As filed with the Securities and
Exchange Commission on February 03, 1999
Registration No. 333-58987
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.3
FORM SB-2/A
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 FEBRUARY 03, 1999
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 Oklahoma City, Oklahoma on or
about , 1999.
Capital West Securities, Inc.
The date of this Prospectus is , 1999.
<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>
The Offering
<TABLE>
<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 ____________, 2004 (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 ________, 2000
(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 October 31, 1998, audited income statements
for the two fiscal years ended October 31, 1998 and November 1, 1997, and
audited financial statements of Leasing for the ten month period ended October
31, 1998 and the year ended December 31, 1997 and audited balance sheet of the
Company at October 31, 1998 and pro forma unaudited balance sheet and pro forma
unaudited income statements for the fiscal years ended October 31, 1998 and
November 1, 1997. This selected financial data should be read in conjunction
with the financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. See "Financial Statements."
<TABLE>
<CAPTION>
Fiscal Year Ended
November 1, October 31,
Historical (1) 1997 1998
---------------- ----------
<S> <C> <C>
Operating Data:
Construction revenues $ 19,373,559 24,610,096
Costs of construction 16,151,864 21,380,290
General and administrative 2,156,992 1,859,443
Earnings before income tax 1,171,578 1,348,409
Income tax 413,063 512,539
Net income $ 758,515 835,870
================ =============
Shares outstanding 80,176 77,246
Earnings per Share $ 9.46 $10.82
</TABLE>
(1) Amounts reflect combined historical data for Holloman Construction and T.
Sisters Leasing, L.L.C. with elimination of intercompany leasing revenue and
leasing expenses.
Pro forma (2)
<TABLE>
<CAPTION>
Fiscal Year Ended
November 1, October 31,
1997 1998
---------------- ----------
<S> <C> <C>
Operating Data:
Construction revenues $ 19,373,559 24,610,096
Costs of construction 16,151,864 21,380,290
General and administrative 2,369,863 2,075,557
Earnings before income tax 958,707 1,132,295
Income tax 345,287 419,190
Net income $ 613,420 713,105
Shares outstanding 1,200,000 1,200,000
Earnings per share $ .51 .59
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998
Actual Pro forma (2) As Adjusted (3)
----------- ------------ ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital 265,000 (3,555,915) 4,944,085
Current assets 265,000 5,383,739 7,883,739
Current liabilities - 8,939,654 2,939,654
Total assets 325,000 12,203,570 14,703,570
Total liabilities - 11,878,570 3,878,570
Shareholders' equity 325,000 325,000 10,825,000
Shares outstanding 1,200,000 1,200,000 2,400,000
</TABLE>
- -----------
(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.
<PAGE>
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 88% of the Company's
revenues during the fiscal year ended October 31, 1998. The Company is also
dependent on a core of customers for the majority of its revenues. Sales to five
customers accounted for 57.0% of total revenues in 1998. 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 $7.29 per share or approximately 72.9%
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 October 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 $(2,070,314) or
$(1.72) 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
$(1.72) to $2.71. This represents an immediate increase in net tangible book
value of $4.43 per share to current shareholders and an immediate dilution of
$7.29 per share to new investors or, 72.9% 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 $(1.72)
Increase per share attributable to new investors 4.43
------
Adjusted net tangible book value per share after this offering $ 2.71
Dilution per share to new investors $7.29
-----
Percentage dilution 72.9 %
The following table sets forth as of October 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>
<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 October 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>
October 31, 1998
<S> <C> <C>
(Unaudited) As Adjusted
Short-term debt:
Current portion of notes payable ................... $ 390,482 $ 390,482
--------------- ---------------
Total short-term debt............................... $ 390,482 $ 390,482
=============== =
Long-term debt:
Notes payable....................................... $ 938,916 $ 938,916
Notes payable - Sellers............................. 8,000,000 0
------------- -------------
Total long-term debt........................................... $ 8,938,916 $ 938,916
============== ===============
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 ............................. $ 9,263,916 $ 11,763,916
============= =============
- ------
</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 three years ended October 31, 1998, the Company increased net
revenues by 103% to $24.6 million from $12.1 million, decreased costs of
revenues as a percentage of revenues by 1.1% while general and administrative
expenses as a percentage of revenues decreased from 8.6% to 7.6%. 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:
Fiscal Year Ended
10/31/98 11/01/97 11/02/96
Contract revenues 100.0% 100.0% 100.0%
Costs of revenues 86.9 83.3 88.0
Gross profit 13.1 16.7 12.0
General and
administrative expenses 7.6 11.1 8.6
Operating income 5.6 5.5 3.4
Interest expense 0.5 0.6 0.7
Income taxes 2.1 2.1 0.9
Net income 3.4 3.9 1.8
Comparison of the Years Ended November 1, 1997 and October 31, 1998
Net revenues for the year ended October 31, 1998 increased 27.0% or $5,236,537
from the previous year. The increase was due primarily to growth in the Plant
Construction Division, whose revenues increased 49.0%, and $2,263,000 in the new
Utilities Division. 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 year remained constant compared to last year at
approximately $3.2 million. The gross profit margin as a percentage of revenues
declined from 16.7% in 1997 to 13.1% in 1998. 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 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 Expense for the year ended October 31, 1998
decreased $297,549 or 13.8% from $2,156,992 in 1997 to $1,859,443 in 1998. In
1997, the Company reduced its income by declaring a bonus to Sam Holloman of
$500,000, while no such bonus was declared in 1998. This reduction was offset by
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 increased to $1,370,363 for the year ended October 31,
1998, an increase of 28.7% from 1997. As a percentage of revenues, operating
income increased to 5.6% from 5.5% in the prior year. On an absolute basis, the
increase in operating income reflects the increase in revenues for the year
relative to 1997, offset by the significant increase in the cost of revenues as
explained above.
