Barbara Jacobs, Deputy Chief
December 8, 1998
Page 3
MAURICE J. BATES, L.L.C.
ATTORNEY AT LAW
8214 WESTCHESTER SUITE, 500
DALLAS , TEXAS 75225
Telephone (214) 692-3566
Fax (214) 987-2091
December 8, 1998
Barbara Jacobs, Deputy Chief,
Office of Small Business Policy
Securities and Exchange Commission
450 5th Street N. W.
Washington, DC. 20549
Re: Holloman Corporation
File No. 333-58987 Amendment No. 2
Dear Ms. Jacobs:
We transmit herewith Amendment No. 2 to the above registration
statement in response to your comment letter dated December 2, 1998. The
numbered paragraphs below correspond to the comments in your letter.
1. The inconsistency on the cover page has been reconciled. In the
final prospectus, the actual date will be inserted.
2. A statement that no value has been assigned to the warrants has been
inserted.
3. A statement with respect to the 200,000 shares to be issued to the
Sellers has been added in the Prospectus Summary.
4. Mr. Hogue is considered an outside director and the paragraph has
been revised to state that one additional director will be added.
5. The Summary Compensation Table has been updated through the end of
fiscal 1998.
6. The Experts paragraph has been revised to comply with this comment.
A new letter from Frost & Green is filed as an exhibit.
7. The purchase price is payable $6,000,000 in cash at the closing of
the offering and is presented as a current liability. The balance of $2,000,000
is payable in stock at the closing and presented as a long term liability.
8. The pro forma financial statements have been revised in response to
this comment.
9. The entities that control Holloman Corporation believe that
Construction is worth substantially all of $8 million and that Leasing has a
nominal value. Before the acquisition, Sam Holloman directly or indirectly owns
100% of Construction and he and his children and grandchildren own 100% of
Leasing.
After the acquisition, Holloman Corporation will own 100% of both
Construction and Leasing. Sam Holloman will own 200,000 shares of Holloman
Corporation and will receive $6,000,000 in cash. In percentage terms, and due to
its immateriality, ignoring the interest in Leasing held by Sam Holloman's
children and grandchildren, Sam Holloman owns 100% of Construction and Leasing
before the acquisition and 8.3% of Holloman Corporation after the transaction.
10. The acquisition has been accounted for as a purchase because there
has been a clear change of ownership. Before the acquisition Sam Holloman and
persons related to him own 100% of Construction and Leasing and after the
acquisition, am Holloman owns 8.3% Please not that Since Holloman Corporation
will only issue common shares, the voting and value percentages are the same.
Revised EITF Issue 88-16 addresses the issue of accounting for
leveraged buyouts. In our case, Holloman Corporation ("Newco") was formed for
the purpose of acquiring Construction and Leasing (collectively "Oldco") and Sam
Holloman continues to hold an interest ("Continuing Shareholder"). There has not
been a change in control that is substantive, genuine and not temporary-the
Continuing Shareholder maintains only an 8.3% interest in Newco.
Sam Holloman will receive cash of $6 million and common shares that
will be publicly traded worth $2 million (based on the final offering price). We
believe the value of the consideration received by Sam Holloman is therefore
objectively determinable.
Management has recognized goodwill of $4,257,409 on the pro forma
financial statements. We believe that this amount should be reduced by 8.3%
($353,365) to reflect Sam Holloman's residual interest, but submit the
difference, which is only 2.7% of total assets, is immaterial.
11. The identifiable assets of Construction and Leasing include
monetary assets, inventories, construction and automotive equipment and
immaterial real property. The fair values of monetary assets and inventories
approximate book value. There are no unique customer lists, patens, know-how,
research and development activities, or other identifiable assets.
The principals of Holloman corporation have reviewed the fair value of
equipment owned by Construction and Leasing and believe fair value approximates
book value. Construction and automotive equipment depreciates quickly.
Construction and Leasing have no history of recording significant gains or
losses on the sale of equipment. The excess of purchase price over book value
has therefore been allocated to goodwill. Twenty years was chosen as the
amortization period because the principals estimate this to be the economic
life. The companies are not in a high technology industry where a short life may
be appropriate. Management believes 40 years is too long. Management is not
aware of any comparable public company.
Management has performed a Fas 121 review of the value of the good will
and is satisfied that there is no impairment in such value and believes that a
20 year economic life is reasonable.
12. The preamble has been removed from the Johnson & Miller opinion.
13. The Holloman Corporation fiscal year will end on the Saturday
closest to October 31 to coincide with the fiscal year-end of Construction. This
is disclosed in Note A to the Holloman Corporation financial statements.
14. The printed name of Johnson, Miller & Co. is on the face of their
reports.
15. Your comment concerning the date of the financial statements is
noted. The underwriters intend to request an effective date of December 14,
1998, before the financials go stale.
16. A currently dated consent of the accountants is being filed and a
signed copy retained.
17. Several lines were dropped in the last filing and are now included.
Purchasers Kellie Diane Baker and Revere Financial Group were included in the
lines that were dropped as was the statement that all of the purchasers are
sophisticated investors or family members of sophisticated investors who
purchased on their behalf. Chase Funding, Ltd. is a Canadian partnership
composed of several Canadian lawyers and Wence Faria, an accountant from London,
all of whom have worked with Mr. Hogue on previous transactions and are
experienced sophisticated investors. Oxford Capital Ltd. is a Canadian
corporation owned by Wayne Turner, a Canadian investment banker who had worked
with Mr. Hogue on previous transactions. As an investment banker who has
participated in venture capital investments, he may be considered a
sophisticated investor. The shares listed under Revere Financial Group include
shares held by Robert A. Shuey, John J. Gorman and Maurice J. Bates, who are
listed in the Principal Shareholders table. Messrs. Shuey and Gorman are the two
top executives of Tejas Securities Group, Inc., a broker dealer and investment
banking firm in Austin and Dallas, Texas. Mr. Bates is counsel to the Company.
By reason of their past experience in business and financial affairs and
knowledge of the Company, they may be considered sophisticated investors.
18. The underwriting agreement has been amended in response to a
telephone conference between underwriters' counsel and Mr. Weingarten.
19. A new opinion of counsel is included as Exhibit 5.1.
If you have any additional comments please contact the undersigned.
Very truly yours,
Maurice J. Bates
<PAGE>
As filed with the Securities and
Exchange Commission on December 08, 1998
Registration No. 333-58987
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
Holloman Corporation
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
Texas 1623 75-2771541
<S> <C> <C>
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
Holloman Corporation
5257 West Interstate 20
P.O. Box 69410
Odessa, Texas 79769-9410
(915) 381-2000
(Address and telephone number of principal
executive offices and principal place of business)
Sam Holloman
Holloman Corporation
5257 West Interstate 20
P.O. Box 69410
Odessa, Texas 79769-9410
(915) 381-2000
(Name, address and telephone number of agent for service)
Copies of all communications to:
Maurice J. Bates, Esq. Norman R. Miller, Esq.
Maurice J. Bates, L.L.C. Wolin, Ridley & Miller LLP
8214 Westchester Suite 500 1717 Main Street
Dallas, Texas 75225 Dallas, Texas 75201
(214) 692-3544 (214) 939-4900
(214) 987-2091 FAX (214) 939-4949 FAX
Approximate date of proposed sale to public: As soon as practicable after
the effective date of the Registration Statement.
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.
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,
please check the following box. X
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
Calculation of Registration Fee
<TABLE>
<CAPTION>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price per Share Aggregate Offering Price Registration Fee
<S> <C> <C> <C> <C>
(1) (1) (1)
Units 1,150,000 $10.00 $11,500,000 $3,450
Common Sock, par
value0.01 (2) 1,150,000 (2) (2) (2)
Redeemable Common Stock
Purchase Warrants (2) 1,150,000 (2) (2) (2)
Common Stock, par
value $0.01 (3) 1,150,000 $12.00 $13,800,000 $4,140
Underwriter's Warrants (4) 100,000 $ 0.01 $100.00 $100
Units Underlying the
Underwriter's Warrants 100,000 $12.00 $1,200,000 $360
Common Stock, par
value $0.01 (5) 100,000 (5) (5) (5)
Redeemable Common Stock
Purchase Warrants 100,000 (5) (5) (5)
Common Stock, par
value $0.01 (6) 100,000 $12.00 $1,200,000 $360
Total $27,700,100 $8310
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee. (2)
Included in the Units. No additional registration fee is required. (3) Issuable
upon the exercise of the Redeemable Common Stock Purchase Warrants. Pursuant to
Rule 416 there are also registered an indeterminate number of shares of Common
Stock which may be issued pursuant to the antidilution provisions applicable to
the Redeemable Common Stock Purchase Warrants, the Underwriter's Warrants and
the Redeemable Common Stock Purchase Warrants issuable under the Underwriters
Warrants. (4) Underwriters' Warrants to purchase up to 100,000 Units, consisting
of an aggregate of 100,000 shares of Common Stock and 100,000 Redeemable Common
Stock Purchase Warrants. (5) Included in the Units underlying the Underwriters'
Warrants. No additional registration fees are required. (6) Issuable upon
exercise of Redeemable Common Stock Purchase Warrants underlying the
Underwriters' Units.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 08, 1998
Holloman Corporation
1,000,000 Units
Consisting of 1,000,000 Shares of Common Stock and
1,000,000 Redeemable Common Stock Purchase Warrants
Holloman Corporation (the "Company") is hereby offering 1,000,000 Units,
each unit (the "Unit") consisting of one share (the "Shares") of Common Stock,
$0.01 par value (the " Common Stock"), and one Redeemable Common Stock Purchase
Warrant (the "Warrants") . The Units, the Shares and the Warrants offered hereby
are referred to collectively as the "Securities."
No value has beeen assigned to the Warrants.
The Shares and Warrants
included in the Units may not be separately traded until [six months after
the date of this Prospectus], unless earlier separated upon ten days' prior
written notice fromCapital West Securities, Inc(the "Representative") to the
Company. Each Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $12.00 per share, commencing at any time
after the Common Stock and Warrants become separately tradable and until [five
years from the date of this Prospectus]. Commencing on [12 months from the date
of this Prospectus], the Warrants are subject to redemption by the Company at
$0.05 per Warrant at any time on thirty days prior written notice, provided that
the closing price quotation for the Common Stock has equalled or exceeded $20.00
for ten consecutive trading days. The Warrant exercise price is subject to
adjustment under certain circumstances. See "Description of Securities."
Prior to this offering, there has been no public market for the Securities,
and there can be no asssurance that an active market will develop. It is
currently anticipated that the initial public offering price of the Units will
be $10.00 per Unit. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Company has
applied to list the Units , Common Stock and Warrants on the American Stock
Exchange under the symbols "HOL.U " , "HOL" and "HOL.W", respectively. There can
be no assurance that the application for listing on the American Stock Exchange
will be approved.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMPANY AND THIS OFFERING.
PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER THE FACT THAT THEIR INVESTMENT WILL
RESULT IN IMMEDIATE SUBSTANTIAL DILUTION. SEE "DILUTION." THESE SECURITIES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE 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>
Underwriting Price
to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Unit............................ $10.00 $1.00 $9.00
Total (2)(3)....................... $10,000,000 $1,000,000 $9,000,000
</TABLE>
(1) In addition, the Company has agreed to pay the Representative, a 2.00%
nonaccountable expense allowance and to sell to the Underwriter warrants
exerciseable for four years commencing one year from the date of this
Prospectus to purchase 100,000 Units at 140% of the public offering price
(the "Underwriter's Warrants"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 , as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of $500,000 payable by the Company,
including the Representative's 2.00% nonaccountable expense allowance. (3) The
Company has granted to the Underwriters an option, exercisable within 45 days
from the date of this Prospectus, to purchase up to 150,000 Units, on the same
terms set forth above, solely for the purpose of covering over-allotments, if
any. If the Underwriters' over-allotment option is exercised in full, the total
Price to the Public will be $ , $ , and $ , respectively. See "Underwriting"
The Securities are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering
without notice and to reject any order, in whole or in part. It is expected that
delivery of Common Stock and Warrant certificates will be made against payment
therefor at the offices of the Underwriter in ____, _____ on or about , 1998.
Capital West Securities The date of this Prospectus
is , 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2. (including any amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Securities, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements made in this Prospectus regarding the contents of
any contract or document filed as an exhibit to the Registration Statement are
not necessarily complete and, in each instance, reference is hereby made to the
copy of such contract or document so filed. Each such statement is qualified in
its entirety by such reference. The Registration Statement and the exhibits and
the schedules thereto filed with the Commission may be inspected, without
charge, at the Commission's public reference facilities located at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the public
reference facilities in the Commission's regional offices located at:
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661; and Suite 1300, Seven World Trade Center, New York, New York
10048. Copies of such materials also may be obtained at prescribed rates by
writing to the Commission, Public Reference Section, 450 Fifth Street, NW,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission at http://www.sec.gov.
As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its shareholders with annual reports
containing audited consolidated financial statements certified by independent
public accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited consolidated financial information for
the first three quarters of each fiscal year following the end of such fiscal
quarter.
The Company has applied for listing of the Securities on the American
Stock Exchange ("Amex"). There can be no assurance that the Company's securities
will be accepted for listing. Reports, proxy statements and other information
concerning the Company will be available for inspection at the principal office
of the Amex at 86 Trinity Place, New York, New York 10006.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVERALLOTMENT, ENTERING STABILIZATION BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES ON AMEX IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) assumes that the acquisition (the "Acquisition") of Holloman Construction
Company and T. Sisters Leasing, L. L. C. has been consummated upon the closing
of this offering (the "Closing"), including the issuance of 200,000 shares of
the Common Stock to the Sellers, and (ii) does not give effect to the exercise
of the Underwriters' over-allotment option or the Underwriters Warrants. The
200,000 shares to be issued to the Sellers are not a part of this offering and
will be issued pursuant to an exemption from registration. Reference to the
"Company" herein means Holloman Corporation and Holloman Construction Company
and assumes that the Acquisition has been consummated.
.
The Company
The Company was organized in May 1998 to acquire all of the outstanding
stock of Holloman Construction Company and T. Sisters Leasing, L. L. C. The
Company specializes in pipeline construction, plant construction, and
engineering services. These services are used by municipal, and state
governments, commercial and industrial building sites, and residential,
commercial, and industrial subdivisions. The majority of the Company's business
is transacted in the state of Texas, but the Company has authorization to work
in numerous other states that have activities relating to the oil and gas
industry. The majority of the Company's work is obtained through an open bid
process, and the Company has a marketing department to search for potential work
opportunities.
The Company's operations are separated into three divisions. The Plant
Division constructs plant facilities for the oil and gas industry. Due to the
mature nature of this industry, most of the division's projects involve
modifications or additions to existing facilities. The division's projects
generally consist of earthwork, concrete foundations, equipment installations,
and piping fabrication and installation. The division has the capability of
working throughout the southeastern and southwestern states; however, most of
the projects are in Texas, New Mexico, Oklahoma and Louisiana. The Plant
Division employs approximately 80 employees.
The Pipeline Division provides a variety of construction services. In
addition to mainline, cross-country gas pipelines, the division installs gas and
oil gathering systems, and installs injection systems for secondary oil
recovery. The repair and upgrade of existing pipelines has become a substantial
portion of the division's work as government regulations for maintenance of
older pipelines have been initiated. The division also performs small plant and
compressor installation work for certain clients, and utility work that includes
the installation of water, sewer and drainage lines for local area
municipalities and developers. The recent acquisition of trenchless-technology
pipeline installation methods has provided a new, highly profitable type of work
to the company. This division employs approximately 100 full-time field
construction workers and 50 temporary workers.
The Engineering Division provides design, drafting, project management
and construction services for the oil and gas industry. The emphasis for the
division is on the engineering and construction of gas plant modifications and
gas compressor installations. The division has particular expertise in the area
of acid gas removal and handling. The division performs some engineering-only
projects, but prefers projects that include engineering, procurement, project
management and construction work. There are approximately 90 employees in the
division.
The Company's strategy will be to capitalize on the demand for oilfield
construction and engineering services by continuing to expand its workforce and
geographic presence in the marketplace. To accomplish these objectives, the
Company intends to (i) continue to enhance its indigenous new employee hiring,
training and retention programs as a method for attracting, training and
retaining new, highly skilled workers, and (ii) seek to acquire other companies
engaged in the engineering and construction business that have good reputations
for quality service and highly skilled workers.
The Company's principal operations are in Texas. The Company's
headquarters are located at 5257 West Interstate 20, Odessa, Texas 79763. The
telephone number at that location is (915) 381-2000, and its fax number is (915)
381-381 6200.
<PAGE>
The Acquisition
Pursuant to a Stock Purchase Agreement dated May 16, 1998, as amended
August 13, 1998, (the "Stock Purchase Agreement"), the Company agreed to acquire
all of the outstanding common stock of Holloman Construction Company, a Texas
corporation ("Construction"), and all of the outstanding membership interests in
T. Sisters Leasing, L. L. C., a Texas limited liability company ("Leasing"),
from Sam Holloman and other entities owned, controlled by, or affiliated with,
Mr. Holloman, including the Holloman Construction Company Employees Stock
Ownership Plan (the "Sellers") for a total consideration of $8,000,000. At the
closing of this offering (the "Closing"), the Company will pay the Sellers
$6,000,000 cash from the net proceeds of this offering and issue to the Sellers
200,000 shares of the Company's Common Stock (assumes an initial public offering
price of $10 per share attributable to the Common Stock in this offering. The
number of shares could be more of less if the offering price were changed.). See
"The Acquisition" and "Certain Relationships and Related Transactions."
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities offered hereby................... 1,000,000 Units, each Unit consisting of one share of Common
Stock and one Warrant, each Warrant entitling the holder to
purchase one share of Common Stock at a price of $12.00 per
share until ____________, 2003 (five years from the date of this
Prospectus) See "Description of Securities."
Description of the Warrants................. The Warrants are not immediately exercisable and are not
transferable separately from the Shares until ____________, 1999
(six months from the date of this Prospectus) unless earlier
separated upon 10 days' prior written notice from the
Representatives to the Company. Commencing on ________, 1999
(12 months from the date of this Prospectus), the Warrants are
redeemable by the Company at $0.05 per Warrant under certain
conditions. See "Description of Securities."
Common Stock to be outstanding
after the Offering........................ 2,400,000 shares (1)
Warrants to be outstanding
after the Offering........................ 1,000,000 Warrants (1)(2)
Use of Proceeds............................. Purchase of Construction and Leasing, working capital and other
general corporate purposes. See "Use of Proceeds."
Risk Factors................................ The Securities offered hereby are speculative and involve a high
degree of risk and should not be purchased by investors who
cannot afford the loss of their entire investment. See "Risk
Factors."
Proposed American Stock Exchange Symbols
Units.................................... "HOL.U"
Common Stock............................. "HOL"
Warrants................................. "HOL.WS"
</TABLE>
- ---------------------
(1) Does not include (i) up to 1,000,000 shares issuable upon exercise of the
Warrants, (ii) 300,000 shares issuable upon exercise of the Underwriters'
over-allotment option and the Warrants thereunder, iii) 200,000 shares
issuable upon exercise of the Underwriters' Warrants and the shares
underlying such Warrants, and (iv) 240,000 shares reserved for issuance
under the Employee Stock Option Plan. Includes 200,000 shares to be issued
to the Sellers to consummate the Acquisition. See "The Acquisition."
(2) Does not include up to 150,000 Warrants issuable upon exercise of the
over-allotment option or the 100,000 Warrants underlying the
Underwriters' Warrants.
<PAGE>
Selected Consolidated Financial Information
The following selected financial data has been derived from the audited
balance sheets of Construction as of November 1, 1997, and November 2, 1996,
audited income statements for the two years ended November 1, 1997 and November
2, 1996, for Construction, audited financial statements of Leasing for the two
years ended December 31, 1997, and unaudited financial statements of
Construction and Leasing for the nine months ended July 31, 1997 and 1998 and
pro-forma unaudited balance sheet of the Company as at November 1, 1997 and July
31, 1998 and pro forma unaudited income statements for the year ended November
2, 1997 and the none months ended July 31, 1998. This selected financial data
should be read in conjunction with the financial statements of the Company,
Construction and Leasing and the related notes thereto included elsewhere in
this Prospectus. See "Financial Statements."
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
November 2, November 1, July 31, July 31,
Historical (1) 1996 1997 1997 1998
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
Operating Data:
Construction revenues $ 12,067,920 19,373,559 12,554,774 18,475,836
Costs of construction 10,614,310 16,065,433 10,114,612 15,076,218
General and administrative 1,310,845 2.243,423 1,127,956 2,070,476
Earnings before income tax 318,411 1,171,578 1,432,331 1,345,182
Income tax 106,414 413,063 477,995 464,975
------------ ------------ ----------- ------------
Net income $ 211,997 758,515 954,336 880,207
================ ============= ============ ============
Shares outstanding 82,850 80,176 81,760 80,176
=============== ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
Pro forma (2)
Fiscal Year Ended Nine Months Ended
November 2, November 1, July 31, July 31,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Operating Data:
Construction revenues $ 12,067,920 19,373,559 12,554,774 18,475,836
Costs of construction 10,614,310 16,065,433 10,114,612 15,076,218
General and administrative 1,523,716 2.456,294 1,287,609 2,230,129
Earnings before income tax 105,540 958,707 1,272,678 1,185,529
Income tax 34,038 340,687 423,713 410,693
------------ ------------ ----------- ------------
Net income $ 71,503 618,020 848,965 774,836
=============== ============= ============ ============
Shares outstanding 1,200,000 1,200,000 1,200,000 1,200,000
============== ============== ===============================
Earnings per share $ .06 .52 .71 .65
</TABLE>
============ =======
<TABLE>
<CAPTION>
July 31, 1998
Actual Pro forma (2) As Adjusted (3)
----------- ------------ ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital 265,000 (3,519,062) 4,980,938
Current assets 265,000 6,083,492 8,583,492
Current liabilities - 9,602,554 3,602,554
Total assets 325,000 13,009,242 15,509,242
Total liabilities - 12,684,242 4,684,242
Shareholders' equity 325,000 325,000 10,825,000
Shares outstanding 1,200,000 1,200,000 2,400,000
</TABLE>
- -----------
1. Amounts reflect combined historical data for Construction and Leasing, with
elimination of intercompany leasing revenues and leasing expenses.
2. Assumes the acquisition of Construction and Leasing by the Company.
3. Adjusted to reflect the sale of the Units offered by this Prospectus at an
offering price of $10.00 per Unit and application of the net proceeds of
$8,500,000 and the consummation of the acquisition.
RISK FACTORS
An investment in the Securities offered hereby involves a high degree
of risk. Prospective investors should consider the following factors in addition
to other information set forth in the prospectus before purchasing the
securities offered hereby. Prospective investors should note that this
Prospectus contains certain "forward-looking statements," including without
limitation, statements containing the words "believes," "anticipates,"
"expects," "intends," "plans," "should," "seeks to," and similar words.
Prospective investors are cautioned that such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those in the forward-looking statements as a
result of various factors, including but not limited to, the risk factors set
forth in this Prospectus. The accompanying information contained in this
Prospectus identifies important factors that could cause such differences.
Risk of the Acquisition
The Company will commence operations upon the consummation of the
Acquisition at the closing of this offering. There can be no assurance, however,
that any benefits will be achieved or that the results of Construction prior to
the Acquisition which will be improved upon. In addition, Sam Holloman, the
President and Chief Executive Officer of Construction, has resigned from those
positions but will continue serving as Chairman of the Board. Although Mr.
Holloman's position will be filled by Mark Stevenson as President,
Construction's Executive Vice President and Chief Operating Officer since 1983,
there can be no assurance that the management of the Company and Construction
will be successfully combined, or that new management will have the necessary
experience to operate the Company.
Dependence On The Oil and Gas Industry
The Company is dependent upon the continued growth, viability and
financial stability of its customers, which are in turn substantially dependent
on the continued growth, viability and financial stability of the oil and gas
industry. The oil and gas industry is very sensitive to pricing levels for oil
and gas, supply conditions, weather, and general economic conditions. Examples
of fluctuating pricing include the 31% decline in benchmark Brent crude oil
prices during the first quarter of 1997 relative to the same period in 1996.
Lower crude oil prices could negatively impact the profitability of the oil and
gas industry, which in turn could reduce the demand for the Company's services.
An example of the impact of general economic conditions affecting the industry
is the recent economic downturn in Asia that subsequently reduced demand for oil
products in that region. This event caused many of the domestic participants in
the industry to report lower revenues for their products, thereby reducing the
demand for the Company's services. Any downturn or other disruption in the oil
and gas industry caused by general economic conditions, pricing, weather or
other factors would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence Upon Key Personnel
The business of the Company is substantially dependent on the efforts
of Mark Stevenson, President, and Sam Holloman, Chairman of the Board. The
Company does not have an employment contract with Mr. Stevenson or Mr. Holloman
and the loss of either could have a material adverse effect on the Company's
operations. Mr. Holloman will devote approximately 40% of his time to the
business of the Company. The Company currently maintains key-man insurance in
the face amount of $500,000 on the life of Mr. Holloman, although there can be
no assurance that such amount will be sufficient to compensate the Company for
the loss of his services. See "Management."
Competition
The general pipeline construction, replacement, rehabilitation and
repair business is highly competitive. The Company faces conceptual and
practical competition both from a number of contractors employing traditional
methods of pipeline construction, replacement and repair and from contractors
offering alternative trenchless products and technologies. Management is unaware
of any publicly-held comparable companies that are direct competitors.
Nonetheless, there could be privately-held competitors with financial resources
substantially greater than these of the Company.
<PAGE>
Acquisitions
The Company plans to grow through acquisitions. The success of this
strategy is strongly affected by personnel in the acquired organization
satisfactorily continuing employment with the Company after the acquisition. The
Company plans to utilize employment agreements in connection with acquisitions.
However, there can be no assurance that employees of an acquired enterprise will
remain with the Company or perform satisfactorily as employees of the Company.
At present, the Company is not engaged in the negotiation of any such
acquisitions and there is no assurance and no representation is made that the
Company will be successful in the negotiations of any acquisitions and, if so,
on terms that will be beneficial to the Company.
