 28,553 24%
======== ===
</TABLE>
Components of the Company's deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Deferred tax assets:
Warranties $20,000
Allowance for doubtful accounts 18,000
-------
Total deferred taxes $38,000
=======
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, and current and
long-term capitalized lease obligations. The carrying value of cash and
cash equivalents approximates fair value because of their short duration.
The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure with any one
financial institution. The carrying value of debt and capitalized lease
obligations approximates their fair value based on current rates for
borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables The Company's customers are concentrated in the Missouri,
Kansas and Arizona markets. The Company believes this concentration of
credit risk is mitigated by the diversity of industries represented by the
Company's customer base. At December 31, 1997, $519,711 was due from one
customer of the Company.
9. PENSION PLAN
The Company has a simplified employee pension plan covering substantially
all non-union employees. Discretionary amounts may be contributed at the
Company's option based on years of service and employee compensation.
During the years ended December 31, 1997, no contributions were made to
the plan.
F-105
<PAGE> 187
The Company contributes monthly to multi-employer defined benefit union
plans based upon hours worked by each eligible employee. Pension expense
for these plans was approximately 291,575 for the year ended December 31,
1997.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate liability
associated with such claims, if any, will not have a material adverse
effect on the Company's financial position or results of operations.
11. SUBSEQUENT EVENTS
In January 1998, the Company obtained an additional line of credit
facility for $150,000 bearing interest at 10%. The facility is secured by
accounts receivable, inventory and certain equipment.
On May 12, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. (GRS) whereby GRS will acquire the Company in a
merger for a combination of cash and common shares of GRS concurrent with
the consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including consummation of the offering.
******
F-106
<PAGE> 188
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Slavik, Butcher & Baecker
Construction Company, Inc.:
We have audited the accompanying balance sheet of Slavik, Butcher & Baecker
Construction Company, Inc. as of June 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 8, 1998
(May 13, 1998 as to Note 13)
F-107
<PAGE> 189
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
ASSETS 1997 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 62,697 $ 185,748
Contract receivables, net of an allowance for doubtful
accounts of $33,246 and $34,309, respectively 939,665 1,475,488
Costs and estimated earnings in excess of billings 359,624 331,937
Other receivables 2,609 8,989
Due from stockholder 45,000
Prepaid expenses and other current assets 54,685 18,178
Refundable income taxes 11,530
---------- ----------
Total current assets 1,430,810 2,065,340
PROPERTY AND EQUIPMENT, net 308,578 365,969
OTHER ASSETS 29,018 30,793
---------- ----------
TOTAL $1,768,406 $2,462,102
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 895,668 $ 816,683
Accrued expenses and other current liabilities 156,784 291,916
Billings in excess of costs and estimated earnings 44,644 194,477
Note payable 75,000 35,000
Current portion of long-term debt 31,937 50,406
Current portion of capitalized lease obligation 20,124 20,124
Income taxes payable 16,862
Deferred tax liabilities 116,955 116,955
---------- ----------
Total current liabilities 1,341,112 1,542,423
LONG-TERM DEBT, net of current portion 36,893 80,615
CAPITALIZED LEASE OBLIGATION, net of current portion 54,519 37,374
DEFERRED TAX LIABILITIES 8,548 8,548
---------- ----------
1,441,072 1,668,960
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 50,000 shares authorized,
10,000 shares issued and outstanding 10,000 10,000
Retained earnings 317,334 783,142
---------- ----------
327,334 793,142
---------- ----------
TOTAL $1,768,406 $2,462,102
========== ==========
</TABLE>
See notes to financial statements.
F-108
<PAGE> 190
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CONTRACT REVENUES
EARNED $ 11,264,944 $ 8,494,369 $ 9,491,802
COSTS OF CONTRACT
REVENUES EARNED 9,927,627 7,476,627 7,744,014
------------ ----------- -----------
GROSS PROFIT 1,337,317 1,017,742 1,747,788
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,215,085 897,177 1,074,936
------------ ----------- -----------
INCOME FROM OPERATIONS 122,232 120,565 672,852
OTHER INCOME (EXPENSE):
Interest income 507 379 3
Interest expense (19,856) (14,892) (9,819)
Other income (expense), net (1,338) (1,002) 1,426
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 101,545 105,050 664,462
INCOME TAX PROVISION 39,958 10,980 198,654
------------ ----------- -----------
NET INCOME $ 61,587 $ 94,070 $ 465,808
============ =========== ===========
</TABLE>
See notes to financial statements.
F-109
<PAGE> 191
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1996 10,000 $10,000 $255,747 $265,747
Net income 61,587 61,587
------ ------- -------- --------
BALANCE, JUNE 30, 1997 10,000 10,000 317,334 327,334
Net income (unaudited) 465,808 465,808
------ ------- -------- --------
BALANCE, MARCH 31, 1998
(Unaudited) 10,000 $10,000 $783,142 $793,142
====== ======= ======== ========
</TABLE>
See notes to financial statements.
F-110
<PAGE> 192
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,587 $ 94,070 $ 465,808
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 101,421 73,720 124,394
Deferred taxes 39,958 25,673
Changes in operating assets and liabilities:
Contract receivables, net 42,093 (136,297) (535,823)
Costs and estimated earnings in excess of billings (28,374) 221,085 27,687
Refundable income taxes 11,530
Other assets (4,087) 11,718 28,352
Accounts payable and accrued expenses (129,384) (179,315) 56,147
Billings in excess of costs and estimated earnings (9,120) (15,990) 149,833
Income taxes payable 16,862
--------- --------- ---------
Net cash provided by operating activities 74,094 94,664 344,790
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (82,693) (80,346) (181,785)
Advance to stockholder (45,000)
--------- --------- ---------
Net cash used in investing activities (82,693) (80,346) (226,785)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit 18,550 (21,450) (40,000)
Proceeds from long-term debt 24,247 24,247 85,549
Repayments of long-term debt (26,105) (22,332) (23,358)
Principal payments under capital lease obligations (15,146) (9,160) (17,145)
--------- --------- ---------
Net cash provided by (used in) financing activities 1,546 (28,695) 5,046
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (7,053) (14,377) 123,051
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 69,750 69,750 62,697
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 62,697 $ 55,373 $ 185,748
========= ========= =========
CASH PAYMENTS FOR:
Interest $ 19,856 $ 14,892 $ 9,819
Taxes $ $ $ 170,262
</TABLE>
See notes to financial statements.
F-111
<PAGE> 193
SLAVIK, BUTCHER & BAECKER CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Slavik, Butcher & Baecker Construction Company, Inc. (the
"Company") operates as a provider of general contractor construction
services as well as comprehensive roofing services to commercial,
industrial, manufacturing, construction and government customers. The
Company also provides residential roofing and remodeling services. The
work is generally performed under fixed-price contracts. The lengths of
the Company's contracts vary, but generally are less than one year. The
Company's principal offices are located in Rochester Hills, Michigan, and
the majority of the Company's business is transacted with customers in
Michigan.
INTERIM FINANCIAL INFORMATION - The interim financial statements as of
March 31, 1998 and for the nine months ended March 31, 1997 and 1998 are
unaudited and certain information and footnote disclosures normally
included in annual 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 items,
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 are not
necessarily indicative of the results for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based on
management's best estimates. Recoveries are recognized in the period they
are received. The ultimate amount of contract receivables that become
uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and well known local companies whose reputation is known to
the Company. Credit checks are performed periodically on its customers'
financial condition. The Company generally has the ability to file liens
against the property if it is not paid on a timely basis.
F-112
<PAGE> 194
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
significant improvements are capitalized at cost and are amortized over
the remaining useful life of the related asset. Depreciation is recorded
using accelerated and straight-line methods over the estimated useful
lives of the related assets. Amortization of assets under capitalized
leases is computed using the straight-line method over the shorter of the
estimated useful lives of the respective assets or the lease agreement.
Depreciation and amortization is provided over the following estimated
useful lives:
<TABLE>
<S> <C>
Construction equipment 5 years
Vehicles 5 years
Office equipment 5 years
Leasehold improvements 31 years
Equipment under capitalized leases 5 years
</TABLE>
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract
costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project which are not reflective of effort are excluded
from the percentage of completion calculation for purposes of determining
profits earned on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to change
as the project progresses and better estimates of project costs become
available. Revisions in cost and profit estimates during the course of the
work are reflected in the period in which the facts requiring revision
become known. Where a loss is forecast for a contract, the full amount of
the anticipated loss is recognized in the period in which it is determined
that a loss will occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings,"
represents revenue recognized in excess of amounts billed. The liability,
"Billings in excess of costs and estimated earnings," represents billings
in excess of revenues recognized.
INCOME TAXES - The Company reports income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. Under SFAS No. 109, income taxes are provided for the tax effects
of transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related to certain income and expenses
recognized in different periods for financial and income tax reporting
purposes. Deferred tax assets and liabilities represent the future tax
consequences of those differences. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future
taxable income and income taxes, respectively. A valuation allowance is
provided if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
F-113
<PAGE> 195
NEW ACCOUNTING PRONOUNCEMENT - In June 1997, SFAS No. 130, Reporting
Comprehensive Income, was issued. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The
Company has not adopted SFAS No. 130, but does not believe that the
effects, if any, that SFAS No. 130 will have on its financial statements
would be significant.
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Completed contracts:
Current accounts $439,501
Retention 18,097
Contracts in progress:
Current accounts 463,171
Retention 52,142
--------
Subtotal 972,911
Less allowance for doubtful accounts 33,246
--------
Contract receivables, net $939,665
========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Costs incurred on uncompleted contracts $1,890,329
Estimated earnings 146,494
----------
Total 2,036,823
Less billings to date 1,721,843
----------
Net underbillings $ 314,980
==========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Costs and estimated earnings in excess of billings $ 359,624
Billings in excess of costs and estimated earnings (44,644)
---------
Total $ 314,980
=========
</TABLE>
F-114
<PAGE> 196
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Construction equipment $221,869
Vehicles 400,348
Office equipment 100,874
Leasehold improvements 59,671
--------
Subtotal 782,762
Less accumulated depreciation 474,184
--------
Property and equipment, net $308,578
========
</TABLE>
Included in property and equipment are the following assets under
capitalized leases:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Equipment $106,034
Less: accumulated depreciation 57,771
--------
Leased equipment, net $ 48,263
========
</TABLE>
F-115
<PAGE> 197
5. LONG-TERM DEBT AND NOTES PAYABLE
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Note payable to a financial institution, due April 1999, bearing interest at
11.5%, with monthly principal and interest payments of $830. Secured by a
vehicle. $14,264
Note payable to a financial institution, due March 2001, bearing interest at
9.25%, with monthly principal and interest payments of $606. Secured by a
vehicle. 22,983
Various loans payable to a bank, due through fiscal year 2000, bearing interest
at rates ranging from 8.75% to 10.25%. Secured by vehicles. 31,583
-------
Total 68,830
Less: current portion 31,937
-------
Long-term debt, net of current portion $36,893
=======
</TABLE>
The Company has a revolving line of credit facility from a bank.
Borrowings under this facility are bearing interest at a variable rate
based on the lender's index rate (10% at June 30, 1997). Outstanding
borrowings at June 30, 1997 were $75,000 and were secured by contract
receivables and equipment. Total available unused line as of June 30, 1997
was $175,000.
The Company has an additional unused line of credit with a bank of
$100,000, available at 1-3/4% above the lender's prime rate.
Aggregate maturities of long-term debt for years ending June 30 are as
follows:
<TABLE>
<S> <C>
1998 $31,937
1999 23,752
2000 11,974
2001 1,167
-------
Total $68,830
=======
</TABLE>
F-116
<PAGE> 198
6. CAPITALIZED LEASE OBLIGATION
The Company has entered into a lease arrangement for a certain vehicle
which expires July 31, 2000 with interest at 9.75%. The asset has been
capitalized and the obligation has been recorded as a capitalized lease
obligation. As of June 30, 1997, approximate future minimum lease payments
(excluding interest) under this capitalized lease obligation were as
follows for years ending June 30:
<TABLE>
<S> <C>
1998 $20,124
1999 20,978
2000 33,541
-------
Present value of net future minimum lease payments 74,643
Less: current portion of capitalized lease obligations 20,124
-------
Long-term portion of capitalized lease obligations $54,519
=======
</TABLE>
7. INCOME TAXES
The Company's provision for income taxes for the year ended June 30, 1997
consists of deferred federal income tax expense of $39,958
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Statutory federal tax rate 34%
Nondeductible meals and entertainment 2
Nondeductible officers' life insurance 2
Other 1
-----
39%
=====
</TABLE>
F-117
<PAGE> 199
Components of the Company's deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 21,169
Allowance for doubtful accounts 11,304
Other 2,125
--------
Total 34,598
--------
Deferred tax liabilities:
Contracts in progress 145,008
Operating versus capital lease treatment 10,673
Other 4,420
--------
Total 160,101
--------
Net deferred tax liability $125,503
========
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, debt and capitalized
lease obligations. The carrying value of these financial instruments
approximates fair value because of their short duration or current
interest rates. The Company places its temporary cash investments with
financial institutions and limits the amount of credit exposure with any
one financial institution. The carrying value of debt and capitalized
lease obligations approximates their fair value based on current rates for
borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Michigan
market. The Company believes this concentration of credit risk is
mitigated by the diversity of industries represented by the Company's
customer base.