Interest expense increased by 5.5% to $128,635 during 1998 from
$121,928 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 October 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 October 31, 1998, the credit facility had no outstanding
balance and available credit of $2,000,000. The Company is currently in
compliance with all of the loan covenants governing the credit facility.
As of October 31, 1998, the Company had working capital of $2,444,085
and a working capital ratio of 1.8 times. Cash from operations for the fiscal
year ended October 31, 1998 was $861,239, compared to $1,712,948 in 1997. The
change is due to the increase in net income and changes in current assets and
liabilities.
The Company's cash requirements for fiscal 1999 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 $3,000,000.
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 88% of the
Company's revenues during the fiscal year ended October 31, 1998. The Company is
also dependent on a core of customers for the majority of its revenues. Sales to
two customers accounted for 36.5% of total revenues in 1998. As of October 31,
1998, five customers accounted for 57% of the Company's revenue. 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 December 31, 1998, the Company had approximately 180 full-time
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, including temporary
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>
<S> <C> <C>
Name Age Position
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.
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.
Summary Compensation Table
<TABLE>
<S> <C> <C> <C> <C>
Name and Annual Compensation All Other
Principal Position Fiscal Year Salary Bonus Compensation
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.
<PAGE>
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 October 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) 160,000 11.4. 160,000 6.7
Maurice J. Bates (9) 80,000 5.7 80,000 3.3
All Executive Officers and Directors
as a group (5 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 Mr. Shuey is 8214 Westchester, Dallas,
Texas,75225.
(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 1, 1997 and October 31,
1998, the Company paid Leasing $390,204 and $571,507, 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 October 31, 1998, Construction had a note receivable for $54,895 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 has applied 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.
<PAGE>
Index To Financial Statements
<TABLE>
<S> <C> <C>
Unaudited Pro Forma Condensed Combined Financial Statements:
Unaudited Pro Forma Condensed Combined Balance Sheet - October 31, 1998 F-1
Unaudited Pro Forma Condensed Combined Statement of Earnings - Year
Ended October 31, 1998 F-2
Unaudited Pro Forma Condensed Combined Statement of Earnings - Year
Ended November 1, 1997 F-3
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-4
Holloman Corporation:
Report of Independent Certified Public Accountants F-5
Balance Sheet - October 31, 1998 F-6
Notes to Financial Statement F-7
Holloman Construction Co.:
Report of Independent Certified Public Accountants F-9
Balance Sheet - October 31, 1998 F-10
Statement of Earnings - Fiscal Years Ended October 31, 1998
and November 1, 1997 F-12
Statement of Stockholders Equity - Fiscal Years Ended October 31, 1998
and November 1, 1997 F-13
Statements of Cash Flows - Fiscal Years Ended October 31, 1998
and November 1, 1997 F-14
Notes to Financial Statements F-16
T Sister Leasing, L.L.C.
Report of Independent Certified Public Accountants F-25
Balance Sheet - October 31, 1998 F-26
Statements of Operations - Ten Months Ended October 31, 1998
and Year Ended December 31, 1997 F-28
Statements of Members Capital - Ten months Ended October 31, 1998
and Year Ended December 31, 1997 F-29
Statement of Cash Flows - Ten Months Ended October 31, 1998
and Year Ended December 31, 1997 F-30
Notes to Financial Statements F-32
</TABLE>
<PAGE>
Holloman Corporation
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
October 31, 1998
The following pro forma condensed combined balance sheet as of October 31,
1998, and the pro forma condensed combined statements of earnings for the years
ended October 31, 1998 and November 1, 1997, give effect to the acquisition of
100% of the outstanding common shares of Holloman Construction and T Sisters
Leasing, L.L.C. by Holloman Corporation. The pro forma information is based on
the historical financial statements of Holloman Construction, 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 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 and T
Sisters Leasing, L.L.C. contained elsewhere herein.
