8,000,000 SHARES
[LOGO]
COMFORT SYSTEMS USA, INC.
COMMON STOCK
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus covers 8,000,000 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by Comfort Systems USA,
Inc. (the "Company", or "Comfort") from time to time in connection with
merger or acquisition transactions entered into by the Company. It is expected
that the terms of acquisitions involving the issuance of securities covered by
this Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to the market prices of Common Stock either at the time the
terms of a merger or acquisition are agreed upon or at or about the time shares
are delivered. No underwriting discounts or commissions will be paid, although
finder's fees may be paid from time to time with respect to specific mergers or
acquisitions. Any person receiving any such fees may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").
The Company currently has 20,975,774 shares of its Common Stock listed on
the New York Stock Exchange, of which 7,015,000 are registered and available for
unrestricted trading in the public markets unless owned by affiliates of the
Company. Application will be made to list the shares of Common Stock offered
hereby on the New York Stock Exchange. On August 8, 1997, the closing price of
the Common Stock on the New York Stock Exchange was $19.0625 per share as
published in THE WALL STREET JOURNAL on August 11, 1997. The Company is subject
to the informational requirements of the Exchange Act of 1934 and in accordance
therewith files reports and other information with the Securities and Exchange
Commission.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at Three Riverway, Suite 200, Houston, Texas 77056, and its telephone number is
(800) 723-8431.
SEE "RISK FACTORS" ON PAGE 9 FOR A DISCUSSION OF CERTAIN RISK FACTORS
THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE COMMON STOCK OFFERED HEREBY.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS AND WITH QUARTERLY REPORTS CONTAINING UNAUDITED SUMMARY FINANCIAL
INFORMATION FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR.
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THE DATE OF THIS PROSPECTUS IS AUGUST 11, 1997
<PAGE>
PROSPECTUS SUMMARY
IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING ON JULY 2, 1997 (THE
"IPO"), COMFORT SYSTEMS USA, INC. ACQUIRED, IN SEPARATE MERGER OR SHARE
EXCHANGE TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND SHARES OF ITS
COMMON STOCK, 12 COMPANIES ENGAGED PRINCIPALLY IN THE HEATING, VENTILATION AND
AIR CONDITIONING ("HVAC") BUSINESS (EACH A "FOUNDING COMPANY" AND,
COLLECTIVELY, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE "COMPANY" HEREIN INCLUDE THE FOUNDING COMPANIES, AND
REFERENCES HEREIN TO "COMFORT SYSTEMS" MEAN COMFORT SYSTEMS USA, INC. PRIOR TO
THE CONSUMMATION OF THE MERGERS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED, PRO FORMA
COMBINED AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO COMMON STOCK INCLUDE
BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK, $0.01
PAR VALUE (THE "RESTRICTED COMMON STOCK") OF COMFORT SYSTEMS.(1)
THE COMPANY
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. On July 2, 1997, the Company acquired in separate, concurrent
transactions twelve companies engaged principally in the HVAC business. These
Founding Companies are: Accurate Air Systems, Inc., located in Houston, Texas;
Atlas Air Conditioning Co., located in Houston, Texas; C.S.I. / Bonneville,
located in Salt Lake City, Utah; Eastern Heating and Cooling Inc., located in
Albany, New York; Freeway Heating and Air Conditioning, Inc., located in
Bountiful, Utah; Quality Air Heating and Cooling, Inc., located in Grand Rapids,
Michigan; Seasonair, Inc., located in Rockville, Maryland; S. M. Lawrence Co.,
Inc., located in Jackson, Tennessee; Standard Heating and Air Conditioning Co.,
located in Birmingham, Alabama; Tech Heating and Air Conditioning, Inc., located
in Solon, Ohio; Tri-City Mechanical, Inc., located in Phoenix, Arizona; and
Western Building Services, Inc., located in Denver, Colorado. The Company's
commercial and industrial applications include office buildings, retail centers,
apartment complexes, hotels, manufacturing plants and government facilities. The
Company also provides specialized HVAC applications such as process cooling,
control systems, electronic monitoring and process piping. Approximately 90% of
the Company's pro forma combined 1996 revenues of $167.5 million was derived
from commercial and industrial customers, with approximately 53% of combined
revenues attributable to installation services and 47% attributable to
maintenance, repair and replacement services. Combined revenues of the Founding
Companies, which have been in business an average of 39 years, increased at a
compound annual growth rate of approximately 16% from 1994 through 1996.
Based on available industry data, the Company believes that the HVAC
industry is highly fragmented with over 40,000 companies, most of which are
small, owner-operated businesses with limited access to capital for
modernization and expansion. The overall HVAC industry, including the
commercial, industrial and residential markets, is estimated to generate annual
revenues in excess of $75 billion, over $35 billion of which is in the
commercial and industrial markets. The Company believes there is a significant
opportunity for a well-capitalized national company to provide comprehensive
HVAC services and that the fragmented nature of the HVAC industry will provide
it with significant opportunities to consolidate commercial, industrial and
residential HVAC businesses.
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(1) Notre Capital Ventures II, L.L.C. ("Notre") holds 2,742,912 shares of
Restricted Common Stock, which are entitled to elect one member of the
Company's Board of Directors and to 0.55 of one vote for each share held on
all other matters on which they are entitled to vote. Restricted Common
Stock is convertible into one share of Common Stock under certain
circumstances. See "Description of Capital Stock -- Common Stock and
Restricted Common Stock."
3
<PAGE>
The Company's commercial and industrial installation business targets
"design and build" projects where the Company is responsible for designing,
engineering and installing a cost-effective, energy-efficient system, customized
to meet the specific needs of the building owner. Management believes that the
"design and build" segment represents a faster growing and more profitable
segment of the HVAC business than traditional "plan and spec" installation,
which is generally awarded based on a bid process. In recent years, the Company
has undertaken a shift from "plan and spec" to "design and build" projects
with "design and build" revenues increasing from approximately 65% of
installation revenues in 1994 to approximately 80% in 1996.
The Company also provides maintenance, repair and replacement of HVAC
systems. Growth in this segment is driven by a number of factors, particularly
(i) the aging of the installed base, (ii) the increasing energy efficiency,
sophistication and complexity of HVAC systems and (iii) the increasing
restrictions on the use of refrigerants commonly used in older HVAC systems. The
energy efficiency and sophistication of new HVAC systems are encouraging
building owners to upgrade and reconfigure their current HVAC systems. Moreover,
the increasing sophistication and complexity of these HVAC systems are leading
many commercial and industrial building owners and property managers to
outsource maintenance and repair through service agreements with HVAC service
providers. Service agreements lead to better utilization of personnel, link the
customer with the Company should a major repair or replacement be needed and
result in recurring revenues. The Company believes there is also an opportunity
to expand its presence in the highly-fragmented residential maintenance, repair
and replacement market. The replacement segment of the residential HVAC market
has grown significantly in recent years as a result of the aging of the
installed base of residential HVAC systems, the introduction of more
energy-efficient systems and the upgrading of older homes with central air
conditioning.
The Company plans to achieve its goal of becoming a leading national
provider of comprehensive HVAC services by improving operations, emphasizing
continued internal growth and expanding through acquisitions.
OPERATING STRATEGY. The Company believes there are significant
opportunities to increase its profitability and that of subsequently acquired
businesses. The key elements of the Company's operating strategy are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company believes that
the commercial and industrial HVAC markets are attractive because of their
growth opportunities, diverse customer base, attractive margins and
potential for long-term relationships with building owners and managers,
general contractors and architects.
OPERATE ON DECENTRALIZED BASIS. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Founding Companies and will allow the Company to capitalize on the
considerable local and regional market knowledge and customer relationships
possessed by each Founding Company.
ACHIEVE OPERATING EFFICIENCIES. The Company intends to use its
increased purchasing power to gain volume discounts in areas such as HVAC
components, raw materials, service vehicles, advertising, bonding and
insurance. In addition, the Company will identify "best practices" that
can be successfully implemented throughout its operations.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company intends to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) improved benefits packages.
4
<PAGE>
INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the Founding Companies and subsequently acquired
businesses. The key elements of the Company's internal growth strategy are:
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to expand the services it offers in its
local markets by leveraging the specialized technical and marketing
strengths of individual Founding Companies.
ESTABLISH NATIONAL MARKET COVERAGE. The Company believes that
significant demand exists from large national companies to utilize the
services of a single HVAC service provider and believes existing local and
regional relationships can be expanded as it develops a nationwide network.
ACQUISITIONS. The Company believes that, due to the highly fragmented
nature of the HVAC industry, it has a significant opportunity to achieve its
acquisition strategy. The Company anticipates that acquisition candidates in the
commercial and industrial markets will typically have annual revenues ranging
from $5 million to $35 million. The key elements of the Company's acquisition
strategy are:
ENTER NEW GEOGRAPHIC MARKETS. The Company will pursue acquisitions
that are located in new geographic markets, are financially stable, and
which will have the customer base, technical skills and infrastructure
necessary to be a core business into which other HVAC service operations
can be consolidated.
EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established HVAC businesses
operating within that region and will also pursue "tuck-in" acquisitions
of smaller companies, whose operations can be integrated into an existing
operation to leverage the Company's infrastructure.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company will focus on the HVAC
industry and may also acquire companies providing complementary services to
the same customer base, such as commercial and industrial process piping
and plumbing and electrical companies.
5
<PAGE>
RECENT DEVELOPMENTS
During late 1996 and early 1997, members of the Company's management team
and certain consultants were assembled to pursue the consolidation of the
Founding Companies. Notre, a consolidator of highly-fragmented industries,
provided the Company with expertise regarding the consolidation process and
advanced the Company the funds needed to pay organizational and Offering
expenses. In connection therewith, during 1996 and January and February 1997,
Comfort Systems sold an aggregate of 1,269,935 shares of Common Stock to
management of and consultants to the Company at a price of $0.01 per share. As a
result, the Company recorded a non-recurring, non-cash compensation charge of
$11.6 million (the "Compensation Charge") in the first quarter of 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale. This Compensation Charge
of $11.6 million is not included in pro forma combined net income.
On July 2, 1997, the Company consummated the IPO and the Mergers. In
connection therewith, the Company issued 7,015,000 shares of Common Stock at a
price of $13.00 per share (less underwriting discounts and commissions).
The aggregate consideration paid by Comfort Systems in the Mergers
consisted of $45.3 million in cash and 9,720,927 shares of Common Stock, plus
the assumption of $19.7 million of existing debt of the Founding Companies. The
consideration paid by Comfort Systems for each Founding Company was negotiated
by the parties and was based primarily upon the pro forma adjusted net income of
each Founding Company. For a more detailed description of these transactions,
see "Certain Transactions -- Organization of the Company."
Between January 1, 1997 and the date of the Mergers, each Founding Company
which was a C Corporation, except Atlas, distributed to its stockholders an
amount equal to its net income for the period from January 1, 1997 through the
date of the Mergers (the "Interim Earnings Distributions"). These aggregate
distributions were $1.5 million and were funded from the Founding Companies'
cash and from borrowings from existing sources available to the Founding
Companies.
Comfort Systems USA, Inc. was incorporated in 1996 in Delaware. The
Company's executive offices are located at Three Riverway, Suite 200, Houston,
Texas 77056, and its telephone number is (800) 723-8431.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors".
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Comfort Systems acquired the Founding Companies in connection with the IPO.
For financial statement presentation purposes, Comfort Systems has been
identified as the "accounting acquirer." The following table presents
unaudited pro forma combined financial data for the Company, adjusted for (i)
the effects of the Mergers, (ii) the effects of certain pro forma adjustments to
the historical financial statements described below and (iii) the consummation
of the IPO and the application of the net proceeds therefrom. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and the
Notes thereto and the historical Financial Statements for Comfort Systems and
certain of the Founding Companies and the Notes thereto included elsewhere in
this Prospectus.
PRO FORMA COMBINED(1)
------------------------------------
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
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INCOME STATEMENT DATA:
Revenues........................ $167,525 $39,505
Gross profit.................... 47,813 10,705
Selling, general and
administrative expenses(2)..... 27,814 7,814
Goodwill amortization(3)........ 3,495 874
Income from operations.......... 16,504 2,017
Interest and other income
(expense), net(4).............. (961) (250)
Income before income taxes...... 15,543 1,767
Net income(5)................... 7,928 847
Net income per share............ 0.44 0.05
Shares used in computing pro
forma net income per
share(6)....................... 18,180,311 18,180,311
MARCH 31, 1997
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PRO FORMA AS
COMBINED ADJUSTED(8)
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BALANCE SHEET DATA:(7)
Working capital(4).............. $ (31,197)(9) $ 48,678
Total assets.................... 188,683 220,389
Long-term debt, net of current
maturities(4).................. 14,292 14,292
Stockholders' equity(4)......... 101,118 180,993
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(1) The pro forma combined income statement data assume that the Mergers and the
IPO were consummated on January 1, 1996 and are not necessarily indicative
of the results the Company would have obtained had these events actually
then occurred or of the Company's future results.
(2) The pro forma combined income statement data reflect an aggregate of $6.6
million for the twelve months ended December 31, 1996 and $428,000 for the
three months ended March 31, 1997 in pro forma reductions in salaries,
bonuses and benefits to the owners of the Founding Companies to which they
have agreed prospectively (the "Compensation Differential") and does not
include the Compensation Charge of $11.6 million recorded in the first
quarter of 1997.
