EX-99.1 2 j1685701exv99w1.txt EX-99.1 Exhibit 99.1 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 INDEPENDENT AUDITORS' REPORT Flagship Services Group, Inc. and Partnership Affiliates We have audited the accompanying combined balance sheets of Flagship Services Group, Inc. and Partnership Affiliates (Group) as of December 31, 2004 and 2003 and the related combined statements of income, changes in stockholders' equity and partners' capital (deficit), and cash flows for the years then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Flagship Services Group, Inc. and Partnership Affiliates as of December 31, 2004 and 2003 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Malin, Bergqist & Company, LLP Pittsburgh, Pennsylvania September 29, 2005 1 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 ASSETS

2004 2003 ---------- ---------- Current Assets Cash, Note 2 $ 348,771 $ 532,035 Contracts receivable, net of allowance, Note 2 5,199,208 1,862,411 Cost and estimated earnings in excess of billing on uncompleted contracts, Notes 2 and 3 1,429,372 118,370 Prepaid expenses 56,068 85,710 ---------- ---------- TOTAL CURRENT ASSETS 7,033,419 2,598,526 ---------- ---------- Property and Equipment, Note 2 Office furniture and equipment 182,119 177,667 Vehicles 139,144 124,231 Construction equipment 7,339 7,339 ---------- ---------- TOTAL PROPERTY AND EQUIPMENT 328,602 309,237 Less accumulated depreciation 222,483 195,720 ---------- ---------- NET PROPERTY AND EQUIPMENT 106,119 113,517 ---------- ---------- Other Assets 1,179 8,984 ---------- ---------- TOTAL ASSETS $7,140,717 $2,721,027 ========== ==========

See accompanying notes 2 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 LIABILITIES

2004 2003 ----------- ----------- Current Liabilities Revolving lines of credit, Note 6 $ 692,150 $ 1,212,000 Notes payable, Note 6 759,804 46,351 Accounts payable - trade, Note 2 3,089,230 822,198 Accounts payable - related party, Note 2 113,280 113,280 Accrued expenses, Note 5 1,091,191 757,841 Billings in excess of costs and estimated earnings on uncompleted contracts, Notes 2 and 3 1,746,359 889,452 ----------- ----------- TOTAL CURRENT LIABILITIES 7,492,014 3,841,122 ----------- ----------- Commitments and Contingencies, Notes 10 and 13 STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT) Common Stock, No Par Value, 100,000 Shares Authorized, 1,000 Shares Issued and Outstanding 1,000 1,000 Partners' Deficit (168,613) (854,464) Accumulated Deficit (183,684) (266,631) ----------- ----------- TOTAL STOCKHOLDER'S EQUITY AND PARTNERS' CAPITAL (DEFICIT) (351,297) (1,120,095) ----------- ----------- TOTAL LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT) $ 7,140,717 $ 2,721,027 =========== ===========

See accompanying notes 3 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

2004 2003 ------------ ------------ Sales $ 19,285,533 $ 13,431,253 Cost of sales 15,123,604 10,497,226 ------------ ------------ GROSS PROFIT ON SALES 4,161,929 2,934,027 ------------ ------------ Selling 2,163,876 2,106,539 General and administrative 592,704 921,298 ------------ ------------ TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,756,580 3,027,837 ------------ ------------ OPERATING INCOME (LOSS) 1,405,349 (93,810) ------------ ------------ Other Income (Expense) Interest expense (77,831) (110,190) Interest income 4,202 17,655 Miscellaneous (13,651) 7,001 ------------ ------------ NET OTHER INCOME (EXPENSE) (87,280) (85,534) ------------ ------------ NET INCOME (LOSS), NOTE 8 $ 1,318,069 $ (179,344) ============ ============

See accompanying notes 4 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

PARTNERS' COMMON ACCUMULATED CAPITAL STOCK DEFICIT (DEFICIT) TOTAL ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 2002, AS RESTATED, NOTE 11 $ 1,000 $ (313,074) $ 140,678 $ (171,396) Net income (loss) -- 46,443 (225,787) (179,344) Partners' distributions -- -- (769,355) (769,355) ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 2003 1,000 (266,631) (854,464) (1,120,095) Net income -- 82,947 1,235,122 1,318,069 Partners' distributions -- -- (549,271) (549,271) ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 2004 $ 1,000 $ (183,684) $ (168,613) $ (351,297) =========== =========== =========== ===========