<TABLE>
<CAPTION>
ASSETS
HISTORICAL
Holloman Tsisters Holloman Pro Forma Pro Forma
Construction Leasing L.L.C. Corporation Adjustment Combined
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 857,610 1,512 265,000 - 1,124,122
Accounts receivable 3,962,857 26,196 -(2) (123,811) 3,865,242
Other current assets 380,163 14,212 - - 394,375
-------------- ------------- -------------- -------------- -------------
Total current assets 5,200,630 41,920 265,000 (123,811) 5,383,739
---------------- ------------- -------------- ---------------- ---------------
PROPERTY, PLANT AND
EQUIPMENT 3,557,723 2,016,113 - - 5,573,836
Less: accumulated depreciation and
amortization 2,826,165 592,275 - - 3,418,440
---------------- ------------- -------------- -------------- ---------------
731,558 1,423,838 - - 2,155,396
-------------- --------------- -------------- -------------- ---------------
OTHER ASSETS
Other 338,002 - 60,000 (2) (55,838) 342,164
Goodwill - - - (1) 4,322,271 4,322,271
------------ ---------------------- ---------------- -------------------------
$ 6,270,190 1,465,758 325,000 4,142,622 12,203,570
================ =============== ============== ================= ================
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt$ 57,674 373,514 - (2) (40,706) 390,482
Accounts payable 1,633,566 111,274 - (2) (83,105) 1,661,735
Related party payable - - - (1) 6,000,000 6,000,000
Accrued expenses and other 859,194 28,243 - - 887,437
-------------- ------------- -------------- -------------- -------------
Total current liabilities 2,550,434 513,031 - 5,876,189 8,939,654
LONG-TERM DEBT,
less current maturities 6,488 988,266 - (2) (55,838) 938,916
RELATED PARTY PAYABLE - - - (1) 2,000,000 2,000,000
DEFERRED INCOME TAXES 73,043 - - (1) (73,043) -
------------- ------------- -------------- --------------- -------------
Total liabilities 2,629,965 1,501,297 - 7,747,308 11,878,570
---------------- --------------- -------------- ----------------- ----------------
STOCKHOLDERS' EQUITY
Common stock 85,000 - 12,000 (1) (85,000) 12,000
Additional contributed cpaital - - 313,000 - 313,000
Retained earnings 3,817,554 - - (1) (3,817,554) -
Members capital - (35,539) - (1) 35,539 -
------------- ------------- -------------- -------------- -------------
3,902,554 (35,539) 325,000 (3,867,015) 325,000
Less Treasury shares (262,329) - - (1) 262,329 -
--------------- ------------- -------------- --------------- -------------
Total stockholders' equity 3,640,225 (35,539) 325,000 (3,604,686) 325,000
---------------- ------------- -------------- ------------------ ------------
$ 6,270,190 1,465,758 325,000 4,142,622 12,203,570
================ =============== ============== ================= ================
</TABLE>
See notes to pro forma condensed combined
financial statements.
<PAGE>
Holloman Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS
(CONTINUED)
For the Period Ended October 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 $ 9,835,819 - - - 9,835,819
Plant construction 6,060,678 - - - 6,060,678
Engineering 6,450,116 - - - 6,450,116
Utilities 2,263,483 - - - 2,263,483
Lease income - 571,507 - (3) 571,507 -
------------- ------------- -------------- --------------- -----------
Total revenues 24,610,096 571,507 - 571,507 24,610,096
Costs of Services and Construction 21,782,925 168,872 - (3) (571,507) 21,380,290
----------- --------------- ------------- ---------------- ------------------
Gross profit 2,827,171 402,635 - - 3,229,806
General and Administrative
Expenses 1,495,169 364,274 - (4) 216,114 2,075,557
---------------- ------------- -------------- --------------- -------------
Income (loss) from
operations 1,332,002 38,361 - 216,114 1,154,249
Other Income (Expense) 74,848 (96,802) - - (21,954)
------------- ------------- -------------- -------------- -----------
Earnings before income taxes 1,406,850 (58,441) - 216,114 1,132,295
Income Tax Expense (Benefit)
Current 510,222 - - (5) (19,870) 490,352
Deferred 2,317 - - (4) (73,479) (71,162)
------------- ------------- -------------- --------------- -----------
512,539 - - (93,349) 419,190
-------------- ------------- -------------- --------------- -------------
NET EARNINGS $ 894,311 (58,441) - 122,765 713,105
============== ============= ============== =============== ===========
Weighted average common
shares outstanding 77,246 1,200,000
============= =============
Basic and diluted earnings $ 11.58 $ .59
================= ================
</TABLE>
See notes to pro forma condensed combined
financial statements.
<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
Engineering 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 16,476,405 65,663 - (3) (390,204) 16,151,864
----------------- ------------- -------------- ---------------- ----------------
Gross profit 2,890,278 331,417 - - 3,221,695
General and Administrative Expenses 1,911,483 245,509 - (4) 212,871 2,369,863
---------------- ------------- -------------- --------------- ---------------
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 - - (5) 4,600 564,471
Deferred (146,808) - - (4) (72,376) (219,184)
--------------- ------------- -------------- --------------- --------------
413,063 - - (67,776) 345,287
-------------- ------------- -------------- --------------- -------------
NET EARNINGS $ 744,985 13,530 - 145,095 613,420
============== ============= ============== =============== =============
Weighted average common
shares outstanding 80,176 1,200,000
============= ===============
Net earnings per common share $ 9.29 .51
=================== ==============
</TABLE>
See notes to pro forma condensed combined
financial statements.
<PAGE>
Holloman Corporation
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
October 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 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 October 31, 1998 and their results of
operations for the years ended October 31, 1998 and November 1, 1997.