Additional Capital Requirements
A substantial portion of the proceeds of this offering will be utilized
to pay the cash portion of the purchase price of the Acquisition. As a result,
the Company may require additional capital to expand its operations. The Company
contemplates that it may seek to expand its operations and acquire other
compatible businesses, which may require the Company to raise additional
financing, either in the form of debt or equity. There can be no assurance that
any such financing will be available on favorable terms to the Company or at
all. If the Company were to seek to raise additional equity, its then existing
shareholders would suffer dilution to their interests. See "Use of Proceeds."
Benefits to Current Shareholders
The current shareholders of the Company acquired their shares of Common
Stock at a cost per share substantially less than that at which the Company
intends to sell its Common Stock included in the Units. Consummation of the
offering will result in a substantial increase in the value of the current
shareholders' holdings and a resulting dilution in the price paid by the public
shareholders. See ""Dilution." In addition, the Sellers will receive
consideration for the sale of their stock in Construction and membership
interests in Leasing which they might not otherwise receive if the offering is
not consummated.
Regulation; General
The transportation of oil and gas through pipelines is regulated by the
Federal Energy Regulatory Commission ("FERC"). Through the current
rate-of-return policy, the FERC regulates the allowed return on pipeline
investments. Historically, the FERC has determined the allowed investment return
on a case-by-case basis. If the current regulatory environment as administered
by the FERC were to become more stringent in establishing return criteria, it
could reduce the appeal of such pipeline investments. This situation could
reduce the growth opportunities in the industry, and thereby reduce the demand
for the Company's services. There can be no assurance that the FERC will not
adopt or change regulations or take other actions that would adversely affect
the industry and the Company's business, financial condition and results of
operations.
Regulation; Environmental
The Company is subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the acquisition
of a permit before installing pipelines, restrict the types, qualities and
concentration of various substances that can be released into the environment in
connection with installation and repair activities, limit or prohibit
installation activities on certain lands lying within wilderness, wetlands and
other protected areas, and impose substantial liabilities for pollution
resulting from the Company's operations. Moreover, the recent trend toward
stricter standards in environmental legislation and regulation is likely to
continue. Although the Company generally attempts to pass on such costs to the
customer in its billing, such standards could have an impact on the operating
costs of the Company.
Influence on Voting by Principal Shareholders
Upon completion of this offering, the directors and principal
shareholders, will own approximately 44.1% of the outstanding Common Stock of
the Company. As a result, these shareholders will be able to impact the vote on
most matters submitted to shareholders, including the election of directors. See
"Principal Shareholders."
<PAGE>
Business Concentration
The Company's customers are concentrated in the oil and gas industry. Sales
to customers in the oil and gas industry accounted for 78% of the Company's
revenues during the fiscal year ended November 1, 1997. The Company is also
dependent on a core of customers for the majority of its revenues. Sales to five
customers accounted for 63.2% of total revenues in 1997. The Company expects
that sales to relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes that its
financial results will depend, in significant part, upon the success of these
few customers. The loss of a significant customer or any reduction in orders by
any significant customers, including reductions due to economic and pricing
conditions in the oil and gas industry, may have a material adverse effect on
the Company's business, financial condition and results of operations.
Absence of Prior Public Market - American Stock Exchange Listing
Prior to this offering, there has been no public market for the
Securities. The Company has applied for listing of the Securities on the
American Stock Exchange. There can be no assurance that the Company's listing
application will be approved. Such listing, if approved, does not imply,
however, that a meaningful, sustained market for the Common Stock or Warrants
will develop. There can be no assurance that an active trading market for the
Securities offered hereby will develop or, if it should develop, will continue.
Risk of Redemption of Warrants
Commencing twelve months from the date of this Prospectus, the Company
may redeem the Warrants for $.05 per Warrant, provided that the closing sale
price of the Common Stock on the American Stock Exchange has been at least
$20.00 for ten consecutive trading days ending within fifteen days of the notice
of redemption. Notice of redemption of the Warrants could force the holders
thereof: (i) to exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous or difficult for the holders to do so, (ii) to sell
the Warrants at the current market price when they might otherwise wish to hold
the Warrants, or (iii) to accept the redemption price, which is likely to be
less than the market value of the Warrants at the time of the redemption. See
"Description of Securities - Warrants."
Investors May Be Unable to Exercise Warrants
For the life of the Warrants, the Company will use its best efforts to
maintain a current effective registration statement with the Commission relating
to the shares of Common Stock issuable upon exercise of the Warrants. If the
Company is unable to maintain a current registration statement the Warrant
holders would be unable to exercise the Warrants and the Warrants may become
valueless. Although the Underwriters have agreed to not knowingly sell the
Warrants in any jurisdiction in which the shares of Common Stock issuable upon
exercise of the Warrants are not registered, exempt from registration or
otherwise qualified, a purchaser of the Warrants may relocate to a jurisdiction
in which the shares of Common Stock underlying the Warrants are not so
registered or qualified. In addition, a purchaser of the Warrants in the open
market may reside in a jurisdiction in which the shares of Common Stock
underlying the Warrants are not registered, exempt or qualified. If the Company
is unable or chooses not to register or qualify or maintain the registration or
qualification of the shares of Common Stock underlying the Warrants for sale in
all of the states in which the Warrant holders reside, the Company would not
permit such Warrants to be exercised and Warrant holders in those states may
have no choice but to either sell their Warrants or let them expire. Prospective
investors and other interested persons who wish to know whether or not shares of
Common Stock may be issued upon the exercise of Warrants by Warrant holders in a
particular state should consult with the securities department of the state in
question or send a written inquiry to the Company. The Company has applied for
listing of the Warrants and the Underlying Common Stock on the American Stock
Exchange which provides an exemption from registration in most states. See
"Description of Securities Warrants."
<PAGE>
Arbitrary Determination of Offering Price
The public offering price for the Units offered hereby was determined
by negotiation between the Company and the Representatives, and should not be
assumed to bear any relationship to the Company's asset value, net worth or
other generally accepted criteria of value. Recent history relating to the
market prices of newly public companies indicates that the market price of the
Securities following this offering may be highly volatile. See "Underwriting."
Immediate Substantial Dilution
The Company's current shareholders acquired their shares of Common
Stock at a cost substantially below the price at which such shares are being
offered in this offering. In addition, the initial public offering price of the
shares of Common Stock included in the Units being offered in this offering will
be substantially higher than the current book value per share of Common Stock.
Consequently, investors purchasing shares of Common Stock included in the Units
being offered in this offering will incur an immediate and substantial dilution
of their investment of approximately $7.26 per share or approximately 72.6%
insofar as it relates to the resulting book value of Common Stock after
completion of this offering. See "Dilution."
Payment of Dividends
The Company has never paid cash dividends on the Common Stock, and does
not anticipate that it will pay cash dividends in the foreseeable future. The
payment of dividends by the Company will depend on its earnings, financial
condition and such other factors as the Board of Directors of the Company may
consider relevant. The Company currently plans to retain any earnings to provide
for the development and growth of the Company. See "Dividend Policy."
Shares Eligible for Future Sale
Upon completion of this offering, the Company's current shareholders
will own 1,200,000 shares of Common Stock, which will represent 50.0% of the
then issued and outstanding shares of Common Stock (47.1% if the over-allotment
option is exercised in full). In addition, the Sellers will own 200,000 shares,
or 8.3% of the outstanding Common Stock (7.8% if the over-allotment option is
exercised in full). The shares held by the current shareholders and by the
Sellers are "restricted securities" as that term is defined in the Rules and
Regulations under the Securities Act, and as such, may be publicly sold only if
registered under the Securities Act or sold pursuant to an applicable exemption
from registration, such as that provided by Rule 144 under the Securities Act.
The shares held by the current shareholders, and the shares to be
issued to the Sellers will not be eligible for sales under Rule 144 for at least
one year from the effective date of this Prospectus. The current shareholders
and the Sellers have agreed with the Representatives that they will not sell or
otherwise dispose of their shares for a period of one year after the date of
this Prospectus without the prior written consent of the Representative. Sales
of significant amounts of Common Stock by current shareholders and the Sellers
in the public market after this offering could adversely affect the market price
of the Common Stock. See "Shares Eligible for Future Sale" and "Principal
Shareholders."
Use of Proceeds for Unspecified Acquisitions
The Company intends to utilize a portion of the net proceeds of this
offering for the purpose of acquisitions, joint ventures and other similar
business opportunities. Under Texas law, transactions of this nature do not
require shareholder approval except when accomplished through a merger or
consolidation. Accordingly, purchasers in this offering will necessarily rely to
a large degree upon the judgment of management of the Company in the utilization
of the net proceeds of this offering applied to acquisitions. The Company does
not now have any agreements or commitments with respect to any specific
transactions, and management has not established specific criteria to be used in
making the determination as to how to invest these proceeds. See
"Business-Strategy" and "Use of Proceeds."
<PAGE>
Shares of Common Stock Reserved Under Stock Option Plan
The Company has reserved 240,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
Stock Option Plan. To date no options have been granted under the Stock Option
Plan. The existence of these options and any other options or warrants may prove
to be a hindrance to future equity financing by the Company. Further, the
holders of such options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Management - Stock Option Plan."
Effect of Outstanding Warrants and Underwriters' Warrants.
Until the date five years following the date of this Prospectus, the
holders of the Warrants and Underwriters' Warrants are given an opportunity to
profit from a rise in the market price of the Common Stock, with a resulting
dilution in the interests of the other shareholders. Further, the terms on which
the Company might obtain additional financing during that period may be
adversely affected by the existence of the Warrants and Underwriters' Warrants.
The holders of the Warrants and Underwriters' Warrants may exercise the Warrants
and Underwriters' Warrants at a time when the Company might be able to obtain
additional capital through a new offering of securities on terms more favorable
than those provided herein. The Company has agreed that, under certain
circumstances, it will register under federal and state securities laws the
Underwriters' Warrants and/or the securities issuable thereunder. Exercise of
these registration rights could involve substantial expense to the Company at a
time when it could not afford such expenditures and may adversely affect the
terms upon which the Company may obtain financing. See "Description of
Securities" and "Underwriting."
Representatives' Influence on the Market
A significant amount of the Securities offered hereby may be sold to
customers of the Representatives. Such customers subsequently may engage in
transactions for the sale or purchase of such Securities through or with the
Representatives. Although it has no obligation to do so, the Representatives may
otherwise effect transactions in such securities. Such market making activity
may be discontinued at any time. If they participate in the market, the
Representatives may exert a dominating influence on the market, if one develops,
for the Securities described in this Prospectus. The price and the liquidity of
the Securities may be significantly affected by the degree, if any, of the
Representatives' participation in such market.
In addition, the Company has agreed to solicit exercises of the
Warrants solely through the Representatives and to pay the Representatives
certain compensation in connection therewith. Solicitation of the exercise of
the Warrants by the Representatives will not be made during the restricted
periods of Regulation M under the Securities Exchange Act of 1934, as amended.
See "Description of Securities-Warrants" and "Underwriting."
<PAGE>
THE ACQUISITION
At the Closing, the Company will use a portion of the proceeds of this
offering to consummate the Acquisition of Construction and Leasing. The
Company will pay the Sellers $6,000,000 cash from the net proceeds of the
offering and issue to the Sellers 200,000 shares of Common Stock. In exchange
therefor, the Sellers will deliver to the Company all of the outstanding
common stock of Construction and all of the membership interests in Leasing.
(The number of shares of Common Stock to be issued to the Sellers is
determined by dividing $2,000,000 by the offering price attributable to the
Common Stock in the final Prospectus used in this offering. Thus, the Sellers
could receive more or fewer shares if the offering price were to change).
The Stock Purchase Agreement provides for customary representations and
warranties by Construction, Leasing and the Sellers, including without
limitation, as to the organization and good standing of Construction and
Leasing, the financial statements of Construction and Leasing and certain
representations as to the business contracts and commitments of Construction.
Although the Company agrees that it will not take any action after the Closing
which would result in a change in the benefits to the employees covered by the
current benefit plans of Construction, there are no commitments or provisions as
to consulting or employment agreements, stock options or registration of the
Company stock delivered to the Sellers at the Closing. Pursuant to the Stock
Purchase Agreement, Mr. Holloman and the Sellers agree that, for a period of
five years, they will not compete with the Company in any business in which
Construction is engaged within any state or province and maintain an office at
the time of execution thereof. Under Texas, law such non-competition covenants
must be reasonable as to time and geographic area. Such covenants could be held
to be unreasonable and not enforceable, or only partially enforceable, by a
Texas court. The Stock Purchase Agreement provides for indemnification by the
Sellers as to misrepresentation, breach of warranty or non-fulfillment of any
agreement or covenant or misrepresentation or omission of material information
in the Stock Purchase Agreement or Schedules attached thereto. Such
indemnification, except as to taxes, is limited to four years from the Closing
and the aggregate purchase price for the Construction stock and Leasing
membership interests.
After the Closing, Construction and Leasing will operate as wholly
owned subsidiaries of the Company. Mr. Holloman, who has been Chairman,
President, and principal owner of Construction and Leasing since he founded them
in 1967, will continue as Chairman of the Company and will devote approximately
40% of his time to the business of the Company.
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering to the Company, are expected to be
approximately $8,500,000 ($9,820,000 if the over-allotment option is exercised
in full), assuming an initial public offering price of $10.00 per Unit, after
deducting the Underwriters' discount and $500,000 of expenses relating to the
offering, including the Underwriters' non-accountable expense allowance. No
value has been assigned to the Warrants included in the Units. The Company
intends to use the net proceeds as follows:
Amount %
Payment to Sellers (1) $ 6,000,000 70.6%
Working capital (2) 2,500,000 29.4%
----------- --------
$ 8,500,000 100.0%
=========== ======
- ---------------
(1) The cash portion of the purchase price of the Acquisition due to the
Sellers at the Closing. See "The Acquisition" and "Certain Relationships
and Related Transactions".
(2) The Company may also use a portion of the proceeds from this offering to
take advantage of future business opportunities as a part of its expansion
plans, although the Company has not identified any specific businesses it
intends to acquire and has not entered into negotiations with respect to
any acquisitions.
Pending application of the net proceeds of this offering, the Company
may invest such net proceeds in interest-bearing accounts, United States
Government obligations, certificates of deposit or short-term interest-bearing
securities.
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future. The Company's Board of Directors plans to
retain earnings for the development and expansion of the Company's business. The
Board of Directors also plans to regularly review the Company's dividend policy.
The Company's ability to pay dividends will be dependent, in large measure, on
its ability to receive dividends and management fees from its life insurance
subsidiaries. The ability of these corporations to pay dividends and management
fees, in turn, is limited pursuant to applicable insurance laws. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including future earnings, capital requirements, financial condition and such
other factors as the Board of Directors may deem relevant.
<PAGE>
DILUTION
As of July 31, 1998, the pro forma net tangible book value of the
Company, Construction and Leasing, as if they were combined on such date and
assuming the issuance of 200,000 shares to the Sellers, was $(3,932,409) or
$(2.81) per share of Common Stock. The net tangible book value of the Company is
the aggregate amount of its tangible assets less its total liabilities. The net
tangible book value per share represents the total tangible assets of the
Company, less total liabilities of the Company, divided by the number of shares
of Common Stock outstanding. After giving effect (i) to the sale of 1,000,000
Units (1,000,000 shares of Common Stock and 1,000,000 Warrants) at an assumed
offering price of $10.00 per Unit, or $10.00 per share of Common Stock (no value
assigned to the Warrants), (ii) the application of the estimated net proceeds
therefrom, the pro forma net tangible book value per share would increase from
$(2.81) to $2.74. This represents an immediate increase in net tangible book
value of $5.55 per share to current shareholders and an immediate dilution of
$7.26 per share to new investors or, 72.6% as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Public offering price per Share $10.00
Net tangible book value per Share before this offering $(2.81)
Increase per share attributable to new investors 5.55
------
Adjusted net tangible book value per share after this offering $ 2.74
Dilution per share to new investors $ 7.26
------
Percentage dilution 72.6 %
</TABLE>
The following table sets forth as of July 31, 1998, (i) the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the current shareholders,
and (ii) the number of shares of Common Stock included in the Units to be
purchased from the Company and total consideration to be paid by new investors
(before deducting underwriting discounts and other estimated expenses) at an
assumed offering price of $10 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Current shareholders 1,400,000 (2) (4)58.3% $ 2,325,000 18.9% $ 1.66
New investors 1,000,000 (2) 41.7% 10,000,000 81.1% $10.00 (3)
--------- ------ ----------- ------
Total 2,400,000 (1) 100.0% $12,325,000 (2) 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Does not include a total of 1,500,000 shares of Common Stock issuable upon
the exercise of: (i) the Warrants or the Underwriters' Warrants, (ii) the
over-allotment option, or (iii) employee stock options. To the extent that
these options and warrants are exercised, there will be further share
dilution to new investors.
(2) Upon exercise of the over-allotment option, the number of shares held by
new investors would increase to 1,150,000 or 45.1% of the total number of
shares to be outstanding after the offering and the total consideration
paid by new investors will increase to $11,500,000. See "Principal
Shareholders."
(3) This amount assumes the attribution of the Unit purchase price solely to
the Common Stock included in each Unit. See "Use of Proceeds."
(4) Assumes the issuance of 200,000 shares to the Sellers to consummate the
Acquisition. If the offering price attributable to the Common Stock were
more or less than $10.00 per share the number of shares to be issued to the
Sellers would change proportionately. See "The Acquisition."
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company,
Construction and Leasing, as if they were combined as of July 31, 1998,
including the issuance of 200,000 shares of the Common Stock to the Sellers to
consummate the Acquisition and (ii) on a pro forma as adjusted basis to give
effect to the sale of 1,000,000 Units offered hereby and the application of the
estimated net proceeds therefrom See "Use of Proceeds."
<TABLE>
<CAPTION>
July 31, 1998
(Unaudited) As Adjusted
<S> <C> <C>
Short-term debt:
Current portion of notes payable ................... $ 844,338 $ 844,338
--------------- ---------------
Total short-term debt............................... $ 844,338 $ 844,338
=============== =
Long-term debt:
Notes payable....................................... $ 1,081,688 $ 1.081,688
Notes payable - Sellers............................. 8,000,000 0
------------- -------------
Total long-term debt............................................ $ 9,081,688 $ 1,081,688
============== ==============
Shareholders' equity:
Common Stock, $0.01 par value,
20,000,000 shares authorized,
1,200,000 shares issued and outstanding,
2,400,000 as adjusted (1) (2) .................... 12,000 24,000
Additional paid in capital.......................... 313,000 10,801,000
Retained earnings................................... 0 0
------------- ------------
Total shareholders' equity........................ 325,000 10,825,000
------------- -------------
Total capitalization ............................. $ 9,406,688 $ 11,906,688
============= =============
- ------
</TABLE>
(1) Does not include 240,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan. See "Management - Stock Option Plan."
(2) Does not include an aggregate of up to 1,500,000 shares issuable upon
exercise of (i) the Warrants, (ii) the over-allotment option, or (iii) the
Underwriters' Warrants.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the Company's Financial
Statements, related notes and other financial information included elsewhere in
this Prospectus.
Results of Operations
Over the two years ended November 1, 1997, the Company increased net
revenues by 61% to $19.4 million from $12.1 million, decreased costs of revenues
as a percentage of revenues by 5.1% while general and administrative expenses as
a percentage of revenues rose from 8.6% to 10.6%. Until this offering, the
Company was a private corporation and declared large bonuses to management which
were primarily income tax motivated.
The following table presents, as a percentage of net revenues, certain
financial data for the Company for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended 7/31
11/01/97 11/02/96 1998 1997
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Contract revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues 82.9 88.0 81.6 80.1
Gross profit 17.1 12.0 18.4 17.7
General and
administrative expenses 10.6 8.6 10.4 7.8
Operating income 6.5 3.4 8.0 12.1
Interest expense 0.5 0.7 0.7 0.7
Income taxes 2.1 0.9 2.5 3.8
Net income 3.9 1.8 4.8 7.6
</TABLE>
Comparison of the Nine Months Ended July 31, 1997 and July 31, 1998
Net revenues for the nine month period ending July 31, 1998 increased
47.2% or $5,921,062 from the same period in the previous year. The increase was
due primarily to growth in the Engineering and Pipeline Divisions, whose
revenues increased 200.5% and 35.6%, respectively. The Company experienced
greater demand for its services due to the general increase in capital
expenditures made by the Company's customer base.
Gross profit for the period increased to $3,399,618, a 39.3% increase
from the previous year. The gross profit margin as a percentage of revenues
declined to 18.4% versus 17.9% in the prior year due to a 47.1% increase in cost
of revenues. The increase in the cost of revenues as a percentage of revenues
was primarily due to the increased use of non-bidded hourly work performed at
pre-determined rates relative to the same period in 1997. Although such work is
guaranteed to the Company and does not involve bidding against competitors, it
is performed at generally less profitable rates that do not allow the Company to
build in a markup on materials at a level comparable to open-bid work.
General and Administrative Expenses for the period increased 83.8%
compared to the same period last year. The Company made significant additions to
personnel in its administrative base during the period. The new general and
administrative support base is expected to be able to absorb increased future
volume without significant additional expenses.
Operating income decreased to $1,460,608 for the nine months ended July
31, 1998, a decrease of 3.9% from the same period in 1997. As a percentage of
revenues, operating income decreased to 8.0% from 12.1% in the prior year. On an
absolute basis, the decrease in operating income reflects the increase in
revenues for the nine months ended July 31, 1998 relative to the same period in
1997, offset by the significant increase in the cost of revenues as explained
above.
Interest expense increased by 31.3% to $115,421 during the period from
$87,884 in the prior year, reflecting an increase in notes payable. The Company
also increased the use of capital leases versus the outright purchase of
equipment financed with bank debt.
<PAGE>
Comparison of the Years Ended November 2, 1996 and November 1, 1997
Total revenues in 1997 increased 60.5% or $7,505,639 from the previous
fiscal year. This increase is attributable to growth in all of the Company's
operating divisions, with the largest increase in Engineering Division revenues.
The Company experienced greater demand for its services consistent with the
general increase in capital spending made by oil and gas companies during the
year.
Gross profit for 1997 increased 127.6% over 1996, reflecting the higher
sales volume in 1997. Gross margin increased from 12.0% in 1996 to 17.1% in
1997. The increased demand for the Company's services allowed the Company to be
more aggressive in its bidding, and this condition allowed the Company to be
awarded bids with higher markups for its cost of services.
General and administrative expenses increased by 75.4% from $1,227,857
in 1996 to $2,153,834 in 1997, reflecting the increase in revenues. As a
percentage of revenues, these expenditures increased to 10.6% in 1997 versus
8.6% in 1996.
Interest expense increased nominally from $82,998 in 1996 to $89,589 in
1997. The Company increased the use of capital leases versus the outright
purchase of equipment financed with bank debt which was offset by reduced use of
the working capital facility.
Prior to this offering, the Company was privately held. The Company
reduced income by declaring and paying bonuses to its employees. Net earnings
for 1997 were reduced by bonuses of $565,710 ($857,135 before tax benefit of
$291,425), and are included in Costs of Services and General and Administrative
Expenses.
Accounts receivable, accounts payable and accrued liabilities were all
significantly higher on November 1, 1997 compared to November 2, 1996. This
reflects the 60.5% increase in revenue in the year ended November 1, 1997 and
the fact that one major contract completed shortly after year end.
Liquidity and Capital Resources
The Company has financed its working capital requirements through the
use of bank debt, capital leases and operating leases. Since 1994, the Company
has increased the use of operating leases versus bank debt as a mean of
financing its equipment. Going forward, management anticipates that it will use
similar operating leases to acquire the use of equipment.
As of July 31, 1998, the Company had a $2,000,000 working capital
credit facility with Bank One, Texas, NA. The facility is secured by accounts
receivable. As of July 31, 1998, the credit facility had an outstanding balance
of $400,000 and available credit of $1,600,000. The Company is currently in
compliance with all of the loan covenants governing the credit facility.
As of July 31, 1998, the Company had working capital of $2,117,712 and
a working capital ratio of 1.5 times. Cash from operations for the fiscal year
ended November 1, 1997 was $1,485,724, compared to $64,682 during the same
period in 1996. The change is due to the increase in net income and changes in
current assets and liabilities.
The Company's cash requirements for fiscal 1998 and in the future will
depend upon the level of sales, acquisitions, sales and marketing expenditures
and capital expenditures. The Company believes that the net proceeds from this
offering, the use of operating leases, and anticipated revenue from operations
should be adequate for the Company's working capital requirements over the
course of the next twelve months. In the event that the Company's plans or
assumptions change or if its requirements to meet unanticipated changes in
business conditions or the proceeds of this offering prove to be insufficient to
fund operations, the Company could be required to seek additional financing
prior to such time.
Year 2000 Compliance
The Company is aware of the issues associated with the year 2000 as it
relates to information systems. The Company completed the installation of a new
information system that is certified by the supplier to be Year 2000 compliant.
The Company incurred approximately $75,000 in costs for the new computers and
software. Based on the nature of the Company's business, the Company anticipates
that it is not likely to experience material business interruption due to the
impact of Year 2000 compliance on its customers and vendors. As a result, the
Company does not anticipate that incremental expenditures to address Year 2000
compliance will be material to the Company's liquidity, financial position or
results of operations over the next few years.
<PAGE>
Accounting Standards
The Financial Accounting Standards Board ("FASB") periodically issues
statements of financial accounting standards. In April 1997, FASB issued
Statement of Financial Accounting Standards (SFAS) No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 is required to be adopted by the Company in the
year ending November 1, 1998. Had the Company been required to adopt SFAS No.
128 for the periods presented, the adoption would not have impacted reported
earnings per share.
In June 1997, the FASB issued SFAS No. 130 and 131. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS No. 131 establishes standards for reporting about operating
segments, products and services, geographic areas, and major customers. The
standards become effective for fiscal years beginning after December 15, 1997.
Management plans to adopt these standards in the year ending November 1, 1999.
Management believes that provisions of SFAS No. 130 and 131 will not have a
material effect on its financial condition or reported results of operation.
In February 1998, the Financial Accounting Standards Board issued SFAS
132, Employers' Disclosures about Pensions and Other Postretirement Benefits -
An Amendment of FASB Statements No. 87,88, and 106. This Statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. Rather, it
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful. This Statement becomes effective February 1998, for the Company, and the
Company believes it will not have a material effect on its financial condition
or results of operations.
In August 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. This
statement, which applies to all entities, requires derivative instruments to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. The statement is effective for fiscal years beginning after June
15, 1999 with earlier application encouraged but permitted only as of the
beginning of any fiscal quarter beginning after June 1998. Retroactive
application is prohibited. The Company does not believe this statement will be
applicable to its financial condition or its results of operations.