9. MAJOR CUSTOMERS
At June 30, 1997, $130,251, $111,462, $134,350 and $164,891, respectively,
were due from four customers of the Company. For the year ended June 30,
1997, sales of 17% of total sales were made to one customer of the
Company.
10. 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. Each year, participants may contribute up to 15% of pretax
annual compensation, not to exceed $10,000, as defined in the plan.
Discretionary matching amounts may be contributed at the Company's option.
During the year ended June 30, 1997, the Company contributed $28,979.
F-118
<PAGE> 200
11. RELATED PARTY TRANSACTIONS
The Company leases its facilities under a long-term lease arrangement
(expiring March 2000) with an entity owned by the Company's stockholders.
The following are the Company's commitments with respect to this lease for
the years ending June 30:
<TABLE>
<S> <C>
1998 $ 78,000
1999 78,000
2000 78,000
--------
Total $234,000
========
</TABLE>
The Company paid rents of $78,000 related to this lease during the year
ended June 30, 1997.
In addition, the Company paid $273,400 in consulting fees during the year
ended June 30, 1997 to its stockholders.
12. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate liability
associated with such claims, if any, will not have a material adverse
effect on the Company's financial position or results of operations.
The Company has entered into a long-term lease arrangement (expiring
November 1999) for warehouse facilities. The following are the Company's
commitments with respect to this lease for years ending June 30:
<TABLE>
<S> <C>
1998 $18,456
1999 18,456
2000 7,690
-------
Total $44,602
=======
</TABLE>
13. SUBSEQUENT EVENT
On May 13, 1998, the Company signed a definitive agreement with General
Roofing Services, Inc. (GRS) whereby GRS will acquire the Company in a
merger for a combination of cash and common shares of GRS concurrent with
the consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including consummation of the offering.
F-119
<PAGE> 201
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Five K Industries, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Five K
Industries, Inc. and subsidiary (the "Company") as of March 31, 1998, and the
related consolidated statements of operations, stockholder's equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Five K Industries, Inc. and
subsidiary as of March 31, 1998 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 30, 1998
(May 19, 1998 as to Note 12)
F-120
<PAGE> 202
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Five K Industries, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Five K
Industries, Inc. and subsidiary (the "Company") as of March 31, 1997, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the two years in the period ended March 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, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of March 31,
1997, and the results of their operations and their cash flows for each of the
two years in the period ended March 31, 1997 in conformity with generally
accepted accounting principles.
BEARDEN & SMITH, P.C.
Atlanta, Georgia
April 28, 1997
F-121
<PAGE> 203
FIVE K INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
ASSETS 1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 312,292 $ 696,417
Contract receivables, net of an allowance for doubtful
accounts of $29,481 and $18,500, respectively 1,752,465 1,715,404
Costs and estimated earnings in excess of billings 57,838 16,850
Other receivables 28,193 11,236
Due from related parties -- 25,000
Inventories 3,694 35,700
Refundable income taxes 217,297 --
---------- ----------
Total current assets 2,371,779 2,500,607
PROPERTY AND EQUIPMENT, net 287,401 374,120
DEFERRED TAX ASSETS 5,730 --
OTHER ASSETS 97,862 97,349
---------- ----------
TOTAL $2,762,772 $2,972,076
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 563,341 $ 427,628
Accrued expenses and other current liabilities 372,361 376,535
Income taxes payable 228,581
Billings in excess of costs and estimated earnings 263,904 121,314
Current portion of long-term debt -- 40,114
Deferred tax liabilities 441,750 360,346
---------- ----------
Total current liabilities 1,641,356 1,554,518
LONG-TERM DEBT, net of current portion -- 46,378
DEFERRED TAX LIABILITIES -- 15,334
---------- ----------
Total 1,641,356 1,616,230
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY:
Common stock, 100,000 shares authorized,
$1.00 par value, 7,800 shares outstanding 7,800 7,800
Additional paid-in capital 30,031 30,031
Retained earnings 1,083,585 1,318,015
--------- ---------
Total 1,121,416 1,355,846
---------- ----------
TOTAL $2,762,772 $2,972,076
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-122
<PAGE> 204
FIVE K INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1996 1997 1998
<S> <C> <C> <C>
CONTRACT REVENUES
EARNED $ 10,402,374 $ 9,360,861 $ 11,091,546
COSTS OF CONTRACT
REVENUES EARNED 8,053,314 6,520,807 7,879,086
------------ ------------ ------------
GROSS PROFIT 2,349,060 2,840,054 3,212,460
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,225,794 2,652,257 2,775,241
------------ ------------ ------------
INCOME FROM
OPERATIONS 123,266 187,797 437,219
OTHER INCOME (EXPENSE):
Interest income 14,104
Interest expense (5,149) (3,010) (5,094)
Other income, net 30,848 16,625 22,650
------------ ------------ ------------
INCOME BEFORE
INCOME TAXES 148,965 201,412 468,879
INCOME TAX PROVISION 44,000 80,000 209,449
------------ ------------ ------------
NET INCOME $ 104,965 $ 121,412 $ 259,430
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-123
<PAGE> 205
FIVE K INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
AMOUNT SHARES CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE,
APRIL 1, 1995 $7,800 7,800 $30,031 $ 894,708 $ 932,539
Net income 104,965 104,965
Distributions to owner -- -- -- (6,250) (6,250)
------ ----- ------- ----------- -----------
BALANCE,
MARCH 31, 1996 7,800 7,800 30,031 993,423 1,031,254
Net income 121,412 121,412
Distributions to owner -- -- -- (31,250) (31,250)
------ ----- ------- ----------- -----------
BALANCE,
MARCH 31, 1997 7,800 7,800 30,031 1,083,585 1,031,254
Net income 259,430 259,430
Distributions to owner -- -- -- (25,000) (25,000)
------ ----- ------- ----------- -----------
BALANCE,
MARCH 31, 1998 $7,800 7,800 $30,031 $ 1,318,015 $ 1,265,684
====== ===== ======= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-124
<PAGE> 206
FIVE K INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 104,965 $ 121,412 $ 259,430
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 72,391 89,552 132,308
Loss (gain) on disposal of assets (14,134) 11,621 --
Deferred taxes (211,786) 234,296 (60,340)
Changes in operating assets and liabilities:
Contract receivables, net (1,137,937) 464,845 37,061
Costs and estimated earnings in excess of billings (6,254) (51,584) 40,988
Due from related parties (25,000)
Inventories (6,901) 8,217 (32,006)
Other receivables (30,156) 39,341 17,470
Accounts payable, accrued expenses, other current liabilities
and income taxes 1,054,345 (995,807) 314,339
Billings in excess of costs and estimated earnings 115,271 109,410 (142,590)
----------- ---------- ----------
Net cash provided by (used in) operating activities (60,196) 31,303 541,660
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (118,048) (92,057) (219,027)
Proceeds from sale of property and equipment 14,134 19,500 --
Other -- (75,000) --
----------- ---------- ----------
Net cash used in investing activities (103,914) (147,557) (219,027)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 50,569 -- 108,792
Repayments of long-term debt (59,667) (58,996) (22,300)
Distributions to stockholder (6,250) (31,250) (25,000)
----------- ---------- ----------
Net cash provided by (used in) financing activities (15,348) (90,246) 61,492
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (179,458) (206,500) 384,125
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 698,250 518,792 312,292
----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 518,792 $ 312,292 $ 696,417
=========== ========== ==========
CASH PAYMENTS FOR (RECEIPTS FROM):
Interest $ 5,149 $ 3,010 $ 6,044
Taxes $ 69,740 $ 288,101 $ (153,822)
</TABLE>
See notes to consolidated financial statements.
F-125
<PAGE> 207
FIVE K INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Five K Industries, Inc. and subsidiary (collectively, the
"Company") operates as a provider of comprehensive roofing services to
commercial, industrial, manufacturing, construction and government
customers. The work is generally performed under fixed-price contracts. The
length of the Company's contracts varies, but generally are less than one
year. The Company's principal offices are located in Smyrna, Georgia and
the majority of the Company's business is transacted with customers in
Georgia. A majority of the Company's hourly employees are covered by
collective bargaining agreements, which expire June 30, 1998 and July 31,
2000.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
all of the accounts of the Company. All significant intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based on
management's best estimates. Recoveries are recognized in the period they
are received. The ultimate amount of contract receivables that become
uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers whose reputation is
known to the Company. Advance payments and progress payments are generally
required for significant projects. The Company generally has the ability to
file liens against the property if it is not paid on a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies and
are valued at the lower of cost, using the first-in, first-out method, or
market.
F-126
<PAGE> 208
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Routine repairs and maintenance are expensed as
incurred; improvements are capitalized at cost and are amortized over the
remaining useful life of the related asset. Property and equipment are
reviewed for impairment and a provision recorded, if necessary, whenever
events or circumstances indicate that the carrying amount of an asset may
not be recoverable. Depreciation is recorded using accelerated methods over
the estimated useful lives of the related assets. Depreciation and
amortization is provided over the following estimated useful lives:
<TABLE>
<S> <C>
Vehicles 5 years
Leasehold improvements 5 to 10 years
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
</TABLE>
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract costs
incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are charged
to expense as incurred. Costs for materials incurred at the inception of a
project, which are not reflective of effort, are excluded from the
percentage of completion calculation for purposes of determining profits on
uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to change
as the project progresses and better estimates of project costs become
available. Revisions in cost and profit estimates during the course of the
work are reflected in the period in which the facts requiring revision
become known. Where a loss is forecast for a contract, the full amount of
the anticipated loss is recognized in the period in which it is determined
that a loss will occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings," represents
revenue recognized in excess of amounts billed. The liability, "Billings in
excess of costs and estimated earnings," represents billings in excess of
revenues recognized.
INCOME TAXES - The Company reports income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related to certain income and expenses
recognized in different periods for financial and income tax reporting
purposes. Deferred tax assets and liabilities represent the future tax
consequences of those differences. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future
taxable income and income taxes, respectively. A valuation allowance is
provided if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
RECLASSIFICATION - Certain amounts in the 1996 and 1997 financial
statements have been reclassified to conform to the 1998 presentation.
F-127
<PAGE> 209
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998
<S> <C> <C>
Completed contracts, including retention $ 200,550 $ 298,075
Contracts in progress:
Current accounts 1,070,834 816,724
Retention 510,562 619,105
---------- ----------
1,781,946 1,733,904
Subtotal
Less: allowance for doubtful accounts 29,481 18,500
---------- ----------
Contract receivables, net $1,752,465 $1,715,404
========== ==========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998
<S> <C> <C>
Costs incurred on uncompleted contracts $ 2,883,371 $ 3,164,782
Estimated earnings 1,469,633 1,082,867
----------- -----------
Total 4,353,004 4,247,649
Less: billings to date 4,559,070 4,352,113
----------- -----------
Net over-billings $ (206,066) $ (104,464)
=========== ===========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 57,838 $ 16,850
Billings in excess of costs and estimated earnings (263,904) (121,314)
----------- ----------
Total $ (206,066) $ (104,464)
=========== ==========
</TABLE>
F-128
<PAGE> 210
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998
<S> <C> <C>
Vehicles $ 529,323 $ 712,126
Leasehold improvements 23,813 23,835
Machinery and equipment 214,138 250,340
Furniture and fixtures 33,352 33,352
---------- ----------
Subtotal 800,626 1,019,653
Less: accumulated depreciation 513,225 645,533
---------- ----------
Property and equipment, net $ 287,401 $ 374,120
========== ==========
</TABLE>
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
On October 15, 1996, the Company entered into a line of credit agreement
(the "1996 Line of Credit") with a financial institution, which allowed the
Company to borrow up to $200,000. Interest was payable monthly at prime
rate plus 1% (prime rate at March 31, 1997 was 8.5%). The 1996 Line of
Credit was secured by the Company's accounts receivable. There were no
borrowings on the 1996 Line of Credit as of March 31, 1997 and it matured
on October 15, 1997.