(3) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Several of the Founding Companies were S Corporations. In connection with
the Mergers, these Founding Companies made distributions to their
stockholders totalling $16.8 million, representing substantially all of
their previously taxed undistributed earnings through March 31, 1997 (the
"S Corporation Distributions"). In order to fund these distributions, the
Founding Companies borrowed $11.0 million from existing sources.
Accordingly, pro forma interest expense has been increased by $935,000 for
the twelve months ended December 31, 1996 and $207,000 for the three months
ended March 31, 1997, pro forma working capital has been reduced by $1.9
million, pro forma long-term debt has been increased by $11.0 million and
pro forma stockholders' equity has been reduced by $12.9 million. Quality
has declared S Corporation Distributions of $3.9 million which have been
recorded as a dividend payable to shareholder and reduction of stockholders'
equity in the pro forma combined balance sheet data. This $3.9 million is
included in the $16.8 million of S Corporation Distributions.
(5) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(6) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO and excludes 915,000 shares of
common stock purchased by the underwriters pursuant to an overallotment
option.
(7) The pro forma combined balance sheet data assume that the Mergers were
consummated on March 31, 1997.
(8) Adjusted for the sale of the 7,015,000 shares of Common Stock offered in the
IPO and the application of the estimated net proceeds therefrom, which
includes 915,000 shares of common stock purchased by the underwriters
pursuant to an overallotment option.
(9) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration paid from a
portion of the net proceeds of the IPO.
7
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
The following table presents summary income statement data for the Founding
Companies for each of their three most recent fiscal years. Income from
operations has not been adjusted for the Compensation Differential or to take
into account increased costs associated with the Company's new corporate
management and with being a public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED(1) MARCH 31,(2)
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
QUALITY:
Revenues........................... $ 24,434 $ 32,594 $ 29,597 $ 6,315 $ 8,766
Income from operations............. 2,154 4,953 4,490 416 1,300
ATLAS:
Revenues........................... 21,848 22,444 30,030 6,207 6,115
Income from operations............. 105 643 2,101 120 496
TRI-CITY:
Revenues........................... 16,883 25,030 24,237 6,482 6,791
Income from operations............. 393 2,539 1,773 374 278
LAWRENCE:
Revenues........................... 12,758 12,568 17,163 3,280 4,565
Income (loss) from operations...... 112 (51) 67 (93) 541
ACCURATE:
Revenues........................... 9,763 12,171 16,806 3,161 2,642
Income (loss) from operations...... (122) 213 499 27 21
EASTERN:
Revenues........................... 7,348 6,067 7,944 1,525 1,284
Income (loss) from operations...... 274 117 431 20 (103)
CSI/BONNEVILLE:
Revenues........................... 6,502 6,361 7,842 1,369 1,562
Income from operations............. 881 448 981 75 59
TECH:
Revenues........................... 6,923 6,960 7,537 1,075 1,656
Income from operations............. 593 948 1,680 46 57
SEASONAIR:
Revenues........................... 5,168 5,942 6,737 1,128 1,831
Income (loss) from operations...... 189 451 134 (62) 22
WESTERN:
Revenues........................... 4,149 4,112 6,494 1,185 1,072
Income (loss) from operations...... 161 (151) 744 96 29
ALL OTHER FOUNDING COMPANIES(3):
Revenues........................... 8,934 12,264 13,138 3,072 3,221
Income (loss) from operations...... 266 321 531 48 (22)
</TABLE>
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(1) The fiscal years presented are as follows: Quality -- the fiscal years ended
March 31, 1995 and 1996 and the year ended December 31, 1996; Atlas and
Accurate -- the fiscal years ended June 30, 1994 and 1995 and the year ended
December 31, 1996; Lawrence -- the fiscal years ended October 31, 1994, 1995
and 1996; and Tri-City, Eastern, CSI/Bonneville, Tech, Seasonair and
Western -- the years ended December 31.
(2) Lawrence's revenues and income from operations are for the three months
ended January 31, 1996 and 1997.
(3) The other Founding Companies are Standard and Freeway, and data presented
are for the years ended December 31, 1994, 1995 and 1996, in the case of
Standard, and the fiscal years ended March 31, 1995 and 1996 and the year
ended December 31, 1996, in the case of Freeway.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY. Comfort Systems was founded in 1996
but conducted no operations and generated no revenues prior to the Mergers on
July 2, 1997. The Founding Companies operated as separate independent entities
prior to the IPO, and there can be no assurance that the Company will be able to
integrate the operations of these businesses successfully or to institute the
necessary systems and procedures, including accounting and financial reporting
systems, to manage the combined enterprise on a profitable basis. The Company's
management group has been assembled only recently, and there can be no assurance
that the management group will be able to effectively manage the combined entity
or successfully implement the Company's operating strategy, internal growth
strategy and acquisition program. The pro forma combined historical financial
results of the Founding Companies cover periods when the Founding Companies and
Comfort Systems were not under common control or management and, therefore, may
not be indicative of the Company's future financial or operating results. The
inability of the Company to integrate the Founding Companies successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations and would make it unlikely that the Company's
acquisition program will be successful. See "Business -- Strategy" and
"Management."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company intends
to grow significantly through the acquisition of additional HVAC and
complementary businesses. The Company expects to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and may lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or manage profitably additional
businesses or to integrate successfully any acquired businesses into the Company
without substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of special risks, including failure of
the acquired business to achieve expected results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on the reputation of the
Company generally and render ineffective the Company's national sales and
marketing initiatives. The Company may consider acquiring complementary
businesses in the electrical, process piping and plumbing industries, and there
can be no assurance that these complementary businesses can be successfully
integrated. In addition, there can be no assurance that the Founding Companies
or other businesses acquired in the future will achieve anticipated revenues and
earnings. See "Business -- Strategy."
RISKS RELATED TO ACQUISITION FINANCING. The timing, size and success of
the Company's acquisition efforts and the associated capital commitments cannot
be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a substantial
portion of the consideration to be paid. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to initiate and maintain its acquisition
program. As of the date of the Mergers, the Company had $34.6 million of
proceeds available for future acquisition and working capital. If the Company
does not have sufficient cash resources, its growth could be limited unless it
is able to obtain additional capital through debt or equity financings. The
Company has obtained a bank line of credit of $75.0 million from Bank One,
Texas, NA ("Bank One") for working capital and acquisitions. As of July 28,
1997, borrowings under the line of credit were $17.3 million, which was used to
repay existing indebtedness of the Founding Companies. The line of credit is
subject to customary financial covenants and drawing conditions. See
9
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Liquidity and Capital Resources."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY. Key elements of
the Company's strategy are to improve the profitability of the Founding
Companies and subsequently acquired businesses and to continue to expand the
revenues of the Founding Companies and any subsequently acquired businesses. The
Company intends to seek to improve the profitability of the Founding Companies
and any subsequently acquired businesses by various means, including increased
purchasing efficiencies and a reduction, in some cases, of duplicative operating
costs and overhead. The Company's ability to increase the revenues of the
Founding Companies and any subsequently acquired company will be affected by
various factors, including demand for new or replacement HVAC systems, the level
of new construction, the Company's ability to expand the range of services
offered to customers of individual Founding Companies and other acquired
businesses, the Company's ability to develop national accounts and other
marketing programs in order to attract new customers and the Company's ability
to attract and retain a sufficient number of qualified HVAC technicians and
other necessary personnel. Many of these factors are beyond the control of the
Company, and there can be no assurance that the Company's operating and internal
growth strategies will be successful or that it will be able to generate cash
flow adequate for its operation and to support internal growth. See
"Business -- Strategy."
COMPETITION. The HVAC industry is highly competitive and is served by
small, owner-operated private companies and several large companies. Certain of
these competitors may have lower overhead cost structures and may, therefore, be
able to provide their services at lower rates than the Company. The HVAC
industry is currently undergoing rapid consolidation on both a national and a
regional level by other companies which have acquisition objectives which are
the same as or similar to the Company's objectives. These companies and other
consolidators may have greater financial resources than the Company to finance
acquisition and internal growth opportunities and might be willing to pay higher
prices than the Company for the same acquisition opportunities. Additionally,
HVAC equipment manufacturers and certain public utilities are beginning to enter
the maintenance, repair and replacement segment of the HVAC industry. These
companies generally are better capitalized, have greater name recognition and
may be able to provide these services at a lower cost. Consequently, the Company
may encounter significant competition in its efforts to achieve both its
acquisition and internal growth objectives as well as its operating strategy to
increase the profitability of the Founding Companies and subsequently acquired
companies. See "Business -- Competition."
AVAILABILITY OF HVAC TECHNICIANS. The timely provision of high-quality
installation service and maintenance, repair and replacement of HVAC systems by
the Company requires an adequate supply of skilled HVAC technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified HVAC technicians, and there can
be no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor expenses
will not increase as a result of a shortage in the supply of skilled technicians
or that the Company will not have to curtail its planned internal growth as a
result of labor shortages. See "Business -- Employees" and " -- Recruiting,
Training and Safety."
SEASONAL AND CYCLICAL NATURE OF THE HVAC INDUSTRY. The HVAC industry is
subject to seasonal variations. Specifically, the demand for new installations
is generally lower during the winter months due to reduced construction activity
during inclement weather and less use of air conditioning during colder months.
Demand for HVAC maintenance, repair and replacement services is generally higher
in the second and third calendar quarters due to the increased use of air
conditioning during warmer months. Accordingly, the Company expects its revenues
and operating results generally will be lower in the first and fourth quarters.
Historically, the construction industry has been highly cyclical. As a result,
the Company's volume of business may be adversely affected by declines in new
installation projects in various geographic regions of the United States.
10
<PAGE>
REGULATION. HVAC systems are subject to various environmental statutes and
regulations, including the Clean Air Act and those regulating the production,
servicing and disposal of certain ozone depleting refrigerants used in HVAC
systems. There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future. Various local,
state and federal laws and regulations impose licensing standards on technicians
who install and service HVAC systems. The Company's failure to comply with these
laws and regulations could subject it to substantial fines and the loss of its
licenses. See "Business -- Governmental Regulation and Environmental Matters."
RELIANCE ON KEY PERSONNEL. The Company will be highly dependent on the
continuing efforts of its executive officers and the senior management of the
Founding Companies, and the Company likely will depend on the senior management
of any significant business it acquires in the future. The business or prospects
of the Company could be affected adversely if any of these persons does not
continue in his management role until the Company is able to attract and retain
qualified replacements. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. The Company's executive
officers and directors, former stockholders of the Founding Companies and
entities affiliated with them beneficially own approximately 66.6% of the
outstanding shares of Common Stock. These persons, if acting in concert, would
be able to exercise control over the Company's affairs, to elect the entire
Board of Directors and to control the outcome of any matter submitted to a vote
of stockholders. See "Principal Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING
COMPANIES. Of the net proceeds of the IPO, $45.3 million, or approximately
53.4%, were paid as the cash portion of the purchase price for the Founding
Companies. Some of the recipients of these funds are directors of the Company or
holders of more than 5% of the Common Stock.
BENEFITS TO NOTRE AND MANAGEMENT. Notre, management and certain
consultants to the Company own in the aggregate 4,239,847 shares of Common
Stock. These stockholders acquired their Common Stock at a price of $0.01 per
share. These parties own, in the aggregate, approximately 20% of the outstanding
Common Stock. Of these shares of Common Stock, 2,742,912 shares are Restricted
Common Stock, which are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors and control in the
aggregate 8.8% of the votes of all shares of Common Stock. See "Principal
Stockholders."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE. Prior to the
IPO, there was no public market for the Common Stock. The offering prices for
the Common Stock to be issued pursuant to this registration statement will be
determined by negotiation between the Company and in each instance, certain
owners of the company to be acquired and may bear no relationship to the price
at which the Common Stock will trade after the respective acquisition
transactions. The Common Stock is listed on The New York Stock Exchange;
however, there can be no assurance that an active trading market will be
sustained subsequent to the IPO or the acquisition transactions. After the
acquisition transaction, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including the timing
of any acquisitions by the Company, variations in the Company's annual or
quarterly financial results or those of its competitors, changes by financial
research analysts in their estimates of the future earnings of the Company,
conditions in the economy in general or in the Company's industry in particular,
unfavorable publicity or changes in applicable laws and regulations (or judicial
or administrative interpretations thereof) affecting the Company or the HVAC,
process piping and plumbing and electrical services industries. From time to
time, the stock market experiences significant price and volume volatility,
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. After the consummation of the Mergers, 20,975,774 shares of Common Stock
were outstanding. The 7,015,000 shares sold in the IPO (other than shares that
may have been or that may subsequently be purchased by affiliates of the
Company) are freely tradable. The remaining outstanding shares may be resold
publicly only following their registration under the Securities Act of 1933, as
amended (the "Securities Act"), or pursuant to an
11
<PAGE>
available exemption from registration (such as provided by Rule 144 following a
one year holding period for previously unregistered shares). The holders of
these remaining shares have certain rights to have their shares registered in
the future under the Securities Act, but may not exercise such registration
rights, and have agreed with the Company that they will not sell, transfer or
otherwise dispose of any of their shares for one year following the closing of
the IPO. See "Shares Eligible for Future Sale." On completion of the IPO, the
Company also had outstanding options to purchase up to a total of 2,174,954
shares of Common Stock. In addition, the 8,000,000 shares to be issued pursuant
to this registration statement may be freely traded after their issuance by
persons not affiliated with the Company unless the Company contractually
restricts their resale. The market price of the Common Stock might be adversely
affected by the sale, or availability for sale, of substantial amounts of the
Common Stock in the public market as described above.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Comfort
Systems' Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"), authorizes the Board of Directors to issue, without
stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. The
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. In addition, the Certificate of
Incorporation provides for a classified Board of Directors, which may also have
the effect of inhibiting or delaying a change in control of the Company. Certain
provisions of the Delaware General Corporation Law may also discourage takeover
attempts that have not been approved by the Board of Directors. See
"Description of Capital Stock."