<PAGE>
BUSINESS
General
The Company was organized in May 1998 to acquire all of the outstanding
stock of Construction and
Leasing.
The Company specializes in pipeline construction, plant construction,
and engineering services. These services are used by municipal and state
governments, commercial and industrial building sites, and residential,
commercial, and industrial subdivisions. The majority of the Company's business
is transacted in the state of Texas although the Company performs work in
adjoining states and is authorized to do business in other states that have
activities relating to the oil and gas industry, particularly in the
southeastern and southwestern parts of the country. The Company's operations are
separated into three divisions.
The Industry
The Company's success is directly related to the demand for fuel and
the repair and maintenance of existing pipelines. Originally the Company focused
on plant and pipeline activities for the oil and gas industry. While customers
in the oil and gas industry continue to contribute a majority of the Company's
revenues, the Company has recently expanded into utilities, including the
construction of water, sanitary sewer, and storm and drainage systems.
Industry sources estimate that worldwide pipeline construction will be
23,232 miles for 1998, a 9.0% increase from the 20,465 miles built in 1997. This
above-average increase in pipeline construction is primarily due to domestic and
Canadian operating companies and producers planning to re-configure the North
American network to move natural gas to East Coast markets.
Outside the United States, total pipeline construction surpassed
original 1997 estimates, reaching 13,867 miles. Industry sources project that
international construction in 1998 will increase 8.8% to 15,091 miles of
pipeline. For example, competition in Europe for traditional gas markets is
spurring additional construction by established and new gas companies in an
effort to secure growth in established and new markets.
Strategy
The Company's strategy will be to capitalize on the demand for oilfield
construction and engineering services by continuing to expand its workforce and
geographic presence in the marketplace. To accomplish these objectives, the
Company intends to (i) continue to enhance its new employee hiring, training and
retention policies as a method of attracting, training and retaining new, highly
skilled workers, and (ii) to seek to acquire other companies engaged in the
engineering and construction of pipeline and plants that have good reputations
for quality service and highly skilled workers.
The Plant Division
The Plant Division constructs plant facilities for the oil and gas
industry. Typical projects for this division include: mainline gas compressor
stations, which include multiple 1000 plus horsepower compressor units,
associated equipment and piping systems that are used in the transportation of
natural gas through the country's gas pipeline system; petroleum product pump
stations, consisting of the installation of electrically driven pumps and
related equipment and piping systems that pump petroleum liquids such as
gasoline, jet fuel and propane through pipeline systems from refineries to sales
outlets; and oil production facilities, where crude oil is gathered and
processed before shipment through pipelines. Due to the mature nature of this
industry, most of the division's projects involve modifications or additions to
existing facilities. The division's projects generally consist of earthwork,
concrete foundations, equipment installations, piping system fabrication and
installation and electrical instrumentation systems. Most of the projects are in
Texas, New Mexico, Oklahoma and Louisiana.
<PAGE>
The Pipeline Division
The Pipeline Division provides a variety of construction services. The
division's primary emphasis has been on the construction of cross-country
mainline pipelines for the natural gas industry but as this industry has matured
and the demand for new pipelines has diminished, the division has diversified
into other related areas of pipeline construction. The installation of gas
gathering lines that connect new gas wells to a mainline are a significant
portion of this division's work. Increases in the drilling of gas wells in the
West Texas area have provided an increase in the division's business. The
division also installs high pressure pipelines used to inject water and carbon
dioxide into existing wells to enhance the production of mature oil fields such
as those found in West Texas. The division also constructs the associated
gathering systems, using pipe capable of withstanding the corrosive nature of
the produced water, carbon dioxide and oil mixture. The repair and upgrade of
existing pipelines has become a substantial portion of the division's work as
government regulations for maintenance of older pipelines have been initiated.
The division also performs small plant and compressor installation work for
certain clients, and utility work that includes the installation of water, sewer
and drainage lines for local area municipalities and developers.
The division also provides utility construction services for government
entities and private developers. This work includes the installation of water
pipelines, sewer pipelines, storm sewer lines, highway drainage projects and gas
distribution systems. The Company recently acquired the equipment and technology
for trenchless pipeline installation which offers new and additional
opportunities for expansion of this division's capabilities.
The Company plans to increase the capabilities of this division by
opening a new office in Austin, Texas to expand its work in commercial and
industrial concrete projects such as highways and bridges, drainage facilities
and related work and has assigned an experienced supervisor to head this office.
The Company's first successful bid in this area was a $250,000 dam repair
project.
The Engineering Division
The Engineering Division provides design, drafting, project management
and construction services for the oil and gas industry. The emphasis for the
division is on the engineering and construction of gas plant modifications and
gas compressor installations. The division has particular expertise in the area
of acid gas removal and handling, which involves the removal of hydrogen
sulfide, a poisonous and highly corrosive gas that occurs in natural gas, from
the gas stream of certain production facilities. The division performs some
"engineering-only" projects, but emphasizes projects that include engineering,
procurement, project management and construction work. The Company intends to
expand this division through the hire of a process engineer to enable the
Company to provide design services for more complicated process systems in gas
and chemical plants and refineries.
Recent Developments
Demand for the Company's services continues to be strong. The Company
has a current backlog of approximately $2,500,000.
The Company believes the growth in demand for pipeline construction,
plant construction, and engineering services will continue as the industry
continues to expand due to regulatory changes, new technology, global demand
dynamics, and new trends in the oil and gas industry. Recently, government
regulations regarding the maintenance of older pipelines have been enhanced.
Stricter regulatory guidelines provide further opportunities for the Company in
the repair and upgrade of existing pipelines. Because of environmental concerns,
the demand for natural gas as a clean-burning fuel has increased the need for
natural gas pipeline construction.
Recent technological developments in the area of trenchless-technology
pipe installation methods have opened new markets for pipeline engineering
services. For example, a new process involving the injection of liquid resin
into existing pipelines has recently been developed as a procedure to repair
existing pipelines. The technology relies extensively on pipeline engineering
services similar to the Company's activities. This procedure is typically
performed on smaller pipelines not typical to the Company's existing work base,
and it has therefore opened a new niche for the Company's services.
<PAGE>
Requirements of the Department of Transportation and technological
innovations in the area of testing are expected to lead to increased spending on
pipeline maintenance and repair. An increasing number of pipelines are using
"smart pig" technology to inspect for pipeline damage, including loss of wall
thickness and signs of general wear. This technology involves inserting an
electronic device (the "pig") into the pipeline that travels the length of the
pipe to detect anomalies. Although these inspection vehicles have been in use
since 1965, it has only been recently that improvements in sensors and computing
power have allowed pigs to detect other types of defects such as cracks, coating
disbondment, dents and gouges. This process has been able to detect pipeline
defects with greater accuracy than traditional methods of detection such as
hydrotesting. Increased use of "smart pig" technology could increase the level
of pipeline repair and maintenance expenditures, and thereby increase demand for
pipeline construction and engineering services.
Companies in the oil and gas industry have tended to limit their
management and engineering staffs to compensate for the cyclically of the
industry. For example, when oil prices are below their historical levels, oil
and gas companies tend to decrease their capital expenditures. Companies have
tended to utilized outside engineering and construction firms rather than employ
full time staffs of their own. This trend has increased the demand for
third-party engineering and construction services.
Marketing
A substantial portion of the Company's business is from repeat
customers and referrals. Approximately half of the Company's work is obtained
through the open bid process, although more recently a substantial number of
projects have been negotiated contracts. The Company utilizes a full time
marketing employee to search for potential work opportunities and also utilizes
its officers and project managers to call on repeat customers who are often
large oil and gas companies with changing personnel.
Worker Safety
Worker safety is an important part of the construction business. The
Company's oil and gas clients require that their contractors maintain a good
safety record. The Company believes that its safety training program and safety
record are well recognized in the industry. In two of the last five years (1994
and 1995) the company had no lost time because of accidents and in 1993 and 1994
completed over 1,300,000 man hours of work with no injuries.
Competition
The general pipeline construction, replacement, rehabilitation and
repair business is highly competitive. The Company faces conceptual and
practical competition both from a number of contractors employing traditional
methods of pipeline construction, replacement and repair and from contractors
offering alternative trenchless products and technologies. Management is unaware
of any publicly-held comparable companies that are direct competitors.
Nonetheless, there could be privately-held competitors with financial resources
substantially greater than these of the Company.
Regulation; General
The transportation of oil and gas through pipelines is regulated by the
Federal Energy Regulatory Commission ("FERC"). Through the current
rate-of-return policy, the FERC regulates the allowed return on pipeline
investments. Historically, the FERC has determined the allowed investment return
on a case-by-case basis. If the current regulatory environment as administered
by the FERC were to become more stringent in establishing return criteria, it
could reduce the appeal of such pipeline investments. This situation could
reduce the growth opportunities in the industry, and thereby reduce the demand
for the Company's services. There can be no assurance that the FERC will not
adopt or change regulations or take other actions that would adversely affect
the industry and the Company's business, financial condition and results of
operations.
<PAGE>
Regulation; Environmental
The Company's projects may be subject to laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. Some of these laws may require the acquisition of a
permit before the work begins. In most cases, the Company relies on its customer
to obtain such permits and assure that the project complies with environmental
regulations. The Company, however, handles compliance with Rule 40 of the
Environmental Protection Act, which governs storm water pollution, Rule 40
requires that the Company submit a storm water pollution prevention plan to the
Environmental Protection Agency (the "EPA") prior to beginning any project where
the ground surface area to be disturbed is in excess of five acres, implement
the plan before construction begins, and maintain the planned provisions during
construction. In the past, the Company has not incurred any significant costs in
complying with EPA regulations. When it does incur costs in such compliance, the
Company attempts to pass on such costs to its customers in its billings.
Customers
The Company's customers are concentrated in the oil and gas industry.
Sales to customers in the oil and gas industry accounted for 78% of the
Company's revenues during the fiscal year ended November 1, 1997. The Company is
also dependent on a core of customers for the majority of its revenues. Sales to
two customers accounted for 35.7% of total revenues in 1997. As of November 1,
1997, three customers accounted for 64% of the Company's accounts receivable.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results will depend, in significant part, upon the
success of these few customers. The loss of a significant customer or any
reduction in orders by any significant customers, including reductions due to
economic and pricing conditions in the oil and gas industry, may have a material
adverse effect on the Company's business, financial condition and results of
operations.
Suppliers
The Company's principal suppliers are equipment dealers, pipe
manufacturers and distributors and construction tool suppliers. The Company is
not dependent upon a single supplier for any of its tools or pipe and buys most
of its construction tools and pipe locally at the job site. The Company
purchases or leases its heavy equipment from dealers in Odessa, Texas, the site
of its home office. Equipment, pipe and construction tools used in the Company's
business are readily available and the Company has not experienced any shortage
or delay in acquiring equipment, pipe or tools.
Employees
At September 30, 1998, the Company had approximately 228 employees
including 4 executive and 15 administrative personnel. The Plant Division and
the Engineering Division each employ approximately 50 employees, the Pipeline
Division employs approximately 109 full-time field construction workers and 50
temporary workers. The number of employees in the Plant, Engineering and
Pipeline Divisions may vary depending on the work load but generally run between
200 to 250. None of the Company's employees are covered by a collective
bargaining agreement and the Company considers its relations with its employees
to be good.
Property
The Company leases a 38,000 square foot office and shop facility on
approximately six acres of land in Odessa, Texas from an unaffiliated third
party at an annual rental of $18,000, plus utilities and taxes. The original
lease term was for a term of five years ending April 1, 1997, but has been
extended for an additional five years under the terms of the lease. The Company
deems this facility adequate for its needs for at least several years.
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the
Company's directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Sam E. Holloman 68 Chairman of the Board
Mark E. Stevenson 43 President, Chief Operating Officer and Director
Peter Lucas 44 Senior Vice President, Chief Financial Officer,
Secretary, Treasurer and Director
John E. Holdridge 59 Director
James E. Hogue 61 Director
</TABLE>
Sam E. Holloman founded Construction and Leasing in 1967 and, as
President and Chairman of the Board of Construction and Manager of Leasing,
managed the growth and development of the businesses. He was elected a Director
and Chairman of the Company in May 1998. Mr. Holloman has 47 years of experience
in the oil field construction industry. Prior to the founding of Construction
and Leasing, he was a partner in another utility and oil field construction
company from 1960 to 1967. Prior to 1967, he had ten years experience with other
construction companies in the Permian Basin. He studied business at Sul Ross
University and University of Texas of the Permian Basin.
Mark E. Stevenson was elected Executive Vice President and Chief
Operating Officer of the Company in May 1998 and President in August 1998. From
1983 to present he has been Vice President and General Manager of the Pipeline
Division. Mr. Stevenson received a BS in Engineering Technology, focusing on
Construction Management, from Texas Tech University in 1976.
Peter Lucas was elected Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company in May 1998. Since April 1997 he has
served as Senior Vice President and Chief Financial Officer of Westower
Corporation. From August 1995 to April 1997, Mr. Lucas served as Chief Financial
Officer of Cotton Valley Resources Corporation, a Dallas based public oil and
gas company. From May 1992 to July 1995, he served as Chief Financial Officer of
Canmax Inc., a Dallas based public company that develops software for gas
stations and convenience stores. Mr. Lucas is a member of the Canadian Institute
of Chartered Accountants. He received his professional training at Coopers &
Lybrand, which he left in 1984 to form his own tax practice. Six years later,
Mr. Lucas's practice merged with Coopers & Lybrand, with whom he was a partner
until 1992. Mr. Lucas passed the AICPA reciprocity examination in 1993, and is
experienced in domestic taxation, accounting and securities matters. He received
a bachelor of commerce degree from the University of Alberta in 1978.
John E. Holdridge was elected a Director and President and Chief
Executive Officer of the Company in May 1998 He resigned as President and Chief
Executive Officer in August 1998 but continues as a Director. He also serves as
Chairman of Odessa Babbitt Bearing Company ("OBBCO"), and previously served as
President of that company from 1963 to 1992. OBBEC is a bearing manufacturing
company headquartered in Odessa, Texas. During his tenure at OBBCO, Mr.
Holdridge was responsible for the purchase and sale of several companies
including D&F Machine (1973-1981), Zimco Electric Corporation (1975-1988), and
Westfork Development Company (1975-1980). He has broad experience in various
phases of the oil and gas industry.
James E. Hogue was appointed a Director of the Company in October 1998.
He has been President, Chief Operating Officer and a Director of Cotton Valley
Resources Corporation, a publicly-owned oil and gas exploration and development
corporation since July 1996. He served as Chairman of CV Energy from February
1995 to January 1996 and Chairman of CV Trading from May 1995 to January 1996.
He was President of CV Energy and CV Operating in January 1996. Mr. Hogue also
has been director, President and major shareholder of Third Coast Capital, Inc.,
a venture capital company, since 1988. Since 1991, Mr. Hogue has served as
President of Martex Oil and Gas, Inc.
Directors of the Company are elected at each annual meeting of
shareholders. The officers of the Company are elected annually by the Board of
Directors. Officers and directors hold office until their respective successors
are elected and qualified or until they're earlier resignation or removal.
Outside Directors
The Company has agreed to appoint one additional outside director who is
not an officer, employee or 5% shareholder or related to an officer, employee or
5% shareholder upon conclusion of the offering. This director has not been
selected.
Compensation of Directors
Directors who are employees of the Company will not receive any
remuneration in their capacity as directors. Outside directors will receive
$12,000 annually, and $500 per meeting attended and related travel expenses.
<PAGE>
Indemnification and Limitation on Liability
If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by any reason of their
positions as officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to its Articles of Incorporation and By-laws, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Executive Compensation
The following table sets forth the compensation awarded to, earned by, or paid
to Sam Holloman and all executive officers (the "Named Executive Officers") who
earned over $100,000 for services rendered to Construction for the fiscal years
ended October 31, 1998, November 2, 1997 and November 1, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Annual Compensation All Other
Principal Position Fiscal Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Sam Holloman October 31, 1998 $166,080 0
Chief Executive Officer November 2, 1997 $166,080 $500,000 -
November 1, 1996 90,000 0 -
Mark Stevenson October 31, 1998 $79,413 $65,000
Vice President November 2, 1997 $ 70,000 $83,000
</TABLE>
Prior to this offering, the Company was a privately held corporation and
distributed much of its income to shareholders by way of bonuses for income tax
planning purposes. In the future, the Company intends to compensate its officers
in accordance with the recommendations of a compensation committee consisting
entirely of outside directors. Employment Agreements
The Company has no employment agreements.
Stock Option Plan
The 1998 Stock Option Plan, (the "Stock Option Plan") provides for the
grant to employees, officers, directors, and consultants to the Company or any
parent, subsidiary or affiliate of the Company of up to 240,000 shares of the
Company's Common Stock, subject to adjustment in the event of any subdivision,
combination, or reclassification of shares. The Stock Option Plan will terminate
in 2008. The Stock Option Plan provides for the grant of incentive stock options
("ISO's") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified options at the discretion of the Board of
Directors or a committee of the Board of Directors (the "Committee"). The
exercise price of any option will not be less than the fair market value of the
shares at the time the option is granted. The options granted are exercisable
within the times or upon the events determined by the Board or Committee set
forth in the grant, but no option is exercisable beyond ten years from the date
of the grant. The Board of Directors or Committee administering the Stock Option
Plan will determine whether each option is to be an ISO or non-qualified stock
option, the number of shares, the exercise price, the period during which the
option may be exercised, and any other terms and conditions of the option. The
holder of an option may pay the option price in (1) cash, (2) check, (3) other
shares of the Company, (4) authorization for the Company to retain from the
total number of shares to be issued that number of shares having a fair market
value on the date of exercise equal to the exercise price for the total number
of shares, (5) irrevocable instructions to a broker to deliver to the Company
the amount of sale or loan proceeds required to pay the exercise price, (6)
delivery of an irrevocable subscription agreement for the shares which
irrevocably obligates the option holder to take and pay for shares not more than
12 months after the date of the delivery of the subscription agreement, (7) any
combination of the foregoing methods of payment, or (8) other consideration or
method of payment for the issuance of shares as may be permitted under
applicable law. The options are nontransferable except by will or by the laws of
descent and distribution. Upon dissolution, liquidation, merger, sale of stock
or sale of substantially all assets, outstanding options, notwithstanding the
terms of the grant, will become exercisable in full at least 10 days prior to
the transaction. The Stock Option Plan is subject to amendment or termination at
any time and from time to time, subject to certain limitations. The plan is
administered by the Compensation Committee of the Board of Directors, which is
composed entirely of directors who are "disinterested persons" as defined in
Rule 16b-3 of the Securities Exchange Act of 1934, as amended.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of July 31, 1998 of the Common Stock by (a) each person
known by the Company to be a beneficial owner of more than 5% of the outstanding
shares of Common Stock, (b) each director of the Company, (c) each Named
Executive Officer, and (d) all directors and executive officers of the Company
as a group. Unless otherwise noted, each beneficial owner named below has sole
investment and voting power with respect to the Common Stock shown below as
beneficially owned by him. The table assumes the issuance of 200,000 shares to
the Sellers to consummate the Acquisition.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering After Offering
Name and Address of Number of Percent Number of Percent
Beneficial Owner Shares Owned Owned Shares Owned Owned
<S> <C> <C> <C> <C>
Sam E. Holloman (1) 200,000 - 200,000 8.3%
John E. Holdridge (1) 57,600 4.1 57,600 2.4
Peter Lucas Family Trust (2) 100,000 7.1 100,000 4.2
Mark E. Stevenson (1) - - - - -
Peter Jeffrey Family Trust (3) 100,000 7.1 100,000 4.2
Calvin J. Payne Family Trust (4) 100,000 7.1 100,000 4.2
S. Roy Jeffrey Family Trust (5) 100,000 7.1 100,000 4.2
James E. Hogue (6) 131,479 9.4 131,479 5.5
Revere Financial Group, Inc. (7) 160,000 11.4 160,000 6.7
Robert A. Shuey, III (8) 80,000 5.7 80,000 3.3
John J. Gorman (8) 80,000 5.7 80,000 3.3
Maurice J. Bates (9) 80,000 5.7 80,000 3.3
All Executive Officers and Directors
as a group (4 persons) (10) 489,079 34.9% 489,079 20.4%
- -----------
</TABLE>
(1) The addresses of Messrs. Holloman, Holdridge and Stevenson is 5257 West
Interstate 20, Odessa, Texas 79769.
(2) The address of Mr. Lucas is 670 South Pekin Road, Woodland Washington
98674. Includes 100,000 shares held by the Lucas Family Trust, beneficial
ownership of which is disclaimed by Mr. Lucas.
(3) The address of Peter Jeffrey is P. O. Box 390 Thorsby, Alberta, Canada TOC
OVO.
(4) The address of Mr. Payne is 5264 Drayton Harbour Road, Blaine, Washington
98230.
(5) The address of S. Roy. Jeffrey is 18375-67 Avenue, Surrey, British Columbia,
Canada V3S 8E7.
(6) The address of Mr. Hogue is 6405 Forest Lane Dallas, Texas, 75230. Mr.
Hogue disclaims beneficial interest in 82,183 of such shares held by his
adult children, directly and through corporations owned by them.
(7) The address of Revere Financial Group, Inc. is 8214 Westchester, Dallas,
Texas,75225.
(8) The address of Messrs. Shuey and Gorman is Two Cielo Center, 1250 Capitol
of Texas Hwy. South, Suite 500
Austin, Texas 78746.
(9) The address of Mr. Bates is 8214 Westchester, Dallas, Texas 75225.
(10) Includes 131,479 shares attributed to James E. Hogue. SeeNote (6) above.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Closing, the Company will use a portion of the proceeds of this
offering to consummate the Acquisition of Construction and Leasing. The Company
will pay Mr. Holloman and the other Sellers $6,000,000 cash from the net
proceeds of the offering and issue to Mr. Holloman and the Sellers 200,000
shares of Common Stock. In exchange therefore, the Sellers will deliver to the
Company all of the outstanding common stock of Construction and all of the
membership interests in Leasing. See "The Acquisition."
The Company leases substantially all of the equipment used in its
business from Leasing. For the 12 months ended November 2, 1996 and November 1,
1997 and the nine months ended July 31, 1998, the Company paid Leasing $200,414,
$390,204 and $402,401, respectively for the lease of the equipment. The Company
believes that the rentals have been on terms at least as favorable as it could
obtain from an independent leasing company. In the Acquisition, the Company will
acquire all of the outstanding membership interests in Leasing and operate
Leasing as a wholly-owned subsidiary. See "The Acquisition."
At November 1, 1997, Construction had a note receivable for $62,800 from
Western Sunset Estates, Inc., a corporation owned by Mr. Holloman, for
construction work in 1997. The note is guaranteed by Mr. Holloman.
All future transactions between the Company and its officers and
directors, principal shareholders and affiliates, will be approved by a majority
of the Board of Directors, including a majority of the independent,
disinterested outside directors, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
<PAGE>
DESCRIPTION OF SECURITIES
Units
Each Unit consists of one share of Common Stock and one Warrant. The Shares
and the Warrants included in the Units may not be separately traded until six
months after the date of this prospectus unless earlier separated upon ten day's
written notice from the Representatives to the Company.
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock,
$0.01 par value. As of September 30, 1998 there were 1,200,000 shares of Common
Stock issued. There were 16 holders of record of the Common Stock. The holders
of the Common Stock are entitled to share ratably in any dividends paid on the
Common Stock when, as and if declared by the Board of Directors out of legally
available funds. Each holder of Common Stock is entitled to one vote for each
share held of record. The Common Stock is not entitled to cumulative voting or
preemptive rights and is not subject to redemption. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in the net assets legally available for distribution.
All outstanding shares of Common Stock are fully paid and non-assessable.
Warrants
The Warrants will be issued in registered form under, governed by, and
subject to the terms of a warrant agreement (the "Warrant Agreement") between
the Company and American Stock Transfer & Trust Company as warrant agent (the
"Warrant Agent"). The following statements are brief summaries of certain
provisions of the Warrant Agreement. Copies of the Warrant Agreement may be
obtained from the Company or the Warrant Agent and have been filed with the
Commission as an exhibit to the Registration Statement of which this Prospectus
is a part.
Each Warrant entitles the holder thereof to purchase at any time one
share of Common Stock at an exercise price of $12.00 per share at any time after
the Common Stock and Warrants become separately tradable until _______, 2003.
The right to exercise the Warrants will terminate at the close of business on
______, 2003. The Warrants contain provisions that protect the Warrant holders
against dilution by adjustment of the exercise price in certain events,
including but not limited to stock dividends, stock splits, reclassification or
mergers. A Warrant holder will not possess any rights as a shareholder of the
Company. Shares of Common Stock, when issued upon the exercise of the Warrants
in accordance with the terms thereof, will be fully paid and non-assessable.
Commencing twelve months after the date of this Prospectus, the Company
may redeem some or all of the Warrants at a call price of $0.05 per Warrant,
upon thirty (30) day's prior written notice if the closing sale price of the
Common Stock on the American Stock Exchange has equaled or exceeded $20 for ten
(10) consecutive days.
The Warrants may be exercised only if a current prospectus relating to
the underlying Common Stock is then in effect and only if the shares are
qualified for sale or exempt from registration under the securities laws of the
state or states in which the purchaser resides. So long as the Warrants are
outstanding, the Company has undertaken to file all post-effective amendments to
the Registration Statement required to be filed under the Securities Act, and to
take appropriate action under federal law and the securities laws of those
states where the Warrants were initially offered to permit the issuance and
resale of the Common Stock issuable upon exercise of the Warrants. However,
there can be no assurance that the Company will be in a position to effect such
action, and the failure to do so may cause the exercise of the Warrants and the
resale or other disposition of the Common Stock issued upon such exercise to
become unlawful. The Company may amend the terms of the Warrants, but only by
extending the termination date or lowering the exercise price thereof. The
Company has no present intention of amending such terms. However, there can be
no assurances that the Company will not alter its position in the future with
respect to this matter. Preferred Stock
The Board of Directors, without further action by the shareholders, is
authorized to issue up to 3,000,000 shares of preferred stock, $.01 par value,
in one or more series and to fix and determine as to any series, any and all of
the relative rights and preferences of shares in each series, including without
limitation, preferences, limitations or relative rights with respect to
redemption rights, conversion rights, voting rights, dividend rights and
preferences on liquidation. The issuance of preferred stock with voting and
conversion rights could have an adverse affect on the voting power of the
holders of the Common Stock. The issuance of preferred stock could also decrease
the amount of earnings and assets available for distribution to holders of the
Common Stock. In addition, the issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no plans or commitments to issue any shares of preferred stock.