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 $ 3,640,225
Net assets as reported by T Sisters Leasing, L.L.C. (35,539)
Elimination of previously deferred taxes 73,043
Goodwill 4,322,271
----------------
As included in the pro forma combined balance sheet $ 8,000,000
================
(2) Elimination of intercompany receivables/payables at October 31, 1998:
Elimination of intercompany payables $ (179,649)
===============
(3) Elimination of Intercompany income/expense.
</TABLE>
<TABLE>
<CAPTION>
October 31, November 1,
1998 1997
<S> <C> <C>
Intercompany leasing income $ 571,507 390,204
Intercompany leasing expense (571,507) (390,204)
--------------- ---------------
$ - -
============= =============
(4) Amortization of goodwill over twenty years. Proforma amortization
for:
Twelve months $ 216,114 -
============== =============
Twelve months $ - 212,871
============= ==============
Related tax benefit:
Twelve months $ 73,479 -
============= =============
Twelve months $ - 72,376
============= =============
</TABLE>
<PAGE>
Holloman Corporation
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
(5) To adjust the income tax expense/benefit for net (income) loss
related to T Sisters Leasing, L.L.C.
Period ending Period ending
October 31, November 1,
1998 1997
------------- ---------
Income tax expense (benefit) $ (19,870) 4,600
<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
October 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 October
31, 1998, in conformity with generally accepted accounting principles.
JOHNSON, MILLER & CO.
Odessa, Texas
January 4, 1999
<PAGE>
Holloman Corporation
BALANCE SHEET
October 31, 1998
ASSETS
CASH $ 265,000
---- ------
Total current assets $ 265,000
OTHER ASSETS 50,000
$ 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.
<PAGE>
Holloman Corporation
NOTES TO FINANCIAL STATEMENT
October 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.
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
<PAGE>
Holloman Corporation
NOTES TO FINANCIAL STATEMENT
(CONTINUED)
October 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.
<PAGE>
Report of Independent Certified Public Accountants
To the Directors and Stockholders of
Holloman Construction Co.
We have audited the accompanying balance sheets of Holloman Construction Co., a
Texas corporation, as of October 31, 1998 and November 1, 1997, and the related
statements of earnings, stockholders' equity, and cash flows for the fiscal
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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Holloman Construction Co. as of
October 31, 1998 and November 1, 1997, and the results of its operations and
cash flows for the fiscal years then ended, in conformity with generally
accepted accounting principles.
JOHNSON MILLER & CO.
Odessa, Texas
January 4, 1999
<PAGE>
Holloman Construction Co.
BALANCE SHEETS
October 31, 1998 and November 1, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 857,610 636,449
Receivables
Trade, net (note B) 3,788,732 4,253,273
Related parties (note E) 174,125 62,994
Current portion of related party notes receivable (note E) 52,011 38,690
Current portion of notes receivable 35,967 -
Other 75,400 -
Costs and estimated earnings in excess of billings, net (note C) 145,745 665,358
Inventories, at lower of cost or market (note A2) 40,586 42,165
Prepaid expenses 30,454 74,963
------------- -------------
Total current assets 5,200,630 5,773,892
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT (notes A4 and G)
Equipment 3,392,443 3,483,992
Leasehold improvements 165,280 341,790
Land - 17,217
------------- -------------
3,557,723 3,842,999
Less: accumulated depreciation and amortization 2,826,165 2,885,181
---------------- ----------------
731,558 957,818
-------------- --------------
OTHER ASSETS
Receivables
Related party notes, long-term portion (note E) 99,428 137,302
Notes, long-term portion 169,033 -
Officers (note E) 44,541 55,500
Other 25,000 -
------------- -------------
$ 6,270,190 6,924,512
================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
1998 1997
------------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt (note D) $ 57,674 148,423
Accounts payable
Trade 1,612,316 2,091,166
Related party payable (note E) 21,250 24,218
Accrued expenses 416,922 881,546
Accrued expenses, related parties (note E) 272,049 362,168
Federal income tax payable (notes A5 and G) 170,223 516,650
-------------- --------------
Total current liabilities 2,550,434 4,024,171
LONG-TERM DEBT, less current maturities (note D) 6,488 59,700
DEFERRED INCOME TAXES (notes A5 and G) 73,043 70,726
------------- -------------
2,629,965 4,154,597
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (note F) - -
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value; 200,000 shares authorized; 85,000 shares
issued and outstanding in 1998 and
1997, respectively 85,000 85,000
Retained earnings 3,817,554 2,923,243
---------------- ----------------
3,902,554 3,008,243
Less common shares in treasury totaling 8,097 in 1998
and 7,411 in 1997 - at cost (262,329) (238,328)
--------------- ---------------
3,640,225 2,769,915
---------------- ----------------
$ 6,270,190 6,924,512
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Holloman Construction Co.