DILUTION. Purchasers of Common Stock will experience immediate,
substantial dilution in the net tangible book value of their stock.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the New York Stock Exchange since
June 27, 1997. On August 8, 1997, the last sale price of the Common Stock was
$19.0625 per share, as published in THE WALL STREET JOURNAL on August 11, 1997.
At August 8, 1997 there were approximately 84 stockholders of record of the
Company's Common Stock. The following table sets forth the range of high and low
sale prices for the Common Stock for the period from June 27, 1997, the date of
the IPO, through June 30, 1997, and from July 1, 1997, through August 8, 1997.
HIGH LOW
--------- ---------
June 27-30, 1997..................... $ 16.125 $ 13.00
July 1-29, 1997...................... $ 19.6875 $ 15.50
12
<PAGE>
THE COMPANY
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. In furtherance of this goal, Comfort Systems acquired the twelve
Founding Companies on July 2, 1997. In 1996, the Founding Companies, which have
been in business an average of 39 years, had pro forma combined revenues of
$167.5 million and served customers in 27 states. For a description of the
transactions pursuant to which these businesses were acquired, see "Certain
Transactions." The following is a description of the Founding Companies:
QUALITY AIR HEATING AND COOLING, INC. -- Quality Air Heating and Cooling,
Inc. ("Quality"), headquartered in Grand Rapids, Michigan, was founded in 1968
and operates primarily in western Michigan. Quality focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems, primarily for medium and large commercial
facilities. Quality operates a sheet metal and ductwork fabrication facility for
its installation services. Quality had 1996 revenues of $29.6 million and
currently has 222 employees. Robert J. Powers, the President of Quality, has
been employed by Quality for 16 years, has signed a five-year employment
agreement with Quality to continue his present position and is a director of the
Company.
ATLAS AIR CONDITIONING CO. -- Atlas Comfort Services USA, Inc., which does
business as Atlas Air Conditioning Co. ("Atlas"), and is headquartered in
Houston, Texas, was founded in 1947 and operates primarily in the southwest,
northeast and mid-Atlantic regions of the United States. Atlas is a leading
provider of HVAC installation services for apartment complexes, condominiums,
hotels and elder care facilities in the United States and also provides
maintenance, repair and replacement of HVAC systems. Atlas had 1996 revenues of
$30.0 million and currently has 205 employees. Brian S. Atlas and Michael Atlas,
the Chief Executive Officer and Chief Operating Officer of Atlas, respectively,
have been employed by Atlas for 22 and 20 years, respectively. They have signed
five-year employment agreements with Atlas to continue their present positions
following consummation of this Offering. Brian S. Atlas is a director of the
Company.
TRI-CITY MECHANICAL, INC. -- Tri-City Mechanical, Inc. ("Tri-City"),
headquartered in Tempe, Arizona, was founded in 1962 and operates in Arizona,
California and Nevada. Tri-City focuses on providing "design and build"
installation services and maintenance, repair and replacement of HVAC systems
primarily for large commercial and industrial facilities, as well as process
piping for industrial facilities. Tri-City operates a sheet metal and ductwork
fabrication facility for its installation services. Tri-City had 1996 revenues
of $24.2 million and currently has 283 employees. Michael Nothum, Jr., the
President of Tri-City, has been employed by Tri-City for 18 years, has signed a
five-year employment agreement with Tri-City to continue his present position
and is a director of the Company.
S. M. LAWRENCE CO., INC. -- S. M. Lawrence Co., Inc. and Lawrence Service,
Inc. (together "Lawrence"), headquartered in Jackson, Tennessee, were founded
in 1917 and operate primarily in Tennessee and the surrounding states. Lawrence
focuses on providing "design and build" installation services and process
piping primarily for industrial facilities and maintenance, repair and
replacement of commercial and industrial HVAC systems. Lawrence operates a sheet
metal and ductwork fabrication facility for its installation services. Lawrence
had 1996 revenues of $17.2 million and currently has 184 employees. Samuel M.
Lawrence III and Frank F. Lawrence, the Chief Executive Officer and President of
Lawrence, respectively, have been employed by Lawrence for 20 and 17 years,
respectively, and have signed five-year employment agreements with Lawrence to
continue their present positions. Samuel M. Lawrence III is a director of the
Company.
ACCURATE AIR SYSTEMS, INC. -- Accurate Air Systems, Inc. ("Accurate"),
headquartered in Houston, Texas, was founded in 1980 and operates primarily in
Texas, Oklahoma and New Mexico. Accurate focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities. Accurate operates a sheet metal and ductwork
fabrication facility for its installation services. Accurate had 1996 revenues
of $16.8 million and currently has 115 employees. Thomas J. Beaty, President and
founder of Accurate, has been employed by Accurate for 16 years, has
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<PAGE>
signed a five-year employment agreement with Accurate to continue his present
position and is a director of the Company.
FREEWAY HEATING AND AIR CONDITIONING, INC. -- Freeway Heating and Air
Conditioning, Inc. ("Freeway"), headquartered in Bountiful, Utah, was founded
in 1947 and operates primarily in the Salt Lake City area. Freeway provides
installation services and maintenance, repair and replacement of HVAC systems
for commercial and residential facilities. Freeway had 1996 revenues of $9.4
million and currently has 107 employees. Robert Arbuckle, President of Freeway,
has been employed by Freeway for 22 years and has signed a five-year employment
agreement with Freeway to continue his present position.
EASTERN HEATING AND COOLING INC. -- Eastern Heating and Cooling Inc.
("Eastern"), headquartered in Albany, New York, was founded in 1945 and
operates primarily within a 75-mile radius of Albany, New York. Eastern focuses
on providing "design and build" installation and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities. Eastern
also offers continuous monitoring and control services for commercial
facilities. Eastern had 1996 revenues of $7.9 million and currently has 57
employees. Alfred J. Giardenelli, Jr., President of Eastern, has been employed
by Eastern for 26 years, has signed a five-year employment agreement with
Eastern to continue his present position and is a director of the Company.
CSI/BONNEVILLE -- Contract Service Inc., which does business as C. S. I.
Heating and Air Conditioning and Bonneville Heating and Cooling
("CSI/Bonneville") and is headquartered in Salt Lake City, Utah, was founded
in 1969 and operates primarily in Utah. CSI/Bonneville focuses on providing
maintenance, repair and replacement of HVAC systems for commercial and
residential facilities. CSI/Bonneville had 1996 revenues of $7.8 million and
currently has 81 employees. John C. Phillips, President and co-founder of
CSI/Bonneville, has been employed by CSI/Bonneville for 28 years, has signed a
five-year employment agreement with CSI/Bonneville to continue his present
position and is a director of the Company.
TECH HEATING AND AIR CONDITIONING, INC. -- Tech Heating and Air
Conditioning, Inc. and Tech Mechanical, Inc. (together "Tech"), headquartered
in Solon, Ohio, were founded in 1979 and operate primarily in the greater
Cleveland, Ohio area. Tech focuses on providing "design and build"
installation services and maintenance, repair and replacement of HVAC systems
for commercial and industrial facilities. Tech also offers continuous monitoring
and control services for commercial facilities. Tech had 1996 revenues of $7.5
million and currently has 65 employees. Robert R. Cook, President and founder of
Tech, has been employed by Tech for 18 years, has signed a five-year employment
agreement with Tech to continue his present position and is a director of the
Company.
SEASONAIR, INC. -- Seasonair, Inc. ("Seasonair"), headquartered in
Rockville, Maryland, was founded in 1966 and operates primarily in Maryland, the
District of Columbia and Virginia. Seasonair focuses on providing installation
services and maintenance, repair and replacement of HVAC systems for light
commercial facilities. Seasonair had 1996 revenues of $6.7 million and currently
has 62 employees. James C. Hardin, Sr., who became Chief Executive Officer of
Seasonair upon consummation of the IPO, has been employed by Seasonair for 11
years and has signed a five-year employment agreement with Seasonair.
WESTERN BUILDING SERVICES, INC. -- Western Building Services, Inc.
("Western"), headquartered in Denver, Colorado, was founded in 1980 and
operates primarily in Colorado. Western focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities. Western also offers continuous monitoring and
control services for commercial facilities. Western had 1996 revenues of $6.5
million and currently has 53 employees. Charles W. Klapperich, President and
founder of Western, has been employed by Western for 17 years, has signed a
five-year employment agreement with Western to continue his present position and
is a director of the Company.
STANDARD HEATING AND AIR CONDITIONING CO. -- Standard Heating and Air
Conditioning Co. ("Standard"), headquartered in Birmingham, Alabama, was
founded in 1939 and operates primarily in Alabama. Standard focuses on providing
comprehensive maintenance, repair and replacement of HVAC systems for
residential and light commercial facilities. Standard had 1996 revenues of $3.7
million and currently has 38
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<PAGE>
employees. Thomas B. Kime, President of Standard, has been employed by Standard
for over 20 years and has signed a five-year employment agreement with Standard
to continue his present position with Standard.
DIVIDEND POLICY
The Company intends to retain all of its future earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including future acquisitions, and does not anticipate paying any cash dividends
on its Common Stock for the foreseeable future. In addition, the Company's
credit facility includes restrictions on the ability of the Company to pay
dividends without the consent of the lender.
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization at March 31, 1997 (i) of the Founding Companies
combined; (ii) of Comfort Systems on a pro forma combined basis to give effect
to the issuance of 1,269,935 shares of Common Stock to management of and
consultants to Comfort Systems, the Mergers and the S Corporation Distributions;
and (iii) of Comfort Systems, pro forma combined, as adjusted to give effect to
the Mergers, the S Corporation Distributions, the IPO and the application of a
portion of the net proceeds therefrom. This table should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements of the Company and
the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997
----------------------------------------
PRO FORMA
COMBINED COMBINED AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Current maturities of long-term debt
obligations(1)..................... $ 9,230 $ 50,658(2) $ 5,355
======== ========= ===========
Long-term obligations, less current
maturities(1)...................... $ 3,267 $ 14,292(3) $ 14,292
Stockholders' equity:
Preferred Stock: $0.01 par
value, 5,000,000 shares
authorized; none issued or
outstanding................... -- -- --
Common Stock: $0.01 par value,
52,969,912 shares authorized;
14,875,774 shares issued and
outstanding pro forma
combined; and 20,975,774
shares issued and outstanding,
as adjusted(4)................ 433 140 210
Additional paid-in capital...... 12,149 100,978 180,783
Retained earnings............... 8,160 -- --
Treasury stock.................. (1,201 ) -- --
-------- --------- -----------
Total stockholders'
equity.................. 19,541 101,118 180,993
-------- --------- -----------
Total
capitalization..... $22,808 $ 115,410 $ 195,285
======== ========= ===========
- ------------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.
(2) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration that was paid from
a portion of the net proceeds of the IPO.
(3) Includes $11.0 million in long-term obligations to reflect that portion of
the S Corporation Distributions that were funded through borrowings.
(4) Excludes 2,174,954 shares of Common Stock subject to options to be granted
upon consummation of the IPO at an exercise price equal to the initial
public offering price. See "Management -- 1997 Long-Term Incentive Plan"
and "-- 1997 Non-Employee Directors' Stock Plan."
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<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Comfort Systems acquired the Founding Companies in connection with the
consummation of the IPO. For financial statement presentation purposes, Comfort
Systems has been identified as the "accounting acquirer." The following
selected financial data for Comfort Systems as of December 31, 1996 has been
derived from audited financial statements of Comfort Systems. The selected
historical financial data as of March 31, 1997 and the three months ended March
31, 1997 have been derived from unaudited financial statements of Comfort
Systems, which have been prepared on the same basis as the audited financial
statements and, in the opinion of Comfort Systems, reflect all adjustments
consisting of normal recurring adjustments, necessary for a fair presentation of
such data. The selected unaudited pro forma combined financial data present data
for the Company, adjusted for (i) the effects of the Mergers, (ii) the effects
of certain pro forma adjustments to the historical financial statements
described below and (iii) the consummation of the IPO and the application of the
net proceeds therefrom. See the Unaudited Pro Forma Combined Financial
Statements and the Notes thereto and the historical Financial Statements of
Comfort Systems and certain of the Founding Companies and the Notes thereto
included elsewhere in this Prospectus.