Transfer Agent and Registrar If the Securities are accepted for listing on the
American Stock Exchange, the Transfer Agent and Registrar for the Units, the
Common Stock and the Warrants will be American Stock Transfer & Trust Company,
40 Wall Street, New York, New York 10005.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,400,000
shares of Common Stock issued and outstanding. Of these shares, the 1,000,000
shares sold in this offering (1,150,000 if the over-allotment option is
exercised in full) will be freely tradable in the public market without
restriction under the Securities Act, except shares purchased by an "affiliate"
(as defined in the Securities Act) of the Company. The remaining 1,400,000
shares, including the 200,000 shares issued to the Sellers at the Closing in
connection with the Acquisition, (the "Restricted Shares"), will be "restricted
shares" within the meaning of the Securities Act and may be publicly sold only
if registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as those provided by Rule 144 under the
Securities Act.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least one year has passed since the later of the date such shares were acquired
from the Company or any affiliate of the Company. Rule 144 provides, however
that within any three-month period such person may only sell up to the greater
of 1% of the then outstanding shares of the Company's Common Stock
(approximately 24,000 shares following the completion of this offering) or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 also are subject to
certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of 90 days preceding a sale of Restricted
Shares is entitled to sell such shares under Rule 144 without regard to such
limitations if at least two years have passed since the later of the date such
shares were acquired from the Company or any affiliate of the Company. Shares
held by persons who are deemed to be affiliated with the Company are subject to
such volume limitations regardless of how long they have been owned or how they
were acquired.
After this offering, executive officers, directors and senior
management will own 357,600 shares of the Common Stock. The Company's officers,
directors and shareholders and the Sellers will enter into an agreement with the
Representatives providing that they will not sell or otherwise dispose of any
shares of Common Stock held by them for a period of one year after the date of
this Prospectus without the prior written consent of the Representatives.
The Company can make no prediction as to the effect, if any, that offer
or sale of these shares would have on the market price of the Common Stock.
Nevertheless, sales of significant amounts of Restricted Shares in the public
markets could adversely affect the fair market price of Common Stock, as well as
impair the ability of the Company to raise capital through the issuance of
additional equity securities.
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters named
below, and each of the Underwriters, for whom Capital West Securities, Inc. (the
"Representatives") are acting as Representatives, have severally agreed to
purchase the number of Units set forth opposite its name in the following table.
Underwriters Number of Units
Capital West Securities, Inc.
Total........................................ 1,000,000
=========
The Representatives have advised the Company that the Underwriters
propose to offer the Units to the public at the initial public offering price
per share set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession of not more than $___ per Unit, of which $____
may be reallowed to other dealers. The public offering price, concession and
reallowance to dealers will not be reduced by the Representatives until after
the offering is completed No such reduction shall change the amount of proceeds
to be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to
150,000 additional Units to cover over-allotments, if any, at the same price per
share as the Company will receive for the 1,000,000 Units that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional Units that the number of
Units to be purchased by it shown in the above table represents as a percentage
of the 1,000,000 Units offered hereby. If purchased, such additional Units will
be sold by the Underwriters on the same terms as those on which the 1,000,000
Units are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The holders of approximately 1,400,000 shares of the Common Stock after
the offering have agreed with the Representatives that, until one year after the
date of this Prospectus, subject to certain limited exceptions, they will not
sell, contract to sell, or otherwise dispose of any shares of Common Stock, any
options to purchase shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, owned directly by
such holders or with respect to which they have the power of disposition,
without the prior written consent of the Representatives. Substantially all of
such shares will be eligible for immediate public sale following expiration of
the lock-up periods, subject to the provisions of Rule 144. In addition, the
Company has agreed that until 365 days after the date of this Prospectus, the
Company will not, without the prior written consent of the Representatives,
subject to certain limited exceptions, issue, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock, any options to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the Company's sales of shares
in this offering, the issuance of Common Stock upon the exercise of outstanding
options or warrants or the issuance of options under its employee stock option
plan. See "Shares Eligible for Future Sale."
The Underwriters have the right to offer the Securities offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc. and may allow such dealers
such portion of its ten (10%) percent commission as the Underwriters may
determine.
The Underwriters will not confirm sales to any discretionary accounts
without the prior written consent of their customers.
The Company has agreed to pay the Representatives a non-accountable
expense allowance of 2.00% of the gross amount of the Units sold ($200,000 on
the sale of the Units offered) at the closing of the offering. The Underwriters'
expenses in excess thereof will be paid by the Representatives. To the extent
that the expenses of the underwriting are less than that amount, such excess
shall be deemed to be additional compensation to the Underwriters. In the event
this offering is terminated before its successful completion, the Company may be
obligated to pay the Representatives a maximum of $25,000 on an accountable
basis for expenses incurred by the Underwriters in connection with this
offering.
The Company has agreed that for a period of five years from the closing
of the sale of the Units offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as the
Representatives have not exercised such right, the Representatives shall have
the right to designate an observer, who shall be entitled to attend all meetings
of the Board and receive all correspondence and communications sent by the
Company to the members of the Board. The Representatives have not yet identified
to the Company the person who is to be nominated for election as a director or
designated as an observer.
The Underwriting Agreement provides for indemnification among the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act, and the Exchange Act.
Underwriters' Warrants
Upon the closing of this offering, the Company has agreed to sell to
the Underwriters for nominal consideration, the Underwriters' Warrants. The
Underwriters' Warrants are exercisable at 140% of the public offering price for
a four-year period commencing one year from the effective date of this offering.
The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated for a period of one year from the date of this offering except to
the officers of the Underwriters and their successors and dealers participating
in the offering and/or their partners or officers. The Underwriters' Warrants
will contain antidilution provisions providing for appropriate adjustment of the
number of shares subject to the Warrants under certain circumstances. The
holders of the Underwriters' Warrants have no voting, dividend or other rights
as shareholders of the Company with respect to shares underlying the
Underwriters' Warrants until the Underwriters' Warrants have been exercised.
The Company has agreed, during the four year period commencing one year
from the date of this offering, to give advance notice to the holders of the
Underwriters' Warrants or underlying securities of its intention to file a
registration statement, other than in connection with employee stock options,
mergers, or acquisitions, and in such case the holders of the Underwriters'
Warrants and underlying securities shall have the right to require the Company
to include their securities in such registration statement at the Company's
expense.
For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of the Company's
shares, with a resulting dilution in the interest of other shareholders. The
holders of the Underwriters' Warrants can be expected to exercise the
Underwriters' Warrants at a time when the Company would, in all likelihood, be
able to obtain needed capital by an offering of its unissued shares on terms
more favorable to the Company than those provided by the Underwriters' Warrants.
Such facts may adversely affect the terms on which the Company can obtain
additional financing. Any profit realized by the Underwriters on the sale of the
Underwriters' Warrants or shares issuable upon exercise of the Underwriters'
Warrants may be deemed additional underwriting compensation.
If the Representatives, at their election, at any time one year after
the date of this Prospectus, solicit the exercise of the Warrants, the Company
will be obligated, subject to certain conditions, to pay the Representatives a
solicitation fee equal to 5% of the aggregate proceeds received by the Company
as a result of the solicitation. No warrant solicitation fees will be paid
within one year after the date of this Prospectus. No solicitation fee will be
paid if the market price of the Common Stock is lower than the then exercise
price of the Warrants, no solicitation fee will be paid if the Warrants being
exercised are held in a discretionary account at the time of exercise, except
where prior specific approval for exercise is received from the customer
exercising the Warrants, and no solicitation fee will be paid unless the
customer exercising the Warrants states in writing that the exercise was
solicited and designates in writing the Representative or other broker-dealer to
receive compensation in connection with the exercise. The Representatives may
reallow a portion of the fee to soliciting broker-dealers.
Determination of Offering Price
The initial public offering price was determined by negotiations
between the Company and the Representatives. The factors considered in
determining the public offering price include the Company's revenue growth since
its organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the offering. The offering price does not bear any
relationship to the Company's assets, book value, net worth or other recognized
objective criteria of value.
Prior to this offering, there has been no public market for the
Securities, and there can be no assurance than an active market will develop.
American Stock Exchange
The Company intends to apply for listing of the Units, Common Stock and
Warrants on the American Stock Exchange under the trading symbols "HOL.U," "HOL"
and "HOL.WS," respectively. The listing is contingent, among other things, upon
the Company obtaining 400 shareholders.
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by Maurice J. Bates L.L.C., Dallas, Texas. Maurice
J. Bates, Esq. owns 80,000 shares of the Company's Common Stock. Certain legal
matters in connection with the sale of the Securities offered hereby will be
passed upon for the Underwriters by Wolin, Ridley & Miller L.L.P., Dallas,
Texas.
EXPERTS
The financial statements included in this Prospectus, for of the fiscal
years ended November 1, 1997 and November 2, 1996 have been included in reliance
on the report of Johnson, Miller, & Company, independent accountants, given on
the authority of said firm as experts in auditing and accounting. Holloman
Construction Company changed accountants for the fiscal year ended November 1,
1997. Green & Frost, Inc., independent accountants audited the Company's books
for the fiscal year ended November 2, 1996 but were not retained to conduct the
audit for 1997. The opinion of Green & Frost, Inc. for fiscal 1996 did not
contain an adverse opinion or disclaimer of opinion. During the two most recent
fiscal years or any interim period there were no disagreements with Green &
Frost, Inc., whether resolved or unresolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which, if not resolved to the satisfaction of Green & Frost, Inc.,
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report.
Index To Financial Statements
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Combined Financial Statements:
Unaudited Pro Forma Condensed Combined Balance Sheet - July 31, 1998 F-1
Unaudited Pro Forma Condensed Combined Statement of Earnings -
Nine Months Ended July 31, 1998 F-3
Unaudited Pro Forma Condensed Combined Statement of Earnings -
PeriodEnded November 1, 1997 F-4
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-5
Holloman Corporation:
Report of Independent Certified Public Accountants F-6
Balance Sheet - July 31, 1998 F-7
Notes to Financial Statement F-8
Holloman Construction Co.:
Report of Independent Certified Public Accountants F-12 Balance Sheet -
July 31, 1998 (unaudited) and November 1, 1997 F-13 Statement of
Earnings - Nine Months Ended July 31, 1998 and 1997 (unaudited)
and Two Periods Ended November 1, 1997 and November 2, 1996. F-13
Statement of Stockholders Equity - Nine Months Ended July 31, 1998 (unaudited)
and Two Periods Ended November 1, 1997 and November 2, 1996 F-14
Statements of Cash Flows - Nine Months Ended July 31, 1998 and
1997 (unaudited)
and Two Periods Ended November 1, 1997 and November 2, 1996. F-15
Notes to Financial Statements F-17
T Sistes Leasing, L.L.C.
Report of Independent Certified Public Accountants F-26
Balance Sheet - July 31, 1998 (unaudited) and December 31, 1997 and 1996 F-27
Statements of Operations - Seven Months Ended July 31, 1998 and 1997
(unaudited) and Two Years Ended December 31, 1997 and 1996 F-29
Statements of Members Capital - Seven months Ended July 31, 1998
(unaudited) and Two Years Ended December 31, 1997 F-30
Statement of Cash Flows - Seven Months Ended July 31, 1998 and 1997
(unaudited) and Two Years Ended December 31, 1997 and 1996 F-31
Notes to Financial Statements F-33
</TABLE>
31
<PAGE>
HOLLOMAN CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
July 31, 1998
The following pro forma condensed combined balance sheet as of July 31,
1998, and the pro forma condensed combined statements of earnings for the years
ended November 1, 1997 and November 2, 1996, and nine months ended July 31, 1998
and July 31, 1997, give effect to the acquisition of 100% of the outstanding
common shares of Holloman Construction Co. and T Sisters Leasing, L.L.C. by
Holloman Corporation. The pro forma information is based on the historical
financial statements of Holloman Construction Co, T Sisters Leasing, L.L.C. and
Holloman Corporation giving effect to the transaction under the purchase method
of accounting and the assumptions and adjustments in the accompanying notes to
the pro forma financial statements.
The pro forma statements have been prepared by Holloman Corporation
management based upon the financial statements of Holloman Construction Co. and
T Sisters Leasing, L.L.C. included elsewhere herein. These pro forma statements
may not be indicative of the results that actually would have occurred if the
combination had been in effect on the dates indicated or which may be obtained
in the future. The pro forma financial statements should be read in conjunction
with the audited financial statements and notes of Holloman Construction Co. and
T Sisters Leasing, L.L.C. contained elsewhere herein.
ASSETS
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
Holloman T sisters Holloman Pro Forma Pro Forma
Construction Leasing L.L.C. Corporation Adjustment Combined
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 507,565 20,405 265,000 - 792,970
Accounts receivable 4,899,726 29,313 - (2) (58,671) 4,870,368
Other current assets 405,941 14,213 - - 420,154
-------------- ------------- -------------- -------------
Total current assets 5,813,232 63,931 265,000 (58,671) 6,083,492
---------------- ------------- -------------- -------------------
PROPERTY, PLANT AND
EQUIPMENT 3,901,405 2,020,379 - - 5,921,784
Less: accumulated depreciation and
amortization 3,009,446 510,324 - - 3,519,770
---------------- ------------- -------------- -------------
891,959 1,510,055 - - 2,402,014
-------------- --------------- -------------- -------------
OTHER ASSETS
Other 338,016 50 60,000 (2) (131,739) 266,327
Goodwill - - - (1) 4,257,409 4,257,409
---------- ------------ ------------ -------------------
$ 7,043,207 1,574,036 325,000 4,066,999 13,009,242
================ =============== ============== =====================
</TABLE>
See notes to pro forma condensed combined financial statements.
F-1
<PAGE>
HOLLOMAN CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C> <C> <C> <C>
Notes payable and current maturities
of long-term debt $ 488,647 386,235 - (2) (30,544) 844,338
Accounts payable 2,000,868 91,412 - (2) (83,235) 2,009,045
Related party payable - - - (1) 6,000,000 6,000,000
Accrued expenses and other 741,159 8,012 - - 749,171
-------------- ------------- -------------- -------------
Total current liabilities 3,230,674 485,659 - 5,886,221 9,602,554
LONG-TERM DEBT,
less current maturities 83,745 1,074,574 - (2) (76,631) 1,081,688
RELATED PARTY PAYABLE - - - (1) 2,000,000 2,000,000
DEFERRED INCOME TAXES 69,567 - - (1) (69,567) -
------------- ------------- -------------- --------------------
Total liabilities 3,383,986 1,560,233 - 7,740,023 12,684,242
---------------- --------------- -------------- ---------------------
STOCKHOLDERS' EQUITY
Common stock 85,000 - 12,000 (1) (85,000) 12,000
Additional contributed capital - - 313,000 - 313,000
Retained earnings 3,812,549 - - (1) (3,812,549) -
Members capital - 13,803 - (1) (13,803) _
------------- ------------- -------------- -------------------
3,897,549 13,803 325,000 (3,911,352) 325,000
Less Treasury shares (238,328) - - (1) 238,328 -
--------------- ------------- -------------- -------------------
Total stockholders' equity 3,659,221 13,803 325,000 (3,673,024) 325,000
---------------- ------------- -------------- ----------------------
$ 7,043,207 1,574,036 325,000 4,066,999 13,009,242
================ =============== ============== =====================
</TABLE>
See notes to pro forma condensed combined
financial statements.
F-2
<PAGE>
HOLLOMAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS
For the Nine Months Period Ended July 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
Holloman T Sisters Holloman Pro Forma
Pro Forma
Construction Leasing L.L.C. Corporation Adjustment Combined
<S> <C> <C> <C> <C> <C>
Revenues
Pipeline construction $ 8,005,763 - - - 8,005,763
Plant construction 4,356,753 - - - 4,356,753
Special projects 6,113,320 - - - 6,113,320
Lease income - 402,401 - (3) 402,401 -
---------- --------------- ------------ ------------------
Total revenues 18,475,836 402,401 - 402,401 18,475,836
Costs of Services and Construction 15,358,543 120,076 - (3) (402,401) 15,076,218
----------------- ------------- -------------- --------------------
Gross profit 3,117,293 282,325 - - 3,399,618
General and Administrative Expenses 1,781,287 289,189 - (4) 159,653 2,230,129
----------- --------------- ------------ ------------------
Income (loss) from operations 1,336,006 (6,864) - 159,653 1,169,489
Other Income (Expense) 18,275 (2,235) - - 16,040
------ ------------- -------------- -------------
Earnings before
income taxes 1,354,281 (9,099) - 159,653 1,185,529
Income Tax Expense 464,975 - - (4) (54,282 410,693
-------------- ------------- -------------- -------------------
NET EARNINGS $ 889,306 (9,099) - 105,371 774,836
============== ============= ============== ===================
Weighted average common
shares outstanding
1,200,000
Basic and diluted earnings $ .65
============
</TABLE>
See notes to pro forma condensed combined
financial statements.
F-3
<PAGE>
HOLLOMAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS
For the Period Ended November 1, 1997
<TABLE>
<CAPTION>
HISTORICAL
Holloman T Sisters Holloman Pro Forma Pro Forma
Construction Leasing L.L.C. Corporation Adjustment Combined
<S> <C> <C> <C> <C> <C>
Revenues
Pipeline construction $ 9,974,648 - - - 9,974,648
Plant construction 4,057,256 - - - 4,057,256
Special projects 5,334,779 - - - 5,334,779
Lease income and other - 397,080 - (3) 390,204 6,876
------------- ------------- -------------- -------------------
Total revenues 19,366,683 397,080 - 390,204 19,373,559
----------------- ------------- -------------- -------------------
Costs of Services and Construction 16,389,974 65,663 - (3) (390,204) 16,065,433
----------------- ------------- -------------- --------------------
Gross profit 2,976,709 331,417 - - 3,308,126
General and Administrative Expenses 1,997,914 245,509 - (4) 212,871 2,456,294
-------------- --------------- ------------ ------------------
Income from operations 978,795 85,908 - 212,871 851,832
Other Income (Expense) 179,253 (72,378) - - 106,875
-------------- ------------- -------------- -------------
Earnings before income taxes 1,158,048 13,530 - 212,871 958,707
---------------- ------------- -------------- -------------------
Income Tax Expense (Benefit)
Current 559,871 - - - 559,871
Deferred (146,808) - - (4) (72,376) (219,184)
------------- ------------ ------------ -----------------
413,063 - - (72,376) 340,687
-------------- ------------- -------------- -------------------
NET EARNINGS $ 744,985 13,530 - 140,495 618,020
============== ============= ============== ===================
Weighted average common
shares outstanding
1,200,000
Net earnings per common share .52
</TABLE>
See notes to pro forma condensed combined
financial statements.
F-4
<PAGE>
HOLLOMAN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
July 31, 1998 and November 1, 1997
(1) Upon consummation of this offering contemplated herein, Holloman
Corporation will acquire 100% of the outstanding common stock of
Holloman Construction Co. and T Sisters Leasing L.L.C. for $8,000,000.
The pro forma financial statements combine the assets and liabilities
of the three companies at July 31, 1998 and their results of
operations for the year ended November 1, 1997 and the nine months
ended July 31, 1998. In combining the entities, the following pro
forma adjustments have been made.
Under the purchase accounting Holloman Construction, Inc. is and T
Sisters L.L.C.'s assets and liabilities are required to be adjusted to
reflect their fair values. The adjusted amounts have been based on
appraisals and computational techniques designed to approximate their
fair value. The following adjustments have been made:
<TABLE>
<S> <C>
Net assets as reported by Holloman Construction Company $ 3,659,221
Net assets as reported by T Sisters Leasing, L.L.C. 13,803
Elimination of previously deferred taxes 69,567
Goodwill 4,257,409
------------
As included in the pro forma combined balance sheet $ 8,000,000
===========
(2) Elimination of intercompany receivables/payables at July 31, 1998:
Elimination of intercompany payables $ (190,410)
=============
</TABLE>
(3) Elimination of Intercompany income/expense.
<TABLE>
<S> <C> <C>
July 31, November 1,
1998 1997
Intercompany leasing income $ 402,401 390,204
Intercompany leasing expense (402,401) (390,204)
-------------- ----
$ - - - -
============ ============ ============= =============
</TABLE>
(4) Amortization of goodwill over twenty years. Proforma amortization
for:
Nine months $ 159,653 -
============== =============
Twelve months $ - 212,871
============= ==============
Related tax benefit:
Nine months $ 54,282 -
============= =============
Twelve months $ - 72,376
============= =============
F-5
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Holloman Corporation:
We have audited the accompanying balance sheet of Holloman Corporation as of
July 31, 1998. 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 financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Holloman Corporation as of July 31,
1998, in conformity with generally accepted accounting principles.
Johnson, Miller & Co.
Odessa, Texas
November 12, 1998
F-6
HOLLOMAN CORPORATION
BALANCE SHEET
July 31, 1998
ASSETS
CASH $ 265,000
-----------
Total current assets $ 265,000
OTHER ASSETS 60,000
$ 325,000
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
Preferred stock - authorized and unissued
3,000,000 shares of $.01 par value $ -
Common stock authorized, 20,000,000
shares of $.01 par value; issued 1,200,000
shares 12,000
Additional contributed capital 313,000
Retained earnings -
$ 325,000
The accompanying notes are an integral part
of this statement.
F-7
<PAGE>
HOLLOMAN CORPORATION
NOTES TO FINANCIAL STATEMENT
July 31, 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Holloman Corporation was organized in May 1998 to acquire all of the
outstanding stock of Holloman Construction Company. The Company specializes in
pipeline construction, plant construction, and engineering services. The
majority of the Company's business is transacted in the state of Texas, but the
Company has authorization to work in numerous other states that have activities
relating to the oil and gas industry. Most of the Company's work is obtained
through bids. The Company anticipates having a fiscal year ending on the
Saturday closest to October 31.
A summary of the significant accounting policies in the preparation of
the accompanying financial statement follows.
1. Cash Equivalents
For purposes of this financial statement, cash equivalents are
short-term, highly liquid investments that are readily
convertible to known amounts of cash.
2. Employee Stock Plan
The Company has a fixed stock option plan accounted for under
Accounting Principles Board (APB) Opinion 25 and related
Interpretations.
3. Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE B - STOCK OPTION PLAN
On May 22, 1998, the Company adopted a Stock Option Plan. The Stock
Option Plan, (the "Stock Option Plan") provides for the grant to
employees, officers, directors, and consultants to the Company of up to
240,000 shares of the Company's Common Stock, subject to adjustment in
the event of any subdivision, combination, or reclassification of
shares. The Stock Option Plan will terminate in 2008. The Stock Option
Plan provides for the grant of incentive stock options ("ISO's") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and non-qualified options at the discretion of the Board of
Directors or a committee of the Board of Directors (the "Committee").
The exercise price of any option will not be less than the fair market
value of the shares at the time the option is granted. The options
granted are exercisable
F-8
<PAGE>
HOLLOMAN CORPORATION
NOTES TO FINANCIAL STATEMENT
(CONTINUED)
July 31, 1998
NOTE B - STOCK OPTION PLAN (Continued)
within the times or upon the events determined by the Board or
Committee set forth in the grant, but no option is exercisable beyond
ten years from the date of the grant. The Board of Directors or
Committee administering the Stock Option Plan will determine whether
each option is to be an ISO or non-qualified stock option, the number
of shares, the exercise price, the period during which the option may
be exercised, and any other terms and conditions of the option. The
holder of an option may pay the option price in (1) cash, (2) check,
(3) other shares of the Company, (4) authorization for the Company to
retain from the total number of shares to be issued that number of
shares having a fair market value on the date of exercise equal to the
exercise price for the total number of shares, (5) irrevocable
instructions to a broker to deliver to the Company the amount of sale
or loan proceeds required to pay the exercise price, (6) delivery of an
irrevocable subscription agreement for the shares which irrevocably
obligates the option holder to take and pay for shares not more than 12
months after the date of the delivery of the subscription agreement,
(7) any combination of the foregoing methods of payment, or (8) other
consideration or method of payment for the issuance of shares as may be
permitted under applicable law. The options are nontransferable except
by will or by the laws of descent and distribution. Upon dissolution,
liquidation, merger, sale of stock or sale of substantially all assets,
outstanding options, notwithstanding the terms of the grant, will
become exercisable in full at least 10 days prior to the transaction.
The Stock Option Plan is subject to amendment or termination at any
time and from time to time, subject to certain limitations. The plan is
administered by the Compensation Committee of the Board of Directors,
which is composed entirely of directors who are "disinterested persons"
as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended.
NOTE C - PUBLIC OFFERING
On May 22, 1998 the Company Board of Directors authorized the letter of
intent between the Company and Capital West Securities, Inc., in which
Capital West will serve as representative of a group of underwriters
for the offer and sale to the public 1,000,000 units (Units) of the
Company's common stock and redeemable common stock purchase warrants.
The letter of intent provides for the Company to pay the Underwriters a
10% underwriting discount, a 2% non-accountable expense allowance and
sell to the Underwriters an underwriter's warrant to purchase 100,000
Units at 120% of the offering price of the Units. An option for the
Underwriters to also purchase an additional 150,000 Units was
authorized.
F-9
<PAGE>
Report of Independent Certified Public Accountants
To the Directors and Stockholders of
Holloman Construction Co.
We have audited the accompanying balance sheet of Holloman Construction Co., a
Texas corporation, as of November 1, 1997 and the related statements of
earnings, stockholders' equity, and cash flows for the fiscal years ended
November 1, 1997 and November 2, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Holloman Construction Co. as of
November 1, 1997, and the results of its operations and cash flows for the
fiscal years ended November 1, 1997 and November 2, 1996, in conformity with
generally accepted accounting principles.
Johnson, Miller & Co.
Odessa, Texas
January 13, 1998
F-10
<PAGE>
HOLLOMAN CONSTRUCTION CO.