See accompanying notes 5 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 1,318,069 $ (179,344) Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 43,502 55,530 Provision for doubtful accounts 215,000 -- Loss on disposal of assets 17,899 1,904 (Increase) decrease in: Contracts receivable (3,551,797) 853,356 Cost and estimated earnings (1,311,002) 15,492 Prepaid expenses 29,642 (26,782) Increase (decrease) in: Accounts payable - trade 2,267,032 (140,394) Billings in excess of cost 856,907 (64,420) Accrued expenses 333,350 (519,454) ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 218,602 (4,112) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (84,003) (37,094) Proceeds from sale of assets 30,000 -- Other 7,805 (8,984) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (46,198) (46,078) ----------- -----------

(Continued) See accompanying notes 6 FLAGSHIP SERVICES GROUP INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (Continued)

2004 2003 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Partner distributions (549,271) (769,355) Proceeds form term note 1,307,000 -- Payments on term note (600,000) -- Net payments on revolving lines of credit (519,850) (466,400) Proceeds from notes payable 94,175 46,351 Payments on notes payable (87,722) (31,262) ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (355,668) (1,220,666) ----------- ----------- NET DECREASE IN CASH (183,264) (1,270,856) Cash Balance, Beginning of Year 532,035 1,802,891 ----------- ----------- Cash Balance, End of Year $ 348,771 $ 532,035 =========== ===========

SUPPLEMENTAL DISCLOSURES ACCOUNTS POLICIES For purposes of this statement, cash consists of cash on hand, money market accounts and demand deposits at commercial banks. INTEREST PAID During 2004 and 2003, interest paid was $77,831 and $110,190, respectively. INCOME TAXES PAID No income taxes were paid during 2004 and 2003. See Note 8. See accompanying notes 7 NOTES TO FINANCIAL STATEMENTS (1) ENTITY Flagship Services Group (the Group) is composed of the following companies: Flagship Services Group, Inc. (a limited liability company), Flagship Reconstruction Associates Residential, Ltd. (a partnership), Flagship Reconstruction Associates Commercial. Ltd. (a partnership), Flagship Reconstruction Associates Houston, Ltd. (a partnership), Flagship Reconstruction Partners, Ltd. (a partnership), and Flagship Reconstruction Associates America, Ltd. (a partnership) (the Companies). The Companies perform residential and commercial reconstruction work under primarily fixed-price contracts throughout the United States. (2) SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF COMBINATION The combined financial statements include the accounts of the limited liability company and all limited partnerships within the Group. Flagship Services Group, Inc., a limited liability company, is the general partner and holds a 1% interest in each associated limited partnership. The shareholders of Flagship Services Group, Inc. hold the remaining interest in each limited partnership. All material related party balances and transactions have been eliminated in combination. (B) USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the financial statements, and reported revenues and expenses during the reporting period. Significant estimates used in preparing these financial statements include those assumed in computing profit percentages under the percentages-of-completion contract accounting method and the allowance for doubtful accounts. Actual results could differ from those estimates. (C) REVENUE RECOGNITION Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. The Group generally considers contracts to be substantially complete upon departure from the work site and acceptance by the customer. 8 NOTES TO FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (C) REVENUE RECOGNITION (CONTINUED) Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Changes in job performance, job condition, estimated contract costs and profitability, and final contract settlements may result in revisions to costs and income and are recognized in the year in which the revisions are determined. Provisions for total estimated losses on uncompleted projects are made in the period in which such losses are determined. The current asset "cost and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed that management believes will be billed and collected within the subsequent year. The current liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized that management believes will be realized within the subsequent year. The length of the Group's contracts varies, but it is typically within one year. (D) CASH AND CASH EQUIVALENTS The Companies consider all short-term investments with an original maturity of three months or less to be cash equivalents. (E) CONTRACTS RECEIVABLE Contracts receivable from performing construction contracts are based on contract prices. The company provides an allowance for doubtful accounts which is based upon a review of outstanding receivable, historical collection information, existing economic condition and estimated legal costs related to collection and disputes. An allowance of $350,000 and $135,000 has been provided related to contracts receivable at December 31, 2004 and 2003, respectively. In many cases, receivables are due from insurance companies which provide for delayed collection. Contract receivable collection may also be delayed due to contract disputes or unapproved change orders. Contract receivables, not including retainages, past due more than 90 days at December 31, 2004 and 2003 were $648,531 and $14,312, respectively. Included in contract receivables is retainage on completed and uncompleted contracts of $760,780 and $194,757 at December 31, 2004 and 2003, respectively. 9 NOTES TO FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (F) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. These assets are depreciated over their estimated useful lives on a straight-line basis. Maintenance, repairs, minor improvements and replacements are expensed as incurred. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the combined statements of income. The recovery periods of the asset classes are as follows: Office furniture and equipments 3-7 years Vehicles 5 years Construction Equipment 5 years Depreciation expense was $43,502 and $55,530 in 2004 and 2003, respectively. There is no depreciation expense included in direct job costs. (G) ACCOUNTS PAYABLE Accounts payable includes retainage due to subcontractors totaling $534,624 and $101,137 at December 31, 2004 and 2003, respectively. These amounts have been retained pending completion and customer acceptance of jobs. (H) COMMISSIONS PAYABLE Commissions are estimated based on the gross profit of each project, and accrued monthly based on the percentage of project completion. Commissions are paid upon completion of the project and the customer's acceptance and payment for the project. (I) ADVERTISING COSTS Advertising costs are generally charged to operations in the year incurred. Advertising expense was $56,711 and $61,709 in 2004 and 2003, respectively. (J) CONCENTRATION OF CREDIT RISK The Companies provide construction services to a diversified group of customers, located primarily in the Southern and Southeastern United States. At December 31, 2004 and 2003, there were cash balances with banks in excess of Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses in its cash accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 10 NOTES TO FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (K) RECENTLY ISSUED ACCOUNTING STANDARDS The FASB recently issued EITF 04-05, Accounting for investments in limited partnerships when the investor is the sole general partner and the limited partners have certain rights. EITF 04-05 provides guidance for assessing when a general partner, or the general partners as a group, controls, and therefore should consolidate, a limited partnership or similar entity when the limited partners have certain rights. Effective for general partners of all new limited partnerships formed, and for existing limited partnerships for which the partnership agreements are modified, after June 29, 2005. Effective for general partners in all other limited partnerships, for the first reporting period in fiscal years beginning after December 15, 2005. Management is currently evaluating the effect, if any, that this pronouncement will have on the Group. (3) UNCOMPLETED CONTRACTS Costs and estimated profits on uncompleted contracts were as follows at December 31:

2004 2003 ---- ---- Costs and estimated profits $ 14,554,245 $ 4,458,344 Billings on uncompleted contracts (14,871,232) (5,229,426) ------------ ----------- $ (316,987) $ (771,082) ============ ===========

Included in the accompanying combined balance sheets under the following captions:

2004 2003 ---- ---- Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,429,372 $ 118,370 Billings in excess of costs and estimated earnings on uncompleted contracts (1,746,359) (889,452) ------------ ----------- $ (316,987) $ (771,082) ============ ===========

A provision of $185,000 has been made for losses on contracts at December 31, 2004. 11 NOTES TO FINANCIAL STATEMENTS (4) BACKLOG The Company's backlog represents the amount of revenue the company expects to realize for work to be performed on uncompleted contracts in progress at year-end and from contractual agreements on which work has not begun. The reconciliation below summarizes backlog activity.

2004 2003 ---- ---- Beginning of year $ 2,284,012 $ 5,246,519 New contracts awarded 32,021,122 10,468,746 Revenue recognized (19,165,553) (13,431,253) ------------ ----------- End of Year $ 15,139,581 $ 2,284,012 ============ ===========

In addition, between January 1, 2005 and September 29, 2005, the Company entered into additional construction contracts with revenues of $8,674,871. (5) ACCRUED EXPENSES Accrued expenses were as follows at December 31:

2004 2003 ---- ---- Commissions payable $ 535,375 $ 519,559 Accrued bonuses 316,759 72,103 Accrued payroll 115,092 133,179 Accrued compensated absences 27,000 28,000 Accrued profit sharing contribution 83,684 - Other accrued expenses 13,281 5,000 ------------ ----------- Total $ 1,091,191 $ 757,841 ============ ===========