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- ------------
INCOME STATEMENT DATA:
COMFORT SYSTEMS
Revenues......................... $ -- $ --
Gross profit..................... -- --
Selling, general and
administrative
expenses(1).................... -- 11,556
------------- ------------
Loss from operations............. -- (11,556)
Interest and other income
(expense), net.................. -- --
------------- ------------
Net loss......................... $ -- $ (11,556)
============= ============
PRO FORMA COMBINED(2)
Revenues......................... $ 167,525 $ 39,505
Gross profit..................... 47,813 10,705
Selling, general and
administrative expenses(3)...... 27,814 7,814
Goodwill amortization(4)......... 3,495 874
Income from operations........... 16,504 2,017
Interest and other income
(expense), net(5)............... (961) (250)
Income before income taxes....... 15,543 1,767
Net income(6).................... 7,928 847
Net income per share............. 0.44 0.05
Shares used in computing pro
forma net income per share(7)... 18,180,311 18,180,311
<TABLE>
<CAPTION>
COMBINED COMPANIES
COMFORT SYSTEMS ------------------------------
-------------------------
MARCH 31, 1997
DECEMBER 31, MARCH 31, ------------------------------
------------ --------- PRO FORMA
1996 1997 COMBINED(8) AS ADJUSTED(9)
------------ --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)............... $ 1 $ 42 $ (31,197)(10) $ 48,678
Total assets..................... 178 2,908 188,683 220,389
Long-term debt, net of current
maturities(5).................. -- -- 14,292 14,292
Stockholders' equity(5).......... 1 42 101,118 180,993
(FOOTNOTES ON FOLLOWING PAGE)
16
</TABLE>
<PAGE>
- ------------
(1) Represents the non-recurring, non-cash Compensation Charge of $11.6
million.
(2) The pro forma combined income statement data assume that the Mergers and
the IPO were consummated on January 1, 1996 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results.
(3) The pro forma combined income statement data reflect the Compensation
Differential of $6.6 million for the twelve months ended December 31, 1996
and $428,000 for the three months ended March 31, 1997 and does not include
the Compensation Charge of $11.6 million recorded in the first quarter of
1997.
(4) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Several of the Founding Companies were S Corporations. In connection with
the Mergers, these Founding Companies made S Corporation Distributions
totalling $16.8 million through March 31, 1997. In order to fund these
distributions, the Founding Companies borrowed $11.0 million from existing
sources. Accordingly, pro forma interest expense has been increased by
$935,000 for the twelve months ended December 31, 1996 and $207,000 for the
three months ended March 31, 1997, pro forma working capital has been
reduced by $1.9 million, pro forma long-term debt has been increased by
$11.0 million and pro forma stockholders' equity has been reduced by $12.9
million. Quality declared S Corporation Distributions of $3.9 million which
have been recorded as a dividend payable to an affiliate and a reduction of
stockholders' equity in the pro forma combined balance sheet data. This
$3.9 million is included in the $16.8 million of S Corporation
Distributions.
(6) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(7) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the Offering necessary to pay the cash portion of
the Merger consideration and expenses of the IPO and excludes 915,000
shares of common stock purchased by the underwriters pursuant to an
overallotment option.
(8) The pro forma combined balance sheet data assume that the Mergers were
consummated on March 31, 1997.
(9) Adjusted for the sale of the 7,015,000 shares of Common Stock offered in
the IPO and the application of the estimated net proceeds therefrom.
(10) Includes a $45.3 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration paid from a
portion of the net proceeds of the IPO.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived from providing comprehensive HVAC
installation services and maintenance, repair and replacement of HVAC systems
primarily for commercial and industrial customers. The Company's commercial and
industrial applications include office buildings, retail centers, apartment
complexes, hotels, manufacturing plants and government facilities. The Company
also provides specialized HVAC applications such as process cooling, control
systems, electronic monitoring and process piping. Approximately 90% of the
Company's pro forma combined 1996 revenues of $167.5 million was derived from
commercial and industrial customers, with approximately 53% of total revenues
attributable to installation services and 47% attributable to maintenance,
repair and replacement services.
Revenues related to commercial and industrial installation are of two
types: "design and build" and "plan and spec." Approximately 80% of the
commercial and industrial installation revenues for 1996 were generated from
"design and build" projects, which generally yield higher margins than "plan
and spec" projects because the Company is responsible for designing,
engineering and installing a cost-effective, energy-efficient system that is
customized to the specific needs of the building owner. This enables the Company
to control the customer's cost and reduce overall design and installation time.
Additionally, the costs and other terms of "design and build" projects are
normally established through relationship-based negotiation with the building
owner or its representative rather than through a competitive bid process.
"Plan and spec" installation projects typically yield lower margins than
"design and build" projects because the building's architect or consulting
engineer designs the HVAC system and the installation project is put out for
bid.
Most installation and reconfiguration projects are completed within one
year. Generally, these contracts are accounted for under the
percentage-of-completion method of accounting. Revenues are recorded based on
the percentage of costs incurred during a particular period, in proportion to
total estimated costs for each contract. Maintenance, repair and replacement
service revenues are recorded as services are performed. Costs of services
consist primarily of HVAC components, parts and materials related to new
installation, equipment maintenance and rental, salaries and benefits payable to
service and repair technicians, as well as supervisory and subcontract labor.
Selling, general and administrative expenses consist primarily of compensation
and benefits to owners as well as to sales and administrative employees, fees
for professional services, depreciation of equipment and other general office
expenses. Selling, general and administrative expenses also include incentive
and discretionary bonuses paid to owners, significant portions of which were
paid in lieu of S Corporation distributions to enable stockholders to meet their
income tax obligations.
The Founding Companies have operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
varying tax structures (S Corporations or C Corporations) which have influenced
the historical level of owners' compensation. Gross profit margins and selling,
general and administrative expenses as a percentage of revenues may not be
comparable among the individual Founding Companies. The owners of the Founding
Companies have agreed to certain reductions in their compensation and benefits
in connection with the organization of the Company. The Compensation
Differential for 1996 of $6.6 million has been reflected as a pro forma
adjustment in the Unaudited Pro Forma Combined Statements of Operations.
The Company anticipates that following the Mergers it will realize savings
from (i) greater volume discounts from suppliers of HVAC components, parts and
raw materials; (ii) consolidation of insurance and bonding programs; (iii) other
general and administrative areas such as training and advertising; and (iv) the
Company's ability to borrow at lower interest rates than most of the Founding
Companies. It is anticipated that these savings will be offset by costs related
to the Company's new corporate management and by the
18
<PAGE>
costs associated with being a public company. The Company believes that neither
these savings nor the costs associated therewith can be quantified because the
Mergers have not occurred, and there have been no combined operating results
upon which to base any assumptions. As a result, they have not been included in
the pro forma financial information included herein.
During January and February 1997, Comfort Systems sold an aggregate of
1,269,935 shares of Common Stock to management and consultants. As a result, the
Company recorded a non-recurring, non-cash Compensation Charge of $11.6 million
in the first quarter of 1997, representing the difference between the amount
paid for the shares and the estimated fair value of the shares on the date of
sale. This Compensation Charge of $11.6 million is not included in pro forma
financial information or Combined Results of Operations.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of acquisition
accounting. Under the purchase method, one of the companies must be designated
as the accounting acquirer. For the remaining companies, $139.8 million,
representing the excess of the fair value of the Merger consideration received
over the fair value of the net assets to be acquired, will be recorded as
"goodwill" on the Company's balance sheet. Goodwill will be amortized as a
non-cash charge to the income statement over a 40-year period. The pro forma
impact of this amortization expense, which is non-deductible for tax purposes,
is $3.5 million per year on an after-tax basis. Prior to the issuance of SAB 97,
goodwill and related amortization expense were not required to be recorded for
most business combinations similar to the Mergers. See "Certain
Transactions -- Organization of the Company."
COMBINED RESULTS OF OPERATIONS
The combined results of operations of the Founding Companies for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the revenues, cost of services and selling, general and
administrative expenses of the individual Founding Companies on a historical
basis. The combined results also exclude the effect of pro forma adjustments and
may not be comparable to, and may not be indicative of, the Company's
post-combination results of operations because (i) the Founding Companies were
not under common control or management during the periods presented; (ii) the
Founding Companies used different tax structures (S Corporations or C
Corporations) during the periods presented; (iii) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company; (iv) the Company will use the purchase method to record the
Mergers, resulting in the recording of goodwill which will be amortized over 40
years; and (v) the combined data do not reflect the Compensation Differential
and potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED(1) MARCH 31,(3)
-------------------------------------------------------------- ----------------------------------------
1994 1995(2) 1996(2) 1996 1997
------------------- -------------------- -------------------- -------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 124,710 100.0% $ 146,512 100.0% $ 167,525 100.0% $ 34,799 100.0% $ 39,505 100.0%
Cost of services........... 92,318 74.0 105,043 71.7 119,712 71.5 25,759 74.0 28,800 72.9
--------- ------ --------- ------- --------- ------- --------- ------- --------- -------
Gross profit............... 32,392 26.0 41,469 28.3 47,813 28.5 9,040 26.0 10,705 27.1
Selling, general and
administrative expenses.. 27,386 22.0 31,038 21.2 34,382 20.5 7,973 22.9 8,027 20.3
--------- ------ --------- ------- --------- ------- --------- ------- --------- -------
Income from operations..... 5,006 4.0 10,431 7.1 13,431 8.0 1,067 3.1 2,678 6.8
</TABLE>
- ------------
(1) The fiscal years presented are as follows: Quality -- the fiscal years ended
March 31, 1995 and 1996 and the year ended December 31, 1996; Atlas and
Accurate -- the fiscal years ended June 30, 1994 and 1995 and the year ended
December 31, 1996; Lawrence -- the fiscal years ended October 31, 1994, 1995
and 1996; and Tri-City, Eastern, CSI/Bonneville, Tech, Seasonair and
Western -- the years ended December 31 for all periods presented.
(2) The financial data for 1995 and 1996 both include Quality's results for the
three months ended March 31, 1996 which were as follows: revenues of $6.3
million, cost of services of $4.3 million, and selling, general and
administrative expenses of $1.6 million.
(3) Lawrence's results of operations are presented for the three months ended
January 31, 1996 and 1997.
19
<PAGE>
COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1996
REVENUES. Combined revenues increased approximately $4.7 million, or
13.5%, from $34.8 million for the three months ended March 31, 1996 to $39.5
million for the three months ended March 31, 1997. The increase in revenues
occurred primarily at Quality, Lawrence and Tech. Revenues at Quality increased
$2.5 million due to a $1.5 million increase in installation revenues and a $1.0
million increase in maintenance, repair and replacement revenues. Revenues
increased $1.3 million at Lawrence due primarily to a "design and build"
installation project for a manufacturing facility in North Carolina. Revenues at
Tech increased $0.6 million due to an increase in commercial installation
services because there were fewer days of inclement weather in the first three
months of 1997 as compared to the prior comparable period. Four of the other
Founding Companies reported an increase in revenues from the first quarter of
1996 compared to the first quarter of 1997, partially offset by a decline in
revenues at Accurate and Eastern.
GROSS PROFIT. Combined gross profit increased $1.7 million, or 18.4%, from
$9.0 million for the three months ended March 31, 1996 to $10.7 million for the
three months ended March 31, 1997, due primarily to increases of $1.4 million at
Quality, $0.5 million at Atlas and $0.3 million at Lawrence. As a percentage of
revenues, combined gross profit increased from 26.0% in the three months ended
March 31, 1996 to 27.1% in the three months ended March 31, 1997. Gross profit
as a percentage of revenues at Quality increased from 32.1% in the three months
ended March 31, 1996 to 38.7% in the three months ended March 31, 1997 as a
result of Quality's ability to be more selective in accepting projects. Gross
profit as a percentage of revenues at Atlas increased from 12.1% for the three
months ended March 31, 1996 to 20.4% for the three months ended March 31, 1997.
This improvement resulted from Atlas's ability to be more selective in accepting
projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $0.1 million, or 0.7%, from $7.9 million
for the three months ended March 31, 1996 to $8.0 million for the three months
ended March 31, 1997 due primarily to an increase in infrastructure needed to
support increased volume, partially offset by a decrease in compensation to
owners and incentive compensation to key employees totalling $1.2 million. As a
percentage of revenues, selling, general and administrative expenses decreased
from 22.9% in the three months ended March 31, 1996 to 20.3% in the three months
ended March 31, 1997.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
REVENUES. Combined revenues increased approximately $21.0 million, or
14.3%, from $146.5 million in 1995 to $167.5 million in 1996. The increase in
combined revenues occurred primarily at Atlas, Accurate and Lawrence. This
increase in combined revenues was primarily attributable to an increase in
commercial and industrial "design and build" revenues of approximately 15% and
an increase in maintenance, repair and replacement revenues of approximately
30%. Revenues for Atlas increased $7.6 million from 1995 to 1996 due to
increasing demand by several large national customers for HVAC "design and
build" installation services provided by Atlas for multi-unit facilities.
Revenues for Accurate increased $4.6 million from 1995 to 1996 reflecting the
success of an increased marketing effort along with the addition of sales
personnel and project managers. Revenues at Lawrence increased by $4.6 million
from 1995 to 1996 due to a management decision in 1995 to expand the number of
general contractors for which Lawrence provides industrial installation services
and due to a large "design and build" installation contract obtained in 1996
for a food processing facility. Seven of the other Founding Companies reported
an increase in revenues from 1995 and 1996, partially offset by a decline in
revenues at Quality and Tri-City.