On October 15, 1997, concurrent with the expiration of the 1996 Line of
Credit, the Company entered into another line of credit agreement (the
"1997 Line of Credit") with terms and conditions similar to the 1996 Line
of Credit. There were no borrowings on the 1997 Line of Credit as of March
31, 1998 and it matures on October 15, 1998.
A summary of the Company's long-term debt is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
<S> <C>
Note payable due on April 1, 1999, bearing interest
at a fixed rate of 9.25%. Note is payable in monthly
installments of $1,313 of principal and interest.
Secured by certain fixed assets. $16,179
Note payable due on October 15, 2000, bearing interest
at a fixed rate of 9.5%. Note is payable in monthly
payments of $2,567 of principal and interest. Secured
by certain fixed assets 70,313
-------
Total 86,492
Less: current portion 40,114
-------
Total $46,378
=======
</TABLE>
F-129
<PAGE> 211
Aggregate maturities of long-term debt for years ending March 31 are as
follows:
<TABLE>
<S> <C>
1999 $40,114
2000 28,978
2001 17,400
-------
Total $86,492
=======
</TABLE>
6. INCOME TAXES
The Company's provisions for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal $ 225,250 $(104,550) $ 222,005
State 39,750 (18,450) 47,784
--------- --------- ---------
265,000 (123,000) 269,789
--------- --------- ---------
Deferred
Federal (187,850) 172,550 (51,289)
State (33,150) 30,450 (9,051)
--------- --------- ---------
(221,000) 203,000 (60,340)
--------- --------- ---------
$ 44,000 $ 80,000 $ 209,449
========= ========= =========
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
1996 1997 1998
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State tax net of federal benefit 4.0 4.0 4.0
Depreciation adjustment 0.0 0.0 3.6
Other - permanent differences (8.5) 1.7 3.1
---- ---- ----
Effective tax rate 29.5% 39.7% 44.7%
==== ==== ====
</TABLE>
F-130
<PAGE> 212
Components of the Company's deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997 1998
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 11,203 $ 7,030
Alternative minimum tax carryforward 47,282 --
Depreciation 5,730 --
Contribution carryforward 6,922 --
------ --------
Total 71,137 7,030
-------- --------
Deferred tax liabilities:
Contracts in progress 507,157 367,376
Depreciation -- 15,334
-------- --------
Total 507,157 382,710
-------- --------
Net deferred tax liability $436,020 $375,680
======== ========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable and debt. The carrying
value of these financial instruments approximates fair value because of
their short duration. The Company places its temporary cash investments
with financial institutions and limits the amount of credit exposure with
any one financial institution. The carrying value of debt approximates
their fair value based on current rates for borrowings of similar quality
and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Georgia
market. The Company believes this concentration of credit risk is mitigated
by the diversity of industries represented by the Company's customer base.
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan covering substantially all
non-union employees. Each year, participants may contribute up to 15% of
pretax annual compensation as defined in the plan. Discretionary matching
amounts may be contributed at the Company's option. During the years ended
March 31, 1996, 1997, and 1998, the Company contributed $49,000, $52,000,
and $51,000, respectively.
The Company contributes monthly to multi-employer defined benefit union
plans based upon hours worked by each eligible employee. Pension expense
for these plans was approximately $73,040, $65,180, and $70,740 for the
years ended March 31, 1996, 1997 and 1998, respectively.
9. RELATED PARTY TRANSACTIONS
The Company's headquarters and warehouse are leased from a relative of the
sole shareholder of the Company on a month-to-month basis. The monthly
rental for this lease is approximately $3,900.
F-131
<PAGE> 213
10. COMMITMENTS AND CONTINGENCIES
The Company has entered into a noncancelable lease arrangement for a
certain vehicle. The future minimum lease payments are $22,028 which are
due in the year ending March 31, 1999.
11. MAJOR CUSTOMERS
At March 31, 1997 and 1998, 12.0% and 26.3% of contracts receivable,
respectively, were due from two customers of the Company. For the years
ended March 31, 1996, 1997, and 1998, sales of 25.6%, 34.4%, and 24.0%,
respectively, of total sales were made to two customers of the Company.
12. SUBSEQUENT EVENT
On May 19, 1998, the Company signed a merger agreement with General Roofing
Services, Inc. ("GRS") whereby GRS will acquire the Company in a merger for
a combination of cash and common shares of GRS concurrent with the
consummation of an initial public offering of the common stock of GRS,
subject to certain conditions including consummation of the offering.
* * * * *
F-132
<PAGE> 214
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Advanced Roofing, Inc.,
Advanced Leasing, Inc.,
K&M Warehouse, Inc. and
Hi-Rise Crane, Inc.:
We have audited the accompanying combined balance sheets of Advanced Roofing,
Inc., Advanced Leasing, Inc., K & M Warehouse, Inc. and Hi-Rise Crane, Inc., all
of which are under common ownership and common management, as of December 31,
1996 and October 31, 1997, and the related combined statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996 and for the ten-month period ended October 31, 1997.
These financial statements are the responsibility of the companies' 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, such financial statements present fairly, in all material
respects, the combined financial position of Advanced Roofing, Inc., Advanced
Leasing, Inc., K & M Warehouse, Inc. and Hi-Rise Crane, Inc. as of December 31,
1996 and October 31, 1997, and the results of their combined operations and
their combined cash flows for each of the two years in the period ended December
31, 1996 and for the ten-month period ended October 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
April 10, 1998,
(May 20, 1998 as to the first
paragraph of Note 12)
F-133
<PAGE> 215
ADVANCED ROOFING, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, OCTOBER 31, 1998
ASSETS 1996 1997 (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 329,926 $ 211,224 $ 209,849
Contract receivables 1,614,524 1,200,826 1,671,793
Costs and estimated earnings in excess of billings 138,836 383,225 551,279
Other current assets, principally supplies 113,233 69,698 118,464
Due from affiliates -- 181,013 212,812
----------- ----------- -----------
Total current assets 2,196,519 2,045,986 2,764,197
PROPERTY AND EQUIPMENT, net 1,854,496 2,175,025 2,062,833
----------- ----------- -----------
TOTAL $ 4,051,015 $ 4,221,011 $ 4,827,030
=========== =========== ===========
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 1,042,188 $ 585,693 $ 713,032
Accrued workers' compensation 162,092 105,868 105,868
Other accrued expenses and current liabilities 215,424 279,717 459,039
Billings in excess of costs and estimated earnings 165,500 156,100 249,600
Due to related parties 41,850 100,000 100,000
Note payable to bank 250,100 400,100 445,100
Current portion of long-term debt 245,225 296,354 282,901
----------- ----------- -----------
Total current liabilities 2,122,379 1,923,832 2,355,540
----------- ----------- -----------
LONG-TERM DEBT, net of current portion 588,465 649,719 562,538
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock 850 873 873
Additional paid-in capital 664,203 673,170 673,170
Retained earnings 780,129 1,078,428 1,339,920
----------- ----------- -----------
1,445,182 1,752,471 2,013,963
Less treasury stock, at cost (105,011) (105,011) (105,011)
----------- ----------- -----------
Total stockholders' equity 1,340,171 1,647,460 1,908,952
----------- ----------- -----------
TOTAL $ 4,051,015 $ 4,221,011 $ 4,827,030
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-134
<PAGE> 216
ADVANCED ROOFING, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE TEN-MONTH FOR THE
YEAR ENDED PERIOD ENDED FIVE-MONTH PERIODS
DECEMBER 31, OCTOBER 31, ENDED MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES EARNED $ 12,077,920 $10,681,751 $10,202,701 $4,933,294 $ 5,068,342
COSTS OF CONTRACT REVENUES EARNED 10,337,731 8,843,162 8,311,953 4,201,115 3,982,463
------------ ----------- ----------- ---------- -----------
GROSS PROFIT 1,740,189 1,838,589 1,890,748 732,179 1,085,879
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,218,750 1,316,394 1,205,377 676,401 755,651
------------ ----------- ----------- ---------- -----------
INCOME FROM OPERATIONS 521,439 522,195 685,371 55,778 330,228
OTHER (INCOME) EXPENSE:
Interest expense 24,052 80,198 99,527 37,093 59,871
Other (income) expense (11,953) 3,172 13,531 17,015 (8,237)
------------ ----------- ----------- ---------- -----------
NET INCOME $ 509,340 $ 438,825 $ 572,313 $ 1,670 $ 278,594
============ =========== =========== ========== ===========
</TABLE>
See notes to combined financial statements.
F-135
<PAGE> 217
ADVANCED ROOFING, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1994 $ 850 $ 58,483 530,787 590,120
Net income 509,340 509,340
Purchase of treasury stock (105,011) $ (105,011)
Contributions from
stockholders 605,720 605,720
Distributions to
stockholders (470,839) (470,839)
---------- ---------- ----------- ---------- -----------
BALANCE,
DECEMBER 31, 1995 850 664,203 569,288 (105,011) 1,129,330
Net income 438,825 438,825
Distributions to
stockholders (227,984) (227,984)
---------- ---------- ----------- ---------- -----------
BALANCE,
DECEMBER 31, 1996 850 664,203 780,129 (105,011) 1,340,171
Net income 572,313 572,313
Issuance of common stock 23 427 450
Contributions from
stockholders 8,540 8,540
Distributions to
stockholders (274,014) (274,014)
---------- ---------- ----------- ---------- -----------
BALANCE,
OCTOBER 31, 1997 873 673,170 1,078,428 (105,011) 1,647,460
Net income (unaudited) 278,594 278,594
Distributions to
stockholders (unaudited) (17,102) (17,102)
---------- ---------- ----------- ---------- -----------
BALANCE,
MARCH 31, 1998 (unaudited) $ 873 $ 673,170 $ 1,339,920 $ (105,011) $ 1,908,952
========== ========== =========== ========== ===========
</TABLE>
See notes to combined financial statements.
F-136
<PAGE> 218
ADVANCED ROOFING, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the Five-Month
Ten-Month Periods Ended
For the Year Period Ended March 31,
Ended December 31, October 31, 1997 1998
1995 1996 1997 (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 509,340 $ 438,825 $ 572,313 $ 1,670 $ 278,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 165,951 261,092 282,161 138,505 146,283
(Gain) loss on disposal of assets (8,482) 19,785 3,994
Changes in assets and liabilities:
Contracts receivable 323,295 (920,195) 413,698 (660,857) (470,967)
Costs and estimated
earnings in excess of billings (670,589) 574,033 (244,389) (40,743) (168,054)
Other current assets 7,499 (72,082) 43,535 28,043 (48,766)
Accounts due from affiliates (181,013) (553) (31,799)
Accounts payable 372,980 8,655 (456,495) 126,448 127,339
Accrued workers' compensation and
other accrued expenses 130,336 (32,493) 8,069 339,554 179,320
Billings in excess of costs and
estimated earnings (159,124) 165,500 (9,400) 241,100 93,500
--------- --------- --------- --------- ---------
Net cash provided by operating activities 679,688 414,853 448,264 177,161 105,450
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (873,937) (599,376) (625,525) (112,463) (34,091)
Proceeds from the sale of equipment 8,000 3,500
--------- --------- --------- --------- ---------
Net cash used in investing activities (873,937) (591,376) (622,025) (112,463) (34,091)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 434,070 446,191 350,240 44,033
Payments of long-term debt (293,818) (172,464) (237,857) (124,800) (144,665)
Net borrowings on note payable to bank 250,000 150,000 45,000
Borrowings from related parties 100,000
Payments on borrowings from related parties (8,865) (54,296) (41,850)
Contributions from stockholders 401,220 8,540 8,540
Distributions to stockholders (266,339) (227,984) (274,014) (17,102)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 266,268 241,447 55,059 (116,260) (72,734)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 72,019 64,924 (118,702) (51,562) (1,375)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 192,983 265,002 329,926 145,465 211,224
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 265,002 $ 329,926 $ 211,224 $ 93,903 $ 209,849
--------- --------- --------- --------- ---------
SUPPLEMENTARY DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 24,052 $ 80,198 $ 99,527 $ 37,093 $ 59,871
========= ========= ========= ========= =========
</TABLE>
NONCASH FINANCING ACTIVITY:
During 1995, the Company issued notes payable in
the amount of $105,011 in exchange for ten shares
of common stock.