12 NOTES TO FINANCIAL STATEMENTS (6) DEBT Debt consists of the following at December 31:

2004 2003 ---- ---- Term note, with interest due monthly at prime plus .5%, 5.75% at December 31, 2004; principal due on March 3, 2005; collateralized by partner personal assets. $ 707,000 $ - Revolving line-of-credit note of $300,000, with interest due monthly at prime less .5%, 4.75% and 3.5% at December 31, 2004 and 2003, respectively; principal due on May 15, 2005; collateral includes accounts receivable, inventory and accounts at Wells Fargo Bank. Guaranteed by the partners. 300,000 300,000 Revolving line-of-credit note of $1,500,000, with interest due monthly at prime, 5.25% at December 31, 2004; principal due on May 15, 2005; collateral includes accounts receivable, inventory and accounts at Wells Fargo Bank. Guaranteed by the partners. 392,150 - Revolving line-of-credit note of $2,000,000, with interest due monthly at prime 4.0% at December 31, 2003, principal due on August 15, 2004; collateral includes accounts receivable, inventory and accounts at Wells Fargo Bank. Guaranteed by the partners. This line of credit arrangement was terminated in 2004. - 912,000 Note payable to finance companies, with interest rates of 5.75% and 5.57%, at 2004 and 2003, respectively; collateralized by unearned insurance premiums. 52,804 46,351 ------------ ----------- 1,451,954 1,258,351 Less-current portion (1,451,954) (1,258,351) ------------ ----------- Debt, net of current portion $ - $ - ============ ===========

13 NOTES TO FINANCIAL STATEMENTS (6) DEBT (CONTINUED) On March 24, 2005, the Group entered into agreement with Summit Bank for two revolving lines of credit and the lines of credit with Wells Fargo were terminated. The first line has $2,000,000 available. The interest rate is prime plus .5%. The second line has $1,000,000 available. The interest rate is prime plus 2.0%. Both lines mature May 1, 2006 and are collateralized by accounts receivable and inventory of the Group. The notes are guaranteed by the partners. As of December 31, 2004, the Group was in default of certain financial covenants with Wells Fargo. A waiver was not obtained. All obligations have been presented as current obligations. (7) PROFIT SHARING PLAN The Group has a 401(k) profit sharing plan (the Plan) which is offered to all employees with more than six months of service. Contributions under the Plan are discretionary and determined annually by the Companies' boards of directors. Included in accrued expenses at December 31, 2004 was a profit sharing contribution of $83,684. The Plan also provides for the Group to match 25% of employee contributions to the Plan, to a maximum of 6% of compensation. The Group contributed $60,356 and $57,283 to the Plan for the years ended December 31, 2004 and 2003, respectively. (8) INCOME TAXES AND DEFERRED TAXES The companies within the Group are organized as pass through entities with Flagship Services Group, Inc. incorporated as a limited liability corporation and the remaining companies as partnerships for federal income tax purposes. All items of revenue and expense are passed through to the owners and partners of the Companies. Accordingly, no provision for income taxes has been recorded in the financial statements. The following pro forma presentation of net income and income tax expense assumes a combined Federal and State statutory rate of 37.5%.

For the year ended December 31, 2004 2003 ---- ---- INCOME BEFORE TAXES $1,318,069 $(179,344) Income tax (expense) benefit (494,276) 67,254 ---------- --------- NET INCOME $ 823,793 $(112,090) ========== =========