BALANCE SHEETS
July 31, 1998 and November 1, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 507,565 636,449
Accounts receivable (net of allowance of $-0- in 1997
and $18,000 in 1998)
Trade (note B) 4,834,373 4,253,273
Employees 27,932 62,994
Related party 37,421 -
Current portion of related party notes receivable - 38,690
Costs and estimated earnings in excess of billings (net) (note C) 356,082 665,358
Inventories, at lower of cost or market (note A3) 35,161 42,165
Prepaid expenses 14,698 74,963
------------- -------------
Total current assets 5,813,232 5,773,892
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT (notes A5, D and F)
Equipment 3,528,282 3,483,992
Leasehold improvements 355,906 341,790
Land 17,217 17,217
------------ ------------
3,901,405 3,842,999
Less: accumulated depreciation and amortization 3,009,446 2,885,181
---------------- ----------------
891,959 957,818
-------------- --------------
OTHER ASSETS
Receivable from related parties 338,016 192,802
-------------- --------------
$ 7,043,207 6,924,512
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
HOLLOMAN CONSTRUCTION CO.
BALANCE SHEETS
JULY 31,1998 AND NOVEMBER 1,1997
LIABILITIES
<TABLE>
<CAPTION>
1998 1997
------------- ---------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable$ 400,000 -
Current maturities of long-term debt (note D) 88,647 148,423
Accounts payable
Trade 1,979,618 2,091,166
Related party payable 21,250 24,218
Accrued expenses 249,708 725,235
Accrued expenses, related parties 25,317 518,479
Federal income tax payable (notes A6 and G) 466,134 516,650
-------------- --------------
Total current liabilities 3,230,674 4,024,171
LONG-TERM DEBT, less current maturities (note D) 83,745 59,700
DEFERRED INCOME TAXES (notes A6 and G) 69,567 70,726
------------- -------------
3,383,986 4,154,597
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (notes F and J) - -
STOCKHOLDERS' EQUITY
Common stock - $1.00 par, 200,000 shares authorized.
85,000 shares issued and outstanding in 1998 and
1997, respectively 85,000 85,000
Retained earnings 3,812,549 2,923,243
---------------- ----------------
3,897,549 3,008,243
Less Treasury shares totaling 7,411 - at cost (238,328) (238,328)
--------------- ---------------
3,659,221 2,769,915
---------------- ----------------
$ 7,043,207 6,924,512
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
HOLLOMAN CONSTRUCTION CO.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Periods ended
Nine months ended July 31, November 1, November 2,
1998 1997 1997 1996
------------ ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
Pipeline construction $ 8,005,763 6,531,362 9,974,648 6,762,182
Plant construction 4,356,753 3,430,128 4,057,256 3,568,810
Special projects 6,113,320 2,588,434 5,334,779 1,736,928
---------- ---------------- ----------------------
Total revenues 18,475,836 12,549,924 19,366,683 12,067,920
Costs of Services and Construction 15,358,543 10,294,660 16,389,974 10,771,775
----------------- ----------------- -----------------------
Gross profit 3,117,293 2,255,264 2,976,709 1,296,145
General and Administrative Expenses 1,781,287 1,030,663 1,997,914 1,215,319
-------------- --------------- ---------------
Income from operations 1,336,006 1,224,601 978,795 80,826
Other Income (Expense)
Gain on sale of equipment 3,905 - 35,595 48,774
Interest income 2,872 - 12,581 16,813
Interest expense (25,923) (50,737) (57,632) (80,702)
Other income 37,421 197,906 188,709 228,055
------------ ------------- ------------- ---------
Earnings before income taxes 1,354,281 1,371,770 1,158,048 293,765
-------------- --------------- ------------ ------------
Income Tax Expense (Benefit) (notes A6 and G)
Current 466,134 625,191 559,871 45,529
Deferred (1,159) (147,196) (146,808) 60,885
------------ ------------- ------------- ------ -
464,975 477,995 413,063 106,414
-------------- ------------- ------------- ----------
NET EARNINGS $ 889,306 893,775 744,985 187,351
============== ============= ============= =======
Weighted average common
shares outstanding 80,176 81.760 80,176 82,850
============= ================= ==============
Net earnings per common share $ 11.09 10.93 9.29 2.26
=============== ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
HOLLOMAN CONSTRUCTION CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Periods Ended,
<TABLE>
<CAPTION>
Common Stock Retained Treasury
Shares Amount Earnings Stock Total
<S> <C> <C> <C> <C> <C>
Balance at October 29, 1995 85,000 $ 85,000 1,990,907 (81,909) 1,993,998
Net earnings for the fifty-three
week period - - 187,351 - 187,351
Purchase of common stock
for treasury (note I) - - - (6,403) (6,403)
----------- ----------- ----------- ------------------ -----------------------
Balance at November 2, 1996 85,000 85,000 2,178,258 (88,312) 2,174,946
Net earnings for the fifty-two
week period - - 744,985 - 744,985
Purchase of common stock
for treasury (note I) - - - (150,016) (150,016)
----------- ----------- ----------- --------------------
Balance at November 1, 1997 85,000 85,000 2,923,243 (238,328) 2,769,915
Net earnings for the nine month
period (unaudited) - - 889,306 - 889,306
----------- ----------- ------------ ---------------------
Balance at July 31, 1998
(unaudited) 85,000 $ 85,000 3,812,549 (238,328) 3,659,221
====== ============ ============ ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
HOLLOMAN CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Periods ended
Nine months ended July 31, November 1, November 2,
1998 1997 1997 1996
------------ ------------- ------------- ----------
(unaudited)
Increase (Decrease) in Cash
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 889,306 893,775 744,985 187,351
Adjustments to reconcile net
earnings net cash (used in)
provided by operating activities
Depreciation and amortization 172,682 216,363 290,421 401,886
(Gain) from sale of assets (3,905) - (35,595) (48,774)
Deferred income tax (benefit)
expense (1,159) (147,196) (146,808) 60,885
Changes in current assets and
current liabilities
(Increase) decrease in accounts
receivable, trade (581,100) 340,215 (1,583,524) 74,679
(Increase) decrease in receivable
from employees (2,359) (3,070) (50,314) 1,850
Decrease (increase) in other
receivables - 302,929 302,929 (114,668)
Decrease (increase) in costs and
estimated earnings in excess
of billings 309,276 32,109 (145,763) (342,329)
Decrease (increase) in inventories 7,004 (34,202) 17,668 (46,882)
Decrease (increase) in prepaid
expenses 60,265 88,372 163,735 (238,698)
(Decrease) increase in accounts
payable, trade (114,516) (487,077) 639,231 34,682
(Decrease) increase in accrued
expenses (968,689) (178,829) 817,638 150,664
(Decrease) increase in federal
income tax payable (50,516) 579,662 471,121 (55,964)
-------------- ------------- -- -------------------
Net cash (used in) provided
by operating activities (283,711) 1,603,071 1,485,724 64,682
--------------- ---------------- ----------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
HOLLOMAN CONSTRUCTION CO.
STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Periods ended
Nine months ended July 31, November 1, November 2,
1998 1997 1997 1996
------------ ----------- ------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from investing activities
Purchase of equipment (112,203) (30,397) (43,577) (141,804)
Proceeds from sale of equipment 9,285 - 72,624 99,206
Collections on receivables from
related parties and affiliates 72,703 173,310 246,544 -
Advances to affiliates (179,227) (188,698) (307,123) (55,317)
Collections on real estate notes - - - 14,133
------------ ------------- -----------------
Net cash (used in) provided
by investing activities (209,422) (45,785) (31,532) 26,852
--------------- ------------- -----------------
Cash flows from financing activities
Proceeds from long-term debt
borrowings 488,647 273,941 250,800 366,125
Repayment of long-term debt (124,378) (891,393) (933,374) (468,982)
Purchase of treasury stock - (58,105) (150,016) (6,403)
------------ ------------- ------
Net cash provided by (used
in) financing activities 364,269 (675,557) (832,590) (109,260)
-------------- -------------- --------------
Net (decrease) increase in cash (128,884) 881,729 621,602 (17,726)
Cash, beginning of period 636,449 14,847 14,847 32,573
-------------- ------------- --------------
Cash, end of period $ 507,565 896,576 636,449 14,847
============== ============= ==================
Supplemental Disclosures of Cash Flow Information:
Interest paid$ 25,923 50,737 57,632 80,702
Income taxes paid $ - - 88,750 106,796
</TABLE>
Supplemental Non-cash Investing and Financing Activities
In 1996, the Company sold selected equipment to an affiliate for $41,731
resulting in the recognition of a $41,731 receivable.
In 1996, the Company exchanged various real estate installment notes
receivable valued at $207,843 for land and leasehold improvements. The property
is capitalized at $207,843. The exchange was made with a related party.
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
July 31, 1998 and November 1, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.Nature of Operations
Holloman Construction Co. (the "Company") is a general contractor specializing
in the construction of refineries, pipelines and other manufacturing plants
throughout the United States. The Company's fiscal year ends on the Saturday
closest to October 31. The fiscal year ending November 1, 1997 is comprised of
52 weeks, and the fiscal year ending November 2, 1996 is comprised of 53
weeks.
2.Cash Equivalents
For purposes of the statement of cash flows, cash includes all of the
Company's cash on hand, cash in the bank, certificates of deposits and similar
instruments, if any, with original maturities of three months or less.
3.Inventories
Inventories consist of small tools, parts, materials and fuel stated at the
lower of cost, as determined using the first-in, first-out method, or market.
4.Construction in Progress
Unfinished jobs in progress at the end of the year are accounted for using the
percentage of completion method. Under this method profit or loss is
recognized as the job progresses as determined by direct labor hours.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts", represents revenues recognized in excess of amounts billed.
Contract retainage by customers is an asset included in accounts receivable,
while the retainage withheld from subcontractors, suppliers and materialmen is
shown as a liability as part of accounts payable. The percentage of completion
method applies to all bid contract jobs as well as to those hourly rate jobs
which are expected to last more than six months. Revenue and costs of hourly
jobs of less than six months are recognized as the job progresses.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies,
tools, repair costs and other indirect overhead. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated.
F-17
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
5. Property, Plant and Equipment
Property, plant and equipment are reported at cost less accumulated
depreciation. Depreciation is provided principally on the straight-line method
over the estimated useful lives of the assets (equipment: 3 to 10 years and
leasehold improvements: 6 to 10 years). Major renewals and betterments are
capitalized whereas the cost of repairs and maintenance is charged to expense
as incurred. As assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income.
6.Income Taxes
Income taxes have been provided in accordance with the Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS 109
requires the use of the liability method of accounting for income taxes. This
method accounts for deferred income taxes by applying statutory tax rates in
effect at the balance sheet date to the temporary differences between the
recorded financial statement balances and the related tax basis of assets and
liabilities.
Accordingly, deferred income taxes are provided to reflect the tax effect of
timing differences between financial and tax reporting methods. These
differences result primarily from loss recovery (note K) and differences
between financial and tax basis of property, plant and equipment and the
related depreciation.
7.Net Income Per Share
Net income per share is based on the weighted average number of shares
outstanding during the period.
8.New Pronouncements
During 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, and SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits. SFAS 130 established standards for reporting and
displaying comprehensive income and its components in general-purpose
financial statements. Comprehensive income includes net income and several
other items that current accounting standards require to be recognized outside
of the statement of operations. SFAS No. 131 requires public enterprises to
report certain information about their operating segments; report certain
enterprise-wide information about their products and services, their
activities in different geographic areas, and their reliance on major
customers; and disclose certain segment information in their interim financial
statements. SFAS No. 132 applies to all employers who sponsor one or more
pension or postretirement employee benefit plan. The statement standardizes
the disclosure requirements and requires additional information on changes in
plan benefit obligations and fair value of plan assets. These statements are
effective for fiscal years beginning after December 15, 1997 and will not have
an effect on the Company's results of operations or financial position.
F-18
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8.New Pronouncements (continued)
During June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that financial
derivatives be accounted for on the balance sheet, that fair value is the only
relevant measure for accounting for derivatives and it established special
accounting for qualifying hedge transactions. This statement is effective for
fiscal years beginning after June 15, 1999 and will not have an effect on the
Company's results of operations or financial position.
9.Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use estimates and assumptions.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and reported
revenues and expenses. Actual results could differ from those estimates.
10. Interim Financial Data (Unaudited)
The interim financial data as of July 31, 1998 and for each of the nine months
ended July 31, 1998 and 1997 is unaudited. The accompanying unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement. In the opinion of management, all adjustments necessary
for a fair presentation of results of the interim periods have been made and
such adjustments were of a normal and recurring nature. The results of
operations and cash flows for the nine months ended July 31, 1998 are not
necessarily indicative of the results that can be expected for the entire
fiscal year ending October 1, 1998.
F-19
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE B - ACCOUNTS RECEIVABLE-TRADE
Trade accounts receivable consists of contract receivables as follows:
November 1,
1997
Billed on completed jobs $ 1,511,122
Billed on jobs in progress (net of retainage) 2,308,440
Retainage on jobs in progress 433,711
----------
Total 4,253,273
Less: Allowance for bad debts -
Total accounts receivable - trade $ 4,253,273
==== ======
NOTE C - CONSTRUCTION IN PROGRESS
Costs and estimated earnings in excess of billings on uncompleted contracts
at the end of the periods follow:
November 1,
1997
Cost incurred on uncompleted contracts $ 5,635,693
Estimated earnings 1,371,300
------------
Costs and estimated earnings 7,006,993
Less: Billings to date 6,341,635
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 665,358
==============
F-20
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
November 1,
1997
Note payable to a bank, at $1,630 per month
including interest at prime + 1.25%, secured
by vehicles, matures December 1999 $ 36,928
Note payable monthly to a bank, at $5,465
per month including interest at prime + 1.5%,
secured by vehicles, matures March 2000 97,972
Note payable monthly to a credit corporation, at
$3,601 per month plus interest at 8.25%,
secured by equipment, matures June 1998 29,613
Note payable monthly to a bank, at $4,949
per month including interest at prime + 1.5%,
secured by vehicles, matures March 1998 23,610
Note payable monthly to a bank, at $2,500 per month plus
interest at prime + 1%, secured by equipment and accounts
receivable, matures
May 1998 20,000
-----------
208,123
Less current maturities 148,423
Net long-term debt $ 59,700
=============
The Company's maturities of long-term debt are as follows:
Year ending
1998 $ 148,423
1999 57,360
2000 2,340
-------------
$ 208,123
F-21
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE E - RELATED PARTY DISCLOSURE
The Company has various related party notes receivables from T Sisters Leasing
totaling $113,192 for the fiscal year ending November 1, 1997. Interest on
these notes receivable range from 8% to 10%, and maturity dates ranging from
October 1, to January 10, 2001.
T Sisters is constructively owned by the Company's major stockholder who owns
a majority of the outstanding shares of Holloman Construction Company. The
major stockholder owns 5% of T Sisters Leasing individually, and Lakewest Ltd
owns the remaining 95%. Additionally, the major stockholder has an 11%
partnership interest in Lakewest Ltd, and the remaining 89% is allocated 11%
each among the major stockholder's children and grandchildren, and 1% another
company owned 100% by the major stockholder.
The Company also has one note receivable from Western Sunset Estates totaling
$62,801 at November 1, 1997. Western Sunset Estates is owned 100% by the
Company's major stockholder.
The Company also had accounts receivables from employees and other related
parties totaling $117,994 for the fiscal year ending November 1, 1997. Of this
amount, $60,000, was due from an officer of the Company.
The Company had various accounts payables to employees and to Sunset
Management Group, a related party created in order to obtain a "stable
employee" group for health insurance and workmen's compensation insurance
purposes. Related party payables totaled $24,218 for fiscal year ended
November 1, 1997.
F-22
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE F - LEASE OBLIGATIONS
The Company leases equipment and office space under operating leases that
expire over the next five years. The following is a schedule by year of future
minimum rental payments required under these operating leases as of November
1, 1997:
<TABLE>
<CAPTION>
Related
Parties Others Total
<S> <C> <C> <C>
Year ending
1998 $ 487,290 32,289 519,579
1999 477,432 26,064 503,496
2000 328,891 24,798 353,689
2001 117,784 21,000 138,784
2002 50,702 8,750 59,452
------------- ------------- -------------
Totals $ 1,462,098 112,901 1,574,999
=============== ============== ================
</TABLE>
For the periods ended November 1, 1997 and November 2, 1996 the lease payments
under these contracts aggregated $375,206 and $224,000 to related parties and
$48,413 and $35,680 to others, respectively.
In addition the Company has negotiated various other leases for equipment
under month-to-month operating lease agreements. These lease payments
aggregated $491,000 and $712,000 for the years ended November 1, 1997 and
November 2, 1996.
NOTE G - INCOME TAXES
The following is a reconciliation between the Company's effective tax
rate and the U.S. statutory rate:
November 1,
1997
Income tax expense at statutory rates $ 393,736
Permanent differences resulting primarily from 23,763
Other (4,436)
$ 413,063
F-23
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE G - INCOME TAXES (Continued)
Deferred income tax liability results primarily from differences between
financial and tax basis of property and related depreciation due to
accumulated timing differences in the recognition of expenses for income tax
and financial reporting purposes.
November 1,
1997
Excess of financial book value of depreciable
property over tax book value at applicable rates $ 70,726
--------
Total deferred income tax payable $ 70,726
======
NOTE H - MAJOR CUSTOMERS AND RISK CONCENTRATION
During the periods ended November 1, 1997 and November 2, 1996 the Company
recognized revenues of $4,663,000 (21% of total revenues) and $1,385,000
(11.4% of total revenues) from a customer in the oil and gas exploration and
refining industry and $2,851,000 (14.7% of total revenues) and $1,378,000
(11.4% of total revenues) from another customer in that industry. Customers in
the oil and gas industry account for 78% of the Company's revenues during the
period ended November 1, 1997.
Including the customers above, the Company recognized revenues of $12,230,000
(63.2% of total revenues) and $6,417,000 (53% of total revenues) from five (5)
customers in 1997 and from six (6) customers in 1996.
The Company grants credit, generally without collateral, to its customers,
which are located primarily within the forty-eight contiguous United States.
These customers are principally involved in production or refining of oil and
gas. Management believes that it's contract acceptance, billing and collection
policies are adequate to minimize potential credit risks. As of November 1,
1997, three (3) customers accounted for 64% of the Company's trade
receivables.
At various times during the course of a year, the Company will have cash
deposits with a bank that exceed the Federal Deposit Insurance Corporation's
insurance coverage.
F-24
<PAGE>
HOLLOMAN CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
July 31, 1998 and November 1, 1997
NOTE I - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company established an Employee Stock Ownership Plan (ESOP) as part of an
employee incentive program. The ESOP plan covers substantially all employees
who meet the eligibility requirements. Participants become fully vested after
ten (10) years of participation. Distribution may be made in cash or in the
form of Company stock with the Company retaining the right of first refusal to
buy back the stock. At October 30, 1993, the ESOP plan was fully funded. The
Company set up a $10,400 contribution payable at November 1, 1997 to reimburse
the Plan for current year plan administration fees.
During the periods ended November 1, 1997 and November 2, 1996, the following
shares of Company stock were purchased:
Number
Year of Shares Cost
1996 173 $ 6,403
1997 5,173 150,016
NOTE J - CONTINGENCIES
The Company reached an agreement in full settlement of the portion of a
lawsuit brought against it and other defendants by the Texas Workers'
Compensation Insurance Facility. The action was filed in a prior year and
involved alleged errors in the premium computations of covered employees
provided to the Company by an employee leasing company. The settlement amount
is included in the November 2, 1996 financial statements.
NOTE K - OTHER DISCLOSURES
In 1996 the Company discovered misappropriations of assets by the Company's
former Controller. In May 1997, $538,242 was repaid by that individual.
Included in this amount is $188,261 attributed to years prior to the period
ended November 2, 1996 and accordingly retained earnings at October 29, 1995
were restated net of the related income tax effects. Restitution of $114,668
was attributed to the period ended November 2, 1996. These two amounts
totalling $302,929 are shown as a receivable on the balance sheet as of
November 2, 1996. The remainder, $235,313, was attributed to the period ending
November 1, 1997.
Additionally, other parties related to the Company recovered from that
individual other property estimated at a value of $565,000.
The total amount of the loss to the Company or its related parties cannot be
determined and no further recovery is expected.
F-25
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
T Sisters Leasing, L.L.C.
We have audited the balance sheets of T Sisters Leasing, L.L.C. (a limited
liability company) as of December 31, 1997 and 1996, and the related statements
of operations, members' capital, 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, the financial statements referred to above present fairly, in
all material respects, the financial position of T Sisters Leasing, L.L.C. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Johnson, Miller & Co.
Odessa, Texas
July 31, 1998
F-26
<PAGE>
T SISTERS LEASING, L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
July 31, December 31,
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 20,405 43,264 2,493
Related party receivable 29,313 33,722 3,021
Prepaid expenses 14,213 - -
------------- ------------- -------------
Total current assets 63,931 76,986 5,514
PROPERTY AND EQUIPMENT
Equipment 1,876,829 1,536,986 621,432
Equipment under capital leases 143,550 - -
-------------- ------------- -------------
2,020,379 1,536,986 621,432
Less accumulated depreciation 510,324 320,957 115,651
-------------- ------------- --------------
Net property and equipment 1,510,055 1,216,029 505,781
RECEIVABLE FROM RELATED PARTY 50 - -
------------- ------------- -------------
$ 1,574,036 1,293,015 511,295
================ =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
T SISTERS LEASING, L.L.C.
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES
July 31, December 31,
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable - related party $ 91,412 83,878 71,210
Current maturities of long-term debt
Banks and finance companies (note C) 327,393 271,766 106,727
Related parties (note D) 30,544 21,217 70,959
Capital lease obligations 28,298 - -
Accrued liabilities and other 8,012 6,620 4,350
------------- ------------- -------------
Total current liabilities 485,659 383,481 253,246
LONG-TERM DEBT, less current maturities (note C)
Banks and finance companies 895,531 796,630 203,993
Related parties (note D) 76,631 90,002 25,903
Capital lease obligations 102,412 - -
-------------- ------------- -------------
1,560,233 1,270,113 483,142
---------------- --------------- --------------
MEMBERS' CAPITAL 13,803 22,902 28,153
------------- ------------- -------------
$ 1,574,036 1,293,015 511,295
================ =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
T SISTERS LEASING, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the seven months
ended July 31, Years ended December 31,
------------------------------------ -------------------------------------
1998 1997 1997 1996
------------- ------------- ------------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Lease income $ 402,101 199,367 390,204 200,414
Other income - 4,850 6,876 -
------------- ------------- ------------- -----------------
402,401 204,217 397,080 200,414
Costs and expenses
Lease expenses 114,649 19,319 65,663 42,949
Administrative 17,236 8,515 24,134 6,310
Depreciation and amortization 216,353 88,778 221,375 89,216
-------------- ------------- ------------- ----------------------
Total operating expenses 348,238 116,612 311,172 138,475
-------------- ------------- ------------- -----------------------
Operating profit 54,163 87,605 85,908 61,939
------------- ------------- ------------- ----------------------
Other (income) expenses
(Gain) loss on disposal of assets 2,235 - 8,082 (2,095)
Interest and financing 57,794 26,288 64,296 32,251
Other 3,233 756 - 7,137
------------ ---------- ---------- -------------
63,262 27,044 72,378 37,293
------------- ------------- ------------- ----------------------
NET (LOSS) EARNINGS $ (9,099) 60,561 13,530 24,646
============= ============= ============= ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
T SISTERS LEASING, L.L.C.
STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
Sam Lakewest
Holloman Ltd Total
<S> <C> <C> <C>
Balances at January 1, 1996 $ 175 3,332 3,507
Net earnings 1,232 23,414 24,646
-------------- ------------- -------------
Balances at December 31, 1996 1,407 26,746 28,153
Net earnings 677 12,853 13,530
Distribution - (18,781) (18,781)
-------------- -------------- -------------
Balances at January 1, 1998 2,084 20,818 22,902
Net loss (unaudited) (455) (8,644) (9,099)
-------------- ------------- -------------
Balance at July 31, 1998 (unaudited) $ 1,629 12,174 13,803
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
T SISTERS LEASING, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Seven months ended
July 31, December 31,
-------------------------------- -------------------------
1998 1997 1997 1996
------------- ------------- ------------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating
activities:
Net (loss) earnings $ (9,099) 60,561 13,530 24,646
Adjustments to reconcile net
(loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 216,353 88,778 221,375 89,216
Decrease (increase) in related
party receivable 4,409 49 (30,701) 1,279
(Increase) in prepaid expense (14,213) - - -
Increase in related party
payable 7,534 66,122 12,668 71,210
Increase (decrease) in
accrued liabilities 1,392 4,991 2,270 (6,383)
(Gain) loss on disposal
of assets 2,235 - 8,082 (2,095)
------------- ------------- ------------- ----------------------
Net cash provided by
operating activities 208,611 220,501 227,224 177,873
-------------- ------------- ------------- -----------------------
Cash flows from investing activities:
Acquisition of property and
equipment (411,814) (707,253) (958,289) (291,203)
Acquisition of leased property (143,550) - - -
Proceeds from sale of assets 42,750 - 18,584 16,824
Distributions - - (18,781) -
Additions to officer receivable (50) (50) - -
------------- ------------- ------------- -----------------
Net cash used in
investing activities (512,664) (707,303) (958,486) (274,379)
--------------- -------------- -------------- ------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
T SISTERS LEASING, L.L.C.
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Seven months ended
July 31, December 31,
1998 1997 1997 1996
----- ----------- ------------ -------
(unaudited)
Cash flows from financing activities:
<S> <C> <C> <C> <C>
Loan proceeds $ 369,099 678,453 1,027,268 217,901
Principal payments under note
obligations (218,615) (125,445) (255,235) (134,513)
Capital lease obligation 143,550 - - -
Principal payments under
capital lease obligations (12,840) - - -
-------------- ------------- ------------- --
Net cash provided by (used
in) financing activities 281,194 553,008 772,033 83,388
-------------- ------------- ------------- ----- ---
Net increase (decrease) in cash (22,859) 66,206 40,771 (13,118)
Cash at beginning of period 43,264 2,493 2,493 15,611
------------- ------------- ------------- --- ----
Cash at end of period $ 20,405 68,699 43,264 2,493
============= ============= ========= ================
Cash paid for interest $ 7,794 26,288 64,296 32,251
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
T SISTERS LEASING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
July 31, 1998, December 31, 1997 and 1996
NOTE A - ORGANIZATION
T Sisters Corporation, Inc. (the Company) is a Texas limited liability company
organized in 1995 under the Texas Limited Liability Company Act. The Company is
owned 5% by Sam Holloman and 95% by Lakewest Limited Trust. Its principal
business consists of leasing equipment and vehicles in the Permian Basin area.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Cash and Cash Equivalents
The Company considers cash on hand and amounts on deposit in banks to be cash
and cash equivalents.