During 1995, the Company distributed property with a
book value of $204,500 to the stockholders.
During 1995, the Company's stockholders contributed
property with a book value of $204,500 to the Company.
See notes to combined financial statements.
F-137
<PAGE> 219
ADVANCED ROOFING, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1996,
FOR THE TEN-MONTH PERIOD ENDED OCTOBER 31, 1997,
AND FOR THE FIVE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The accompanying combined financial statements include the
accounts of Advanced Roofing, Inc., Advanced Leasing, Inc., K&M
Warehouse, Inc. and Hi-Rise Crane, Inc. (collectively referred to
herein as the "Company"), all of which are under common ownership and
common management and are presented on a combined basis since they are
managed as one entity. The Company operates as a provider of
comprehensive roofing services to commercial, industrial,
manufacturing, construction and government customers. The work is
generally performed under fixed-price contracts. The length of the
Company's contracts varies, but generally are less than one year. The
Company's principal offices are located in Fort Lauderdale, Florida and
the majority of the Company's business is transacted with customers in
Florida.
The following represents the components of the Company's capital
accounts at October 31, 1997:
<TABLE>
<CAPTION>
ADDITIONAL TREASURY
PAR SHARES COMMON PAID-IN TREASURY
COMPANY NAME VALUE AUTHORIZED STOCK CAPITAL STOCK
<S> <C> <C> <C> <C> <C>
Advanced Roofing, Inc. $ 1 1,000 $ 100 $ 400 $105,011
Advanced Leasing, Inc. 1 1,000 500 499,500
K&M Warehouse, Inc. 1 500 250 164,303
Hi-Rise Crane, Inc. 0.50 1,000 23 8,967
-------- -------- --------
Total at October 31, 1997 $ 873 $673,170 $105,011
======== ======== ========
</TABLE>
The Hi-Rise Crane, Inc. shares were issued during the ten-month period
ended October 31, 1997 and were the only shares issued by any of the
entities since December 31, 1994.
PRINCIPLES OF COMBINATION - The combined financial statements include
the accounts of Advanced Roofing, Inc., Advanced Leasing, Inc., K&M
Warehouse, Inc. and Hi-Rise Crane, Inc. All significant intercompany
balances and transactions have been eliminated in combination.
INTERIM FINANCIAL INFORMATION - The interim financial statements as of
March 31, 1998 and for the five months ended March 31, 1997 and 1998
are unaudited and certain information and footnote disclosures normally
included in annual 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 items, 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 are not necessarily indicative of the results for an
entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the
F-138
<PAGE> 220
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based
on management's best estimates. Recoveries are recognized in the period
they are received. The ultimate amount of contract receivables that
become uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and local companies whose reputation is known to the
Company. Advance payments and progress payments are generally required
for significant projects. Credit checks are performed for significant
new customers that are not known to the Company. The Company generally
has the ability to file liens against the property if it is not paid on
a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies
and are valued at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the
remaining useful life of the related asset. Depreciation and
amortization are recorded using the straight-line method over the
estimated useful lives of the related assets. Depreciation and
amortization are provided over the following estimated useful lives:
Buildings and improvements 30 to 39 years
Office equipment 5 to 7 years
Service equipment and vehicles 5 to 7 years
WARRANTIES - The Company provides for future estimated warranty
obligations in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized
under the percentage of completion method measured by the ratio of
contract costs incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project which are not reflective of effort are excluded
from the percentage of completion calculation for purposes of
determining profits earned on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to
change as the project progresses and better estimates of project costs
become available. Revisions in cost and profit estimates during the
course of the work are reflected in the period in which the facts
requiring revision become known. Where a loss is forecast for a
contract, the full amount of the anticipated loss is recognized in the
period in which it is determined that a loss will occur, regardless of
the stage of completion.
F-139
<PAGE> 221
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings" on uncompleted contracts, represents billings in
excess of revenues recognized.
INCOME TAXES - The Company is an S Corporation for federal income tax
purposes. Accordingly, the current taxable income of the Company is
taxable to the shareholders who are responsible for the payment of
taxes thereon. The tax basis of assets and liabilities of the Company
differ from the financial statement basis principally due to the use of
the completed contract method of reporting revenues for income tax
purposes and due to accelerated depreciation of assets for tax
purposes.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, SFAS No. 130, Reporting
Comprehensive Income, was issued. SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that a company (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Company has not determined the effects, if
any, that SFAS No. 130 will have on its combined financial statements.
YEAR-END CHANGE - During the ten-month period ended October 31, 1997
the Company changed its year-end to October 31.
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Current accounts $ 708,598 $ 653,726
Retention 2,500
---------- ----------
711,098 653,726
Contracts in progress:
Current accounts 750,326 417,400
Retention 153,100 129,700
---------- ----------
Subtotal 903,426 547,100
---------- ----------
Contract receivables $1,614,524 $1,200,826
========== ==========
</TABLE>
F-140
<PAGE> 222
3. PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
<S> <C> <C>
Land $ 151,498 $ 151,498
Buildings and improvements 677,807 754,438
Office equipment 132,455 132,455
Service equipment and vehicles 1,878,035 2,404,094
----------- ----------
2,839,795 3,442,485
Less accumulated depreciation 985,299 1,267,460
----------- ----------
$ 1,854,496 $2,175,025
=========== ==========
4. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
DECEMBER 31, OCTOBER 31,
1996 1997
Costs incurred on uncompleted contracts $ 2,601,836 $1,759,125
Estimated earnings 756,100 558,000
----------- ----------
Total 3,357,936 2,317,125
Less billings to date 3,384,600 2,090,000
----------- ----------
Net (over) under billings $ (26,664) $ 227,125
=========== ==========
Included in the accompanying balance sheets under the following
captions:
DECEMBER 31, OCTOBER 31,
1996 1997
Costs and estimated earnings in excess
of billings $ 138,836 $ 383,225
Billings in excess of costs and estimated
earnings 165,500 156,100
----------- ----------
Total $ (26,664) $ 227,125
=========== ==========
</TABLE>
5. 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. Each year, participants may contribute up to 15% of pretax
annual compensation, not to exceed $9,000 and $9,500 in 1996 and 1997,
respectively, as defined in the plan. The Company shall contribute and
allocate to each participant's account an amount equal to the amount
withheld from the compensation of such participant pursuant to his or
her salary savings agreement. Discretionary matching amounts may be
contributed at the Company's option, not to exceed 25% of the
participant's contributions. The Company's contributions were $44,979,
$30,839, and $25,931 for the years ended December 31, 1995 and 1996 and
the ten-month period ended October 31, 1997, respectively.
F-141
<PAGE> 223
6. RELATED PARTY TRANSACTIONS
During 1995, the Company entered into an agreement to purchase ten
shares of issued and outstanding common stock of Advanced Roofing, Inc.
from the spouse of a deceased former shareholder under the terms of a
Stockholders' Agreement dated January 16, 1992. In exchange for the
stock, the Company issued notes payable in the amount of $105,011. The
notes bear an interest rate of 10% and are payable in twenty-four equal
monthly installments of $4,846 from 1995 through 1997. The amounts
payable under the Stockholders' Agreement was $41,850 at December 31,
1996. No amount was outstanding at October 31, 1997.
During 1997, the Company borrowed $100,000 from a relative of one of
the Company's shareholders. The note bears an interest rate of 10%;
interest is payable monthly with the principal payable in a lump-sum
payment in 1998. The note is secured by an airplane and related
equipment owned by one of the Company's shareholders and guaranteed by
that same shareholder.
During the ten-month period ended October 31, 1997, the Company made
cash advances to certain affiliates totaling $181,013. The entire
balance was outstanding at October 31, 1997.
7. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
<S> <C> <C>
Mortgage note bearing an annual interest rate
of 10%, interest and principal payable in equal
monthly installments of $5,286 from 1995
through 2005; secured by certain real estate $362,186 $338,705
Mortgage note bearing an annual interest rate
of 9%, interest and principal payable in equal
monthly installments of $1,282 from 1994
through 2003; secured by certain real estate 77,631 70,389
Various equipment and automobile notes
bearing interest rates ranging from 7.75%
to 9.00%, interest and principal payable
in equal monthly payments due from 1995
through 2000; secured by certain equipment
and automobiles 393,873 536,975
-------- --------
Total long-term debt 833,690 946,069
Less current portion 245,225 296,354
-------- --------
Long-term debt, net of current portion $588,465 $649,715
======== ========
</TABLE>
F-142
<PAGE> 224
The annual aggregate maturities of long-term debt are as follows:
<TABLE>
OCTOBER 31,
<S> <C>
1998 $ 296,354
1999 236,167
2000 138,197
2001 53,989
2002 59,508
Thereafter 161,854
-------------
Total $ 946,069
=============
</TABLE>
8. NOTE PAYABLE TO BANK
The Company has a revolving credit facility with a financial
institution for direct borrowings, bearing one percentage point above
the lender's prime interest rate (8.5% and 8.25% for 1997 and 1996,
respectively) and maturing in yearly intervals, with the next maturity
date of April 26, 1998. The credit facility is generally renewed
annually and is guaranteed by the stockholders and secured by
substantially all of Advanced Roofing, Inc.'s assets. Amounts payable
under the revolving credit facility were $250,100 and $400,100 at
December 31, 1996 and October 31, 1997, respectively.
9. MAJOR CUSTOMERS
At October 31, 1997, $89,498 was due from one customer of the Company.
For the ten-month period ended October 31, 1997, sales of 21% of total
sales were made to this customer.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, contract receivables, accounts and notes payable, debt and
capitalized lease obligations. The carrying value of these financial
instruments approximates fair value because of their short duration or
current interest rates. The Company places its temporary cash
investments with financial institutions and limits the amount of credit
exposure with any one financial institution. The carrying value of debt
and capitalized lease obligations approximates their fair value based
on current rates for borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Florida
market. The Company believes this concentration of credit risk is
mitigated by the diversity of industries represented by the Company's
customer base.
11. COMMITMENTS AND CONTINGENCIES
The Company is party to various litigation matters involving routine
claims incidental to the business of the Company. Although the ultimate
outcome cannot presently be determined with certainty, the Company
believes, with advice from its legal counsel, that the ultimate
liability associated with such claims, if any, will not have a material
adverse effect on the Company's financial position or results of
operations.
F-143
<PAGE> 225
12. SUBSEQUENT EVENT
On May 20, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. ("GRS") whereby GRS will acquire the Company in
a merger for a combination of cash and common shares of GRS concurrent
with the consummation of an initial public offering of the common stock
of GRS, subject to certain conditions including the approval by
Directors of both companies. The assets and operations related to K&M
Warehouse, Inc. and Hi-Rise Crane, Inc. ("Hi-Rise"), together with
certain portions of Advanced Leasing, Inc. (consisting primarily of the
assets related to Hi-Rise) will not be acquired in connection with the
proposed transaction with GRS.
Additionally, in January 1998, one of the Company's stockholders
relinquished control of Hi-Rise. In connection therewith, 45% of
Hi-Rise's stock was transferred to an unrelated third party and 10% of
the stock was transferred to an officer of the Company.
* * * * * *
F-144
<PAGE> 226
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Blackmore and Buckner Roofing, Inc.:
We have audited the accompanying balance sheet of Blackmore and Buckner Roofing,
Inc. (the "Company") as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 23, 1998
(May 12, 1998 as to Note 11)
F-145
<PAGE> 227
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Blackmore and Buckner Roofing, Inc.:
We have audited the accompanying balance sheet of Blackmore and Buckner Roofing,
Inc. (the "Company") as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1996 and December 31, 1995. 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 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 above-mentioned financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
BLUE & CO., LLC
Indianapolis, Indiana
January 29, 1997
F-146
<PAGE> 228
BLACKMORE AND BUCKNER ROOFING, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1998
ASSETS 1996 1997 (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,884 $ 238,524 $ 246,957
Contract receivables 2,453,687 1,532,800 778,602
Cost and estimated earnings in excess of billings 66,993 233,135 271,678
Inventories 83,327 80,208 75,734
Prepaid expenses and other current assets 13,460 20,060 24,480
----------- ---------- ----------
Total current assets 2,684,351 2,104,727 1,397,451
PROPERTY AND EQUIPMENT, NET 334,096 361,396 342,734
OTHER ASSETS 72,213 85,250 90,168
----------- ---------- ----------
$ 3,090,660 $2,551,373 $1,830,353
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 586,427 $ 345,532 $ 291,104
Accrued payroll and withholdings 363,581 323,391 159,644
Accrued expenses 200,189 131,081 95,332
Billings in excess of costs and estimated earnings 497,601 362,752 122,156
Current maturities of long-term debt 19,286 22,645 22,838
----------- ---------- ----------
Total current liabilities 1,667,084 1,185,401 691,074
LONG-TERM DEBT, net of current portion 58,610 85,073 76,912
----------- ---------- ----------
Total liabilities 1,725,694 1,270,474 767,986
----------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $1 stated value, 40,000 shares authorized,
37,851, 29,014 and 29,014 shares issued, respectively 37,851 29,014 29,014
Additional paid-in capital 501,265 370,352 370,352
Retained earnings 880,600 881,533 663,001
Treasury stock, 4,716 shares in 1996 (54,750)
----------- ---------- ----------
Total stockholders' equity 1,364,966 1,280,899 1,062,367
----------- ---------- ----------
$ 3,090,660 $2,551,373 $1,830,353
=========== ========== ==========
</TABLE>
See notes to financial statements.