STATEMENTS OF EARNINGS
For the Fiscal Years Ended October 31, 1998 and
November 1, 1997,
<TABLE>
<CAPTION>
1998 1997
------------- ---------
<S> <C> <C>
Revenues
Pipeline construction $ 9,835,819 9,974,648
Plant construction 6,060,678 4,057,256
Engineering revenue 6,450,116 5,334,779
Utilities 2,263,483 -
---------------- -------------
Total revenues 24,610,096 19,366,683
Costs of services and construction 21,782,925 16,476,405
----------------- -----------------
Gross profit 2,827,171 2,890,278
General and administrative expenses 1,495,169 1,911,483
---------------- ----------------
Earnings from operations 1,332,002 978,795
Other income (expense)
Gain on sale of assets 81,484 35,595
Interest income 18,538 12,581
Interest expense (34,645) (57,632)
Other income 9,471 188,709
------------- --------------
Earnings before income taxes 1,406,850 1,158,048
---------------- ----------------
Income tax expense (benefit) (notes A5 and G)
Current 510,222 559,871
Deferred 2,317 (146,808)
------------- ---------------
512,539 413,063
-------------- --------------
NET EARNINGS $ 894,311 744,985
============== ==============
Weighted average common shares outstanding 77,246 80,176
============= =============
Net earnings per common share $ 11.58 9.29
=============== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Holloman Construction Co.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended October 31, 1998
and November 1, 1997
<TABLE>
<CAPTION>
Common Stock Retained Treasury
Shares Amount Earnings Stock Total
<S> <C> <C> <C> <C> <C>
Balance at November 2, 1996 85,000 $ 85,000 2,178,258 (88,312) 2,174,946
Net earnings for the fiscal year
ending November 1, 1997 - - 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 fiscal year
ending October 31, 1998 - - 894,311 - 894,311
Purchase of common stock
for treasury (note I) - - - (24,001) (24,001)
----------- ----------- ----------- ------------ -------------
Balance at October 31, 1998 85,000 $ 85,000 3,817,554 (262,329) 3,640,225
=========== =========== =========================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Holloman Construction Co.
STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended October 31, 1998 and
November 1, 1997
<TABLE>
<CAPTION>
1998 1997
------------- ---------
Increase (Decrease) in Cash
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 894,311 744,985
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 230,532 290,421
Gain on sale of assets (81,484) (35,595)
Deferred income tax expense (benefit) 2,317 (146,808)
Changes in current assets and current liabilities
Decrease (increase) in accounts receivable, trade 464,541 (1,583,524)
Increase in related party receivables (131,680) (50,314)
(Increase) decrease in other receivables (5,400) 302,929
Decrease (increase) in costs and estimated earnings
in excess of billings 519,613 (145,763)
Decrease in inventories 1,579 17,668
Decrease in prepaid expenses 44,509 163,735
(Decrease) increase in accounts payable (481,818) 639,231
(Decrease) increase in accrued expenses (554,743) 817,638
(Decrease) increase in federal income tax payable (346,427) 471,121
--------------- --------------
Net cash provided by operating activities 555,850 1,485,724
-------------- ----------------
Cash flows from investing activities
Purchase of equipment (129,923) (43,577)
Proceeds from sale of assets 24,785 72,624
Collections on receivables from related parties and affiliates 30,102 246,544
Advances to officers and affiliates (91,691) (307,123)
-------------- ---------------
Net cash used in investing activities (166,727) (31,532)
--------------- --------------
Cash flows from financing activities
Proceeds from long-term debt 1,200,000 250,800
Repayment of long-term debt (1,343,961) (933,374)
Purchase of treasury stock (24,001) (150,016)
-------------- ---------------
Net cash used in financing activities (167,962) (832,590)
--------------- ---------------
Net increase in cash 221,161 621,602
Cash, beginning of year 636,449 14,847
-------------- -------------
Cash, end of year $ 857,610 636,449
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Holloman Construction Co.
STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Fiscal Years Ended October 31, 1998 and
November 1, 1997
<TABLE>
<S> <C> <C>
1998 1997
------------- ---------
Cash paid during the year for:
Interest $ 34,645 57,632
Income taxes 856,650 88,750
Non-cash investing and financing activities
</TABLE>
In 1998, the Company acquired real estate with a fair market value of
$25,000 for a reduction in related party receivables.
In 1998, the Company acquired an airplane with a fair market value of
$92,650 from an officer of the Company in exchange for a reduction of his
payable to the Company.
In 1998, the Company exchanged land and related leasehold improvements for
a $205,000 note receivable.
In 1998, the Company sold certain equipment in exchange for a $70,000
receivable.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
October 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. During fiscal year 1998, the Company created a new
utilities division which provides services for municipalities and governmental
operations. The Company's fiscal year ends on the Saturday closest to October
31. The fiscal year ending October 31, 1998 is comprised of 53 weeks, and the
fiscal year ending November 1, 1997 is comprised of 52 weeks.
2. 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.
3. 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.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
4. 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.
5. Income Taxes
Income taxes have been provided in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. SFAS No. 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 differences between
financial and tax basis of property, plant and equipment and the
related depreciation.
6. 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.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
7. Net Earnings Per Share
Net earnings per share is based on the weighted average number of
shares outstanding during the period.
8. 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.
9. Certain Reclassifications
Certain reclassifications have been made to conform to the 1998
presentation.
10. New Pronouncements
During 1997, the Financial Accounting Standards Board (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.