2. Property and Equipment
Major additions and betterments are capitalized, while replacements,
maintenance, and repairs that do not improve or extend the life of the
respective asset are expensed. When the assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is charged or credited to operations.
Property and equipment are depreciated using the straight-line method over
their estimated useful lives which range from 5-7 years.
3. Income Taxes
The Company is not a taxpaying entity for federal income tax purposes, and thus
no income tax expense has been recorded in the statements. Income of the
Company is taxed to the members in their individual returns.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts and disclosures; accordingly, actual results
could differ from those estimates.
F-32
<PAGE>
T SISTERS LEASING, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998, December 31, 1997 and 1996
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
Installment notes from bank, payable in aggregate monthly installments of
$1,162 principal, plus interest. Variable interest rate is 1% above bank's
prime. Interest was 9.5% and 9.25% at December 31, 1997 and 1996, respectively.
Notes are collateralized by vehicles.
Installment notes from banks, payable in aggregate monthly principal and
interest installments of $13,118 and $3,509 in 1997 and 1996, respectively.
Interest rates range from 8.00% to 9.50% at December 31, 1997 and range from
8.25% to 9.25% at December 31, 1996. Notes are collateralized by various
equipment and vehicles.
Installment notes from a financing company, payable in aggregate monthly
principal and interest installments of $14,293 and $4,208 in 1997 and 1996,
respectively. Interest rates range form 8.32% to 8.75%. Notes are
collateralized by various equipment and vehicles.
Less current maturities
Total 1997
$ 31,108
504,066
533,222
1,068,396
271,766
$ 796,630
1996
57,888
133,222
119,610
310,720
106,727
203,993
Maturities of long-term debt at December 31, 1997 and 1996 are as follows:
1997 1996
----------- ---------
1997$ - 106,727
1998 271,766 90,661
1999 262,817 78,514
2000 235,760 34,818
2001 199,879 -
2002 ------- ------------------
$ 1,068,396 310,720
==============
F-33
<PAGE>
T SISTERS LEASING, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998, December 31, 1997 and 1996
NOTE D - LONG-TERM DEBT RELATED PARTY
Installment notes from affiliate, payable in aggregate monthly principal and
interest installments of $3,929 and $7,966 in 1997 and 1996, respectively.
Interest ranged from 8% to 10% at December 31, 1997 and was 10% at December 31,
1996.
Less current maturities
Total 1997
$ 111,219
21,217
$ 90,002
1996
96,862
70,959
25,903
Maturities of long-term debt at December 31, 1997 and 1996 are as follows:
1997 1996
---------- ---------
1997$ - 70,959
1998 21,217 12,548
1999 39,832 12,397
2000 30,670 958
2001 19,500 -
------- ------------------
$ 111,219 96,862
========== =============
NOTE E - RELATED PARTY TRANSACTIONS
The Company is lessor with respect to certain operating lease agreements with
related parties. Payments received from related parties in 1997 and 1996 were
approximately $390,000 and $200,000 respectively. The following are the future
minimum lease payments to be received under these lease agreements.
Year ended December 31, 1997 1996
--------- ---------
1997 $ - 224,536
1998 595,888 163,423
1999 579,201 146,736
2000 424,758 71,810
2001 240,359 6,475
2002 159,342 -
------------ -------------
$ 1,999,548 612,980
============ ==============
F-34
<PAGE>
T SISTERS LEASING, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 31, 1998, December 31, 1997 and 1996
NOTE F - OPERATING LEASES
The Company is lessee with certain operating leases for heavy equipment and
vehicles. Lease payments made relating to these operating leases were
approximately $66,000 and $43,000 in fiscal years 1997 and 1996, respectively.
The following is a schedule of future minimum lease payments under these lease
agreements.
Year ended December 31, 1997 1996
---------- ---------
1997 $ - 36,041
1998 198,749 36,041
1999 198,749 36,042
2000 149,533 16,519
--------- -------------
$ 547,031 124,643
========= ==============
NOTE G - UNAUDITED FINANCIAL STATEMENTS
The financial statements for the seven months ended July 31, 1998 and 1997 are
unaudited, however, in the opinion of management, such statements include all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and changes
in financial position of the Company. The results of operations for the seven
months ended July 31, 1998 are not necessarily indicative of the results to be
obtained for the full fiscal year.
F-35
<PAGE>
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates or an
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstance, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
1,000,000 UNITS
Each Unit Consisting of
One Share of Common Stock
and
One Redeemable Common
Stock Purchase Warrant
OFFERING PRICE
$10.00
PER UNIT
TABLE OF CONTENTS
PAGE
Additional Information.................... 2
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 13
Dividend Policy........................... 13
Dilution.................................. 14
Capitalization............................ 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operation................. 16
Business.................................. 18
Management................................ 22
Principal Shareholders.................... 24
Certain Relationships
and Related Transactions............... 25
Description of Securities................. 27
Shares Eligible For Future Sale........... 28
Underwriting.............................. 28
Legal Matters............................. 30
Experts................................... 30
Index to Financial Statements............. 31
Until ____ , 1998 (25 days from the date of this Prospectus), 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 obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
Holloman
Corporation
Prospectus
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to Section 2.02-1 of the Texas Business Corporation Act, a corporation
may indemnify an individual made a party to a proceeding because the individual
is or was a director against liability incurred in his official capacity with
the corporation including expenses and attorneys fees.
Article VII of the Articles of Incorporation provides as follows:
"The Corporation shall indemnify any director or officer, or former
director or officer of the Corporation, or any person who may have served at its
request as a director or officer of another corporation of which this
Corporation owns shares of capital stock or of which it is a creditor to the
fullest extent permitted by the Texas Business Corporation act and s provided in
the By-laws of the Corporation."
Article XI of the By -laws provides as follows:
"POWER TO INDEMNIFY AND TO PURCHASE
INDEMNITY INSURANCE; DUTY TO INDEMNIFY
Section 1. In this Article XI:
(a) "Corporation," includes any domestic or foreign predecessor entity
of the Corporation in a merger, consolidation, or other transaction in
which the liabilities of the predecessor are transferred to the
Corporation by operation of law and in any other transaction in which
the Corporation assumes the liabilities of the predecessor but does not
specifically exclude liabilities that are the subject matter of this
Article.
(b) "Director" means any person who is or was a director of the
Corporation, any person who, while a director of the Corporation, is or
was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan, or
other enterprise. (c) "Expenses" include court costs and attorneys'
fees. (d) "Official capacity", means:
(1) when used with respect to a director, the office of director in the
Corporation; and (2) when used with respect to a person other than a director,
the elective or appointive office in the Corporation held by the officer or the
employment or agency relationship undertaken by the employee or agent in behalf
of the Corporation, but
(3) in both Paragraph (1) and (2) does not include
service for any other foreign or domestic corporation
or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or
other enterprise.
(e) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an
action, suit, or proceeding.
Section 2. The Corporation shall indemnify a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director of the Corporation only if it is determined in
accordance with Section 6 of this Article XI that the person:
(a) conducted himself in good faith;
(b) reasonably believed:
(1) in the case of conduct in his official capacity as
a director of the Corporation, that
his conduct was in the Corporation's best interests;
and
(2) in all other cases, that his conduct was at least
not opposed to the Corporation's best interests;
and
(c) in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Section 3. Except to the extent permitted by Section 5 of this Article,
a director may not be indemnified under Section 2 of this Article in respect of
a proceeding:
(a) in which the person is found to be liable on the basis that
personal benefit was improperly received by him, whether or not the
benefit resulted from an action taken in the person's official
capacity; or (b) in which the person is found liable to the
Corporation.
Section 4. The termination of a proceeding by judgment, order,
settlement, or conviction, or on a plea of nolo contenders or its equivalent is
not of itself determinative that the person did not meet the requirements set
forth in Section 2 of this Article. A person shall be deemed to have been found
liable in respect of any claim, issue or matter only after the person shall have
been so adjudged by a court of competent jurisdiction after exhaustion of all
appeals therefrom.
Section 5. A person may be indemnified under Section 2 of this Article
against judgments, penalties (including excise and similar taxes), fines,
settlement, and reasonable expenses actually incurred by the person in
connection with the proceeding; but if the person is found liable to the
Corporation or is found liable on the basis that personal benefit was improperly
received by the person, the indemnification:
(a) is limited to reasonable expenses actually incurred by the person
in connection with the proceeding; and (b) shall not be made in respect
of any proceeding in which the person shall have been found liable for
willful or intentional misconduct in the performance of his duty to the
Corporation.
Section 6. A determination of indemnification under Section 2 of this
Article XI must be made: (a) by a majority vote of a quorum consisting
of directors who at the time of the vote are not named defendants or
respondents in the proceeding; (b) if such a quorum cannot be obtained,
by a majority vote of a committee of the Board of Directors designated
to act in the matter by a majority vote of all directors, consisting
solely of two or more directors who at the time of the vote are not
named defendants or respondents in the proceeding; (c) by special legal
counsel selected by the Board of Directors or a committee of the Board
by vote as set forth in Subsection (a) or (b) of this Section, or, if
such a quorum cannot be obtained and such a committee cannot be
established, by a majority vote of all directors; or (d) by the
shareholders in a vote that excludes the shares held by directors who
are named defendants or respondents in the proceeding.
Section 7. Authorization of indemnification and determination as to
reasonableness of expenses must be made in the same manner as the determination
that indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses must be
made in the manner specified by Subsection (c) of Section 6 of this Article XI
for the selection of special legal counsel. A provision contained in the
Articles of Incorporation, the By-laws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted
under Section 2 of this Article XI shall be deemed to constitute authorization
of indemnification in the manner required by this Section 7 even though such
provision may not have been adopted or authorized in the same manner as the
determination that indemnification is permissible.
Section 8. The Corporation shall indemnify a director against
reasonable expenses incurred by him in connection with a proceeding in which he
is a named defendant or respondent because he is or was a director if he has
been wholly successful, on the merits or otherwise, in the defense of the
proceeding.
Section 9. If, in a suit for the indemnification required by Section 8
of this Article XI, a court of competent jurisdiction determines, that the
director is entitled to indemnification under that Section, the court shall
order indemnification and shall award to the director the expenses incurred in
securing the indemnification.
Section 10. If, upon application of a director, a court of competent
jurisdiction determines, after giving any notice the court considers necessary,
that the director is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not he has met the requirements
set forth in Section 2 of this Article XI or has been adjudged liable in the
circumstances described by Section 3 of this Article XI, the court may order the
indemnification that the court determines is proper and equitable. The court
shall limit indemnification to reasonable expenses if the proceeding is brought
by or in behalf of the Corporation or if the director is found liable on the
basis that personal benefit was improperly received by him, whether or not the
benefit resulted from an action taken in the person's official capacity.
Section 11. Reasonable expenses incurred by a director who was, is, or
is threatened to be made a named defendant or respondent in a proceeding may be
paid or reimbursed by the Corporation, in advance of the final disposition of
the proceeding and without any of the determination specified in Section 6 and 7
of this Article XI, after the Corporation receives a written affirmation by the
director of his good faith belief that he has met the standard of conduct
necessary for indemnification under this Article XI and a written undertaking by
or on behalf of the director to repay the amount paid or reimbursed if it is
ultimately determined that he has not met those requirements.
Section 12. The written undertaking required by Section 11 of this
Article XI must be an unlimited general obligation of the director but need not
be secured. It may be accepted without reference to financial ability to make
repayment.
Section 13. A provision for the Corporation to indemnify or to advance
expenses to a director who was, is, or is threatened to be made a named
defendant or respondent in a proceeding, whether contained in the Articles of
Incorporation, the By-laws, a resolution of shareholders or directors, an
agreement or otherwise, except in accordance with Section 18 of this Article XI,
is valid only to the extent it is consistent with this Article XI as limited by
the Articles of Incorporation, if such a limitation exists.
Section 14. Notwithstanding any other provision of this Article XI, the
Corporation may pay or reimburse expenses incurred by a director in connection
with his appearance as a witness or other participation in a proceeding at a
time when he is not a named defendant or respondent in the proceeding.
Section 15. An officer of the Corporation shall be indemnified as, and
to the same extent, provided by Sections 8, 9, and 10 of this Article XI for a
director and is entitled to seek indemnification under those sections to the
same extent as a director. The Corporation may indemnify and advance expenses to
an officer, employee, or agent of the Corporation to the same extent that it may
indemnify and advance expenses to directors under this Article XI.
Section 16. The Corporation may indemnify and advance expenses to
persons who are not or were not officers, employees, or agents of the
Corporation who are or were serving at the request of the Corporation as a
director, officer, partner, venturer, proprietor, trustee, employee, agent, or
similar functionary of another foreign or domestic corporation, partnership,
joint venturer sole proprietorship, trust, employee benefit plan or other
enterprise, to the same extent that it may indemnify and advance expenses to
directors under this Article XI.
Section 17. The Corporation may indemnify and advance expenses to an
officer, employee or agent, or person who is identified in Section 16 of this
Article XI and who is not a director to such further extent, consistent with
law, as may be provided by the Articles of Incorporation, By-laws, general or
specific action of the Board of Directors, or contract or as permitted or
required by common law.
Section 18. The Corporation may purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation or who is or was serving at the request of
the Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, against any liability asserted against him
and incurred by him in such a capacity or arising out of his status as such a
person, whether or not the Corporation would have the power to indemnify him
against that liability under this Article XI. If the insurance or other
arrangement is with a person or entity that is not regularly engaged in the
business of providing insurance coverage, the insurance or arrangement may
provide for payment of a liability with respect to which the Corporation would
not have the power to indemnify the person only if including coverage for the
additional liability has been approved by the shareholders of the Corporation.
Without limiting the power of the Corporation to procure or maintain any kind of
insurance or other arrangement, the Corporation may, for the benefit of persons
indemnified by the Corporation:
(a) create a trust fund;
(b) establish any form of self-insurance;
(c) secure its indemnity obligation by grant of a security
interest or other lien on the assets of
the Corporation; or
(d) establish a letter of credit, guaranty, or surety arrangement.
The insurance or other arrangement may be procured, maintained, or
established within the Corporation or with any insurer or other person deemed
appropriate by the Board of Directors regardless of whether all or part of the
stock or other securities of the insurer `or other person are owned in whole or
part by the Corporation. In the absence of fraud, the judgment of the Board of
Directors as to the terms and conditions of the insurance or other arrangement
and the identity of the insurer or other person participating in an arrangement
shall be conclusive and the insurance or arrangement shall not be voidable and
shall not subject the directors approving the insurance or arrangement to
liability, on any ground, regardless of whether directors participating in the
approval are beneficiaries of the insurance or arrangement.
Section 19. Any indemnification of or advance of expenses to a director
in accordance with this Article XI shall be reported in writing to the
shareholders with or before the notice or waiver of notice of the next
shareholders' meeting or with or before the next submission to the shareholders
of a consent to action without a meeting pursuant to Section A, Article 9.10 of
the Texas Business Corporation Act and, in any case, within the 12-month period
immediately following the date of the indemnification or advance.
Section 20. For purposes of this Article XI, the Corporation is deemed
to have requested a director to serve an employee benefit plan whenever the
performance by him of his duties to the Corporation also imposes duties on or
otherwise involves services by him to the plan or participants or beneficiaries
of the plan. Excise taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law are deemed fines. Action taken or
omitted by him with respect to an employee benefit plan in the performance of
his duties for a purpose reasonably believed by him to be in the interest of the
participants and beneficiaries of the plan is deemed to be for a purpose which
is not opposed to the best interests of the Corporation."
Item 25. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the public offering by the Company of the
securities offered hereunder are as follows:
Securities and Exchange Commission Filing Fee $5,897
Blue Sky Fees and Expenses* 20,000
American Stock Exchange Application and Listing Fee 20,000
Accounting Fees and Expenses* 60,000
Legal Fees and Expenses 75,000
Printing* 40,000
Fees of Transfer Agents and Registrar* 20,000
Underwriters' Non-Accountable Expense Allowance 200,000
Miscellaneous* 59,103
----------
Total* $500,000
- ----------------
* Estimated.
Item 26. Recent Sales of Unregistered Securities
The following is a summary of transactions by the Registrant during the
last three years involving the sale of securities which were not registered
under the Securities Act:
In May 1998, the registrant sold 1,200,000 shares of its Common stock
to the investors named below for an aggregate purchase price of $325,000.
Name Number of Shares
Peter Jeffrey Family Trust 100,000
Calvin J. Payne Family Trust 100,000
S. Roy Jeffrey Family Trust 100,000
Peter Lucas Family trust 100,000
Chase Funding, Ltd. 53,521
Galaxy Partners Limited 49,296
Oxford Capital Corp. 15,000
The Mission Group, Inc. 14,084
Neighborhood Image, Inc. 28,169
T. R. Hogue 18,908
Julia Diane Jones 21,022
John Holdridge 57,600
Julie Ann Ingram 47,467
Lorie Beth Koonce 47,467
Kellie Diane Baker 47,466
Revere Financial Group, Inc. 400,000
All of the above persons are sophisticated investors, or family members
of the investors, who were familiar with the business of the registrant and the
companies to be acquired for this offering and had access to corporate
information about Holloman Construction and T. Sisters Leasing, directly or
through one of the principals involved in the transaction. The purchasers agreed
to take the shares for investment and not with a view to distribution. The
certificates, when issued, will be stamped with a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that registration is not necessary. No underwriter was involved in the
transaction. The transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to the exemption provided by Section 4(2)
thereunder for transactions not involving a public offering.
In May 1998, the registrant entered into a Stock Purchase Agreement
with Sam Holloman and several entities owned, controlled by, or affiliated with,
Mr. Holloman (collectively the "Sellers") for the purchase of all of the
outstanding common stock of Holloman Construction Company for a total
consideration of $8,000,000. The agreement was amended in August 1998, to
include the Membership interests of T. Sisters Leasing, L. L. C. for no
additional consideration. The registrant agreed to pay the Sellers $6,000,000
cash from the proceeds of this offering and to issue to them 200,000 shares of
the registrant's Common Stock at the Closing of this offering (the number of
shares is to be determined by dividing $2,000,000 by the public offering price
in this offering as set forth in the final Prospectus). The Sellers agreed to
take the shares for investment and not with a view to distribution. The
certificates, when issued, will be stamped with a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that registration is not necessary. No underwriter was involved in the
transaction. The transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to the exemption provided by Section 4(2)
thereunder for transactions not involving a public offering.
<TABLE>
<S> <C> <C>
Item 27. Exhibits
Item 27. Exhibits
Exhibit No Item
Exhibit 1.1 Revised Form of Underwriting Agreement.(1)
Exhibit 1.2 Form of Underwriters' Warrant Agreement.(3)
Exhibit 2.1 Stock Purchase Agreement Relating to the Acquisition of Holloman Construction Company by
Holloman Corporation ("Stock Purchase Agreement"), including list of Schedules. (3)
Exhibit 2.1.1 Schedules to Stock Purchase Agreement (3)
Exhibit 2.2 Amendment to Stock Purchase Agreement (3)
Exhibit 2.3 Amendment No. 2 to Stock Purchase Agreement (3)
Exhibit 3.1 Articles of Incorporation of the Registrant. (3)
Exhibit 3.2 Bylaws of the Registrant (3)
Exhibit 4.1 Form of Warrant Agreement between Company and American Stock
Transfer and Trust Company. (3)
Exhibit 4.3 Specimen of Warrant Certificate. (3) Contained in Exhibit 4.1
Exhibit 5.1 Opinion of Maurice J. Bates L.L.C.(1)
Exhibit 10.1 1998 Stock Option Plan (3)
Exhibit 10.2 Form of Equipment Lease between the Registrant and T
Sisters Leasing, LLC (3) Exhibit 10.3 Copy of Commercial Lease for
building and premises between Holloman Construction Co. and
Bob Gist (3)
Exhibit 10.4 Copy of Loan Agreement between the Registrant and Bank One, Texas, N. A. (3)
Exhibit 16 Letter from Green & Frost, Inc. (1)
Exhibit 21.1 Subsidiaries of the Registrant. (3)
Exhibit 23.1 Consent of Johnson, Miller, & Company, LLP Certified Public Accountants.(1)
Exhibit 23.2 Consent of Maurice J. Bates, L.L.C. is contained in his opinion filed as Exhibit 5.1 to
this registration statement.(1)
Exhibit 27.1 Financial Data Schedule (1)
(1) Filed herewith (2) To be filed by amendment (3) Previously filed.
</TABLE>
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(1) 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.
(2) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration
Statement to:
(a) Include any Prospectus required by Section 10(a)(3)
of the Securities Act;
(b) Reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental
change in the Registration Statement; and
(c) Include any additional or changed material information on
the plan of distribution.
(3) 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 that time shall be deemed to be
the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised
that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
shares of the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(5) For the purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was
declared effective.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Odessa, State of Texas on December 8, 1998.
Holloman Corporation.
By: /s/ Mark E. Stevenson
Mark E. Stevenson, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints Sam Holloman, Mark E.
Stevenson, and Peter Lucas, and each for them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (until
revoked in writing), to sign any and all further amendments to this Registration
Statement (including post-effective amendments), and to file same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto such attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in person
thereby ratifying and confirming all that said attorneys-in-fact and agents, and
each of them, or their substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Sam Holloman
Sam Holloman Chairman of the Board December 8, 1998
/s/ Mark E. Stevenson
Mark E. Stevenson President December 8, 1998
(Principal Executive Officer)
/s/ John E. Holdridge Director December 8, 1998
John E. Holdridge
/s/ Peter Lucas
Peter Lucas Senior Vice President, Chief December 8, 1998
Financial Officer, Secretary,
Treasurer, Director (Principal
Financial and Accounting Officer)
/s/ James E. Hogue Director December 8, 1998
James E. Hogue
Underwriting Agreement
28325_7 - 21720/00001
1,000,000 Units
HOLLOMAN CORPORATION
Each Unit Consisting of
One Share of Common Stock and
One Redeemable Common Stock Purchase Warrant
______________, 1998
UNDERWRITING AGREEMENT
CAPITAL WEST SECURITIES, INC.
As Representative of the Several Underwriters
211 N. Robinson, Suite 200
Oklahoma City, Oklahoma 73102
Dear Sirs:
Holloman Corporation, a Texas corporation (together with its
subsidiaries, the "Company"), proposes to sell to you and the other underwriters
named in Schedule I hereto (collectively, the "Underwriters"), for whom Capital
West Securities, Inc. is acting as managing underwriter and representative (the
"Representative"), in the respective amounts set forth opposite each
Underwriter's name in Schedule I hereto, an aggregate of 1,000,000 units (the
"Units"), each consisting of one share of the Company's Common Stock, no par
value (the "Common Stock"), and one redeemable common stock purchase warrant
(the "Warrants"), which entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $12.00 per share. The Units, together with
(a) the shares of Common Stock and Warrants comprising the Units and (b) the
shares of Common Stock issuable upon exercise of the Warrants are collectively
referred to herein as the "Underwritten Securities". The Company also proposes
to grant to the Underwriters the Underwriters' Option (described in Section 2(b)
hereof) to purchase up to an aggregate of 150,000 additional Units solely to
cover over-allotments in the sale of the Underwritten Securities (such
additional Units, together with (a) the shares of Common Stock and Warrants
comprising such additional Units and (b) the shares of Common Stock issuable
upon exercise of the Warrants, are collectively referred to herein as the
"Option Securities"); and to issue to the Representative the Representative's
Warrants (described in Section 7 hereof) to purchase 100,000 additional Units,
which additional Units are identical to the Units described above, except that
the exercise price of the Warrants included in the Units subject to the
Representative's Warrant shall be $15.00 per share (individually, the
Representative's Warrants and additional Units, together with (a) the shares of
Common Stock and Warrants comprising such additional Units and (b) the shares of
Common Stock issuable upon exercise of such Warrants, are collectively referred
to herein as the "Representative's Securities"). The Underwritten Securities,
the Option Securities and the Representative's Securities are collectively
referred to herein as the "Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. The term "Effective Date" shall mean each date that the
Registration Statement (as defined below) and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean the
date and time that this Agreement is executed and delivered by the parties
hereto. The term "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in Section 1(a) below with respect to the offering of the
Securities, and any preliminary prospectus included in the Registration
Statement on the Effective Date that omits Rule 430A Information (as defined
below). Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the most recent Preliminary Prospectus which predates or
coincides with the Execution Time. "Prospectus" shall mean the final prospectus
with respect to the offering of the Securities that contains the Rule 430A
Information. "Registration Statement" shall mean (a) the registration statement
referred to in Section 1(a) below, including Exhibits and Financial Statements
exhibits and financial statements, in the form in which it has or shall become
effective, (b) in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as defined in Section 3(a) hereof) or any
settlement date pursuant to Section 3(b) hereof, such registration statement as
so amended on such date, and (c) in the event of the filing of any abbreviated
registration statement increasing the size of the offering (a "Rule 462
Registration Statement"), pursuant to Rule 462(b) (as defined below), which
registration statement became effective upon filing the Rule 462 Registration
Statement. Such term shall include Rule 430A Information (as defined below)
deemed to be included therein at the Effective Date as provided by Rule 430A.
"Rule 424," "Rule 462(b)" and "Rule 430A" refer to such rules promulgated under
the Securities Act of 1933, as amended (the "Act"). "Rule 430A Information"
means information with respect to the Securities and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
1. 1. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with, each
Underwriter that:
(a) The Company meets the requirements for the use of Form
SB-2 under the Act and has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a
related preliminary prospectus ("Preliminary Prospectus"), on Form SB-2
(Commission File No. 333-58987) (the "Registration Statement") for the
registration under the Act of the Securities. The Company may have
filed one or more amendments thereto, including related Preliminary
Prospectuses, each of which has previously been furnished to you. The
Company will next file with the Commission either prior to
effectiveness of such Registration Statement, a further amendment
thereto (including the form of Prospectus) or, after effectiveness of
such Registration Statement, a Prospectus in accordance with Rules 430A
and 424(b)(1) or (4). As filed, such amendment and form of Prospectus,
or such Prospectus, shall include all Rule 430A Information and, except
to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you in
writing, prior to the Execution Time, will be included or made therein.