F-147
<PAGE> 229
BLACKMORE AND BUCKNER ROOFING, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT AND SERVICE
REVENUES EARNED $ 7,210,134 $ 7,704,410 $ 7,738,719 $ 1,401,394 $ 1,061,435
COST OF CONTRACT AND
SERVICE REVENUES EARNED 5,794,958 5,948,466 6,320,994 1,273,060 896,081
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 1,415,176 1,755,944 1,417,725 128,334 165,354
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,161,527 1,326,300 1,219,461 205,840 215,422
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 253,649 429,644 198,264 (77,506) (50,068)
OTHER INCOME (EXPENSE):
Interest income 2,518 11,306 17,331 5,559
Interest expense (12,433) (8,438) (6,958) (1,557) (3,108)
Other income (expense), net 15,879 (1,025) 6,016 (1,357) (2,646)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 259,613 $ 431,487 $ 214,653 $ (80,420) $ (50,263)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-148
<PAGE> 230
BLACKMORE AND BUCKNER ROOFING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL TREASURY
COMMON STOCK PAID-IN STOCK RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 37,851 $ 37,851 $ 501,265 4,716 $ (54,750) $404,878 $ 889,244
Distributions to shareholders (71,240) (71,240)
Net income 259,613 259,613
------ --------- --------- ----- ----------- -------- ----------
BALANCES, DECEMBER 31, 1995 37,851 37,851 501,265 4,716 (54,750) 593,251 1,077,617
Distributions to stockholders (144,138) (144,138)
Net income 431,487 431,487
------ --------- --------- ----- ----------- -------- ----------
BALANCES, DECEMBER 31, 1996 37,851 37,851 501,265 4,716 (54,750) 880,600 1,364,966
Purchase of treasury stock 4,121 (85,000) (85,000)
Distributions to stockholders (213,720) (213,720)
Retirement of treasury stock (8,837) (8,837) (130,913) (8,837) 139,750
Net income 214,653 214,653
------ --------- --------- ----- ----------- -------- ----------
BALANCES, DECEMBER 31, 1997 29,014 29,014 370,352 881,533 1,280,899
Net loss (unaudited) (50,263) (50,263)
Distributions to stockholders
(unaudited) (168,269) (168,269)
------ --------- --------- ----- ----------- -------- ----------
BALANCES, MARCH 31, 1998
(unaudited) 29,014 $ 29,014 $ 370,352 $ 663,001 $ 1,062,367
====== ========= ========= ===== =========== ======== ==========
</TABLE>
See notes to financial statements.
F-149
<PAGE> 231
BLACKMORE AND BUCKNER ROOFING, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 259,613 $ 431,487 $ 214,653 $ (80,420) $ (50,263)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 99,120 82,321 88,776 20,197 18,662
Gain on disposal of assets (9,807) (900)
Life insurance premiums paid in excess of increase in
cash surrender value of officers' life insurance (576) (2,456) (2,139) (2,273)
Changes in operating assets and liabilities:
Contract receivables 191,137 (1,275,210) 920,887 1,090,507 754,198
Costs and estimated earnings in excess of billings 53,936 (47,297) (166,142) (74,990) (38,543)
Inventories 11,425 25,158 3,119 2,532 4,474
Other current assets (16,540) 17,813 (6,600) (3,172) (4,420)
Accounts payable and accrued expenses (27,979) 360,925 (350,193) (440,773) (253,924)
Billings in excess of costs and estimated earnings (209,658) 270,778 (134,849) 34,785 (240,596)
--------- ----------- --------- ----------- ---------
Net cash provided by (used in) operating activities 351,247 (135,501) 567,195 546,527 187,315
--------- ----------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (85,519) (19,071) (116,076) (9,849)
Proceeds from sale of property and equipment 13,473 900
Increase in cash surrender value of officers' life
insurance (9,906) (10,581) (10,581) (2,495) (2,645)
--------- ----------- --------- ----------- ---------
Net cash used in investing activities (81,952) (28,752) (126,657) (12,344) (2,645)
--------- ----------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (19,414) (20,222) (20,178) (5,135) (7,968)
Distributions to stockholders (71,240) (144,138) (213,720) (120,396) (168,269)
Purchase of treasury stock (35,000)
--------- ----------- --------- ----------- ---------
Net cash used in financing activities (90,654) (164,360) (268,898) (125,531) (176,237)
--------- ----------- --------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 178,641 (328,613) 171,640 408,652 8,433
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 216,856 395,497 66,884 66,884 238,524
--------- ----------- --------- ----------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 395,497 $ 66,884 $ 238,524 $ 475,536 $ 246,957
========= =========== ========= =========== =========
Cash payments for:
Interest $ 12,433 $ 8,438 $ 6,958 $ 1,557 $ 3,108
========= =========== ========= =========== =========
</TABLE>
See notes to financial statements.
F-150
<PAGE> 232
BLACKMORE AND BUCKNER ROOFING, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Blackmore and Buckner Roofing, Inc. (the "Company") is a
roofing contractor headquartered in Indianapolis, Indiana. The
principal activities of the Company include installing commercial and
residential roofing, repair work on existing and newly constructed
buildings, and metal fabrication. The Company performs these
construction activities primarily in Indiana for commercial
enterprises.
A majority of the Company's hourly employees are covered by collective
bargaining agreements, which expire May 31, 1998 and May 31, 1999.
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 annual 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 items, 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 are not necessarily indicative of the results for an
entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based
on management's best estimates. Recoveries are recognized in the period
they are received. The ultimate amount of contract receivables that
become uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, local school
districts, and well-known companies whose reputation is known to the
Company. Advance payments and progress payments are generally required
for significant projects. Credit checks are performed for significant
new customers that are not known to the Company. The Company generally
has the ability to file liens against the property if it is not paid on
a timely basis.
INVENTORIES - Inventories consist primarily of materials and supplies
and are valued at the lower of cost, using the first-in, first-out
method, or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision is provided, if necessary, whenever events
or circumstances indicate that the carrying amount of an asset may not
be recoverable. Routine
F-151
<PAGE> 233
repairs and maintenance are expensed as incurred; improvements are
capitalized at cost and are amortized over the remaining useful life of
the related asset. Depreciation is recorded using the straight-line
method over the estimated useful life of the related assets.
Depreciation is provided over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings 10 - 31 years
Shop and general equipment 2 - 7 years
Office equipment 5 - 10 years
Trucks, trailers and vehicles 3 - 5 years
Fabrication equipment 10 years
</TABLE>
WARRANTIES - The Company provides for future estimated warranty
obligations in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - The Company performs repair work under
time-and-material contracts and installation work generally under
fixed-price contracts. Revenues from time-and-material contracts are
recognized currently as the work is performed. Revenue from fixed price
contracts is recognized under the percentage-of-completion method
measured by the ratio of contract costs incurred to date to estimated
total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs relating to contract performance such as indirect labor,
supplies and tools. Selling, general and administrative costs are
charged to expense as incurred. Costs for materials incurred at the
inception of a project, which are not reflective of effort, are
excluded from the percentage of completion calculation for purposes of
determining profits on uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to
change as the project progresses and better estimates of project costs
become available. Revisions in cost and profit estimates during the
course of work are reflected in the period in which the facts requiring
the revision become known. Where a loss is forecast for a contract, the
full amount of the anticipated loss is recognized in the period in
which it is determined that a loss will occur, regardless of the stage
of completion.
The asset, "Costs and estimated earnings in excess of billings,"
represents revenue recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized on uncompleted
contracts.
INCOME TAXES - The Company is an S Corporation for federal income tax
purposes. The current taxable income of the Company is taxable to the
shareholders who are responsible for the payment of taxes thereon.
Accordingly, the accompanying financial statements do not include any
provision for federal and state income taxes.
NEW ACCOUNTING PRONOUNCEMENT - Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income. There are no significant differences between
comprehensive income and net income as reported in the Company's
Statements of Operations.
RECLASSIFICATION - Certain amounts in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation.
F-152
<PAGE> 234
2. CONTRACT RECEIVABLES
Contract receivables include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Completed contracts:
Current accounts $ 593,996 $ 851,246
Contracts in progress:
Current accounts 1,766,182 526,072
Retention 93,509 155,482
---------- ----------
$2,453,687 $1,532,800
========== ==========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress, earnings thereon and
related billings includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $ 3,103,306 $ 3,563,178
Estimated earnings 884,365 477,665
----------- -----------
Total 3,987,671 4,040,843
Less: billings to date (4,418,279) (4,170,460)
----------- -----------
Net over billings $ (430,608) $ (129,617)
=========== ===========
</TABLE>
Included in the accompanying balance sheets under the following
captions:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 66,993 $ 233,135
Billings in excess of costs and estimated earnings (497,601) (362,752)
--------- ---------
Total $(430,608) $(129,617)
========= =========
</TABLE>
F-153
<PAGE> 235
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Land $ 107,381 $ 107,381
Buildings 351,657 351,657
Shop and general equipment 431,954 468,685
Office equipment 114,297 138,841
Trucks, trailers and vehicles 333,967 372,567
Fabrication equipment 143,459 159,660
----------- -----------
1,482,715 1,598,791
Accumulated depreciation (1,148,619) (1,237,395)
----------- -----------
$ 334,096 $ 361,396
=========== ===========
</TABLE>
5. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
Note payable to bank under equipment line-of-credit due
October 2000 bears interest at prime plus 1-1/4% (9.5% and
9.75% at December 31, 1996 and 1997, respectively)
Note is payable in monthly principal payments of $744
plus interest $ 34,226 $ 27,120
Note payable to U.S. Small Business Administration due October
2003 bears interest at 5.2%. Note is payable in monthly
payments of $560 of principal and interest 38,151 33,313
Note payable to former stockholder due August 2002 bears
interest at 8.5%. Note is payable in monthly payments
of $1,026 of principal and interest 47,285
Note payable to former stockholder repaid in 1997 5,519
--------- ---------
77,896 107,718
Current maturities (19,286) (22,645)
--------- ---------
$ 58,610 $ 85,073
========= =========
</TABLE>
F-154
<PAGE> 236
Aggregate annual maturities of long-term debt for the years ending
December 31, are as follows:
<TABLE>
<S> <C>
1998 $ 22,645
1999 23,679
2000 25,130
2001 17,075
2002 14,253
Thereafter 4,936
---------
$ 107,718
=========
</TABLE>
The Company has a $500,000 line-of-credit with a bank which is
available for its current working capital needs, through July 1998, and
a $85,000 line-of-credit to be used for capital expenditures. No
amounts were outstanding under the working capital line of credit at
December 31, 1996 and 1997. The Company had outstanding borrowings of
$34,226 and $27,120 under the equipment line of credit at December 31,
1996 and 1997, respectively. These credit facilities require monthly
interest payments at the bank's prime rate (8.25% and 8.5% at December
31, 1996 and December 31, 1997, respectively) plus 3/4% and 1-1/4%,
respectively.
The credit facilities are secured by contract receivables, equipment,
and mortgages on certain commercial properties, and are personally
guaranteed by several of the Company's stockholders. The loan
agreements place restrictive covenants on the Company, including
maintenance of certain collateral ratios, a specified minimum amount of
working capital and net worth, as defined. The credit facilities also
contain acceleration clauses in the event the Company enters into a
merger agreement or a transfer of ownership occurs. The note payable to
the U.S. Small Business Administration is secured under the same terms
as the line-of-credit facilities.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, contract receivables, accounts and notes payable and debt.