GROSS PROFIT. Combined gross profit increased $6.3 million, or 15.3%, from
$41.5 million in 1995 to $47.8 million in 1996, due principally to increases in
gross profit of $2.2 million at Atlas, $1.5 million at Lawrence and $1.1 million
at Western. As a percentage of revenues, combined gross profit increased from
28.3% in 1995 to 28.5% in 1996. Gross profit as a percentage of revenues at
Atlas increased from 12.5% of revenues in 1995 to 16.5% of revenues in 1996 as
increasing demand for Atlas' specialized installation services enabled Atlas to
earn higher margins. Gross profit as a percentage of revenues at Accurate
decreased from 26.1% of revenues in 1995 to 21.0% of revenues in 1996 as a
result of an increase in
20
<PAGE>
overtime and subcontract labor necessary to support the increased number of
"design and build" projects. Gross profit as a percentage of revenues at
Western increased from 17.1% to 28.2% from 1995 to 1996, which resulted in part
from Western's participation in an incentive program sponsored by the Public
Service Company of Colorado during 1996. Western does not intend to participate
in this program during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $3.4 million, or 10.8%, from $31.0 million
in 1995 to $34.4 million in 1996. Selling, general and administrative expenses
increased $1.4 million at Lawrence, approximately one-half of which was related
to increases in salary and incentive compensation paid to the owners, and the
other half of which was related to increases in incentive compensation and
discretionary profit sharing contributions for employees. Selling, general and
administrative expenses increased $0.7 million at Tri-City as a result of a $1.1
million increase in compensation to the owners in lieu of S Corporation
distributions, offset by $0.4 million of reductions in other overhead expenses.
As a percentage of combined revenues, selling, general and administrative
expenses decreased from 21.2% in 1995 to 20.5% in 1996.
COMBINED RESULTS FOR 1995 COMPARED TO 1994
REVENUES. Combined revenues increased approximately $21.8 million, or
17.5%, from $124.7 million in 1994 to $146.5 million in 1995, primarily due to
an increase in commercial and industrial "design and build" revenues of
approximately 40% and an increase of approximately 10% in maintenance, repair
and replacement revenues. Revenues at Quality increased $8.2 million from 1994
to 1995 as a result of management's focus on obtaining more "design and build"
projects and related service work. Revenues at Tri-City increased $8.1 million
from 1994 to 1995 as a result of a strategy implemented in late 1994 to focus on
larger "design and build" projects and the related service relationships. To
accomplish its strategy, Tri-City increased the size of its sales and project
management staff.
GROSS PROFIT. Combined gross profit increased $9.1 million, or 28.0%, from
$32.4 million in 1994 to $41.5 million in 1995. Gross profit increased $3.1
million at Tri-City and $2.9 million at Quality. As a percentage of revenues,
combined gross profit increased from 26.0% in 1994 to 28.3% in 1995. Gross
profit as a percentage of revenues at Tri-City increased from 15.5% in 1994 to
22.9% in 1995 as a result of an increase in the number of higher-margin "design
and build" installation projects. Gross profit as a percentage of revenues at
Lawrence increased from 23.2% in fiscal 1994 to 27.3% in fiscal 1995 as
management emphasized higher-margin "design and build" projects and
successfully implemented an incentive program for project managers to control
project costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $3.6 million, or 13.3%, from $27.4 million
in 1994 to $31.0 million in 1995. Selling, general and administrative expenses
increased $1.0 million at Tri-City from 1994 to 1995 primarily due to a $0.8
million increase in compensation to its owners. Selling, general and
administrative expenses at Lawrence increased $0.6 million primarily due to an
increase in salary and incentive compensation to its owners. As a percentage of
combined revenues, combined selling, general and administrative expenses
decreased from 22.0% in 1994 to 21.2% in 1995.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies generated $2.1 million of net
cash from operating activities for the three months ended March 31, 1997,
primarily at Quality, Tri-City and Seasonair. Net cash used in investing
activities was $0.8 million, primarily for equipment purchases. Net cash used in
financing activities was $0.4 million and consisted of increases in long-term
debt of $1.9 million offset by distributions to stockholders of $2.3 million. At
March 31, 1997, the combined Founding Companies had working capital of $16.0
million and total debt of $12.5 million, including $5.1 million of debt to
stockholders.
In connection with and prior to the Mergers, certain Founding Companies
made S Corporation Distributions to their owners of substantially all of their
previously-taxed undistributed earnings. The pro forma combined financial
statements as of March 31, 1997 and for the three months then ended, included
elsewhere in this Prospectus, reflect pro forma adjustments for the estimated
amount of these S Corporation
21
<PAGE>
Distributions and additional debt needed to fund these distributions had they
occurred in their entirety as of March 31, 1997. These pro forma adjustments
reflect $16.8 million of S Corporation Distributions and $11.0 million of
additional debt.
On a combined basis, the Founding Companies generated $9.0 million of net
cash from operating activities during fiscal 1996, primarily at Quality,
Tri-City and CSI/Bonneville. Net cash used in investing activities was $3.0
million on a combined basis, primarily for equipment purchases. Net cash used in
financing activities was $7.3 million on a combined basis, consisting of net
reductions in long-term debt of $1.6 million and distributions to stockholders
of $5.7 million. At December 31, 1996, the combined Founding Companies had
working capital of $18.9 million and total debt of $8.6 million, including debt
to stockholders.
The Company intends to pursue acquisition opportunities. The Company
expects to fund future acquisitions through the issuance of additional Common
Stock, borrowings, including use of amounts available under its credit facility
executed in connection with the IPO and cash flow from operations. The Company
anticipates that its cash flow from operations will provide cash in excess of
the Company's normal working capital needs, debt service requirements and
planned capital expenditures for equipment. On a combined basis, the Founding
Companies made capital expenditures of $2.3 million in fiscal 1996.
The Company has obtained a revolving line of credit of $75.0 million from
Bank One. The facility will be used for acquisitions, capital expenditures,
refinancing of debt not paid out of the proceeds of the IPO and for general
corporate purposes. The credit facility requires the Company to comply with
various loan covenants including (i) maintenance of certain financial ratios,
(ii) restrictions on additional indebtedness, and (iii) restrictions on liens,
guarantees, advances and dividends. As of July 28, 1997, borrowings under the
line of credit were credit $17.3 million, which was used to repay existing
indebtedness of the Founding Companies.
QUALITY RESULTS OF OPERATIONS
Quality, headquartered in Grand Rapids, Michigan, was founded in 1968 and
operates primarily throughout western Michigan. Quality focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems, primarily for medium and large commercial
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------------------------ -------------------- --------------------
1995 1996(1) 1996(1) 1995
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 24,434 100.0% $ 32,594 100.0% $ 29,597 100.0% $ 26,279 100.0%
Cost of services..................... 15,634 64.0 20,850 64.0 18,467 62.4 16,559 63.0
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 8,800 36.0 11,744 36.0 11,130 37.6 9,720 37.0
Selling, general and administrative
expenses........................... 6,646 27.2 6,791 20.8 6,640 22.4 5,183 19.7
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations............... 2,154 8.8 4,953 15.2 4,490 15.2 4,537 17.3
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
Revenues............................. $ 23,282 100.0% $ 6,315 100.0% $ 8,766 100.0%
Cost of services..................... 14,176 60.9 4,291 67.9 5,372 61.3
--------- --------- --------- --------- --------- ---------
Gross profit......................... 9,106 39.1 2,024 32.1 3,394 38.7
Selling, general and administrative
expenses........................... 5,032 21.6 1,608 25.5 2,094 23.9
--------- --------- --------- --------- --------- ---------
Income from operations............... 4,074 17.5 416 6.6 1,300 14.8
</TABLE>
- ------------
(1) The financial data for the year ended December 31, 1996 and the year ended
March 31, 1996 both include results for the three months ended March 31,
1996, which were as follows: revenues of $6.3 million, cost of services of
$4.3 million and selling, general and administrative expenses of $1.6
million.
QUALITY RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $2.5 million, or 38.8%, from $6.3 million for
the three months ended March 31, 1996 to $8.8 million for the three months ended
March 31, 1997 due to a $1.5 million increase in installation revenues and a
$1.0 million increase in maintenance, repair and replacement revenues.
GROSS PROFIT. Gross profit increased $1.4 million, or 67.7%, from $2.0
million for the three months ended March 31, 1996 to $3.4 million for the three
months ended March 31, 1997. As a percentage of
22
<PAGE>
revenues, gross profit increased from 32.1% to 38.7% as a result of Quality's
ability to be more selective in accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.5 million, or 30.2%, from $1.6 million for
the three months ended March 31, 1996 to $2.1 million for the three months ended
March 31, 1997. The increase in selling, general and administrative expenses was
primarily attributable to an increase in administrative costs associated with
the higher sales volume. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.5% to 23.9% as Quality was able to
increase its sales volume without a commensurate increase in overhead expenses.
QUALITY RESULTS FOR NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS
ENDED DECEMBER 31, 1995
REVENUES. Revenues decreased $3.0 million, or 11.4%, from $26.3 million
for the nine months ended December 31, 1995 to $23.3 million for the nine months
ended December 31, 1996 due to a decrease in Quality's volume of commercial
"design and build" installation projects. Quality's decline in revenues from
1995 to 1996 resulted from management's decision to be more selective in
accepting installation projects. Management continues to emphasize project
selectivity and expansion of capacity through the addition of technical staff
and management rather than through subcontract labor and employee overtime.
GROSS PROFIT. Gross profit decreased $0.6 million, or 6.3%, from $9.7
million for the nine months ended December 31, 1995 to $9.1 million for the nine
months ended December 31, 1996. As a percentage of revenues, gross profit
increased from 37.0% to 39.1% due to management's emphasis on project selection
and a decrease in the use of subcontract labor, employee overtime and outside
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 2.9%, from $5.2 million for
the nine months ended December 31, 1995 to $5.0 million for the nine months
ended December 31, 1996. As a percentage of revenues, these expenses increased
from 19.7% to 21.6% due to the decline in revenues.
QUALITY RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED MARCH
31, 1996
REVENUES. Revenues decreased $3.0 million, or 9.2%, from $32.6 million for
the year ended March 31, 1996 to $29.6 million for the year ended December 31,
1996, for the reasons described above.
GROSS PROFIT. Gross profit decreased $0.6 million, or 5.2%, from $11.7
million for the year ended March 31, 1996 to $11.1 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit increased from
36.0% to 37.6% due to management's emphasis on project selection and a decrease
in the use of subcontract labor, employee overtime and outside services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 2.2%, from $6.8 million for
the year ended March 31, 1996 to $6.6 million for the year ended December 31,
1996. As a percentage of revenues, selling, general and administrative expenses
increased from 20.8% to 22.4% due to the decline in revenues.
QUALITY RESULTS FOR YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31,
1995
REVENUES. Revenues increased $8.2 million, or 33.4%, from $24.4 million
for the fiscal year ended March 31, 1995 to $32.6 for the fiscal year ended
March 31, 1996. This increase in revenues was primarily attributable to
management's emphasis on obtaining more "design and build" installation
projects and the related service work.
GROSS PROFIT. Gross profit increased $2.9 million, or 33.5%, from $8.8
million for the fiscal year ended March 31, 1995 to $11.7 million for the fiscal
year ended March 31, 1996. As a percentage of revenues, gross profit remained
unchanged at 36.0% as the benefits associated with higher revenues were offset
by an increase in subcontract labor, employee overtime and outside services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 2.2%, from $6.6 million for
the fiscal year ended March 31, 1995 to $6.8 million for the fiscal year ended
March 31, 1996. As a percentage of revenues, selling, general and administrative
expenses
23
<PAGE>
decreased from 27.2% to 20.8% as the Company successfully leveraged its
infrastructure to support the significant increase in volume.
QUALITY LIQUIDITY AND CAPITAL RESOURCES
Quality generated $1.5 million in net cash from operating activities for
the three months ended March 31, 1997. Net cash used in investing activities was
approximately $0.1 million, principally for equipment purchases. Net cash used
in financing activities was $0.3 million, representing repayment of long-term
debt.
At March 31, 1997, Quality had working capital of $3.5 million and $1.1
million of total debt outstanding.
Quality generated $4.5 million in net cash from operating activities for
the twelve months ended December 31, 1996. Net cash used in investing activities
was approximately $0.4 million, principally for equipment purchases. Net cash
used in financing activities was $4.4 million, of which $3.5 million was
distributed to shareholders and $0.9 million was used to repay long-term debt.
At December 31, 1996, Quality had working capital of $4.9 million and $1.3
million of total debt outstanding.
ATLAS RESULTS OF OPERATIONS
Atlas, headquartered in Houston, Texas, was founded in 1947 and operates
primarily in the southwest, northeast and mid-Atlantic regions of the United
States. Atlas is a leading provider of HVAC installation services for apartment
complexes, condominiums, hotels and elder care facilities in the United States
and also provides maintenance, repair and replacement of HVAC systems.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1995
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 21,848 100.0% $ 22,444 100.0% $ 29,174 100.0% $ 14,689 100.0%
Cost of services..................... 19,657 90.0 19,635 87.5 25,449 87.2 12,886 87.7
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,191 10.0 2,809 12.5 3,725 12.8 1,803 12.3
Selling, general and administrative
expenses........................... 2,086 9.5 2,166 9.6 2,843 9.8 1,417 9.6
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations.. 105 0.5 643 2.9 882 3.0 386 2.7
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
Revenues............................. $ 15,545 100.0% $ 6,207 100.0% $ 6,115 100.0%
Cost of services..................... 12,508 80.5 5,456 87.9 4,866 79.6
--------- ------- --------- ------- --------- -------
Gross profit......................... 3,037 19.5 751 12.1 1,249 20.4
Selling, general and administrative
expenses........................... 1,432 9.2 631 10.2 753 12.3
--------- ------- --------- ------- --------- -------
Income from operations.. 1,605 10.3 120 1.9 496 8.1
</TABLE>
ATLAS RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARE D TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.1 million, or 1.5%, from $6.2 million for
the three months ended March 31, 1996 to $6.1 million for the three months ended
March 31, 1997.