Temporary differences between financial statement and tax basis assets and liabilities relate to bad debt expense on financial statements not deductible for tax purposes. 14 NOTES TO FINANCIAL STATEMENTS (9) RELATED-PARTY TRANSACTIONS The Group leases its Arlington, Texas office and warehouse facilities from the majority shareholders of Flagship Services Group. See note 10. (10) COMMITMENTS The Group leased its office and certain other facilities under operating lease agreements, which expired at various times through December 2004. During 2004, the Group agreed to terms of a new lease with related party shareholders for a new facility which will house its office and certain other facilities. The lease contains a hold-over provision which will increase the monthly rent by 20% if the Group holds over without a new lease agreement after expiration of the lease. Future minimum rentals for operating leases having initial lease terms in excess of one year as of December 31, 2004 are summarized as follows: Year ending December 31, 2005 $ 93,417 2006 160,144 2007 162,446 2008 166,393 2009 168,037 2010 70,017 -------- Total $820,454 ======== Rent expense was $98,737 and $112,150 for the years ended December 31, 2004 and 2003, respectively. (11) RESTATEMENT Partners' Capital and Accumulated Deficit at the beginning of the year ended December 31, 2003 have been reduced by $198,056 to correct errors primarily for liability accounts. (12) SUBSEQUENT EVENTS On August 25, 2005, PDG Environmental, Inc. acquired the business and certain assets of Flagship Services Group, Inc. PDG Environmental Inc. is a national specialty contractor which provides asbestos abatement, mold remediation, disaster restoration, demolition and related services to commercial, industrial and governmental clients. 15 NOTES TO FINANCIAL STATEMENTS (13) LITIGATION The Group is currently involved in various litigation matters and has suits pending against customers for unpaid amounts due for services performed. In many of the matters the defendant has filed a counterclaim alleging the Group failed to perform work or perform satisfactory work. The suits are pending and are currently at varying stages. The Group has considered the status of these suits when estimating the allowance for doubtful accounts. Management of the Group also believes the potential for material loss from the counter claims is remote. 16 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Arlington, Texas Combined Financial Statements June 30, 2005 and 2004 (PICKENS SNODGRASS KOCH & COMPANY, P.C. LOGO) CERTIFIED PUBLIC ACCOUNTANTS Flagship Services Group, Inc. and Partnership Affiliates 1200 Grambrel Rd., Suite 100 Arlington, TX 76014 We have compiled the accompanying combined balance sheets of Flagship Services Group, Inc., an S-corporation, and Partnership Affiliates as of June 30, 2005 and 2004, and the related combined statements of income, combined statement of changes in stockholders' equity and partners' capital (deficit), and combined statements of cash flows for the six months ended June 30, 2005 and 2004, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting, in the form of financial statements, information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. /s/ PICKENS, SNODGRASS, KOCH & COMPANY, P.C. November 4, 2005 3001 Medlin Drive / Suite 100 * Arlington, Texas 76015-2332 * 817-664-3000 * Fax 817-664-3001 www.pskcpa.com Page 2 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED BALANCE SHEETS JUNE 30, 2005 AND 2004 ASSETS

2005 2004 ----------- ----------- Current Assets Cash, Note 2 $ 861,938 $ 117,768 Contracts receivable, net of allowance, Note 2 6,226,443 1,660,302 Costs and estimated earnings in excess of billings on uncompleted contracts, Notes 2 and 3 258,172 889,036 Prepaid expenses 80,229 11,274 ----------- ----------- Total current assets 7,426,782 2,678,380 ----------- ----------- Property and Equipment, Note 2 Furniture and equipment 221,429 185,005 Vehicles 109,144 124,231 ----------- ----------- Total property and equipment 330,573 309,236 Less: accumulated depreciation (243,799) (222,269) ----------- ----------- Net property and equipment 86,774 86,967 ----------- ----------- Other Assets 8,984 18,984 ----------- ----------- TOTAL ASSETS $ 7,522,540 $ 2,784,331 =========== ===========

See accompanying notes Page 3 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED BALANCE SHEETS JUNE 30, 2005 AND 2004 LIABILITIES

2005 2004 ---------- ---------- Current Liabilities Revolving lines of credit, Note 6 $1,700,000 $ 976,960 Accounts payable - trade, Note 2 2,419,543 1,154,975 Accounts payable - related party, Note 2 113,280 463,280 Accrued expenses, Note 5 1,285,420 474,636 Billings in excess of costs and estimated earnings on uncompleted contracts, Notes 2 and 3 1,698,164 348,500 ---------- ---------- Total current liabilities 7,216,407 3,418,351 ---------- ---------- Commitments and Contingencies, Note 10 STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT) Common stock, No Par Value, 100,000 Shares Authorized, 1,000 Shares Issued and Outstanding 1,000 1,000 Accumulated Equity/Capital (Deficit) 305,133 (635,020) ----------- ----------- Total Stockholders' Equity and Partners' Capital (Deficit) 306,133 (634,020) ----------- ----------- TOTAL LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT) $ 7,522,540 $ 2,784,331 =========== ===========

See accompanying notes Page 4 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

2005 2004 ------------ ------------ Sales $ 16,266,190 $ 5,892,591 Cost of Sales 12,753,141 4,523,520 ------------ ------------ Gross profit on sales 3,513,049 1,369,071 ------------ ------------ Selling 695,135 633,632 General and administrative 367,967 226,728 ------------ ------------ Total selling, general and administrative expenses 1,063,102 860,360 ------------ ------------ Operating income 2,449,947 508,711 ------------ ------------ Other Income (Expense) Interest expense (44,483) (28,293) Interest and dividend income 2,439 2,392 Miscellaneous income 1,108 3,265 ------------ ------------ Net other income (expense) (40,937) (22,636) ------------ ------------ NET INCOME, NOTE 8 $ 2,409,011 $ 486,075 ============ ============

See accompanying notes Page 5 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS CAPITAL (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