The carrying value of these financial instruments approximates fair
value because of their short duration or current interest rates. The
Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure with any one
financial institution. The carrying value of debt obligations
approximates their fair value based on current rates for borrowings of
similar quality and terms.
Other financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist primarily of
contract receivables. The Company's customers are concentrated in the
Indiana market. The Company believes this concentration of credit risk
is mitigated by the diversity of industries represented by the
Company's customer base.
7. MAJOR CUSTOMERS
At December 31, 1996 and 1997, 51% and 28% of contract receivables,
respectively, were due from two customers of the Company. For the years
ended December 31, 1995, 1996 and 1997, sales of 27%, 41% and 26%,
respectively, of total sales were made to two customers of the Company.
F-155
<PAGE> 237
8. PENSION PLANS
Substantially all of the Company's nonmanagement employees are covered
by collective bargaining agreements. The Company's contributions to
various union-sponsored multi-employer pension plans were $113,492,
$159,631 and $214,842 in 1995, 1996 and 1997, respectively. Information
on the Company's portion of the accumulated plan benefits and the plans'
net assets, if any, is not determinable. Under the Employee Retirement
Income Security Act of 1974, as amended in 1980, an employer, upon
withdrawing from a multi-employer pension plan, is obligated for its
proportionate share of the plan's unfunded vested benefits. The Company
has no intention of withdrawing from the plans.
In 1990, the Company adopted a Simplified Employee Pension ("SEP") plan
which covers all non-union employees who meet certain age and employment
criteria. Contributions to the plan are at the discretion of the Board
of Directors. The Company's liability for benefits is limited to the
amount funded to the plan. Contributions to the SEP plan were $92,371,
$99,077 and $112,023 in 1995, 1996 and 1997, respectively.
9. STOCKHOLDERS' EQUITY
COMMON STOCK - At December 31, 1996 and 1997, the Company's common stock
consists of 40,000 shares authorized ($1 stated value), 37,851 and
29,014 shares issued and outstanding, respectively, including shares
held in treasury. All common shares have equal voting, dividend,
participation and liquidation rights.
TREASURY STOCK - The Company purchased 4,121 shares of common stock on
August 1, 1997 for $85,000. The Company paid cash of $35,000 and issued
a note payable to a former stockholder in the amount of $50,000.
On December 31, 1997, the Company retired 8,837 shares of treasury stock
at a cost of $139,750. The shares were originally issued at one dollar
per share. Additional paid-in capital was reduced for the amount in
excess of the original $8,837 purchase price of the common stock, or
$130,913.
10. CONTINGENCY
The Company is currently involved in arbitration to recover costs
incurred in connection with a warranty replacement. Although it is not
possible to predict the outcome of the arbitration, in the opinion of
management, resolution will not have a material effect on the financial
position, results of operations or cash flows of the Company.
11. SUBSEQUENT EVENT
On May 12, 1998, the Company signed a merger agreement with General
Roofing Services, Inc. ("GRS") whereby GRS will acquire the Company in a
merger for a combination of cash and common shares of GRS concurrent
with the consummation of an initial public offering of the common stock
of GRS, subject to certain conditions including consummation of the
offering.
F-156
<PAGE> 238
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Register Contracting Company, Inc.:
We have audited the accompanying balance sheets of Register Contracting Company,
Inc. (the "Company"), as of September 30, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such financial statements present fairly, in all material
respects, the financial position of Register Contracting Company, Inc., and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
October 31, 1997
(May 8, 1998 as to Note 11)
F-157
<PAGE> 239
REGISTER CONTRACTING COMPANY, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 549,829 $ 594,137 $ 489,396
Contract receivables, net of an allowance for doubtful
accounts of $20,916, $20,916, and $35,916, respectively 612,910 1,139,133 1,342,682
Costs and estimated earnings in excess of billings 109,739 15,352 116,654
Due from related parties 122,619 103,412 85,223
Inventories 73,981 71,079 88,165
Prepaid expenses and other current assets 20,276 35,670 33,622
Deferred tax assets 2,862
---------- ---------- ----------
Total current assets 1,498,354 1,961,645 2,155,742
PROPERTY AND EQUIPMENT, net 438,530 476,332 549,253
OTHER ASSETS 22,000 46,000 46,000
---------- ---------- ----------
TOTAL $1,949,884 $2,483,977 $2,750,995
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 551,941 $ 540,846 $ 590,038
Accrued expenses 252,890 344,664 359,160
Billings in excess of costs and estimated earnings 94,268 174,671 255,582
Current portion of long-term debt 21,723 44,558 44,895
Accrued bonuses 213,684 145,000
Income taxes payable 5,605 107,441
Deferred tax liabilities 93,929 68,777
---------- ---------- ----------
Total current liabilities 1,020,356 1,425,864 1,463,452
LONG-TERM DEBT, net of current portion 10,406 54,795 132,010
DEFERRED TAX LIABILITIES 12,730 22,739 22,739
---------- ---------- ----------
Total 1,043,492 1,503,398 1,618,201
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 10,000 shares authorized;
1902, 1992 and 1992 shares issued and outstanding 19,020 19,920 19,920
Additional paid-in capital 45,291 72,932 72,932
Retained earnings 842,081 887,727 1,039,942
---------- ---------- ----------
Total 906,392 980,579 1,132,794
---------- ---------- ----------
TOTAL $1,949,884 $2,483,977 $2,750,995
========== ========== ==========
</TABLE>
See notes to financial statements.
F-158
<PAGE> 240
REGISTER CONTRACTING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES
EARNED $ 6,532,709 $ 6,187,007 $ 6,831,850 $ 3,043,586 $ 4,169,021
COSTS OF CONTRACT
REVENUES EARNED 5,871,215 5,173,719 5,791,836 2,536,567 3,443,424
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 661,494 1,013,288 1,040,014 507,019 725,597
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 591,763 803,940 1,002,174 431,272 516,888
----------- ----------- ----------- ----------- -----------
INCOME FROM
OPERATIONS 69,731 209,348 37,840 75,747 208,709
OTHER INCOME (EXPENSE):
Interest income 7,531 16,665 26,131 9,046 10,884
Interest expense (19,738) (17,083) (9,038) (4,099) (8,014)
Other income 3,100 67,337 73,267 6,872 12,275
----------- ----------- ----------- ----------- -----------
INCOME BEFORE
INCOME TAXES 60,624 276,267 128,200 87,566 223,854
INCOME TAX PROVISION 18,848 88,730 82,554 56,042 71,639
----------- ----------- ----------- ----------- -----------
NET INCOME $ 41,776 $ 187,537 $ 45,646 $ 31,524 $ 152,215
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-159
<PAGE> 241
REGISTER CONTRACTING COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE,
OCTOBER 1, 1994 1,800 $18,000 $ 612,768 $ 630,768
Issuance of common stock 102 1,020 $45,291 46,311
Net income 41,776 41,776
------ ------- ------- ---------- ----------
BALANCE,
SEPTEMBER 30, 1995 1,902 19,020 45,291 654,544 718,855
Net income 187,537 187,537
------ ------- ------- ---------- ----------
BALANCE,
SEPTEMBER 30, 1996 1,902 19,020 45,291 842,081 906,392
Issuance of common stock 90 900 27,641 28,541
Net income 45,646 45,646
------ ------- ------- ---------- ----------
BALANCE,
SEPTEMBER 30, 1997 1,992 19,920 72,932 887,727 980,579
Net income (unaudited) 152,215 152,215
------ ------- ------- ---------- ----------
BALANCE,
MARCH 31, 1998
(UNAUDITED) 1,992 $19,920 $72,932 $1,039,942 $1,132,794
====== ======= ======= ========== ==========
</TABLE>
See notes to financial statements.
F-160
<PAGE> 242
REGISTER CONTRACTING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,776 $ 187,537 $ 45,646 $ 31,524 $ 152,215
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,081 92,781 97,405 41,823 48,702
Loss (gain) on disposal of assets 5,803 (48,759) (11,999) (2,690)
Deferred taxes 19,442 29,195 (86,782) 12,895 71,640
Changes in operating assets and liabilities:
Contract receivables, net 247,563 145,671 (526,223) (278,859) (203,549)
Costs and estimated earnings in excess billings 208,685 (88,686) 94,387 (66,400) (101,302)
Due from related parties (2,592) (6,587) 26,290 18,268 18,189
Inventories (44,416) (8,434) 2,902 (3,435) (17,086)
Other current assets 36,129 (2,618) (15,394) (9,039) 2,048
Accounts payable and accrued expenses (345,147) 73,063 80,679 121,467 63,688
Billings in excess of costs and estimated earnings 125,032 (150,641) 80,403 36,176 80,911
Accrued bonuses (29,850) 213,684 (68,684)
Income taxes payable (1,706) 5,605 101,836 50,437 (107,442)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities 350,800 228,127 102,834 (47,833) (60,670)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (51,762) (106,760) (60,331) (59,000) (121,623)
Proceeds from sale of property and equipment 56,901 41,833 4,000
Loans to related parties (100,000) (3,242) (19,377)
Receipts on loans to related parties 7,138 12,294
Deposits (24,000)
--------- --------- --------- --------- ---------
Net cash used in investing activities (144,624) (53,101) (49,581) (55,000) (121,623)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 1,500 53,740 106,593
Repayments of long-term debt (76,855) (52,231) (37,486) (22,170) (29,041)
Repayment of loan to stockholders (34,023) (15,318)
Net change in line of credit 140,750 (140,000)
Proceeds from issuance of stock 46,311 28,541 28,541
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 77,683 (207,549) (8,945) 60,111 77,552
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 283,859 (32,523) 44,308 (42,722) (104,741)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 298,493 582,352 549,829 549,829 594,137
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 582,352 $ 549,829 $ 594,137 $ 507,107 $ 489,396
========= ========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Equipment acquired through non-cash financing $ 25,008 $ 104,710
CASH PAYMENTS FOR:
Interest $ 19,738 $ 17,083 $ 9,038 $ 4,098 $ 8,012
Taxes $ 55,000 $ 12,500 $ 91,000
</TABLE>
See notes to financial statements.
F-161
<PAGE> 243
REGISTER CONTRACTING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Register Contracting Company, Inc. ("RCCI" or the "Company") was
incorporated on September 15, 1981 and is engaged in the business of
general contracting and commercial roofing throughout the southeastern
United States with the majority of its contracts in Florida. The work is
generally performed under fixed-price contracts. The lengths of the
Company's contracts vary, but are typically less than one year.
INTERIM FINANCIAL INFORMATION - The interim financial statements as of
March 31, 1998 and for the six months ended March 31, 1997 and 1998 are
unaudited and certain information and footnote disclosures normally
included in annual 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 items,
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 are not
necessarily indicative of the results for an entire fiscal year.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONTRACT RECEIVABLES - The Company carries contract receivables at the
amounts it deems to be collectible. Accordingly, the Company provides
allowances for contract receivables it deems to be uncollectible based on
management's best estimates. Recoveries are recognized in the period they
are received. The ultimate amount of contract receivables that become
uncollectible could differ from those estimated.
CREDIT POLICY - In the normal course of business, the Company provides
credit to its customers and does not generally require collateral. The
Company principally deals with recurring customers, state and local
governments and well known local companies whose reputation is known to the
Company. Advance payments and progress payments are generally required for
significant projects. Credit checks are performed for significant new
customers that are not known to the Company. The Company generally has the
ability to file liens against the property if it is not paid on a timely
basis.
INVENTORIES - Inventories consist primarily of materials and supplies and
are valued at the lower of cost or market using the first-in, first-out
method.
F-162
<PAGE> 244
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. Property and equipment are reviewed for
impairment and a provision recorded, if necessary, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Routine repairs and maintenance are expensed as incurred;
improvements are capitalized at cost and are amortized over the remaining
useful life of the related asset. Depreciation is recorded using
straight-line methods over the estimated useful lives of the related
assets. Depreciation is provided over the following estimated useful lives:
<TABLE>
<S> <C>
Building improvements 15 to 39 years
Service equipment 5 to 7 years
Furniture and equipment 5 to 7 years
Computer equipment 5 years
Vehicles 5 years
</TABLE>
WARRANTIES - The Company provides for future estimated warranty obligations
in the period in which the related revenue is recognized.