GROSS PROFIT. Gross profit increased $0.4 million, or 66.3%, from $0.8
million for the three months ended March 31, 1996 to $1.2 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 12.1% to 20.4% due to management's ability to be more selective in
accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 19.3%, from $0.6 million for
the three months ended March 31, 1996 to $0.8 million for the three months ended
March 31, 1997. As a percentage of revenues, selling, general and administrative
expenses increased from 10.2% to 12.3% due to the addition of administrative
personnel and related costs.
ATLAS RESULTS FOR SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $0.8 million, or 5.8%, from $14.7 million for
the six months ended December 31, 1995 to $15.5 million for the six months ended
December 31, 1996. This increase was primarily attributable to an increase in
demand for Atlas' specialized services for multi-unit facilities.
GROSS PROFIT. Gross profit increased $1.2 million, or 68.4%, from $1.8
million for the six months ended December 31, 1995 to $3.0 million for the six
months ended December 31, 1996. As a percentage of
24
<PAGE>
revenues, gross profit increased from 12.3% to 19.5% due to an increase in the
proportion of "design and build" projects and management's ability to be more
selective in accepting projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained unchanged at $1.4 million for the six months
ended December 31, 1995 and the six months ended December 31, 1996. As a
percentage of revenues, selling, general and administrative expenses decreased
from 9.6% to 9.2% as Atlas was able to increase revenues without a commensurate
increase in overhead expenses.
ATLAS RESULTS FOR YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
REVENUES. Revenues increased $6.8 million, or 30.0%, from $22.4 million
for the year ended June 30, 1995 to $29.2 million for the year ended June 30,
1996 due to an increase in demand for Atlas' specialized services for multi-unit
facilities.
GROSS PROFIT. Gross profit increased $0.9 million, or 32.6%, from $2.8
million for the year ended June 30, 1995 to $3.7 million for the year ended June
30, 1996. As a percentage of revenues, gross profit increased from 12.5% to
12.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million, or 31.3%, from $2.2 million for
the year ended June 30, 1995 to $2.8 million for the year ended June 30, 1996,
as Atlas increased its infrastructure to support higher volume. As a percentage
of revenues, selling, general and administrative expenses increased from 9.6% to
9.8%.
ATLAS RESULTS FOR JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES. Revenues increased $0.6 million, or 2.7%, from $21.8 million for
the year ended June 30, 1994 to $22.4 million for the year ended June 30, 1995.
GROSS PROFIT. Gross profit increased $0.6 million, or 28.2%, from $2.2
million for the year ended June 30, 1994 to $2.8 million for the year ended June
30, 1995. As a percentage of revenues, gross profit increased from 10.0% to
12.5%. The increase in the gross profit percentage from 1994 to 1995 was
primarily related to higher demand for Atlas' specialized installation services
for multi-unit facilities and a decrease in lower-margin "plan and spec"
projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 3.8%, from $2.1 million for
the twelve months ended June 30, 1994 to $2.2 million for the twelve months
ended June 30, 1995. As a percentage of revenues, selling, general and
administrative expenses increased from 9.5% to 9.6%.
ATLAS LIQUIDITY AND CAPITAL RESOURCES
Atlas generated $0.2 million in net cash from operating activities for the
three months ended March 31, 1997. Net cash used in investing activities was
approximately $0.1 million, primarily for equipment purchases. Net cash provided
by financing activities was $0.2 million, representing borrowings on the line of
credit.
At March 31, 1997, Atlas had working capital of $2.8 million and total debt
of $2.0 million.
Atlas used $0.3 million in net cash from operating activities for the
twelve months ended June 30, 1996 primarily due to an increase in accounts
receivable which were collected in subsequent periods. Net cash used in
investing activities was approximately $0.1 million for equipment purchases. Net
cash provided by financing activities was $0.3 million for the twelve months
ended June 30, 1996, principally as a result of a net increase in long-term debt
and notes payable.
At December 31, 1996, Atlas had working capital of $2.7 million and total
debt of $1.8 million.
TRI-CITY RESULTS OF OPERATIONS
Tri-City, headquartered in Tempe, Arizona, was founded in 1962 and operates
in Arizona, California and Nevada. Tri-City focuses on providing "design and
build" installation services and maintenance, repair
25
<PAGE>
and replacement of HVAC systems primarily for large commercial and industrial
facilities, as well as process piping for industrial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 16,883 100.0% $ 25,030 100.0% $ 24,237 100.0% $ 6,482 100.0%
Cost of services..................... 14,271 84.5 19,298 77.1 18,561 76.6 5,082 78.4
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,612 15.5 5,732 22.9 5,676 23.4 1,400 21.6
Selling, general and administrative
expenses........................... 2,219 13.2 3,193 12.8 3,903 16.1 1,026 15.8
--------- ------- --------- ------- --------- ------- --------- -------
Income from operations............... 393 2.3 2,539 10.1 1,773 7.3 374 5.8
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 6,791 100.0%
Cost of services..................... 5,946 87.6
--------- ---------
Gross profit......................... 845 12.4
Selling, general and administrative
expenses........................... 567 8.3
--------- ---------
Income from operations............... 278 4.1
TRI-CITY RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.3 million, or 4.8%, from $6.5 million for
the three months ended March 31, 1996 to $6.8 million for the three months ended
March 31, 1997 due primarily to an increase in "design and build" installation
activity for a large medical institution. Tri-City pursued this project to
expand its presence in its regional healthcare HVAC market. Tri-City was
selected as the lead mechanical contractor on this project. Installation of the
HVAC and process piping systems on this project began in October 1996 and
accounted for approximately 45% of the revenues in the three months ended March
31, 1997. This particular project is for a nationally-known healthcare
organization, and represents the first major facility on what is expected to be
a medical campus covering more than 100 acres.
GROSS PROFIT. Gross profit decreased $0.6 million, or 39.6%, from $1.4
million for the three months ended March 31, 1996 to $0.8 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 21.6% to 12.4%. In its role as lead mechanical contractor on this major
healthcare project Tri-City is responsible for arranging a significant amount of
subcontract work as well as for procuring most of the HVAC equipment on this
project. Margins on subcontract work and procured equipment are typically lower
than margins on work performed directly by Tri-City.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.4 million, or 44.7%, from $1.0 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997 due to a decrease in owners' compensation. As a percentage of
revenues, selling, general and administrative expenses decreased from 15.8% to
8.3% due to the decrease in owners' compensation.
TRI-CITY RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
REVENUES. Revenues decreased $0.8 million, or 3.2%, from $25.0 million in
1995 to $24.2 million in 1996, primarily due to a decrease in "plan and spec"
revenues from 1995 to 1996 of approximately $2.0 million, partially offset by an
increase of approximately $1.2 million in commercial HVAC maintenance, repair
and replacement service revenues.
GROSS PROFIT. Gross profit remained constant at $5.7 million for 1995 and
1996. As a percentage of revenues, gross profit increased from 22.9% to 23.4%,
due to a decrease in lower margin "plan and spec" projects in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 22.2%, from $3.2 million in
1995 to $3.9 million in 1996 due to a $1.1 million increase in compensation to
owners in lieu of S Corporation distributions, offset by a $0.4 million
reduction in other overhead expenses. As a percentage of revenues, selling,
general and administrative expenses increased from 12.8% in 1995 to 16.1% in
1996, primarily as a result of the increase in owners' compensation.
26
<PAGE>
TRI-CITY RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
REVENUES. Revenues increased $8.1 million, or 48.2%, from $16.9 million in
1994 to $25.0 million in 1995 as a result of a strategy implemented in 1994 to
emphasize "design and build" projects. To implement its strategy, Tri-City
increased its sales and project management staff.
GROSS PROFIT. Gross profit increased $3.1 million, or 119.4%, from $2.6
million in 1994 to $5.7 million in 1995. As a percentage of revenues, gross
profit increased from 15.5% in 1994 to 22.9% in 1995 as a result of an increase
in the proportion of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million, or 43.9%, from $2.2 million in
1994 to $3.2 million in 1995. The increase in selling, general and
administrative expenses in 1995 was primarily attributable to a $0.8 million
increase in compensation to owners in lieu of S Corporation distributions and an
increase in the number of the sales personnel and project managers. As a
percentage of revenues, selling, general and administrative expenses decreased
from 13.2% in 1994 to 12.8% in 1995 as Tri-City was able to substantially
increase its volume without a commensurate increase in overhead expenses.
TRI-CITY LIQUIDITY AND CAPITAL RESOURCES
Tri-City generated $0.7 million in net cash from operating activities for
the three months ended March 31, 1997. Investing and financing activities were
immaterial during this period.
At March 31, 1997, working capital was $5.8 million and there was no debt
outstanding.
Tri-City generated $1.4 million in net cash from operating activities in
1996. Net cash used in investing activities was approximately $0.7 million, of
which $0.5 million was used for investments in U.S. Treasury obligations and
$0.2 million for equipment purchases. Net cash used in financing activities was
$1.2 million, primarily for distributions to shareholders.
At December 31, 1996, working capital was $5.5 million and there was no
debt outstanding.
LAWRENCE RESULTS OF OPERATIONS
Lawrence, headquartered in Jackson, Tennessee, was founded in 1917 and
operates primarily in Tennessee and the surrounding states. Lawrence focuses on
providing "design and build" installation services and process piping
primarily for industrial facilities and maintenance, repair and replacement of
commercial and industrial HVAC systems.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 12,758 100.0% $ 12,568 100.0% $ 17,163 100.0% $ 6,736 100.0%
Cost of services..................... 9,797 76.8 9,142 72.7 12,211 71.1 4,958 73.6
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,961 23.2 3,426 27.3 4,952 28.9 1,778 26.4
Selling, general and administrative
expenses........................... 2,849 22.3 3,477 27.7 4,885 28.5 1,976 29.3
--------- ------- --------- ------- --------- ------- --------- -------
Income (loss) from operations........ 112 0.9 (51) (0.4) 67 0.4 (198) (2.9)
</TABLE>
SIX MONTHS ENDED
APRIL 30
--------------------
1997
--------------------
Revenues............................. $ 8,563 100.0%
Cost of services..................... 6,139 71.7
--------- ---------
Gross profit......................... 2,424 28.3
Selling, general and administrative
expenses........................... 1,630 19.0
--------- ---------
Income (loss) from operations........ 794 9.3
LAWRENCE RESULTS FOR SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS
ENDED APRIL 30, 1996
REVENUES. Revenues increased $1.9 million, or 27.1%, from $6.7 million for
the six months ended April 30, 1996 to $8.6 million for the six months ended
April 30, 1997 primarily due to both an increase in "design and build"
installation revenues primarily related to a manufacturing facility in North
Carolina and a $0.6 million increase in maintenance, repair and replacement
revenues.
GROSS PROFIT. Gross profit increased $0.6 million, or 36.3%, from $1.8
million for the six months ended April 30, 1996 to $2.4 million for the six
months ended April 30, 1997. As a percentage of revenues,
27
<PAGE>
gross profit increased from 26.4% to 28.3% as a result of an increase in the
proportion of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.4 million, or 17.5%, from $2.0 million for
the six months ended April 30, 1996 to $1.6 million for the six months ended
April 30, 1997 primarily due to a decrease in discretionary bonuses to the
owners of $0.6 million. As a percentage of revenues, selling, general and
administrative expenses decreased from 29.3% to 19.0% due to the increase in
revenues and the decrease in owners' compensation.
LAWRENCE RESULTS FOR YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER
31, 1995
REVENUES. Revenues increased $4.6 million, or 36.6%, from $12.6 million
for the year ended
October 31, 1995 to $17.2 million for the fiscal year ended October 31, 1996 due
to a management decision in 1995 to expand the number of general contractors for
which Lawrence provides industrial installation services and due to a large
"design and build" installation contract obtained in 1996 for a food
processing facility in Tennessee.
GROSS PROFIT. Gross profit increased $1.5 million, or 44.5%, from $3.5
million for the fiscal year ended October 31, 1995 to $5.0 million for the
fiscal year ended October 31, 1996. As a percentage of revenues, gross profit
increased from 27.3% to 28.9%, primarily as a result of an increase in the
volume of "design and build" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.4 million, or 40.5%, from $3.5 million for
the fiscal year ended October 31, 1995 to $4.9 million for the fiscal year ended
October 31, 1996. The increase in selling, general and administrative expenses
in fiscal 1996 was primarily attributable to a $0.6 million increase in salary
and incentive compensation paid to the owners and a $0.7 million increase in
incentive compensation to employees and discretionary profit sharing
contributions. As a percentage of revenues, selling, general and administrative
expenses increased from 27.7% in fiscal 1995 to 28.5% in fiscal 1996.
LAWRENCE RESULTS FOR FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR
ENDED OCTOBER 31, 1994
REVENUES. Revenues decreased $0.2 million, or 1.5%, from $12.8 million the
fiscal year ended October 31, 1994 to $12.6 million for the fiscal year ended
October 31, 1995.