Common Stock Accumulated ------------------------------ Equity/Capital Shares Amount (Deficit) Total ----------- ----------- -------------- ----------- Balance at December 31, 2003 1,000 $ 1,000 $ (1,121,095) $(1,120,095) Net Income -- -- 486,075 486,075 ----------- ----------- -------------- ----------- BALANCE AT JUNE 30, 2004 1,000 $ 1,000 $ (635,020) $ (634,020) =========== =========== ============== =========== Balance at December 31, 2004 1,000 $ 1,000 $ (352,297) $ (351,297) Net Income -- -- 2,409,011 2,409,011 Partners' distributions -- -- (1,751,581) (1,751,581) ----------- ----------- -------------- ----------- BALANCE AT JUNE 30, 2005 1,000 $ 1,000 $ 305,133 $ 306,133 =========== =========== ============== ===========

See accompanying notes Page 6 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

2005 2004 ----------- ----------- Cash Flows from Operating Activities Net Income $ 2,409,011 $ 486,075 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 21,316 26,549 (Increase) decrease in: Contracts receivable (1,027,235) 202,109 Cost and estimated earnings 1,171,200 (770,666) Prepaid expenses (24,161) 74,437 Increase (decrease) in: Accounts payable - trade (669,687) 682,777 Billings in excess of cost (48,195) (540,952) Accrued expenses 194,229 (283,205) ----------- ----------- Net Cash Cash Provided by (used in) Operating Activities 2,026,478 (122,876) ----------- ----------- Cash Flows from Investing Activities Net change in: Other assets (7,805) (10,000) Property and equipment (1,971) -- ----------- ----------- Net Cash Used in Investing Activities (9,776) (10,000) ----------- ----------- Cash Flows from Financing Activities Partners' distributions (1,751,581) -- Net change in: Revolving line of credit 248,046 (281,391) ----------- ----------- Net Cash Used in Financing Activities (1,503,535) (281,391) ----------- ----------- Net Increase (Decrease) in Cash 513,167 (414,267) Cash Balance, Beginning of Period 348,771 532,035 ----------- ----------- CASH BALANCE, END OF PERIOD $ 861,938 $ 117,768 =========== ===========