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.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE B - ACCOUNTS RECEIVABLE-TRADE
Trade accounts receivable consist of contract receivables as follows:
<TABLE>
<S> <C> <C>
October 31, November 2,
1998 1997
Billed on completed jobs $ 2,014,649 1,511,122
Billed on jobs in progress (net of retainage) 1,771,655 2,308,440
Retainage on jobs in progress 38,932 433,711
------------- --------------
Total 3,825,236 4,253,273
Less: Allowance for bad debts 36,504 -
------------- -------------
Net accounts receivable - trade $ 3,788,732 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:
October 31, November 2,
1998 1997
Cost incurred on uncompleted contracts $ 2,292,582 5,635,693
Estimated earnings 564,705 1,371,300
-------------- ----------------
Costs and estimated earnings 2,857,287 7,006,993
Less: Billings to date 2,711,542 6,341,635
---------------- ----------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 145,745 665,358
============== ==============
</TABLE>
Revisions in estimated contract profits are made in the year in which
circumstances requiring the revision become known. The effect of
changes in estimates of contract profits was to decrease net earnings
of 1998 by $163,110 ($2.11 per share) from that which would have been
reported had the revised estimate been used as the basis of
recognition of contract profits in the preceding year.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE D - LONG-TERM DEBT
<TABLE>
<S> <C> <C>
Long-term debt consists of the following:
October 31, November 1,
1998 1997
Note payable to a bank, at $1,630 per month including interest
at prime (8.0%) + 1.25%, as of October 31, 1998, secured by
vehicles,
matures December 1999 $ 24,503 36,928
Note payable to a bank, at $5,465 per month including interest
at prime (8.0%) + 1.5%, as of October 31, 1998, secured by
vehicles,
matures March 2000 39,659 97,972
Other - 73,223
------------- -------------
64,162 208,123
Less current maturities 57,674 148,423
------------- --------------
$ 6,488 59,700
============= =============
</TABLE>
The Company's maturities of long-term debt are as follows:
October 31,
1998
Year ending
1999 $ 57,674
2000 6,488
-------------
$ 64,162
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE E - RELATED PARTY DISCLOSURE
The Company has various related party notes receivable from T Sisters
Leasing (T Sisters) L.L.C. totaling $96,544 and $113,192 for fiscal
years ending October 31, 1998 and November 1, 1997, respectively.
Interest on these notes receivable ranges from 8% to 10%, and maturity
dates range from October 1, to January 10, 2003.
T Sisters is constructively owned 100% by Sam Holloman, whom owns a
majority of the outstanding shares of Holloman Construction Co.
Mr. Holloman owns 5% of T Sisters directly, and Lakewest Ltd. owns the remaining
95%. Mr. Holloman has an 11% partnership interest in Lakewest Ltd., and the
remaining 89% is owned 11% each by Mr. Holloman's children and grandchildren,
and 1% by company owned 100% by Mr. Holloman, Western Sunset Estates (Western).
The Company also has one note receivable from Western totaling $54,895
and $62,801 for fiscal years ending October 31, 1998 and November 1,
1997, respectively.
The Company also had accounts receivables from other related parties
totaling $218,666 and $117,994, respectively, for fiscal years ending
October 31, 1998 and November 1, 1997. Of this amount, $44,541 and
$55,500, respectively, was due from an officer of the Company.
The Company had an account payable to T Sisters totalling $21,250 as
of October 31, 1998. In 1997 the Company owed various employees
$24,218.
Sunset Management Group, Inc. was created to provide a "stable
employee" group for health insurance and workmen's compensation
insurance purposes. The Company accrued $272,049 and $518,479 of
related party expenses related to Sunset Management Group, Inc. as of
October 31, 1998 and November 1, 1997, respectively. The employees
included in this group are the president, vice president, office
employees, and superintendents.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 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 October 31, 1998:
<TABLE>
<S> <C> <C> <C>
Related
Parties Others Total
Year ending
1999 $ 691,330 26,064 717,394
2000 574,207 24,798 599,005
2001 366,242 21,000 387,242
2002 264,366 8,750 273,116
2003 38,007 - 38,007
------------- ------------- -------------
Totals $ 1,934,152 80,612 2,014,764
=============== ============= ================
</TABLE>
For the periods ended October 31, 1998 and November 1, 1997 the lease
payments under these contracts aggregated $685,752 and $375,206 to
related parties, and $34,893 and $48,413 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 $526,000 and $491,000 for the years ended October
31, 1998 and November 1, 1997.
NOTE G - INCOME TAXES
The following is a reconciliation between the Company's effective tax rate and
the U.S. statutory rate:
<TABLE>
<CAPTION>
October 31, 1998 November 1, 1997
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Income tax expense at
staturoty rates $ 478,329 34% $ 393,736 34%
Permanent differences
resulting primarily from
nondeductible expenses 35,000 2% 23,763 2%
Other (790) - (4,436) -
----------- ----------- ----------- -------
$ 512,539 36% 413,063 36%
============ =========== ============ ===========
</TABLE>
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998 and November 1, 1997
NOTE G - INCOME TAXES (Continued)
The 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.