(b) The Preliminary Prospectus, at the time of filing,
conformed in all material respects with the applicable requirements of
the Act and the rules and regulations thereunder and did not include
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading. If the Effective Date is prior to or
simultaneous with the Execution Time, (i) on the Effective Date, the
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations thereunder and
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and (ii) at the
Execution Time, the Registration Statement conforms, and at the time of
filing of the Prospectus pursuant to Rule 424(b), the Registration
Statement and the Prospectus will conform, in all material respects to
the requirements of the Act and the rules and regulations thereunder,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state a
material fact required to be stated therein or necessary in order to
make the statements therein (and, in the case of the Prospectus, in the
light of the circumstances under which they were made) not misleading.
If the Effective Date is subsequent to the Execution Time, on the
Effective Date, the Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the
rules and regulations thereunder, and neither of such documents will
contain any untrue statement of any material fact or will omit to state
any material fact required to be stated therein or necessary to make
the statements therein (and, in the case of the Prospectus, in the
light of the circumstances under which they were made) not misleading.
The two preceding sentences do not apply to statements in or omissions
from the Registration Statement or the Prospectus (or any supplements
thereto) based upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through the
Representative specifically for use in connection with the preparation
of the Registration Statement or the Prospectus (or any supplements
thereto).
(c) The Company does not own or control, directly or
indirectly, any shares of capital stock or equity interests in any
corporation, partnership, association or other entity, except as set
forth in the Prospectus.
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and corporate authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which it conducts its business or owns
property and in which the failure, individually or in the aggregate, to
be so qualified would have a material adverse effect on the properties,
assets, operations, business, condition (financial or otherwise) or
prospects of the Company ("Material Adverse Effect"). The Company has
all necessary authorizations, approvals, orders, licenses, certificates
and permits of and from all government regulatory officials and bodies,
to own its properties and conduct its business as described in the
Prospectus except where the absence of any such authorization,
approval, order, license, certificate or permit would not have a
Material Adverse Effect.
(e) The Company does not own any shares of capital stock or
any other securities of any corporation or any equity interest in any
firm, partnership, association or other entity other than as described
in the Registration Statement and ownership interests that would not
have a Material Adverse Effect.
(f) The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock (including, without limitation, the
shares of Common Stock underlying (i) the Units to be sold by the
Company hereunder, (ii) the Warrants, and (iii) the Representative's
Warrants) have been duly and validly authorized and issued and are
fully paid and nonassessable, and the certificates therefor are in
valid and sufficient form; there are, and, on the Effective Date, the
Closing Date (and any settlement date pursuant to Section 3(b) hereof),
there will be, no other classes of stock outstanding except Common
Stock; all outstanding options to purchase shares of Common Stock have
been duly and validly authorized and issued; except as described in the
Registration Statement, there are, and, on the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), there will be, no
options, warrant or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or understandings to
which the Company is a party, outstanding or in existence, entitling
any person to purchase or otherwise acquire shares of capital stock of
the Company; the issuance and sale of the Securities have been duly and
validly authorized and, when issued and delivered and paid for, the
Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Warrants and Representative's
Warrants will, when issued, constitute valid and binding obligations of
the Company enforceable in accordance with their terms and the Company
has reserved a sufficient number of shares of Common Stock for issuance
upon exercise thereunder; the Securities will, when issued, possess the
rights, privileges and characteristics as described in the Prospectus;
and the certificates for the Securities are in valid and sufficient
form. Each offer and sale of securities of the Company referred to in
Item 26 of Part II of the Registration Statement was effected in
compliance with the Act and the rules and regulations thereunder.
(g) The Securities (other than the Representative's Warrants)
have been approved for listing on the American Stock Exchange ("AMEX"),
upon official notice of issuance.
(h) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of the Company, threatened action,
suit or proceeding before any court or governmental agency, authority
or body, domestic or foreign, or any arbitrator involving the Company
of a character required to be disclosed in the Registration Statement
or the Prospectus. There is no contract or other document of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit that is not described or filed
as required.
(i) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as rights of indemnity and contribution
hereunder may be limited by public policy and except as the
enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and general principles of equity.
(j) The Company has full corporate power and corporate
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement. The Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(k) Neither the offering, issuance and sale of the Securities,
nor the consummation of any other of the transactions contemplated
herein, nor the fulfillment of the terms hereof, will conflict with or
result in a breach or violation of, or constitute a default under, or
result in the imposition of a lien on any properties of the Company or
an acceleration of indebtedness pursuant to, the Articles of
Incorporation or bylaws of the Company, as currently in effect, or any
of the terms of any indenture or other agreement or instrument to which
the Company is a party or by which the Company or any of its properties
are bound, or any law, order, judgment, decree, rule or regulation
applicable to the Company of any court, regulatory body, administrative
agency, governmental body, stock exchange or arbitrator having
jurisdiction over the Company. The Company is not in violation of its
Articles of Incorporation or bylaws, as currently in effect, or, except
as described in the Prospectus, in breach of or default under any of
the terms of any indenture or other agreement or instrument to which it
is a party or by which it or its properties are bound, which breach or
default would, individually or in the aggregate, have a Material
Adverse Effect.
(l) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of the
Securities, nor does any person have preemptive rights, or rights of
first refusal or other rights to purchase any of the Securities. Except
as referred to in the Prospectus, no person holds a right to require or
participate in a registration under the Act of Common Stock, Preferred
Stock or any other equity securities of the Company.
(m) The Company has not (i) taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result
in, under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities (other than those actions permitted by
applicable law) or (ii) effected any sales of shares of securities that
are required to be disclosed in response to Item 26 of Part II of the
Registration Statement (other than transactions disclosed in the
Registration Statement or the Prospectus).
(n) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is
required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made for registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters.
(o) The accountants who have certified the Financial
Statements financial statements filed or to be filed with the
Commission as part of the Registration Statement are independent
accountants as required by the Act.
(p) No stop order preventing or suspending the use of any
Preliminary Prospectus has been issued, and no proceedings for that
purpose are pending or, to the best knowledge of the Company,
threatened or contemplated by the Commission; no stop order suspending
the sale of the Securities in any jurisdiction has been issued and no
proceedings for that purpose have been instituted or, to the best
knowledge of the Company, threatened or are contemplated; and any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) has been
complied with.
(q) The Company has not sustained, since January 1, 1998 any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
and, since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there have not been any
changes in the capital stock or long-term debt of the Company, or any
material adverse change, or a development known to the Company that
could reasonably be expected to cause or result in a material adverse
change, in the general affairs, management, financial position,
stockholders' equity, results of operations or prospects of the
Company, otherwise than as set forth in the Prospectus. Except as set
forth in the Prospectus, there exists no present condition or state of
facts or circumstances known to the Company involving its customers
which the Company can now reasonably foresee would have a Material
Adverse Effect or which would result in a termination or cancellation
of any agreement with any customer whose purchases, individually or in
the aggregate, are material to the business of the Company, or which
would result in any material decrease in sales to any such customer or
purchases from any supplier, or which would prevent the Company from
conducting its business as described in the Prospectus in essentially
the same manner in which it has heretofore been conducted.
(r) The Financial Statements financial statements and the
related notes of the Company's subsidiaries, included in the
Registration Statement and the Prospectus present fairly the financial
position, results of operations, cash flow and changes in shareholders'
equity of the Company at the dates and for the periods indicated,
subject in the case of the Financial Statements financial statements
for interim periods, to normal and recurring year-end adjustments. The
unaudited pro forma combined condensed statements of the Company
present fairly the financial position and the results of operations at
the dates and for the periods indicated. Such Financial Statements
financial statements and the unaudited pro forma combined financial
information of the Company were prepared in conformity with the
Commission's rules and regulations and in accordance with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved. The financial information of the Company set
forth in the Prospectus under the captions "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" fairly present, on the basis stated in the
Prospectus, the information included therein.
(s) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus, and,
except as set forth in the Prospectus, the Company has not received any
notice of either (i) default under any of the foregoing or (ii)
infringement of or conflict with asserted rights of others with respect
to, or challenge to the validity of, any of the foregoing which, in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material Adverse Effect, and the Company knows of
no fact which could reasonably be anticipated to serve as the basis for
any such notice.
(t) Subject to such exceptions as are not likely to result in
a Material Adverse Effect, (A) the Company owns all properties and
assets described in the Registration Statement and the Prospectus as
being owned by it and (B) the Company has good title to all properties
and assets owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except as otherwise disclosed in the
Prospectus and except for (i) liens for taxes not yet due, (ii)
mortgages and liens securing debt reflected on the Financial Statements
financial statements included in the Prospectus, (iii) materialmen's,
workmen's, vendor's and other similar liens incurred in the ordinary
course of business that are not delinquent, individually or in the
aggregate, and do not have a Material Adverse Effect on the value of
such properties or assets of the Company, or on the use of such
properties or assets by the Company, in its respective business, and
(iv) any other liens that, individually or in the aggregate, are not
likely to result in a Material Adverse Effect. All leases to which the
Company is a party and which are material to the conduct of the
business of the Company are valid and binding and no material default
by the Company has occurred and is continuing thereunder; and the
Company enjoys peaceful and undisturbed possession under all such
material leases to which it is a party as lessee.
(u) The books, records and accounts of the Company accurately
and fairly reflect, in reasonable detail, the transactions in and
dispositions of the assets of the Company. The system of internal
accounting controls maintained by the Company is sufficient to provide
reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(v) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company has not incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, in each case, which are likely to result in a Material
Adverse Effect, and there has not been any payment of or declaration to
pay any dividends or any other distribution with respect to the shares
of the capital stock of the Company.
(w) The Company has obtained and delivered to the
Representative the written agreements, substantially in the form
attached hereto as Exhibit B, of the principal shareholders of the
Company restricting dispositions of equity securities of the Company.
(x) The Company is in compliance in all material respects with
all applicable laws, rules and regulations, including, without
limitation, employment and employment practices, immigration, terms and
conditions of employment, health and safety of workers, customs and
wages and hours, and is not engaged in any unfair labor practice. No
property of the Company has been seized by any governmental agency or
authority as a result of any violation by the Company or any
independent contractor of the Company of any provisions of law. There
is no pending unfair labor practice complaint or charge filed with any
governmental agency against the Company. There is no labor strike,
material dispute, slow down or work stoppage actually pending or, to
the best knowledge of the Company, threatened against or affecting the
Company; no grievance or arbitration arising out of or under any
collective bargaining agreements is pending against the Company no
collective bargaining agreement which is binding on the Company
restricts the Company from relocating or closing any of its operations
and none of the Company has experienced any work stoppage or other
labor dispute at any time.
(y) The Company has accurately, properly and timely (giving
effect to any valid extensions of time) filed all federal, state, local
and foreign tax returns (including all schedules thereto) that are
required to be filed, and has paid all taxes and assessments shown
thereon. Any and all tax deficiencies asserted or assessed against the
Company by the Internal Revenue Service ("IRS") or any other foreign or
domestic taxing authority have been paid or finally settled with no
remaining amounts owed. Neither the IRS nor any other foreign or
domestic taxing authority has examined any tax returns of the Company
nor has the IRS or any foreign or domestic taxing authority asserted a
position which conflicts with any tax position taken by the Company.
The charges, accruals and reserves shown in the Financial Statements
financial statements included in the Prospectus in respect of taxes for
all fiscal periods to date are adequate, and nothing has occurred
subsequent to the date of such Financial Statements financial
statements that makes such charges, accruals or reserves inadequate.
The Company is not aware of any proposal (whether oral or written) by
any taxing authority to adjust any tax return filed by the Company.
(z) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the
Company to or for the benefit of its affiliates, or any of its officers
or directors, or any of the members of the families of any of them,
which are required to be disclosed in the Registration Statement or the
Prospectus.
(aa) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(bb) Except as set forth in the Prospectus, the Company has
insurance of the types and in the amounts that it reasonably believes
is adequate for its business, including, but not limited to, casualty
and general liability insurance covering all real and personal property
owned or leased by the Company, as applicable, against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against.
(cc) The Company has not at any time (i) made any
contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made
any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by all applicable laws;
or (iii) violated, nor is it in violation of, any provision of the
Foreign Corrupt Practices Act of 1977.
(dd) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company, and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of the
Company.
(ee) All documents delivered or to be delivered by the Company
or any of its directors or officers to the Underwriters, the Commission
or any state securities law administrator in connection with the
issuance and sale of the Securities were, on the dates on which they
were delivered, and will be, on the dates on which they are to be
delivered, true, complete and correct in all material respects.
(ff) With such exceptions as are not likely to result in a
Material Adverse Effect, the Company is in compliance with all Federal,
state, foreign and local laws and regulations relating to pollution or
protection of human health or the environment ("Environmental Laws"),
there are no circumstances that may prevent or interfere with such
compliance other than as set forth in the Prospectus, and the Company
has not received any notice or other communication alleging a currently
pending violation of any Environmental Laws. With such exceptions as
are not likely to result in a Material Adverse Effect, other than as
set forth in the Prospectus, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge or disposal of any
chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products, that may result in the imposition of
liability on the Company or any claim against the Company or, to the
Company's best knowledge, against any person or entity whose liability
for any claim the Company has or may have assumed either contractually
or by operation of law, and the Company has not received any notice or
other communication concerning any such claim against the Company or
such person or entity.
(gg) Except as described in the Prospectus, the Company does
not maintain, nor does any other person maintain on behalf of the
Company, any retirement, pension (whether deferred or non-deferred,
defined contribution or defined benefit) or money purchase plan or
trust. There are no unfunded liabilities of the Company with respect to
any such plans or trusts that are not accrued or otherwise reserved for
on the Financial Statements financial statements.
(hh) Any certificates signed by an officer of the Company and
delivered to the Representative or the Underwriters or to counsel for
the Underwriters shall also be deemed a representation and warranty of
the Company to the Underwriters as to the matters covered thereby. Any
certificate delivered by the Company to its counsel for purposes of
enabling such counsel to render the opinions referred to in Section
6(b) will also be furnished to the Representative and counsel for the
Underwriters and shall be deemed to be additional representations and
warranties by the Company to the Underwriters as to the matters covered
thereby.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue and
sell to the Underwriters an aggregate of 1,000,000 Units. Each of the
Underwriters agrees, severally and not jointly, to purchase from the Company the
number of Units set forth opposite its name in Schedule I hereto. The purchase
price per Unit to be paid by the several Underwriters to the Company shall be
$______ per Unit. No value shall be attributable to the Warrants.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option (the "Underwriters' Option") to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 150,000 Units at the same
purchase price for use solely in covering any over-allotments made by the
Representative for the account of the Underwriters in the sale and distribution
of the Underwritten Securities. The Underwriters' Option may be exercised in
whole or in part at any time on or before the 45th day after the Effective Date
upon written or telegraphic notice by the Representative to the Company setting
forth the number of Units which the several Underwriters are electing to
purchase pursuant to the Underwriters' Option and the settlement date. Delivery
of certificates for such Units by the Company and payment therefor to the
Company shall be made as provided in Section 3 hereof. The number of Units
purchased by each Underwriter pursuant to the Underwriters' Option shall be
determined by multiplying the number of Units to be sold by the Company pursuant
to the Underwriters' Option, as exercised, by a fraction, the numerator of which
is the number of Units to be purchased by such Underwriter as set forth opposite
its name in Schedule I and the denominator of which is the total number of Units
to be purchased by all of the Underwriters as set forth on Schedule I (subject
to such adjustments to eliminate any fractional Unit purchases as the
Representative in its discretion may make).
3. Delivery and Payment.
(a) If the Underwriters' Option described in Section 2(b) hereof is
exercised on or before the third business day prior to the Closing Date (as
defined below), delivery of the certificates for the Common Stock and Warrants
comprising the Units described in Sections 2(a) and 2(b) hereof shall be made by
the Company through the facilities of the Depository Trust Company ("DTC"), and
payment therefor shall be made at 9:00 a.m. local time, on __________________,
1998 or such later date (not later than _______________, 1998) as the
Representative shall designate, which date and time may be postponed by
agreement among the Representative and the Company or as provided in Section 9
hereof (such date, time of delivery and payment for such Securities being herein
called the "Closing Date"). Delivery of the certificates for such Securities to
be purchased on the Closing Date shall be made as provided in the preceding
sentence for the respective accounts of the several Underwriters against payment
by the several Underwriters through Capital West Securities, Inc. of the
aggregate purchase price of such Underwritten Securities by wire transfer in
same day funds. Certificates for such Underwritten Securities shall be
registered in such names and in such denominations as the Representative may
request not less than one full business day in advance of the Closing Date. The
Company agrees to have the certificates for the Underwritten Securities to be
purchased on the Closing Date available at the office of the DTC, not later than
9:00 a.m. local time, at least one business day prior to the Closing Date.
(b) If the Underwriters' Option is exercised after the third business
day prior to the Closing Date, (i) delivery of the certificates for the Units
described in Section 2(a) hereof and payment therefor will be governed by the
provisions of Section 3(a) hereof and (ii) the Company will deliver (at the
expense of the Company) on the date specified by the Representative (which shall
not be less than one nor more than five business days after exercise of the
Underwriters' Option), certificates for the Common Stock and Warrants comprising
the Units described in Section 2(b) hereof in such names and denominations as
the Representative shall have requested against payment at the office of Capital
West Securities, Inc. of the purchase price by wire transfer in same day funds.
If settlement for such Securities occurs after the Closing Date, the Company
will deliver to the Representative on the settlement date for such Securities,
and the obligation of the Underwriters to purchase such Securities shall be
conditions upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof. The Company agrees to have the
certificates for the Securities to be purchased after the Closing Date available
at the office of the DTC, not later than 9:00 a.m. local time at least one
business day prior to the settlement date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Securities for sale to the public as set forth in the
Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution Time, to
become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the Prospectus,
properly completed, pursuant to Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any post-effective
amendment thereto shall have become effective, (iii) of any request by the
Commission for any amendment or supplement of the Registration Statement or the
Prospectus or for any additional information with respect thereto, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any notification with
respect to the institution or threatening of any proceeding for that purpose and
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal thereof.
The Company will not file any amendment to the Registration Statement or
supplement to the Prospectus without the prior consent of the Representative.
The Company will prepare and file with the Commission, promptly upon your
request, any amendment to the Registration Statement or supplement to the
Prospectus that you reasonably determine to be necessary or advisable in
connection with the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it otherwise shall be necessary to supplement the
Prospectus to comply with the Act or the rules or regulations thereunder, the
Company will promptly prepare and file with the Commission, subject to Section
5(a) hereof, a supplement that will correct such statement or omission or a
supplement that will effect such compliance.
(c) As soon as practicable (but not later than eighteen months after
the effective date of the Registration Statement), the Company will make
generally available to its security holders and to the Representative an
earnings statement or statements (which need not be audited) of the Company
covering a period of at least twelve months after the Effective Date (but in no
event commencing later than 90 days after such date), which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for the
Underwriters, without charge, one signed copy of the Registration Statement and
any amendments thereto (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement and any amendments
thereto (without exhibits thereto) and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request.
(e) The Company will take all actions necessary for the registration or
qualification of the Securities for sale under the laws of such jurisdictions
within the United States and its territories as the Representative may
designate, will maintain such qualifications in effect so long as required for
the distribution of the Securities and will pay the fee of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with its
review of the offering, provided that the Company shall not be required to
qualify as a foreign corporation or to consent to service of process under the
laws of any such jurisdiction (except service of process with respect to the
offering and sale of the Securities). Without limiting the foregoing, the
Company will use its best efforts to register or qualify the shares of Common
Stock underlying the Warrants in any jurisdiction where the registered holders
of 5% or more of such Warrants reside, and will use its best efforts to keep
such registrations or qualifications in effect during the term of the Warrants.
(f) The Company will apply the net proceeds from the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will (i) cause the Securities (other than the
Representative's Warrants) to be listed on AMEX and (ii) comply with all
registration, filing and reporting requirements of the Exchange Act, and AMEX
which may from time to time be applicable to the Company.
(h) During the five-year period commencing on the date hereof, the
Company will furnish to its shareholders, as soon as practicable after the end
of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of earnings and will furnish to you and, upon request, to the other
Underwriters hereunder (i) concurrent with furnishing such quarterly reports to
its shareholders, statements of income and other information of the Company for
such quarter in the form furnished to the Company's shareholders; (ii)
concurrent with furnishing such annual reports to its shareholders, a balance
sheet of the Company as at the end of such fiscal year, together with statements
of income and surplus and of cash flow of the Company for such fiscal year, all
in reasonable detail and accompanied by a copy of the certificate or report
thereon of its independent certified public accountants; (iii) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, the NASD, AMEX or any other securities exchange on
which any of the Company's securities may be listed; (iv) every press release
and every material news item or article in respect of the Company or its affairs
which was released or prepared by the Company; and (v) any additional
information of a public nature concerning the Company or its business that you
may reasonably request. During such five-year period, if the Company shall have
active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary that is not so consolidated.
(i) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for the Securities.
(j) The Company will not, for a period of 365 days following the
Effective Date, without the prior written consent of the Representative, offer,
sell, contract to sell (including, without limitation, any short sale),
transfer, assign, pledge, encumber, hypothecate or grant any option to purchase
or otherwise dispose of, any capital stock, or any options, rights or warrants
to purchase any capital stock of the Company, or any securities or indebtedness
convertible into or exchangeable for shares of capital stock of the Company,
except for (i) sales of Securities as contemplated by this Agreement and (ii)
sales of Common Stock upon the exercise of the Warrants or outstanding options
described in the Prospectus.
(k) The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon exercise of the
Representative's Warrants and the Warrants.
(l) If the Company elects to rely on Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 p.m., Washington D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(m) For the five year period from the Closing Date, the Company will
nominate for election as a director a person designated by the Representative,
and during such time as the Representative shall not have exercised such right,
the Representative shall have the right to designate an observer, who shall be
entitled to attend all meetings of the Board of Directors and receive all
correspondence and communications sent by the Company to the members of the
Board of Directors.
(n) The Company shall solicit the exercise of the Warrants solely
through the Representative, at the Representative's election, and at any time
after one year from the date of the Prospectus, and the Company shall pay to the
Representative the compensation set forth in Section 7 hereof for such services.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the Units described in Sections 2(a) and 2(b) hereof
shall be subject to (i) the accuracy of the representations and warranties on
the part of the Company contained herein as of the Execution Time, the Closing
Date and (in the case of any Units delivered after the Closing Date, any
settlement date pursuant to Section 3(b) hereof), (ii) the accuracy of the
statements of the Company made in any certificates delivered pursuant to the
provisions hereof, (iii) the performance by the Company of its obligations
hereunder, and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) not later than 5:00
p.m. Eastern Standard Time, on the execution date hereof or at such later date
and time as the Representative may approve in writing and, at the Closing Date
(and any settlement date pursuant to Section 3(b) hereof), no stop order
suspending the effectiveness of the Registration Statement or any qualification
in any jurisdiction shall have been issued and no proceedings for that purpose
shall have been initiated or, to the best knowledge of the Company, threatened
by the Commission.
(b) The Company shall have furnished to the Representative the opinion
of Maurice J. Bates L.L.C., counsel for the Company, addressed to the
Underwriters and dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), or other evidence satisfactory to the Representative to
the effect that:
(i) The Registration Statement has become effective under the
Act; any required filing of the Prospectus or any supplements thereto
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to the best knowledge of such counsel,
no stop order suspending the effectiveness of the Registration
Statement or any qualification in any jurisdiction has been issued and
no proceedings for that purpose have been instituted or threatened; any
request from the Commission for additional information has been
complied with; the Registration Statement and the Prospectus (and any
supplements thereto) comply as to form in all material respects with
the applicable requirements of the Act and the rules and regulations
thereunder (except that such counsel need express no opinion with
respect to the Financial Statements financial statements and schedules
included in the Registration Statement and Prospectus).
(ii) The Company does not own or control, directly or
indirectly, any shares of capital stock or equity interests in any
corporation, partnership, association or other entity, except as set
forth in the Prospectus.
(iii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and corporate authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which it conducts its business or owns
property and in which the failure, individually or in the aggregate, to
be so qualified would have a Material Adverse Effect. The Company has
all necessary and material authorizations, approvals, orders, licenses,
certificates and permits of and from all government regulatory
officials and bodies, to own its properties and conduct its business as
described in the Prospectus, except where failure to obtain such
authorizations, approvals, orders, licenses, certificates or permits
would not have a Material Adverse Effect.
(iv) The Company has an authorized share capitalization as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; all outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable and
the certificates therefor are in valid and sufficient form in
accordance with applicable state law; there are no other classes of
stock outstanding except Common Stock; all outstanding options to
purchase shares of Common Stock have been duly and validly authorized
and issued; except as described in the Prospectus, there are no
options, warrants or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or understandings to
which the Company is a party, outstanding or in existence, entitling
any person to purchase or otherwise acquire any shares of capital stock
of the Company; the issuance and sale of the Securities have been duly
and validly authorized and, when issued and delivered and paid for, the
Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Warrants and the
Representative's Warrants constitute valid and binding obligations of
the Company enforceable in accordance with their terms and the Company
has reserved a sufficient number of shares of Common Stock for issuance
upon exercise thereof; the Warrants and the Representative's Warrants
possess the rights, privileges and characteristics as represented in
the forms filed as exhibits to the Registration Statement and as
described in the Prospectus; the Securities (other than the
Representative's Warrants) have been approved for listing on AMEX upon
notice of issuance thereof; the certificates for the Securities are in
valid and sufficient form. Each offer and sale of securities of the
Company described in Item 26 of Part II of the Registration Statement
was effected in compliance with the Act and the rules and regulations
thereunder.
(v) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of such counsel after reasonable
investigation, threatened action, suit or proceeding before any court
or governmental agency, authority or body, domestic or foreign, or any
arbitrator involving the Company of a character required to be
disclosed in the Registration Statement or the Prospectus that is not
adequately disclosed in the Prospectus, and, to the best knowledge of
such counsel, there is no contract or other document of a character
required to be described in the Registration Statement or the
Prospectus, or to be filed as an exhibit, which is not described or
filed as required.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement and obligation of the Company enforceable against it in
accordance with its terms (subject to standard bankruptcy and equitable
remedy exceptions, and limitations under the Act as to the
enforceability of indemnification provisions).