INTEREST PAID ------------- For periods ended June 30, 2005 and 2004, interest paid was $44,483 and $28,293, respectively. See accompanying notes Page 7 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 1 - ENTITY Flagship Services Group (the Group) is composed of the following companies. Flagship Services Group, Inc. (an "S" corporation), Flagship Reconstruction Associates Residential, Ltd. (a partnership), Flagship Reconstruction Associates Commercial, Ltd. (a partnership), Flagship Reconstruction Associates Houston, Ltd. (a partnership), Flagship Reconstruction Partners, Ltd. (a partnership), and Flagship Reconstruction Associates America, Ltd. (a partnership) (the Companies). The Companies perform residential and commercial reconstruction work under fixed-price contracts throughout the United States. 2 - SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of the "S" corporation and all limited partnerships within the Group. Flagship Services Group, Inc., an "S" corporation, is the general partner and holds a 1% interest in each associated limited partnership. The shareholders of Flagship Services Group, Inc. hold the remaining interest in each limited partnership. All material related party balances and transactions have been eliminated in combination. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the financial statements, and reported revenues and expenses during the reporting period. Significant estimates used in preparing these financial statements include those assumed in computing profit percentages under the percentages-of-completion revenue recognition method and the allowance for doubtful accounts. Actual results could differ from those estimates. Revenue Recognition Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. The Group generally considers contracts to be substantially complete upon departure from the work site and acceptance by the customer. Page 8 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (Continued) Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Changes in job performance, job condition, estimated contract costs and profitability, and final contract settlements may result in revisions to costs and income and are recognized in the year in which the revisions are determined. Provisions for total estimated losses on uncompleted projects are made in the period in which such losses are determined. The current asset "cost and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed that management believes will be billed and collected within the subsequent year. The current liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized that management believes will be realized within the subsequent year. The length of the Groups' contracts varies but it is typically one year. Cash and Cash Equivalents The Companies consider all short-term investments with an original maturity of three months or less to be cash equivalents. For the periods ended June 30, 2005 and 2004, cash consists of cash on hand, money market accounts, and demand deposits at commercial banks. Contracts Receivable Contracts receivable from performing construction contracts are based on contract prices. The Companies provide an allowance for doubtful accounts which is based upon a review of outstanding receivable, historical collection information, existing economic condition and estimated legal costs related to collection and disputes. An allowance of $1,515,677 and $135,000 has been provided related to contracts receivable at June 30, 2005 and 2004, respectively. In many cases, receivables are due from insurance companies which provides for delayed collection. Contract receivable collection may also be delayed due to contract disputes or unapproved change orders. Contract receivables, not including retainages, past due more than 90 days at June 30, 2005 and 2004 were $2,266,306 and $241,771 respectively. Included in contract receivables is retainage on completed and uncompleted contracts of $1,101,980 and $104,707 at June 30, 2005 and 2004, respectively. Property and Equipment Property and equipment are recorded at cost. All other assets are depreciated over their estimated useful lives on a straight-line basis. Maintenance, repairs, minor improvements and replacements are expensed as incurred. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the combined statements of income. The recovery periods of the asset classes are as follows: Office furniture and equipments 3-7 years Vehicles 5 years Construction Equipment 5 years Page 9 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment (Continued) Depreciation expense was $21,316 and $26,549 for the periods ended June 30, 2005 and 2004, respectively. There is no depreciation expense included in direct job costs. Accounts Payable Accounts payable includes retainage due to subcontractors totaling $832,823 and $119,876 at June 30, 2005 and 2004, respectively. These amounts have been retained pending completion and customer acceptance of jobs. Commissions Payable Commissions are estimated based on the gross profit of each project, and accrued monthly based on the percentage of project completion. Commissions are paid upon completion of the project and the customer's acceptance and payment for the project. Advertising Costs Advertising costs are generally charged to operations in the year incurred. Advertising expense was $12,338 and $25,688 for the periods ended June 30, 2005 and 2004, respectively. Concentration of Credit Risk The Companies provide construction services to a diversified group of customers, located primarily in the Southern and Southeastern United States. At June 30, 2005 and 2004, there were cash balances with banks in excess of Federal Deposit Insurance Corporation insured limits. The Companies have not experienced any losses in its cash accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Recently Issued Accounting Standards The FASB recently issued EITF 04-05, Accounting for Investments in Limited Partnerships When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights. EITF 04-05 provides guidance for assessing when a general partner, or the general partners as a group, controls, and therefore should consolidate, a limited partnership or similar entity when the limited partners have certain rights. Effective for general partners of all new limited partnerships formed, and for existing limited partnerships for which the partnership agreements are modified, after June 29, 2005. Effective for general partners in all other limited partnerships, for the first reporting period in fiscal years beginning after December 15, 2005. Management is currently evaluating the effect, if any, that this pronouncement will have on the Group. Page 10 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 3 - UNCOMPLETED CONTRACTS Costs and estimated profits on uncompleted contracts were as follows at June 30:

2005 2004 ------------ ------------ Costs and estimated profits $ 21,029,184 $ 3,739,966 Billings on uncompleted contracts (22,469,176) (4,280,502) ------------ ------------ $ (1,439,992) $ (540,536) ============ ============

Included in the accompanying combined balance sheets under the following captions:

2005 2004 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 258,172 $ 889,036 Billings in excess of costs and estimated earnings on uncompleted contracts (1,698,164) (348,500) ----------- ----------- $(1,439,992) $ (540,536) =========== ===========

A provision of approximately $185,000 has been made for losses on contracts at June 30, 2005. 4 - BACKLOG The Companies backlog represents the amount of revenue the Companies expect to realize for work to be performed on uncompleted contracts in progress at year-end and from contractual agreements on which work has not begun. The reconciliation below summarizes backlog activity.

2005 2004 ------------ ------------ Beginning of year $ 15,139,581 $ 2,284,012 New contracts awarded 12,293,826 5,314,308 Revenue recognized (18,545,386) (4,140,042) ------------ ------------ June 30 $ 8,888,021 $ 3,458,278 ============ ============

In addition, between January 1, 2005 and October 17, 2005, the Companies entered into additional construction contracts with revenues of $8,674,871. Page 11 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 5 - ACCRUED EXPENSES Accrued expenses were as follows at June 30:

2005 2004 ----------- ----------- Commissions payable $ 631,202 $ 261,139 Accrued bonuses 201,153 133,123 Accrued payroll 95,872 58,474 Accrued insurance 168,509 -- Accrued profit sharing contribution 83,684 -- Other accrued expenses 105,000 21,900 ----------- ----------- Total $ 1,285,420 $ 474,636 =========== ===========

6 - DEBT Debt consists of the following at June 30:

2005 2004 ----------- ----------- Revolving line-of-credit note of $300,000, with interest due monthly at prime less .5%, 4.75% and 3.5% at December 31, 2004 and 2003, respectively; principal due on May 15, 2005; collateral includes accounts receivable, inventory and accounts at Wells Fargo Bank. Guaranteed by the partners. $ -- $ 300,000 Revolving line-of-credit note of $2,000,000, with interest due monthly at prime, 5.25% at December 31, 2004; principal due on May 15, 2005; collateral includes accounts receivable, inventory and accounts at Wells Fargo Bank. Guaranteed by the partners. 1,700,000 676,960 ----------- ----------- 1,700,000 976,960 Less-current portion (1,700,000) (976,960) ----------- ----------- Debt, net of current portion $ -- $ -- =========== ===========

On March 24, 2005, the Group entered into an agreement with Summit Bank for two revolving lines of credit and the lines of credit with Wells Fargo were terminated. The first line has $2,000,000 available. The interest rate is prime plus .5%. The second line has $1,000,000 available. The interest rate is prime less 2.0%. Both lines mature May 1, 2006 and are collateralized by accounts receivable and inventory of the Group. The notes are guaranteed by the partners. Page 12 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 7 - PROFIT SHARING PLAN The Group has a 401(k) profit sharing plan (the Plan) which is offered to all employees with more than six months of service. Contributions under the Plan are discretionary and determined annually by the Companies' boards of directors. The Plan also provides for the Group to match 25% of employee contributions to the Plan, to a maximum of 6% of compensation. The Group did not contribute to the plan for the six months ending June 30, 2005 and 2004. 8 - INCOME TAXES AND DEFERRED TAXES The companies within the Group are organized as pass through entities with Flagship Services Group, Inc. incorporated as an "S" corporation and the remaining companies as partnerships for federal income tax purposes. All items of revenue and expense are passed through to the owners of the Companies. Accordingly, no provision for income taxes has been recorded in the financial statements. The following pro forma presentation of net income and income tax expense assumes a combined Federal and State statutory rate of 37.5%.

For the six months ended June 30, 2005 2004 ----------- ----------- Income before taxes $ 2,409,011 $ 486,075 Income tax (expense) (903,379) (182,278) ----------- ----------- NET INCOME $ 1,505,632 $ 303,797 =========== ===========

There are no significant temporary differences between financial statement and tax basis assets and liabilities. 9 - RELATED-PARTY TRANSACTIONS The Group leases its Arlington, Texas office and warehouse facilities from the majority shareholders of Flagship Services Group. See note 10. Page 13 FLAGSHIP SERVICES GROUP, INC. AND PARTNERSHIP AFFILIATES Notes to Combined Financial Statements June 30, 2005 and 2004 10 - COMMITMENTS AND CONTINGENCIES Operating Leases The Group leased its office and certain other facilities under operating lease agreements, which expired at various times through December 2004. During 2004, the Group agreed to terms of a new lease with related party shareholders for a new facility which will house its office and certain other facilities. The lease contains a hold-over provision which will increase the monthly rent by 20% if the Group holds over without a new lease agreement after expiration of the lease. Future minimum rentals for operating leases having initial lease terms in excess of one year as of December 31, 2004 are summarized as follows: Year ending December 31, 2005 $ 93,417 2006 160,144 2007 162,446 2008 166,393 2009 168,037 2010 70,017 ---------- Total $ 820,454 ========== Rent expense was $76,018 and $50,106 for the six months ended June 30, 2005 and 2004, respectively. 11 - RESTATEMENT Partners' Capital and Accumulated Deficit at the beginning of the year ended December 31, 2003 have been reduced by $198,056 to correct errors primarily for liability accounts. 12 - SUBSEQUENT EVENTS On August 25, 2005, PDG Environmental, Inc. acquired the business and certain assets of Flagship Services Group, Inc. PDG Environmental, Inc. is a national specialty contractor which provides asbestos abatement, mold remediation, disaster restoration, demolition and related services to commercial, industrial and governmental clients. 13 - LITIGATION The Group is currently involved in various litigation matters and has suits pending against customers for unpaid amounts due for services performed. In many of the matters the defendant has filed a counterclaim alleging the Group failed to perform work or perform satisfactory work. The suits are pending and are currently at varying stages. The Group has considered the status of these suits when estimating the allowance for doubtful accounts. Management of the Group also believes the potential for material loss from the counterclaims is remote.