REVENUE AND COST RECOGNITION - Revenue from contracts is recognized under
the percentage of completion method measured by the ratio of contract costs
incurred to date to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, and tools. Selling, general, and administrative costs are charged
to expense as incurred. Costs for materials incurred at the inception of a
project which are not reflective of effort are excluded from the percentage
of completion calculation for purposes of determining profits earned on
uncompleted contracts.
Estimates made with respect to uncompleted projects are subject to change
as the project progresses and better estimates of project costs become
available. Revisions in cost and profit estimates during the course of the
work are reflected in the period in which the facts requiring revision
become known. Where a loss is forecast for a contract, the full amount of
the anticipated loss is recognized in the period in which it is determined
that a loss will occur, regardless of the stage of completion.
The asset, "Costs and estimated earnings in excess of billings" on
uncompleted contracts, represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings"
on uncompleted contracts, represents billings in excess of revenues
recognized.
INCOME TAXES - The Company reports income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related to certain income and expenses
recognized in different periods for financial and income tax reporting
purposes. Deferred tax assets and liabilities represent the future tax
consequences of those differences. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future
taxable income and income taxes, respectively. A valuation allowance is
provided if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS - Effective October 1, 1997, the Company
adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. There are no significant differences between
comprehensive income and net income as reported in the Company's statements
of operations.
F-163
<PAGE> 245
2. CONTRACT RECEIVABLES
Contract receivables consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
Completed contracts, including retention $ 128,183 $ 821,008
Contracts in progress:
Current accounts 294,312 234,365
Retention 211,331 104,676
----------- -----------
Subtotal 633,826 1,160,049
Less: allowance for doubtful accounts (20,916) (20,916)
----------- -----------
Contract receivables, net $ 612,910 $ 1,139,133
=========== ===========
</TABLE>
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
Costs incurred on uncompleted contracts $ 1,884,145 $ 701,714
Estimated earnings 321,836 185,726
----------- -----------
Total 2,205,981 887,440
Less: billings to date (2,190,510) (1,046,759)
----------- -----------
Net under (over) billings $ 15,471 $ (159,319)
=========== ===========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings $ 109,739 $ 15,352
Billings in excess of costs and estimated earnings (94,268) (174,671)
----------- -----------
Total $ 15,471 $ (159,319)
=========== ===========
</TABLE>
F-164
<PAGE> 246
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
Land $ 96,266 $ 103,803
Building and improvements 254,622 254,622
Service equipment and vehicles 607,043 690,156
Office equipment 86,415 89,451
----------- -----------
Subtotal 1,044,346 1,138,032
Less: accumulated depreciation (605,816) (661,700)
----------- -----------
Property and equipment, net $ 438,530 $ 476,332
=========== ===========
</TABLE>
5. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
$250,000 unsecured line of credit; $ 1,000 $ 1,000
interest is payable monthly and
accrues at the prime rate plus
1% (9.5% at September 30, 1997);
matures December 31, 1997;
renewable annually
Vehicle loans; interest accrues at 31,129 98,353
various fixed rates ranging from
7% to 9.14%; original maturities
are from 24 to 36 months;
collateralized by vehicles with a net
book value of $112,102, and $24,486
at September 30, 1996 and 1997, respectively -------- --------
Total 32,129 99,353
Less: current portion (21,723) (44,558)
-------- --------
$ 10,406 $ 54,795
======== ========
</TABLE>
F-165
<PAGE> 247
Aggregate maturities of long-term debt for years ending September 30 are as
follows:
<TABLE>
<S> <C>
1998 $44,558
1999 38,140
2000 16,655
-------
Total $99,353
=======
</TABLE>
6. INCOME TAXES
The Company's provisions for income taxes consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $ 56,295 $ 144,586
State 3,240 24,750
--------- ---------
59,535 169,336
--------- ---------
Deferred:
Federal $ 15,146 23,474 (78,008)
State 3,702 5,721 (8,774)
--------- --------- ---------
18,848 29,195 (86,782)
--------- --------- ---------
$ 18,848 $ 88,730 $ 82,554
========= ========= =========
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 4.2 4.2 4.2
Other (7.2) (6.2) 26.2
---- ---- ----
Effective rate 31.0% 32.0% 64.4%
==== ==== ====
</TABLE>
Deferred taxes have been recorded using the enacted tax rates expected to
apply to taxable income in the periods in which the deferred tax
liabilities are expected to be settled. The settlement of such deferred tax
liability in 1997 was at a rate exceeding that previously recorded
resulting in an effective rate for 1997 in excess of the statutory rate.
Construction contracts are reported for tax purposes on the
completed-contract method and for financial statement purposes on the
percentage-of-completion method. Accelerated depreciation is used for tax
reporting, and straight-line depreciation is used for financial statement
reporting.
F-166
<PAGE> 248
Components of the Company's deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 16,929
Allowance for doubtful accounts 5,856 $ 6,685
Vacation accrual 3,516 3,516
Other 24,717 49,823
-------- -------
Total 51,018 60,024
-------- -------
Deferred tax liabilities:
Contracts in progress 144,947 57,162
Depreciation 12,730 22,739
-------- -------
Total 157,677 79,901
-------- -------
Net deferred tax liability $106,659 $19,877
======== =======
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
contract receivables, accounts and notes payable, and debt. The carrying
value of these financial instruments approximates fair value because of
their short duration or current interest rates. The Company places its
temporary cash investments with financial institutions and limits the
amount of credit exposure with any one financial institution. The carrying
value of debt approximates their fair value based on current rates for
borrowings of similar quality and terms.
Other financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of contract
receivables. The Company's customers are concentrated in the Florida
market. The Company believes this concentration of credit risk is mitigated
by the diversity of industries represented by the Company's customer base.
8. MAJOR CUSTOMERS
At September 30, 1997, approximately $329,000 was due from one customer of
the Company. Total revenues under this contract represented 52% of the
Company's total contract revenues for the year ended September 30, 1997.
9. EMPLOYEE PROFIT SHARING PLAN
The Company sponsored a non-contributory employee profit sharing plan
adopted on September 27, 1984. Under the plan, employees who are 21 years
of age or older and who have been employed at least one year and completed
at least 1,000 hours of service were eligible to participate. The plan
provided for discretionary contributions by the Company up to the maximum
amount permitted under the Internal Revenue Code. The Company's board of
directors determines amounts to be contributed to the plan on an annual
basis which is largely determined by the Company's performance over the
preceding year. Contributions accrued for the year ended September 30, 1996
were $25,000. There were no contributions for the years ended September 30,
1995 or 1997. The Company terminated the plan effective September 30, 1997,
at which time the net assets of the plan were disbursed to participants.
F-167
<PAGE> 249
10. RELATED PARTY TRANSACTIONS
The Company has subcontracted with Gary Register, General Contractor, Inc.,
a company 100% owned and operated by a shareholder of RCCI. The costs
related to these subcontracts are reflected in "Cost of Contract Revenues
Earned" and amounted to $44,841, $214,473 and $7,545 for the years ended
September 30, 1995, 1996, and 1997, respectively.
In April 1995, the Company loaned $100,000 to Gibbs and Register, Inc., a
company owned in part by shareholders of RCCI. This note is scheduled to be
paid off in January 1999, and earns interest at 10% compounded monthly.
Interest income related to this loan was $5,078, $10,563, and $9,363 for
the years ended September 30, 1995, 1996 and 1997, respectively. Through
September 30, 1997, principal payments received relating to this note
amounted to $28,709.
Gibbs and Register, Inc. was issued performance bonds under RCCI's surety
policy during 1995, 1996 and 1997.
11. SUBSEQUENT EVENT
On May 8, 1998, the Company signed a merger agreement with General Roofing
Services, Inc. (GRS) whereby GRS will acquire the Company in a merger for
cash concurrent with the consummation of an initial public offering of the
common stock of GRS, subject to certain conditions including consummation
of the offering.
* * * * * *
F-168
<PAGE> 250
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of certain estimated
expenses incurred in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . . . . $20,355.00
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400.00
Nasdaq National Market listing fee . . . . . . . . . . . . . . . . . .
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . .
Printing and engraving expenses . . . . . . . . . . . . . . . . . . . .
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . .
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . .
Registrar and Transfer Agent's fees and expenses . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and Nasdaq National Market listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under the Florida General Corporation Act to
indemnify all directors and officers to the extent provided in such statute.
The Company's Articles of Incorporation provide that the Company shall
indemnify its directors to the fullest extent permitted by law either now or
hereafter. The Company has also entered into an agreement with each of its
directors and certain of its officers wherein it has agreed to indemnify each
of them to the fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a director
or officer of the Company as to which indemnification is being sought, nor is
the Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C> <C>
1.1 - Underwriting Agreement among the Registrant, The Robinson-Humphrey Company, LLC
and BancAmerica Robertson Stephens*
2.1 - Stock Purchase Agreement dated May 12, 1998, by and among the Registrant,
Harrington-Scanlon Roofing Company, Inc., a Kansas corporation, and its
stockholders*
2.2 - Stock Purchase Agreement dated May 8, 1998, by and among the Registrant,
Register Contracting Company, Inc., a Florida corporation, Register & Childers
Roof Repairs, Inc., a Florida corporation, and their
</TABLE>
II-1
<PAGE> 251
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C> <C>
stockholders*
2.3 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant, S & B
Roofing Services, Inc., a Michigan corporation and its stockholders*
2.4 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
Anthony Roofing, Ltd., an Illinois corporation, and its stockholders*
2.5 - Stock Purchase Agreement dated May 12, 1998, by and among the Registrant,
Specialty Associates, Inc., a Wisconsin corporation, SAI Wholesale
Distributors, Inc., a Wisconsin corporation, and their stockholders*
2.6 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
Cyclone Roofing Company, a North Carolina corporation, and its sole
stockholder*
2.7 - Stock Purchase Agreement dated May 19, 1998, by and among the Registrant, Five-
K Industries, Inc., a Georgia corporation, and its sole stockholder*
2.8 - Stock Purchase Agreement dated May 20, 1998, by and among the Registrant,
- Advanced Roofing, Inc., a Florida corporation, and its stockholders*
2.9 - Stock Purchase Agreement dated May 12, 1998, by and among the Registrant,
Blackmore & Buckner Roofing, Inc., an Indiana corporation, and its
stockholders*
2.10 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
Wright-Brown Roofing Company, a Michigan corporation, and its stockholders*
2.11 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
C.E.I. West Roofing Company, Inc., a Colorado corporation, and its
stockholders*
2.12 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
C.E.I. Roofing, Inc., a Texas corporation, and its stockholders*
2.13 - Stock Purchase Agreement dated May 13, 1998, by and among the Registrant,
C.E.I. Florida, Inc., a Florida corporation, and its stockholders*
2.14 - Stock Purchase Agreement dated as of May 25, 1998, by and among the Registrant, GRI
of South Florida, Inc., a Florida corporation, and its shareholders*
2.15 - Stock Purchase Agreement dated as of May 25, 1998, by and among the Registrant, GRI
of West Florida, Inc., a Florida corporation, and its shareholders*
2.16 - Stock Purchase Agreement dated as of May 25, 1998, by and among the Registrant, GRI
of Orlando, Inc., a Florida corporation, and its shareholders*
2.17 - Stock Purchase Agreement dated as of May 25, 1998, by and among the Registrant,
Dakota Leasing, Inc., a Florida corporation, and its shareholders*
3.1 - Articles of Incorporation of Registrant*
3.2 - Bylaws of Registrant*
4.1 - Specimen Certificate for the Common Stock*
5.1 - Opinion of Baker & McKenzie*
10.1 - Employment Agreement dated as of February 16, 1998 between the Registrant and
Gregg Wallick*
10.2 - Employment Agreement dated as of February 16, 1998 between the Registrant and
Eric B. Levine*
10.3 - Employment Agreement dated as of February 16, 1998 between the
</TABLE>
II-2
<PAGE> 252
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C> <C>
Registrant and Dale E. Eby*
10.4 - Employment Agreement dated as of February 16, 1998 between the Registrant and
William A. Abberger III*
10.5 - Indemnification Agreement dated May 26, 1998 between the Registrant and Gregg
E. Wallick*
10.6 - Indemnification Agreement dated May 26, 1998 between the Registrant and Eric B.
Levine*
10.7 - Indemnification Agreement dated May 26, 1998 between the Registrant and Dale E.