(vii) The Company has full corporate power and corporate
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement; and the Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(viii) Neither the offering, issue and sale of the Securities
nor the consummation of any other of the transactions contemplated
herein, nor the fulfillment of the terms hereof, will conflict with or
result in a breach or violation of, or constitute a default under, or
result in the imposition of a lien on any properties of the Company, or
an acceleration of indebtedness pursuant to, the Articles of
Incorporation (or other charter document) or bylaws of the Company, or
any of the terms of any indenture or other agreement or instrument to
which the Company is a party or by which its properties are bound, or
any law, order, judgment, decree, rule or regulation applicable to the
Company of any court, regulatory body, administrative agency,
governmental body, stock exchange or arbitrator having jurisdiction
over the Company. The Company is not in violation of its Articles of
Incorporation or bylaws or, to the best knowledge of such counsel after
reasonable investigation, in breach of or default under any of the
terms of any indenture or other agreement or instrument to which it is
a party or by which it or its properties are bound, which breach or
default would, individually or in the aggregate, have a Material
Adverse Effect.
(ix) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of the
Securities to be sold by the Company hereunder nor does any person have
preemptive rights, or rights of first refusal or other rights to
purchase any of the Securities. Except as referred to in the
Prospectus, no person holds a right to require or participate in a
registration under the Act of Common Stock or any other equity
securities of the Company.
(x) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is
required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction.
(xi) To the best knowledge of such counsel after reasonable
investigation, the Company is not in violation of or default under any
judgment, ruling, decree or order or any statute, rule or regulation of
any court or other United States governmental agency or body, including
any applicable laws respecting employment, immigration and wages and
hours, in each case, where such violation or default could have a
Material Adverse Effect. The Company is not involved in any labor
dispute, nor, to the best knowledge of such counsel, is any labor
dispute threatened.
(xii) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(xiii) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company, and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of the
Company.
(xiv) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus, and,
except as set forth in the Prospectus, neither such counsel nor, to the
knowledge of such counsel, the Company has received any notice of
either (i) default under any of the foregoing or (ii) infringement of
or conflict with asserted rights of others with respect to, or
challenge to the validity of, any of the foregoing which, in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material Adverse Effect, and counsel knows of no
facts which could reasonably be anticipated to serve as the basis for
any such notice.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs (i)
and (v) above), on the basis of the foregoing and on such counsel's
participation in the preparation of the Registration Statement and the
Prospectus, nothing has come to the attention of such counsel that causes such
counsel to believe that the Registration Statement, at the Effective Date and at
the Closing Date (and any settlement date pursuant to Section 3(b) hereof),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, at the date
of such Prospectus or at the Closing Date (or any settlement date pursuant to
Section 3(b) hereof), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no comment with respect to the Financial Statements
financial statements and schedules and other financial or statistical data
derived therefrom included in the Registration Statement or Prospectus).
References to the Prospectus in this Section 6(b) shall include any
supplements thereto.
(c) The Representative shall have received from Wolin, Ridley & Miller
LLP, counsel for the Underwriters, an opinion dated the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), with respect to the issuance
and sale of the Securities, and with respect to the Registration Statement, the
Prospectus and other related matters as the Representative may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representative a
certificate of the Company, signed by its Chief Executive Officer and its Chief
Financial Officer, dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), to the effect that each has carefully examined the
Registration Statement, the Prospectus (and any supplements thereto) and this
Agreement, and, after due inquiry, that:
(i) As of the Closing Date (and any settlement date pursuant
to Section 3(b) hereof), the statements made in the Registration
Statement and the Prospectus are true and correct and the Registration
Statement and the Prospectus do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(ii) No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under
the securities or Blue Sky laws of any jurisdiction is in effect and no
proceeding for such purpose is pending before or, to the knowledge of
such officers, threatened or contemplated by the Commission or the
authorities of any such jurisdiction; and any request for additional
information with respect to the Registration Statement or the
Prospectus on the part of the staff of the Commission or any such
authorities brought to the attention of such officers has been complied
with to the satisfaction of the staff of the Commission or such
authorities.
(iii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of the Company,
except as set forth in or contemplated by the Registration Statement
and the Prospectus, (y) there has not been any material adverse change
in the general affairs, business, prospects, properties, management,
results of operations or condition (financial or otherwise) of the
Company, whether or not arising from transactions in the ordinary
course of business, in each case, other than as set forth in or
contemplated by the Registration Statement and the Prospectus, and (z)
the Company has not sustained any material interference with its
business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any
court or legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the
Prospectus.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has been
no litigation instituted against the Company, any of its respective
officers or directors, or, to the best knowledge of such officers, any
affiliate or promoter of the Company, and since such dates there has
been no proceeding instituted or, to the best knowledge of such
officers, threatened against the Company, any of its officers or
directors, or, to the best knowledge of such officers, any affiliate or
promoter of the Company, before any federal, state or county court,
commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect.
(v) Each of the representations and warranties of the Company in this
Agreement is true and correct in all material respects on and as of the
Execution Time and the Closing Date (and any settlement date pursuant
to Section 3(b) hereof) with the same effect as if made on and as of
the Closing Date (and any settlement date pursuant to Section 3(b)
hereof).
(vi) Each of the covenants required in this Agreement to be
performed by the Company on or prior to the Closing Date (and any
settlement date pursuant to Section 3(b) hereof) has been duly, timely
and fully performed, and each condition required herein to be complied
with by the Company on or prior to the Closing Date (and any settlement
date pursuant to Section 3(b) hereof) has been duly, timely and fully
complied with.
(e) At the Execution Time and on the Closing Date (and any settlement
date pursuant to Section 3(b) hereof), Johnson, Miller & Co. shall have
furnished to the Representative letters, dated as of such dates, in form and
substance satisfactory to the Representative, confirming that they are
independent accountants within the meaning of the Act and the applicable rules
and regulations thereunder and stating in effect that:
(i) In their opinion, the audited Financial Statements of
Holloman Construction Company ("Construction") and balance sheet of the
Company as of July 31, 1998, the audited financial statements of T.
Sisters Leasing, L.L.C. ("Leasing") for the two fiscal years ended
December 31, 1997 and 1996, and the audited balance sheet of Holloman
Construction Company ("Construction") for the fiscal year ended
November 1, 1997, and the notes to the Financial Statements related
statements of earnings, stockholders' equity and cash flows for the two
fiscal years then ended, and the notes to the financial statements for
those periods included in the Registration Statement and the
Prospectus, comply in all material respects with generally accepted
accounting principles and the applicable accounting requirements of the
Act and the applicable rules and regulations thereunder.
(ii) On the basis of a reading of the latest unaudited
Financial Statements financial statements made available by the
Company, Construction and Leasing, carrying out certain specified
procedures (but not an examination in accordance with generally
accepted auditing standards), a reading of the minutes of the meetings
of the shareholders, directors and committees of the Company,
Construction and Leasing, and inquiries of certain officials of the
Company, Construction and Leasing who have responsibility for financial
and accounting matters of the Company, Construction and Leasing,
nothing came to their attention that caused them to believe that: (i)
the unaudited Financial Statements Unaudited Pro Forma Condensed
Combined Statements of the Company as of July 31, 1998 and the
unaudited financial statements of Construction and Leasing as of and
for the quarter nine months ended April 30 July 31, 1998, and the notes
to the Financial Statements for the period then ended such financial
statements included in the Registration Statement and Prospectus, do
not comply in all material respects with generally accepted accounting
principles or the applicable accounting requirements of the Act and the
applicable rules and regulations thereunder; and (ii) with respect to
the period subsequent to April 30 July 31, 1998, at a specified date
not more than five business days prior to the date of the letter, (y)
there were any changes in the long-term debt or capital stock of the
Company, Construction and Leasing or their subsidiaries, or decreases
in net current assets, net assets or stockholders' equity of the
Company, Construction and Leasing, as compared with the amounts shown
on the April 30, July 31, 1998 balance sheet sheets included in the
Registration Statement and the Prospectus, or (z) there were any
decreases in reserves, sales, net income or income from operations, of
the Company, Construction and Leasing, as compared with the amounts
shown in the corresponding period of the preceding year, except for
changes or decreases which the Registration Statement discloses have
occurred or may occur and except for changes or decreases set forth in
such letter, in which case (A) the letter shall be accompanied by an
explanation by the Company, Construction and Leasing as to the
significance thereof, unless said explanation is not deemed necessary
by the Representative, and (B) such changes or decreases and the
explanation thereof shall be acceptable to the Representative, in its
sole discretion.
(iii) They have performed certain other specified procedures
as a result of which they determined that all information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company), Construction and Leasing)
set forth in the Registration Statement and the Prospectus and
specified by you prior to the Execution Time, agrees with the
accounting records of the Company, Construction and Leasing.
(iv) On the basis of a reading of the unaudited pro forma
combined condensed combined balance sheet of the Company as of July 31,
1998 and the related unaudited pro forma combined condensed combined
statement of income and retained earnings of the Company for the three
nine months ended July 31, 1998, and 1997, and the summary unaudited
pro forma combined financial information as of condensed combined
statement of earnings of the Company for the years ended November 1,
1997 and the year then ended and July 31, 1998 and the three months
then ended November 2, 1996, nothing came to their attention that
caused them to believe that the above described pro forma balance sheet
sheets and statements of income earnings had not been properly compiled
on the pro forma bases basis described in the notes thereto.
The Representative shall also have also received from Johnson,
Miller & Co., a letter stating that the Company's system of internal accounting
controls are sufficient to meet the objectives of internal accounting control
insofar as those objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material to the Financial Statements
financial statements of the Company, Construction and Leasing.
References to the Prospectus in this Section 6(f) shall
include any supplements thereto.
(f) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not have been (i)
any changes or decreases from that specified in the letters referred to in
Section 6(f) hereof or (ii) any change, or any development involving a
prospective change, in or affecting the properties, assets, results of
operations, business, capitalization, net worth, prospects, general affairs or
condition (financial or otherwise) of the Company, the effect of which is, in
the sole judgment of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities as contemplated by the Registration Statement and the Prospectus.
(g) On or prior to the Effective Date, the Securities shall have been
approved for listing on AMEX.
(h) The Company shall not have sustained any uninsured substantial loss
as a result of fire, flood, accident or other calamity.
(i) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain information
and other matters as the Representative may reasonably request.
(j) The Company shall have furnished to the Representative such further
information, certificates and documents as the Representative may reasonably
request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in any respect when and as provided in this Agreement, or if any
of the opinions and certificates mentioned above or elsewhere in this Agreement
shall not be in all respects reasonably satisfactory in form and substance to
the Representative and its counsel, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time prior to, the Closing
Date (or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the Company in
writing or by telephone, facsimile or telegraph confirmed in writing.
7. Fees and Expenses and the Representative's Warrants. The Company agrees to
pay or cause to be paid and issue the following:
(a) the fees, disbursements and expenses of its own counsel and counsel
for the Company and accountants in connection with the registration of the
Securities under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any Preliminary
Prospectus, any Prospectus, and any drafts thereof, and amendments and
supplements thereto, and the mailing and delivery of copies thereof to the
Underwriters and dealers;
(b) all expenses in connection with the qualification of the Securities
for offering under state securities laws, including the fees and disbursements
of counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky Memorandum;
(c) all filing and other fees in connection with filing with the NASD,
and complying with applicable review requirements thereof;
(d) the cost of preparing and printing certificates for the Securities;
(e) all expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties sellers' and buyers' stamp taxes
or duties on the purchase and sale of the Securities and stock exchange
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Securities (the latter to the extent paid and not
reimbursed) (i) incident to the sale and delivery by the Company of the
Securities to the Underwriters and (ii) incident to the sale and delivery of the
Securities by the Underwriters to the initial purchasers thereof;
(f) the costs and charges of any transfer agent and registrar;
(g) the fees and expenses in connection with qualification of the
Securities for listing on the AMEX;
(h) a nonaccountable expense allowance of 2.0% of the proceeds derived
from the offering (including the Units described in Section 2(b) hereof) payable
to the Representative;
(i) a solicitation fee to the Representative equal to 5.0% of the
aggregate proceeds received by the Company as a result of the solicitation of
the exercise of the Warrants, provided that no solicitation fee shall be payable
(i) within one year after the date of this prospectus the Prospectus, (ii) if
the market price of the Common Stock is lower than the exercise price of the
Warrants, (iii) if the Warrants are held in a discretionary account at the time
of exercise, unless prior written approval of the exercise of such Warrants is
received from the beneficial owner of the Warrants, or (iv) if the exercise of
the Warrants is not solicited by the Representative, unless the beneficial owner
of such the Warrants states in writing that the exercise was solicited by the
Representative and designates in writing the Representative to receive the
solicitation fee with respect to the exercise of such Warrants;
(j) all other costs and expenses incident to the performance of the
Company's obligations hereunder which are not otherwise specifically provided
for in this Section 7; and
(k) in addition to the sums payable to the Representative provided
elsewhere herein and in addition to the Underwriters' Option, the Representative
shall be entitled to receive on the Closing Date, as partial compensation for
its services, warrants (the "Representative's Warrants") for the purchase of an
additional 100,000 Units. The Representative's Warrants shall be issued pursuant
to the Representative's Warrant Agreement in the form of Exhibit A attached
hereto and shall be exercisable, in whole or in part, for a period of four years
commencing one year from the date of the Prospectus, at 120% 140% of the initial
public offering price of the Units. The Representative's Warrants, including the
Warrants issuable upon exercise thereof, shall be non-transferable for one year
from the date of issuance of the Representative's Warrants, except for (i)
transfers to officers or partners of the Representative, (ii) in connection with
a merger, consolidation or reorganization of the Representative, or (iii)
transfers occurring by operation of law. The terms of the Units subject to the
Representative's Warrants shall be the same as the Units sold to the public.
Without limiting in any respect the foregoing obligations of the
Company, which obligations shall survive any termination of this Agreement, if
the sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 6 hereof
is not satisfied, because of any termination pursuant to Section 10 hereof, or
because of any refusal, inability or failure on the part of the Company or the
Company to perform any agreement herein or comply with any provision hereof to
be performed or complied with by the Company or the Company other than by reason
of a default by any of the Underwriters, the Company agrees to reimburse the
Underwriters, upon demand, for all out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities to the extent
the amounts paid pursuant to Section 7(h) hereof are insufficient therefor.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person who controls any Underwriter within the meaning of the Act or
the Exchange Act against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the Act,
the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in (i)
Section 1 of this Agreement, the Registration Statement, any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or (ii) any application or other document, or any amendment or supplement
thereto, executed by the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order to qualify the
Securities under the securities or Blue Sky laws thereof or filed with the
Commission or any securities association or securities exchange, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representative specifically for use in the
Registration Statement or Prospectus; provided further, that with respect to any
untrue statement or omission, or any alleged untrue statement or omission, made
in any Preliminary Prospectus, the indemnity agreement contained in this
subsection (a) shall not inure to the benefit of any Underwriter (or to the
benefit of any person controlling any such Underwriter) from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the Securities concerned to the extent that such untrue statement or omission,
or alleged untrue statement or omission, has been corrected in the Prospectus
and the failure to deliver the Prospectus was not a result of the Company's
failure to comply with its obligations under Section 5(d) hereof. The indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless the settlement or compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding,
satisfactory in form and substance to the Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of the Company's officers who signs the
Registration Statement, and each person who controls the Company or the Company,
as the case may be, within the meaning of the Act or the Exchange Act to the
same extent as the foregoing indemnity from the Company or the Company to each
Underwriter, but only with reference to written information relating to such
Underwriter furnished to the Company by or on behalf of such Underwriter through
the Representative specifically for use in the Registration Statement or
Prospectus. The Company acknowledges that the corporate names of the
Underwriters, the stabilization legend on page 2 and the information under the
heading "Underwriting" in the Prospectus and in any Preliminary Prospectus
constitute the only information furnished in writing by or on behalf of the
several Underwriters. The obligations of each Underwriter under this subsection
(b) shall be in addition to any liability which the Underwriters may otherwise
have.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof and the indemnifying party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the indemnified party and the payment of all expenses; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party, unless such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. All such
expenses shall be paid by the indemnifying party as incurred by an indemnified
party. Any such indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees and expenses
or (ii) the indemnifying party shall have failed promptly after notice by such
indemnified party to assume the defense of such action or proceeding and employ
counsel reasonably satisfactory to the indemnified party in any such action,
suit or proceeding or (iii) the named parties in any such action or proceeding
(including any impleaded parties) include both such indemnified party and the
indemnifying party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to such
indemnified party which are different from or additional to those available to
the indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action or proceeding on behalf of the
indemnified party or parties, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at any
time for all such indemnified parties, which firm shall be designated in writing
to the indemnifying party). Any such fees and expenses payable by the
indemnifying party shall be paid to or on behalf of the indemnified party
entitled thereto as incurred. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent, which consent
shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a) or 8(b)
is applicable in accordance with its terms but is for any reason held by a court
to be unavailable from the indemnifying party on grounds of policy or otherwise,
the Company, the Company and the Underwriters shall contribute to the aggregate
losses, claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same) to which
the Company, the Company and one or more of the Underwriters may be subject in
such proportion so that the Underwriters are responsible in the aggregate for
that portion represented by the total underwriting compensation in respect of
the Securities bears to the public offering price appearing thereon and the
Company is responsible for the balance; provided, however, that (i) in no case
shall any Underwriter (except as may be provided in the Agreement Among
Underwriters relating to the offering of the Securities) be responsible for any
amount in excess of the total underwriting compensation applicable to the
Securities to be purchased by such Underwriter hereunder and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each person
who controls an Underwriter within the meaning of the Act shall have the same
rights to contribution as such Underwriter, and each person who controls the
Company or the Company within the meaning of the Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clause (ii) of this Section 8(d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section
8(d), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the number of Units set forth
opposite their names in Schedule I hereto bears to the aggregate number of Units
set forth opposite the names of all the remaining Underwriters) the Units which
the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that if the aggregate number of Units which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate number of Units set forth in Schedule I hereto, the remaining
Underwriters shall have the right to purchase all, but shall not be under any
obligation to purchase any, of such Units, and if such nondefaulting
Underwriters do not purchase all of such Units, this Agreement will terminate
without liability to any non-defaulting Underwriter or the Company except as
otherwise provided in Section 7. In the event of a default by any Underwriter as
set forth in this Section 9, the Closing Date shall be postponed for such
period, not exceeding seven days, as the Representative shall determine in order
that the required changes in the Registration Statement and the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company or any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given by the Representative to the
Company prior to delivery of and payment for the Securities, if prior to such
time (a) a suspension or material limitation in trading in securities generally
on the New York or American Stock Exchange, the Nasdaq National Market or any
relevant over-the-counter market, the Chicago Board Options Exchange, the
Chicago Mercantile Exchange or the Chicago Board of Trade System or the Nasdaq
SmallCap Market shall have occurred, (b) a banking moratorium shall have been
declared by federal, or New York or California state authorities, (c) the United
States shall have engaged in hostilities which shall have resulted in the
declaration, on or after the date hereof, outbreak or escalation of major
hostilities involving the United States or the declaration by the United States
of a national emergency or war, or (d) a change in national or international
political, financial or economic conditions or national or international equity
markets or currency exchange rates shall have occurred, if the effect of any
such event specified in clause (c) above is, in the sole reasonable judgment of
the Representative, so material and adverse as to make it impractical or
inadvisable to proceed with the public offering or delivery of the Securities as
contemplated by the Registration Statement this Agreement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company,
its officers and the Underwriters set forth in, referred to in, or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Section 8 hereof,
and will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing and effective only
on receipt, and will be mailed, delivered, telegraphed or sent by facsimile
transmission and confirmed:
to the Representative at:
Capital West Securities, Inc.
211 N. Robinson, Suite 200
Oklahoma City, Oklahoma 73102
Attention: Robert G. Rader
Facsimile: (405) 231-0696
to the Company at:
Holloman Corporation
5257 West Interstate 20
Odessa, Texas 79763
Attention: President
Facsimile: (915) 381-6200
13. Successors. This Agreement will inure to the benefit of and be binding upon
the parties hereto and their respective successors and the officers, directors
and controlling persons referred to in Section 8 hereof, and no other person
will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in two or more counterparts, each
of which shall be an original, with the same effect as if the signatures thereon
and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
Very truly yours,
HOLLOMAN CORPORATION
By:
Mark E. Stevenson, President and Chief Executive
Officer
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CAPITAL WEST SECURITIES, INC., For itself and as Representative of the several
Underwriters in Schedule I to this Underwriting Agreement.
By:
Robert G. Rader
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
28325_5 - 75205/00003
SCHEDULE I
Number of Units
Underwriters
To Be Purchased
Capital West Securities, Inc.
Total 1,000,000
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
28325_5 - 75205/00003
EXHIBIT A
FORM OF WARRANT AGREEMENT
<PAGE>
Underwriting Agreement
28325_7 - 21720/00001
28325_5 - 75205/00003
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
Capital West Securities, Inc.,
As Representative of the Several Underwriters
211 N. Robinson, Suite 200
Oklahoma City, Oklahoma 73102
Ladies and Gentlemen:
The undersigned understands that you, as the Representative of the
several underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with Holloman Corporation, a Texas
corporation (the "Company"), providing for the initial public offering by the
Underwriters of an aggregate of 1,000,000 units (the "Units"), each consisting
of one share of the Company's Common Stock, no par value (the "Common Stock"),
and one redeemable common stock purchase warrant (the "Warrants"), pursuant to
the Company's Registration Statement on Form SB-2 (the "Registration Statement")
filed with the Securities and Exchange Commission.
In consideration of the Underwriters' agreement to purchase the Units,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the undersigned hereby agrees that during the period beginning on
the date of this letter and ending one (1) year (the "Lock-Up Period") after the
date of the final prospectus relating to the offer and sale of the Units, the
undersigned will not, directly or indirectly, offer, sell, contract to sell,
grant any option for the sale of, pledge, or otherwise dispose of (individually,
a "Disposition") any Common Stock, or securities exercisable, convertible, or
exchangeable for or into Common Stock (collectively, the "Securities"), that the
undersigned now owns or will own in the future (beneficially or of record),
except (i) as a bona fide gift or gifts, provided the donee or donees thereof
agree in writing to be bound by this Lock-Up Agreement, or (ii) with the prior
written consent of the Representative. The foregoing restriction is expressly
agreed to preclude the holder of Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a disposition of Securities during the Lock-Up Period, even if such
Securities would be disposed of by someone other than the undersigned. Such
prohibited hedging or other transactions would include, without limitation, any
short sale or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities.
Sincerely,
Date: _________ ___, 1998
Print Name
Holloman Corporation
December 8, 1998
Page 2.
MAURICE J. BATES, L.L.C.
ATTORNEY AT LAW
8214 WESTCHESTER SUITE, 500
DALLAS , TEXAS 75225
Telephone (214) 692-3566
Fax (214) 987-2091
December 8, 1998
Holloman Corporation
5257 West Interstate 20
P. O. Box 69410
Odessa, Texas 79769-2000
Re: Registration Statement on Form SB-2
Public Offering of 1,000,000 Units
Gentlemen:
I have acted as counsel to HollomanCorporation, a Texas corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, (the "Securities Act"), of 1,000,000 units, each unit
consisting of one share (the "Shares") of common stock, $.01 par value, (the
"Common Stock") and one Redeemable Common Stock Purchase Warrant (the
"Warrants") to purchase one share of Common Stock of the Company (the "Units")
to be offered to the public by the Company in a firm commitment underwriting by
Capital West Securities, Inc.. The Registration Statement (defined below) also
includes 150,000 additional Units to cover over-allotments, if any.
A registration statement on Form SB-2 (SEC File No. 333-58987) was
filed with the Securities and Exchange Commission on July 13, 1998 (the
"Registration Statement"), Amendment No. 1 was filed November , 1998 and
Amendment No. 2 thereto is being filed herewith. In connection with rendering
this opinion I have examined executed copies of the Registration Statement and
all exhibits thereto and Amendment Nos. 1 and 2 and all exhibits thereto. I have
also examined and relied upon the original, or copies certified to my
satisfaction, of (i) the Articles of Incorporation and the By-laws of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Units, the Common Stock and the Warrants,
and related matters, and (iii) such other agreements and instruments relating to
the Company as I deemed necessary or appropriate for purposes of the opinion
expressed herein. In rendering such opinion, I have made such further
investigation and inquiries relevant to the transaction contemplated by the
Registration Statement as I have deemed necessary for the opinion expressed
herein, and I have relied, to the extent I deemed reasonable, on certificates
and certain other information provided to me by officers of the Company and
public officials as to matters of fact of which the maker of such certificate or
the person providing such other information had knowledge.
Furthermore, in rendering my opinion, I have assumed that the signatures on all
documents examined by me are genuine, that all documents and corporate record
books submitted to me as originals are accurate and complete, and that all
documents submitted to me are true, correct and complete copies of the originals
thereof.
Based upon the foregoing, I am of the opinion that the Units, the
Shares, the Warrants and the shares of Common Stock issuable upon the exercise
of the Warrants, to be issued by the Company as described in the Registration
Statement, have been duly authorized for issuance and sale and the Units, the
Shares, the Warrants and the shares of Common Stock issuable upon exercise of
the Warrants, when issued by the Company, will be validly issued, fully paid and
nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/: Maurice J. Bates, L.L.C.
By Maurice J. Bates
Green & Frost, Inc.
Certified Public Accountants
December 3, 1998
Securities & Exchange Commission
450 Fifth Street N.W.
Washington, D.C.
Re: Holloman Corporation
File No. 333-58987
Gentlemen:
We have reviewed the disclosure in Amendment No. 2 to the Holloman Corporation
Registration Statement referred to above regarding our not being retained as
auditors of Holloman Construction Company for the audit of the fiscal year ended
November 1, 1997. We agree with the statements set forth in the Registration
Statement.
Very truly yours,
Green & Frost, Inc.
By: /S/ Paul Frost, CPA
Paul Frost, CPA
Vice-President
6010 Highway 191, Suite 250
P.O. Box 12187
Telephone (915) 367-3911
Odessa, Texas 79768
Members of The American Institute of Certified Public
Accountants
Consent of Independent Certified Public Accountants
We have issued our report dated November 12, 1998, accompanying the financial
statements of Holloman Corporation: January 13, 1998- accompaning the financial
statements of Holloman Construcion Co; and July 31, 1998- accompaning financial
statements of T-sisters Leasing, LLC incorporated by reference in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Expert."
/s/ Johnson Miller & Co.
Johnson Miller & Co.
Odessa, Texas
December 8, 1998
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(Replace this text with the legend)
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<NAME> HOLLOMAN CORPORATION
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<FISCAL-YEAR-END> NOV-1-1998
<PERIOD-START> NOV-2-1998
<PERIOD-END> JUL-31-1998
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0
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