GROSS PROFIT. Gross profit increased $0.4 million, or 15.7%, from $3.0
million for the fiscal year ended October 31, 1994 to $3.4 million for the
fiscal year ended October 31, 1995. As a percentage of revenues, gross profit
increased from 23.2% to 27.3% as management emphasized higher-margin "design
and build" projects and successfully implemented an incentive program for
project managers designed to control project costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 22.0%, from $2.8 million in
fiscal 1994 to $3.5 million in fiscal 1995 primarily due to an increase in
salary and incentive compensation paid to the owners. As a percentage of
revenues, selling, general and administrative expenses increased from 22.3% in
fiscal 1994 to 27.7% in fiscal 1995 and, as a result, Lawrence incurred an
operating loss in fiscal 1995.
LAWRENCE LIQUIDITY AND CAPITAL RESOURCES
Lawrence used $0.2 million in net cash from operating activities for the
six months ended April 30, 1997 primarily due to a decrease in accounts payable
and accrued expenses. Net cash used in investing activities was approximately
$0.1 million, principally for equipment purchases.
Working capital as of April 30 1997 was $1.8 million and there was no debt
outstanding as of that date.
Lawrence generated $0.1 million in net cash from operating activities for
the fiscal year ended
October 31, 1996. Net cash used in investing activities was approximately $0.4
million, principally for equipment purchases and leasehold improvements.
Working capital as of October 31, 1996 was $1.4 million and there was no
debt outstanding as of that date.
28
<PAGE>
ACCURATE RESULTS OF OPERATIONS
Accurate, headquartered in Houston, Texas, was founded in 1980 and operates
primarily in Texas and Oklahoma. Accurate focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, YEAR ENDED MARCH 31,
------------------------------------------ DECEMBER 31, --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 9,763 100.0% $ 12,171 100.0% $ 16,806 100.0% $ 3,161 100.0%
Cost of services..................... 7,204 73.8 8,998 73.9 13,270 79.0 2,450 77.5
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit......................... 2,559 26.2 3,173 26.1 3,536 21.0 711 22.5
Selling, general and administrative
expenses........................... 2,681 27.5 2,960 24.3 3,037 18.0 684 21.6
--------- ------- --------- ------- --------- ------- --------- -------
Income (loss) from operations........ (122) (1.3) 213 1.8 499 3.0 27 0.9
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 2,642 100.0%
Cost of services..................... 2,095 79.3
--------- ---------
Gross profit......................... 547 20.7
Selling, general and administrative
expenses........................... 526 19.9
--------- ---------
Income (loss) from operations........ 21 0.8
ACCURATE RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.6 million, or 16.4%, from $3.2 million for
the three months ended March 31, 1996 to $2.6 million for the three months ended
March 31, 1997 due to a decrease in commercial installation services. This
decrease resulted from a decrease in commercial installation services due to the
greater number of days of inclement weather in Texas during the first three
months of 1997 compared to the same period of the prior year.
GROSS PROFIT. Gross profit decreased $0.2 million, or 23.1%, from $0.7
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 22.5% to 20.7% due to the decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2, or 23.1% from $0.7 million for the three
months ended March 31, 1996 to $0.5 million for the three months ended March 31,
1997 primarily due to a decrease in owners' compensation. As a percentage of
revenues, selling, general and administrative expenses decreased from 21.6% to
19.9%.
ACCURATE RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED JUNE
30, 1995
REVENUES. Revenues increased $4.6 million, or 38.1%, from $12.2 million
for the year ended June 30, 1995 to $16.8 million for the year ended December
31, 1996, reflecting the success of an increased marketing effort along with the
addition of project management personnel who also have sales responsibility.
These efforts resulted in an increase in commercial "design and build"
installation revenues and an increase in replacement services.
GROSS PROFIT. Gross profit increased $0.3 million, or 11.4%, from $3.2
million for the year ended June 30, 1995 to $3.5 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit decreased from
26.1% to 21.0%, primarily as a result of an increase in subcontract labor and
employee overtime necessary to support the increased number of "design and
build" projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained constant at $3.0 million for the fiscal year
ended June 30, 1995 and the year ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses decreased from 24.3% to
18.0% as Accurate was able to increase revenues without a commensurate increase
in overhead expenses.
ACCURATE RESULTS FOR YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30,
1994
REVENUES. Revenues increased $2.4 million, or 24.7%, from $9.8 million for
the year ended June 30, 1994 to $12.2 million for the fiscal year ended June 30,
1995. This increase was primarily attributable to a
29
<PAGE>
new project for an existing customer to design and build an HVAC system for a
correctional facility and an increase in maintenance and replacement services.
GROSS PROFIT. Gross profit increased $0.6 million, or 24.0%, from $2.6
million for the fiscal year ended June 30, 1994 to $3.2 million for the fiscal
year ended June 30, 1995. As a percentage of revenues, gross profit remained
stable over these periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.3 million, or 10.4%, from $2.7 million in
fiscal 1994 to $3.0 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 27.5% to 24.3% as
Accurate was able to increase revenues without a commensurate increase in
overhead expenses.
ACCURATE LIQUIDITY AND CAPITAL RESOURCES
Accurate used $0.1 million of net cash for operating activities for the
three months ended March 31, 1997. Net cash provided by financing activities of
$0.2 million resulted from an increase in long-term debt used to fund working
capital needs.
Working capital at March 31, 1997 was $0.2 million and total debt
outstanding was $1.5 million, of which $0.6 million was owed to a shareholder.
Accurate generated $0.2 million in net cash from operating activities for
the year ended December 31, 1996. Net cash used in investing activities was
approximately $0.1 million for equipment purchases.
Working capital at December 31, 1996 was $0.2 million and total debt
outstanding was $1.3 million, of which $0.6 million was owed to a shareholder.
CSI/BONNEVILLE RESULTS OF OPERATIONS
CSI/Bonneville, headquartered in Salt Lake City, Utah, was founded in 1969
and operates primarily in Utah. CSI/Bonneville focuses on providing maintenance,
repair and replacement of HVAC systems for commercial and residential
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 6,502 100.0% $ 6,361 100.0% $ 7,842 100.0% $ 1,369 100.0%
Cost of services..................... 4,393 67.6 4,413 69.4 5,201 66.3 926 67.6
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,109 32.4 1,948 30.6 2,641 33.7 443 32.4
Selling, general and administrative
expenses........................... 1,228 18.9 1,500 23.6 1,660 21.2 368 26.9
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 881 13.5 448 7.0 981 12.5 75 5.5
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997
--------------------
Revenues............................. $ 1,562 100.0%
Cost of services..................... 1,045 66.9
--------- ---------
Gross profit......................... 517 33.1
Selling, general and administrative
expenses........................... 458 29.3
--------- ---------
Income from operations............... 59 3.8
CSI/BONNEVILLE RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.2 million, or 14.1%, from $1.4 million for
the three months ended March 31, 1996 to $1.6 million for the three months ended
March 31, 1997 primarily due to an increase in commercial and residential
maintenance, repair and replacement services.
GROSS PROFIT. Gross profit increased $0.1 million, or 16.7%, from $0.4
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 32.4% to 33.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 24.5%, from $0.4 million for
the three months ended March 31, 1996 to $0.5 million for the three months ended
March 31, 1997 as a result of an increase in administrative personnel. As a
percentage of revenues, selling, general and administrative expenses increased
from 26.9% to 29.3%.
30
<PAGE>
CSI/BONNEVILLE RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
REVENUES. Revenues increased $1.4 million, or 23.3%, from $6.4 million in
1995 to $7.8 million in 1996, primarily as a result of an increase in both
commercial and residential maintenance, repair and replacement services due to
an increase in the number of sales and marketing personnel in 1995 and 1996.
Revenues declined in 1995 due to the deployment of operating personnel to a move
to a new facility in that year.
GROSS PROFIT. Gross profit increased $0.7 million, or 35.6%, from $1.9
million for 1995 to $2.6 million in 1996. As a percentage of revenues, gross
profit increased from 30.6% in 1995 to 33.7% in 1996. The lower gross profit in
1995 was due to the deployment of operating personnel to a move to a new
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 10.7%, from $1.5 million in
1995 to $1.7 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 23.6% in 1995 to 21.2% in 1996.
CSI/BONNEVILLE RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
REVENUES. Revenues decreased from $6.5 million in 1994 to $6.4 million in
1995 as a result of CSI/Bonneville's move into a new facility during 1995.
GROSS PROFIT. Gross profit decreased $0.2 million, or 7.6%, from $2.1
million in 1994 to $1.9 million in 1995. As a percentage of revenues, gross
profit declined from 32.4% in 1994 to 30.6% in 1995 as a result of
CSI/Bonneville's move into a new facility during 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.3 million, or 22.1%, from $1.2 million in
1994 to $1.5 million in 1995. As a percentage of revenues, selling, general and
administrative expenses increased from 18.9% in 1994 to 23.6% in 1995. This
percentage increase was primarily attributable to rent, depreciation and related
costs associated with the new facility occupied in 1995.
CSI/BONNEVILLE LIQUIDITY AND CAPITAL RESOURCES
CSI/Bonneville's operating activities were breakeven on a cash-flow basis
for the three months ended March 31, 1997. Net cash used in investing activities
was $0.1 million, principally for equipment purchases.
Working capital at March 31, 1997 was $0.5 million and total debt
outstanding was $0.5 million, all of which was owed to shareholders.
CSI/Bonneville generated $1.1 million in net cash from operating activities
in 1996. Net cash used in investing activities was $0.2 million, principally for
equipment purchases. Net cash used in financing activities was $0.8 million,
primarily for distributions to shareholders.
Working capital at December 31, 1996 was $0.5 million and total debt
outstanding was $0.5 million, all of which was owed to shareholders.
TECH RESULTS OF OPERATIONS
Tech, headquartered in Solon, Ohio, was founded in 1979 and operates
primarily in the greater Cleveland, Ohio area. Tech focuses on providing
"design and build" installation services and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities.
31
<PAGE>
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 6,960 100.0% $ 7,537 100.0% $ 1,075 100.0% $ 1,656 100.0%
Cost of services..................... 4,212 60.5 3,996 53.0 639 59.4 1,034 62.4
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,748 39.5 3,541 47.0 436 40.6 622 37.6
Selling, general and administrative
expenses........................... 1,800 25.9 1,861 24.7 390 36.3 565 34.1
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 948 13.6 1,680 22.3 46 4.3 57 3.5
</TABLE>
TECH RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.6 million, or 54.0%, from $1.1 million for
the three months ended March 31, 1996 to $1.7 million for the three months ended
March 31, 1997 due primarily to an increase in commercial installation services
because there were fewer days of inclement weather in the first three months of
1997 as compared to the prior comparable period.
GROSS PROFIT. Gross profit increased $0.2 million, or 42.7%, from $0.4
million for the three months ended March 31, 1996 to $0.6 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 40.6% to 37.6% due to a decrease in the proportion of maintenance, repair
and replacement revenues, which typically have higher margins than installation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 44.9%, from $0.4 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997 due to an increased marketing effort, including an increase in
marketing personnel. As a percentage of revenues, selling, general and
administrative expenses declined from 36.3% to 34.1% as Tech was able to
substantially increase its volume without a commensurate increase in overhead
expenses.
TECH RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
REVENUES. Revenues increased $0.5 million, or 8.3%, from $7.0 million in
1995 to $7.5 million in 1996. This increase was primarily attributable to an
increase in commercial "design and build" installation projects and related
service work.
GROSS PROFIT. Gross profit increased $0.8 million, or 28.9%, from $2.7
million in 1995 to $3.5 million in 1996. As a percentage of revenues, gross
profit increased from 39.5% to 47.0%, primarily due to an increase in "design
and build" versus "plan and spec" installation projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained relatively unchanged from 1995 to 1996. As a
percentage of revenues, selling, general and administrative expenses decreased
from 25.9% in 1995 to 24.7% in 1996 as Tech successfully leveraged its
infrastructure to achieve revenue growth.
TECH LIQUIDITY AND CAPITAL RESOURCES
Tech generated $0.6 million in net cash from operating activities for the
three months ended March 31, 1997. Net cash used in financing activities was
$0.9 million, principally for distributions to shareholders of $1.6 million
offset by borrowings of long-term debt of $0.7 million.
Total debt outstanding at March 31, 1997 was $1.0 million.
Tech generated $0.9 million in net cash from operating activities in 1996.
Net cash used in investing activities was $0.3 million for equipment purchases.
Net cash used in financing activities was $0.4 million, principally for
distributions to shareholders.
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<PAGE>
Working capital at December 31, 1996 was $1.6 million and total debt
outstanding was $0.3 million.
WESTERN RESULTS OF OPERATIONS
Western, headquartered in Denver, Colorado, was founded in 1980 and
operates primarily in Colorado. Western focuses on providing "design and
build" installation services and maintenance, repair and replacement of HVAC
systems for commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 4,112 100.0% $ 6,494 100.0% $ 1,185 100.0% $ 1,072 100.0%
Cost of services..................... 3,408 82.9 4,662 71.8 857 72.3 812 75.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 704 17.1 1,832 28.2 328 27.7 260 24.3
Selling, general and administrative
expenses........................... 855 20.8 1,088 16.7 232 19.6 231 21.6
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ (151) (3.7) 744 11.5 96 8.1 29 2.7
</TABLE>
WESTERN RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.1 million, or 9.5%, from $1.2 million for
the three months ended March 31, 1996 to $1.1 million for the three months ended
March 31, 1997.