<TABLE>
<CAPTION>
October 31, November 1,
1998 1997
<S> <C> <C>
Excess of financial book value of depreciable
property over tax book value at applicable rates $ 73,043 70,726
------------- -------------
Total deferred income tax payable $ 73,043 70,726
============= =============
</TABLE>
NOTE H - MAJOR CUSTOMERS AND RISK CONCENTRATION
During the periods ended October 31, 1998 and November 1, 1997 the
Company recognized revenues of approximately $4,949,000 (20% of total
revenues) and $2,851,000 (14.7% of total revenues) from a customer in
the gas producing, processing and transmission industry and $4,091,000
(16.5% of total revenues) and $1,573,000 (12.86% of total revenues)
from another customer in that industry. Customers in the energy
production and transportation industry account for approximately 87.5%
and 78% of the Company's revenues during the fiscal year ended October
31, 1998 and November 1, 1997, respectively. The remaining 12.5% and
22% of revenues for fiscal years ended October 31, 1998 and November
1, 1997, respectively, is comprised of public works and commercial
construction.
Including the customers above, the Company recognized revenues of
approximately $14,103,000 (56.95% of total revenues) and $12,230,000
(63.2% of total revenues) from five (5) customers in 1998 and from
five (5) customers in 1997.
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 October 31, 1998, five (5)
customers accounted for approximately 58% 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. The Company has not experienced any
losses in such account and believes it is not exposed to any
significant credit risk on such account.
<PAGE>
Holloman Construction Co.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 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 $9,985 contribution payable at October
31, 1998 to reimburse the Plan for current year plan administration
fees.
During the fiscal years ended October 31, 1998 and November 1, 1997,
the following shares of Company stock were purchased:
<TABLE>
<S> <C> <C>
Number
Year of Shares Cost
1998 686 $ 24,001
1997 5,173 150,016
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
T Sisters Leasing, L.L.C.
We have audited the balance sheet of T Sisters Leasing, L.L.C. (a limited
liability company) as of October 31, 1998, and the related statements of
operations, members' capital, and cash flows for the ten months then ended and
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of T Sisters Leasing, L.L.C. as of
October 31, 1998, and the results of its operations and its cash flows for the
ten months then ended, and for the fiscal year ended December 31, 1997, in
conformity with generally accepted accounting principles.
Odessa, Texas
January 4, 1999
<PAGE>
T Sisters Leasing, L.L.C.
BALANCE SHEET
October 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 1,512
Related party receivable 26,196
Prepaid expenses 14,212
-----
Total current assets $ 41,920
PROPERTY AND EQUIPMENT
Heavy equipment 935,652
Vehicles 936,911
Equipment under capital leases 143,550
----------
2,016,113
Less accumulated depreciation 592,275
Net property and equipment 1,423,838
$ 1,465,758
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
BALANCE SHEET
(CONTINUED)
October 31, 1998
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt
Banks and finance companies (note C) $ 305,663
Related parties (note D) 40,706
Capital lease obligations (note G) 27,145
Accounts payable - related party 96,845
Accounts payable - other 14,429
Accrued liabilities
Deferred lease income 13,130
Other 15,113
Total current liabilities $ 513,031
LONG-TERM DEBT, less current maturities
Banks and finance companies (note C) 830,682
Related parties (note D) 55,838
Capital lease obligations (note G) 101,746
------------
988,266
MEMBERS' CAPITAL (35,539)
$ 1,465,758
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
STATEMENTS OF OPERATIONS
Ten months ended October 31, 1998 and
the year ended December 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- ---------
<S> <C> <C>
Lease income $ 570,780 390,204
Other income 727 6,876
------------- -------------
571,507 397,080
Costs and expenses
Lease expenses 168,872 65,663
Administrative 47,062 24,134
Depreciation and amortization 317,212 221,375
-------------- --------------
Total operating expenses 533,146 311,172
-------------- --------------
Operating profit 38,361 85,908
------------- -------------
Other (income) expenses
Loss on disposal of assets 4,286 8,082
Interest and financing 92,190 64,296
Other 326 -
------------- -------------
96,802 72,378
------------- -------------
NET (LOSS) EARNINGS $ (58,441) 13,530
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
STATEMENT OF MEMBERS' CAPITAL
Ten months ended October 31, 1998 and
the year ended December 31, 1997
<TABLE>
<S> <C> <C> <C>
Sam Lakewest
Holloman Ltd Total
Balances at January 1, 1997 $ 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 (2,922) (55,519) (58,441)
------------- -------------- --------------
Balance at October 31, 1998 $ (838) (34,701) (35,539)
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
STATEMENTS OF CASH FLOWS
Ten months ended October 31, 1998 and
the year ended December 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- ---------
Increase (Decrease) in Cash
<S> <C> <C>
Cash flows from operating activities
Net (loss) earnings $ (58,441) 13,530
Adjustments to reconcile net
(loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 317,212 221,375
Decrease (increase) in related
party receivable 7,526 (30,701)
(Increase) in prepaid expense (14,213) -
Increase in related party payable 12,967 12,668
Increase in account payable 14,429 -
Increase in accrued liabilities 8,493 2,270
Increase in deferred income 13,130 -
Loss on disposal of assets 4,286 8,082
------------- -------------
Net cash provided by
operating activities 305,389 227,224
-------------- --------------
Cash flows from investing activities
Acquisition of property and equipment (505,314) (958,289)
Proceeds from sale of assets 119,557 18,584
Distributions - (18,781)
------------- --------------
Net cash used in investing activities (385,757) (958,486)
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
STATEMENTS OF CASH FLOWS
(CONTINUED)
Ten months ended October 31, 1998 and
the year ended December 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- ---------
Cash flows from financing activities
<S> <C> <C>
Loan proceeds $ 438,924 1,027,268
Principal payments under note
obligations (385,649) (255,235)
Principal payments under capital lease obligations (14,659) -
-------------- -------------
Net cash provided by financing activities 38,616 772,033
------------- --------------
Net increase (decrease) in cash (41,752) 40,771
Cash at beginning of period 43,264 2,493
------------- -------------
Cash at end of period $ 1,512 43,264
============= =============
Cash paid for interest $ 84,379 64,296
- ----------------------
Noncash investing and financing activities:
Equipment acquired under capital lease obligations $ 143,550 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T Sisters Leasing, L.L.C.