Eby*
10.8 - Indemnification Agreement dated May 26, 1998 between the Registrant and William
A. Abberger III*
10.9 - Indemnification Agreement dated May 26, 1998 between the Registrant and
Angela Pettus*
10.10 - 1998 Stock Option and Restricted Stock Purchase Plan adopted May 26, 1998*
11.1 - Statement Regarding Computation of Per Share Earnings*
21.1 - List of Subsidiaries of the Company
23.1 - Consent of Baker & McKenzie (included in Exhibit 5.1)*
23.2 - Consents of Independent Auditors
24.1 - Powers of Attorney (as set forth on the signature page of the Registration
Statement)
27.1 - Financial Data Schedules
99.1 - Consent of Francis X. Maguire, Proposed Director of the Registrant
99.2 - Consent of Charles "Red" Scott, Proposed Director of the Registrant
99.3 - Consent of David C. Willis, Proposed Director of the Registrant
99.4 - Consent of Robert G. Shuler, Proposed Director of the Registrant
99.5 - Consent of John C. Cook, Proposed Director of the Registrant
99.6 - Consent of Joel A. Thompson, Proposed Director of the Registrant
99.7 - Consent of Thomas E. Brown, Jr., Proposed Director of the Registrant
</TABLE>
_________
* To be filed by amendment.
(b) Financial Statement Schedules:
None.
II-3
<PAGE> 253
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of the 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 the
registration statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act, 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 the time
shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(4) That insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of 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.
II-4
<PAGE> 254
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has caused this Form S-1 Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pompano
Beach, Florida, on the 27th day of May, 1998.
GENERAL ROOFING SERVICES, INC.
By: /s/ Gregg E. Wallick
------------------------------
Gregg E. Wallick
President and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby authorizes Gregg E. Wallick with full power of substitution, to
file one or more amendments, including post-effective amendments, to this
Registration Statement or to file a new registration statement pursuant to Rule
462(b) of the Securities Act for the purpose of registering additional shares
of Common Stock, which amendments may make such changes, or new registration
statement may contain such information, Gregg Wallick deems appropriate, and
each person whose signature appears below, individually and in each capacity
stated below, hereby appoints Gregg E. Wallick with full power of substitution,
as Attorney-in-Fact to execute his name and on his behalf, to file any such
amendments to this Registration Statement or any such new registration
statement.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Gregg E. Wallick President, Chief Executive May 27, 1998
- ------------------------------- Officer, Director
Gregg E. Wallick (Principal Executive Officer)
/s/ Dale E. Eby Chief Financial Officer May 27, 1998
- ------------------------------- Treasurer and Assistant
Dale E. Eby Secretary (Principal Financial
and Accounting Officer)
/s/ Eric B. Levine Senior Vice President of May 27, 1998
- ------------------------------- Corporate Development
Eric B. Levine
/s/ William A. Abberger III Senior Vice President of May 27, 1998
- ------------------------------- Operations
William A. Abberger III
</TABLE>
<PAGE> 255
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C> <C>
21.1 - List of Subsidiaries of the Company
23.2 - Consents of Independent Auditors
24.1 - Powers of Attorney (as set forth on the signature page of the Registration
Statement)
27.1 - Financial Data Schedules
99.1 - Consent of Francis X. Maguire, Proposed Director of the Registrant
99.2 - Consent of Charles "Red" Scott, Proposed Director of the Registrant
99.3 - Consent of David C. Willis, Proposed Director of the Registrant
99.4 - Consent of Robert G. Shuler, Proposed Director of the Registrant
99.5 - Consent of John C. Cook, Proposed Director of the Registrant
99.6 - Consent of Joel A. Thompson, Proposed Director of the Registrant
99.7 - Consent of Thomas E. Brown, Jr., Proposed Director of the Registrant
-
</TABLE>
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES OF REGISTRANT*
GRI of South Florida, Inc., a Florida corporation
GRI of West Florida, Inc., a Florida corporation
GRI of Orlando, Inc., a Florida corporation
Dakota Leasing, Inc., a Florida corporation
Harrington-Scanlon Roofing Company, Inc., a Kansas corporation
Register Contracting Company, Inc., a Florida corporation
Register & Childers Roof Repairs, Inc., a Florida corporation
S & B Roofing Services, Inc., a Michigan corporation
Anthony Roofing, Ltd., an Illinois corporation
Specialty Associates, Inc., a Wisconsin corporation
SAI Wholesale Distributors, Inc.,
Cyclone Roofing Company, a North Carolina corporation
Five-K Industries, Inc., a Georgia corporation
Advanced Roofing, Inc., a Florida corporation
Blackmore & Buckner Roofing, Inc., an Indiana corporation
Wright-Brown Roofing Company, a Michigan corporation
C.E.I. Roofing, Inc., a Texas corporation
C.E.I. West Roofing Company, Inc., a Colorado corporation
C.E.I. Florida, Inc., a Florida Corporation
_________________
* Effective upon the consummation of the Registrant's initial public offering.
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. ("GRS") on Form S-1 of our report dated May 26, 1998, on the
financial statement of GRS appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Miami, Florida
May 26, 1998
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated December 12, 1997, January 20,
1998 as to the final paragraph of Note 6, and February 16, 1998 as to Note 11
on the combined financial statements of GRI of South Florida, Inc., GRI of
Orlando, Inc., GRI of West Florida, Inc. and Dakota Leasing, Inc., appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Miami, Florida
May 26, 1998
<PAGE> 3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated May 15, 1998, on the combined
financial statements of Harrington - Scanlon Roofing Company, Inc., appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 26, 1998
<PAGE> 4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 10, 1998 and May 20, 1998
as to the first paragraph of Note 12, on the combined financial statements of
Advanced Roofing, Inc., Advanced Leasing, Inc., K&M Warehouse, Inc. and Hi-Rise
Crane, Inc. appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Miami, Florida
May 26, 1998
<PAGE> 5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 27, 1998 and May 12, 1998
as to Note 12, on the combined financial statements of Specialty Associates,
Inc. and Affiliate, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 26, 1998
<PAGE> 6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated October 31, 1997 and May 8, 1998
as to Note 11, on the financial statements of Register Contracting Company,
Inc., appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
May 26, 1998
<PAGE> 7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated May 8, 1998 and May 13, 1998 as
to Note 13, on the financial statements of Slavik, Butcher and Baecker
Construction Company, Inc., appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 26, 1998
<PAGE> 8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 23, 1998 and May 13, 1998
as to Note 11, on the financial statements of Anthony Roofing, Ltd., appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 26, 1998
<PAGE> 9
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 30, 1998 and May 19, 1998
as to Note 12, on the financial statements of Five-K Industries, Inc. and
Subsidiary, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 26, 1998
<PAGE> 10
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 29, 1998 and May 13, 1998
as to Note 12, on the financial statements of Wright-Brown Roofing Company,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 26, 1998
<PAGE> 11
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated May 19, 1998, on the financial
statements of Cyclone Roofing Company, appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 26, 1998
<PAGE> 12
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 23, 1998 and May 12, 1998
as to Note 11, on the financial statements of Blackmore and Buckner Roofing,
Inc., appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 26, 1998
<PAGE> 13
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General
Roofing Services, Inc. on Form S-1 of our report on the 1995, 1996 and 1997
combined financial statements of C.E.I. Roofing, Inc., C.E.I. Florida, Inc. and
C.E.I. West Roofing Company, Inc., dated February 18, 1998, except for Note
13, as to which the date is May 13, 1998, appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
BELEW AVERITT LLP
Dallas, Texas
May 26, 1998
<PAGE> 14
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report on the 1996 and 1995 financial
statements of Anthony Roofing, Ltd., dated May 22, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
DUGAN & LOPATKA CPAs, PC
Wheaton, Illinois
May 22, 1998
<PAGE> 15
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in the Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report dated April 28, 1997 related to the
consolidated financial statements of Five-K Industries, Inc. and Subsidiary,
appearing in the Prospectus, which is part of the Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
BEARDEN & SMITH, P.C.
Atlanta, Georgia
May 26, 1998
<PAGE> 16
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of General Roofing
Services, Inc. on Form S-1 of our report on the 1996 and 1995 financial
statements of Blackmore and Buckner Roofing, Inc. dated January 29, 1997,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ Blue & Co., LLC
- --------------------------------
Blue & Co., LLC
Indianapolis, IN
May 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 155,634
<SECURITIES> 0
<RECEIVABLES> 4,961,078
<ALLOWANCES> 36,345
<INVENTORY> 347,285
<CURRENT-ASSETS> 6,291,410
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,394,382
<CURRENT-LIABILITIES> 4,446,190
<BONDS> 3,720,057
0
0
<COMMON> 1,200
<OTHER-SE> 1,076,935
<TOTAL-LIABILITY-AND-EQUITY> 9,394,382
<SALES> 0
<TOTAL-REVENUES> 10,838,123
<CGS> 0
<TOTAL-COSTS> 8,015,732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149,916
<INCOME-PRETAX> (547,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (547,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547,693)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 240,679
<SECURITIES> 0
<RECEIVABLES> 4,047,906
<ALLOWANCES> 36,345
<INVENTORY> 320,889
<CURRENT-ASSETS> 5,433,244
<PP&E> 2,465,420
<DEPRECIATION> 860,051
<TOTAL-ASSETS> 7,522,585
<CURRENT-LIABILITIES> 4,985,811
<BONDS> 767,088
0
0
<COMMON> 1,200
<OTHER-SE> 1,568,486
<TOTAL-LIABILITY-AND-EQUITY> 7,522,585
<SALES> 0
<TOTAL-REVENUES> 26,792,268
<CGS> 0
<TOTAL-COSTS> 19,100,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 29,291
<INTEREST-EXPENSE> 152,548
<INCOME-PRETAX> 625,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 625,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625,113
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT OF PROPOSED DIRECTOR
I, Francis X. Maguire, hereby consent to the use of my name in the
Form S-1 Registration Statement (the "Registration Statement") of General
Roofing Services, Inc., a Florida corporation (the "Company"), as an individual
who has been appointed and will serve as a director of the Company prior to the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ Francis X. Maguire
-----------------------
Francis X. Maguire
<PAGE> 1
EXHIBIT 99.2
CONSENT OF PROPOSED DIRECTOR
I, Charles "Red" Scott, hereby consent to the use of my name in the
Form S-1 Registration Statement (the "Registration Statement") of General
Roofing Services, Inc., a Florida corporation (the "Company"), as an individual
who has been appointed and will serve as a director of the Company prior to the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ Charles "Red" Scott
-------------------------------
Charles "Red" Scott
<PAGE> 1
EXHIBIT 99.3
CONSENT OF PROPOSED DIRECTOR
I, David C. Willis, hereby consent to the use of my name in the Form
S-1 Registration Statement (the "Registration Statement") of General Roofing
Services, Inc., a Florida corporation (the "Company"), as an individual who has
been appointed and will serve as a director of the Company prior to the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ David C. Willis
--------------------------------------
David C. Willis
<PAGE> 1
EXHIBIT 99.4
CONSENT OF PROPOSED DIRECTOR
I, Robert G. Shuler, hereby consent to the use of my name in the Form
S-1 Registration Statement (the "Registration Statement") of General Roofing
Services, Inc., a Florida corporation (the "Company"), as an individual who has
been appointed and will serve as a director of the Company prior to the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ Robert G. Shuler
------------------------------------
Robert G. Shuler
<PAGE> 1
EXHIBIT 99.5
CONSENT OF PROPOSED DIRECTOR
I, John C. Cook, hereby consent to the use of my name in the Form S-1
Registration Statement (the "Registration Statement") of General Roofing
Services, Inc., a Florida corporation (the "Company"), as an individual who has
been appointed and will serve as a director of the Company upon the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ John C. Cook
--------------------------------
John C. Cook
<PAGE> 1
EXHIBIT 99.6
CONSENT OF PROPOSED DIRECTOR
I, Joel A. Thompson, hereby consent to the use of my name in the Form
S-1 Registration Statement (the "Registration Statement") of General Roofing
Services, Inc., a Florida corporation (the "Company"), as an individual who has
been appointed and will serve as a director of the Company upon the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ Joel A. Thompson
---------------------------------
Joel A. Thompson
<PAGE> 1
EXHIBIT 99.7
CONSENT OF PROPOSED DIRECTOR
I, Thomas E. Brown, Jr., hereby consent to the use of my name in the
Form S-1 Registration Statement (the "Registration Statement") of General
Roofing Services, Inc., a Florida corporation (the "Company"), as an individual
who has been appointed and will serve as a director of the Company upon the
consummation of the initial public offering referenced in the Registration
Statement.
May 26, 1998
/s/ Thomas E. Brown, Jr.
---------------------------------
Thomas E. Brown, Jr.