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
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
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.
<PAGE>
T Sisters Leasing, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
NOTE C - LONG-TERM DEBT
Long-term debt at October 31, 1998 consists of the following:
Installment notes from banks, payable in aggregate monthly principal
and interest installments of $15,438. Interest rates range from 8.25%
to 9.00% at October 31, 1998. Notes are collateralized by various
equipment and vehicles.
Installment notes from a financing company, payable in aggregate
monthly principal and interest installments of $19,137. Interest rates
range from 8.32% to 8.75% at October 31, 1998. Notes are
collateralized by various equipment and vehicles.
Less current maturities
$ 513,262
623,083
1,136,345
305,663
$ 830,682
Maturities of long-term debt at October 31, 1998 are as follows:
1999 $ 305,663
2000 283,001
2001 264,488
2002 209,678
2003 73,515
-------------
$ 1,136,345
<PAGE>
T Sisters Leasing, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
NOTE D - LONG-TERM DEBT RELATED PARTY
Installment notes from affiliate, payable in aggregate monthly
principal and interest installments of $3,929 in 1998 and 1997,
respectively. Interest ranged from 8% to 10% at October 31, 1998.
Less current maturities
$ 96,544
40,706
55,838
Maturities of related party long-term debt at October 31, 1998 are as
follows:
1999 $ 40,706
2000 31,221
2001 24,617
------------
$ 96,544
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 1998 and 1997 were approximately $571,000 and $390,000,
respectively. The following are the future minimum lease payments to
be received under these lease agreements.
<TABLE>
<S> <C> <C>
Year ended October 31, 1998 1997
-------------- ---------
1998 $ - 595,888
1999 691,330 579,201
2000 574,207 424,758
2001 366,242 240,359
2002 264,366 159,342
2003 38,007 -
-------------- -------------
$ 1,934,152 1,999,548
================ ================
</TABLE>
<PAGE>
T Sisters Leasing, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
NOTE E - RELATED PARTY TRANSACTIONS (Continued)
The Company had three notes payable to Holloman Construction totalling
$96,544 at October 31, 1998.
In addition, the Company had a related party payable to Holloman
Construction totalling $61,855 at October 31, 1998, a related party
payable to Sam E. Holloman for $27,400 at October 31, 1998, and
payables to various other related parties totalling $7,590 at October
31, 1998.
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 $172,000 and $66,000 in fiscal
years 1998 and 1997, respectively. The following is a schedule of
future minimum lease payments under these lease agreements.
<TABLE>
<S> <C> <C>
Year ended December 31, 1998 1997
-------------- ---------
1998 $ - 198,749
1999 198,749 198,749
2000 182,658 149,533
-------------- --------------
$ 381,407 547,031
============== ==============
</TABLE>
NOTE G - CAPITAL LEASES
The Company is lessee with respect to a capital lease for heavy
equipment.
Total future minimum lease payments at October 31, 1998 are:
1999 $ 38,520
2000 38,520
2001 75,011
-------------
152,051
Less amount related to interest 23,160
Less current portion - lease payable 27,145
Long term lease obligation $ 101,746
==============
<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 ____ , 1999 (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 , 1999
<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.(3)
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.(3)
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. (3)
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.(3)
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 February 02, 1999.
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 February 02, 1999
/s/ Mark E. Stevenson
Mark E. Stevenson President February 02, 1999
(Principal Executive Officer)
/s/ John E. Holdridge Director February 02, 1999
John E. Holdridge
/s/ Peter Lucas
Peter Lucas Senior Vice President, Chief February 02, 1999
Financial Officer, Secretary,
Treasurer, Director (Principal
Financial and Accounting Officer)
/s/ James E. Hogue Director February 02, 1999
James E. Hogue
Consent of Independent Certified Public Accountants
We have issued our reports dated January 4, 1999 on the accompanying October 31,
1998 financial statements of Holloman Corporation, Holloman Construction Co.,
and T Sisters Leasing, L.L.C. 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 "Experts."
Johnson, Miller & Co.
Odessa, Texas
February 2, 1999
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(Replace this text with the legend)
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<PERIOD-START> NOV-1-1997
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0
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