GROSS PROFIT. Gross profit was $0.3 million for the three months ended
March 31, 1996 and the three months ended March 31, 1997. As a percentage of
revenues, gross profit decreased from 27.7% to 24.3% due primarily to the
decline in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained constant at $0.2 million for the three months
ended March 31, 1996 and the three months ended March 31, 1997. As a percentage
of revenues, selling, general and administrative expenses increased from 19.6%
to 21.6% due to the decline in revenues.
WESTERN RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
REVENUES. Revenues increased $2.4 million, or 57.9%, from $4.1 million in
1995 to $6.5 million in 1996. This increase was primarily attributable to an
increase in commercial replacement revenues of $1.5 million related to the
Demand Side Management ("DSM") incentive program developed by the Public
Service Company of Colorado ("PSC"). This program provided incentives for
commercial PSC customers to replace existing HVAC systems with more
energy-efficient systems and ended in November 1996. Management believes that a
significant portion of the revenues generated under the DSM program can be
replaced by redeploying Western's sales force to emphasize installation of
commercial control systems and commercial maintenance, repair and replacement
services. Western does not intend to participate in this program during 1997.
GROSS PROFIT. Gross profit increased $1.1 million, or 160.2%, from $0.7
million in 1995 to $1.8 million in 1996. As a percentage of revenues, gross
profit increased from 17.1% in 1995 to 28.2% in 1996, primarily due to an
increase in maintenance, repair and replacement revenues, including revenues
generated under the DSM program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million in 1995, or 27.3%, from $0.9
million in 1995 to $1.1 million in 1996. As a percentage of revenues, selling,
general and administrative expenses decreased from 20.8% to 16.7% as a result of
the substantial revenue increase without a commensurate increase in overhead
expenses.
33
<PAGE>
WESTERN LIQUIDITY AND CAPITAL RESOURCES
Western used $0.1 million in net cash from operating activities in the
three months ended March 31, 1997 primarily due to a decrease in accounts
payable and accrued expenses.
Working capital at March 31, 1997 was $0.3 million and total long-term debt
outstanding was $0.2 million.
Western generated $0.6 million in net cash from operating activities in
1996. Net cash used in investing activities was approximately $0.1 million,
principally for equipment purchases. Net cash used in financing activities was
$0.4 million, as a result of distributions to shareholders and net repayments of
long-term debt.
Working capital at December 31, 1996 was $0.4 million and total long-term
debt outstanding was $0.3 million.
SEASONAIR RESULTS OF OPERATIONS
Seasonair, headquartered in Rockville, Maryland, was founded in 1966 and
operates primarily in Maryland, the District of Columbia and Virginia. Seasonair
focuses on providing installation services and maintenance, repair and
replacement of HVAC systems for light commercial facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 6,737 100.0% $ 1,128 100.0% $ 1,831 100.0%
Cost of services........................ 4,006 59.5 586 52.0 1,165 63.6
--------- --------- --------- --------- --------- ---------
Gross profit............................ 2,731 40.5 542 48.0 666 36.4
Selling, general and administrative
expenses.............................. 2,597 38.5 604 53.5 644 35.2
--------- --------- --------- --------- --------- ---------
Income (loss) from operations........... 134 2.0 (62) (5.5) 22 1.2
</TABLE>
SEASONAIR RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues increased $0.7 million, or 62.3%, from $1.1 million for
the three months ended March 31, 1996 to $1.8 million for the three months ended
March 31, 1997 due to an increase in maintenance, repair and replacement
services resulting from management's decision to expand the business more
rapidly.
GROSS PROFIT. Gross profit increased $0.2 million, or 22.9%, from $0.5
million for the three months ended March 31, 1996 to $0.7 million from the three
months ended March 31, 1997. As a percentage of revenues, gross profit decreased
from 48.0% to 36.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $0.6 million for the three months ended March 31,
1996 and the three months ended March 31, 1997. As a percentage of revenues,
selling, general and administrative expenses decreased from 53.5% to 35.2% due
to management's ability to increase revenues without a commensurate increase in
overhead expenses.
SEASONAIR LIQUIDITY AND CAPITAL RESOURCES
Seasonair generated $0.1 million in net cash from operating activities for
the three months ended March 31, 1997 due to a decrease in prepaid expenses and
other current assets and an increase in accounts payable and accrued expenses.
Net cash provided by financing activities was $0.1 million from borrowings on
the line of credit.
Working capital at March 31, 1997 was $0.5 million and total debt
outstanding was $0.2 million.
Seasonair used $0.2 million in net cash from operating activities in 1996
primarily due to an increase in prepaid expenses and other current assets. Net
cash provided by investing activities was $0.1 million
34
<PAGE>
from proceeds on sale of equipment. Net cash used in financing activities was
$0.1 million to repay long-term debt.
Working capital at December 31, 1996 was $0.5 million and total debt
outstanding was $0.1 million.
EASTERN RESULTS OF OPERATIONS
Eastern, headquartered in Albany, New York, was founded in 1945 and
operates primarily within a 75 mile radius of Albany, New York. Eastern focuses
on providing "design and build" installation and maintenance, repair and
replacement of HVAC systems for commercial and industrial facilities. Eastern
also offers continuous monitoring and control services for commercial
facilities.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 7,944 100.0% $ 1,525 100.0% $ 1,284 100.0%
Cost of services........................ 5,276 66.4 973 63.8 805 62.7
--------- --------- --------- --------- --------- ---------
Gross profit............................ 2,668 33.6 552 36.2 479 37.3
Selling, general and administrative
expenses.............................. 2,237 28.2 532 34.9 582 45.3
--------- --------- --------- --------- --------- ---------
Income (loss) from operations........... 431 5.4 20 1.3 (103) (8.0)
</TABLE>
EASTERN RESULTS FOR THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
REVENUES. Revenues decreased $0.2 million, or 15.8% from $1.5 million for
the three months ended March 31, 1996 to $1.3 million for the three months ended
March 31, 1997 due primarily to a decrease in maintenance, repair and
replacement services. As a result of a mild winter season in the first three
months of 1997 in the Albany, New York area, the need for service work on
heating equipment decreased.
GROSS PROFIT. Gross profit decreased $0.1 million, or 13.2%, from $0.6
million for the three months ended March 31, 1996 to $0.5 million for the three
months ended March 31, 1997. As a percentage of revenues, gross profit increased
from 36.2% to 37.3%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 9.4%, from $0.5 million for
the three months ended March 31, 1996 to $0.6 million for the three months ended
March 31, 1997. As a percentage of revenues, selling, general and administrative
expenses increased from 34.9% to 45.3% due to the higher expenses and the
decrease in revenues.
EASTERN LIQUIDITY AND CAPITAL RESOURCES
Eastern generated $0.1 million in net cash from operating activities
primarily from a net decrease in accounts receivables of $0.3 million. Cash
flows used for financing activities were $0.1 million for distributions to
shareholders and $0.1 million for repayment of long-term debt. Cash flows used
in financing activities was $0.2 million of borrowings on the line of credit.
As of March 31, 1997, Eastern had a working capital deficit of $0.2 million
and total debt outstanding of $1.0 million. Eastern has historically funded its
operations with cash flow from operations and debt from lenders and
shareholders. The Company believes that Eastern has adequate financing
alternatives to fund its operations.
Eastern generated $0.5 million in net cash from operating activities in
1996 primarily due to $0.4 million in net income. Net cash used in investing
activities was $0.2 million for the purchase of property and equipment. Net cash
used in financing activities in 1996 was $0.3 million for distributions to
shareholders.
Working capital at December 31, 1996 was $0.1 million and total debt
outstanding was $0.9 million of which $0.3 million is payable to the former
owner.
35
<PAGE>
SEASONAL AND CYCLICAL NATURE OF THE HVAC INDUSTRY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due to
reduced construction activities during inclement weather and less use of air
conditioning during the colder months. Demand for HVAC services is generally
higher in the second and third quarters due to the increased use of air
conditioning during the warmer months. Accordingly, the Company expects its
revenues and operating results generally will be lower in the first and fourth
quarters. Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.
INFLATION
Inflation did not have a significant effect on the results of operations of
the combined Founding Companies for 1994, 1995 or 1996 or the three months ended
March 31, 1997.
36
<PAGE>
BUSINESS
Comfort Systems was founded in 1996 to become a leading national provider
of comprehensive HVAC installation services and maintenance, repair and
replacement of HVAC systems, focusing primarily on the commercial and industrial
markets. Comfort Systems acquired the twelve Founding Companies on July 2, 1997.
The Company's commercial and industrial applications include office buildings,
retail centers, apartment complexes, hotels, manufacturing plants and government
facilities. The Company also provides specialized HVAC applications such as
process cooling, control systems, electronic monitoring and process piping.
Approximately 90% of the Company's pro forma combined 1996 revenues of $167.5
million was derived from commercial and industrial customers, with approximately
53% of combined revenues attributable to installation services and 47%
attributable to maintenance, repair and replacement services. Combined revenues
of the Founding Companies, which have been in business an average of 39 years,
increased at a compound annual growth rate of approximately 16% from 1994
through 1996.
INDUSTRY OVERVIEW
Based on available industry data, the Company believes that the HVAC
industry is highly fragmented with over 40,000 companies, most of which are
small, owner-operated businesses with limited access to capital for
modernization and expansion. The overall HVAC industry, including the
commercial, industrial and residential markets, is estimated to generate annual
revenues in excess of $75 billion, over $35 billion of which is in the
commercial and industrial markets. HVAC systems have become a necessity in
virtually all commercial and industrial buildings as well as homes. Because most
commercial buildings are sealed, HVAC systems provide the primary method of
addressing air quality concerns and injecting fresh air. Older industrial
facilities often have poor air quality as well as inadequate air conditioning,
factors which are causing industrial facility owners to consider replacement
options. Operation of older HVAC systems represents a significant cost due to
their energy inefficiency. In many instances, the replacement of an aging system
with a modern, energy-efficient system will significantly reduce a building's
operating costs while also improving the effectiveness of the HVAC system and
air quality.
Growth in the HVAC industry is being positively affected by a number of
factors, particularly (i) the aging of the installed base, (ii) the increasing
efficiency, sophistication and complexity of HVAC systems and (iii) the
increasing restrictions on the use of refrigerants commonly used in older HVAC
systems. These factors are expected to increase demand for the reconfiguration
or replacement of existing HVAC systems. These factors also mitigate the effect
on the HVAC industry of the cyclicality inherent in the traditional construction
industry.
The HVAC industry can be broadly divided into the installation segment and
the maintenance, repair and replacement segment.
INSTALLATION SEGMENT. The installation segment consists of "design and
build" and "plan and spec" projects. In "design and build" projects, the
commercial HVAC firm is responsible for designing, engineering and installing a
cost-effective, energy-efficient system customized to meet the specific needs of
the building owner. Costs and other project terms are normally negotiated
between the building owner or its representative and the HVAC firm. Firms which
specialize in "design and build" projects generally have specially-trained
HVAC engineers, CAD/CAM design systems, in-house sheet metal and prefabrication
capabilities. These firms utilize a consultative approach with customers and
tend to develop long-term relationships with building owners and developers,
general contractors, architects and property managers. "Plan and spec"
installation refers to projects where an architect or a consulting engineer
designs the HVAC system and the installation project is put out for bid. The
Company believes that "plan and spec" projects usually take longer to complete
than "design and build" projects because the preparation of the system design
and the bid process often take months to complete. Furthermore, in "plan and
spec" projects, the HVAC firm is not responsible for project design and changes
must be approved by several parties, thereby increasing overall project time and
cost.
MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. This segment includes the
maintenance, repair, replacement, reconfiguration and monitoring of previously
installed HVAC systems and controls. Growth in
37
<PAGE>
this segment has been fueled by the aging of the installed base of HVAC systems
and the increasing demand for more efficient, sophisticated and complex systems
and controls. The increasing sophistication and complexity of these HVAC systems
is leading many commercial and industrial building owners and property managers
to outsource maintenance and repair, often through service agreements with HVAC
service providers. In addition, increasing restrictions are being placed on the
use of certain types of refrigerants used in HVAC systems, which, along with air
quality concerns, are expected to increase demand for the reconfiguration and
replacement of existing HVAC systems. State-of-the-art control and monitoring
systems feature electronic sensors and microprocessors and require specialized
training to install, maintain and repair, which the typical building engineer
does not have. Increasingly, HVAC systems in commercial and industrial buildings
are being remotely monitored through PC-based communications systems to improve
energy efficiency and expedite problem diagnosis and correction.
The Company believes that the majority of business owners in the HVAC
industry have limited access to capital for expansion of their businesses and
that few have attractive liquidity options. In addition, the increasing
complexity of HVAC systems has led to a need for better trained technicians to
install, monitor and service these systems. The cost of recruiting, training and
retaining a sufficient number of qualified technicians makes it more difficult
for smaller HVAC companies to expand their businesses. The Company believes that
significant opportunities exist for a well-capitalized, national company
operating in the commercial, industrial and residential markets of the HVAC
industry and that the highly fragmented nature of this industry should allow it
to consolidate existing HVAC businesses.
STRATEGY
The Company plans to achieve its goal of becoming a leading national
provider of comprehensive HVAC services by implementing its operating strategy,
emphasizing continued internal growth and expanding through acquisitions.
OPERATING STRATEGY. The Company believes there are significant
opportunities to increase the profitability of the Founding Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company intends to
focus principally on the commercial and industrial markets with particular
emphasis on the "design and build" installation and the maintenance,
repair and replacement segments. The Company believes that the commercial
and industrial HVAC markets are attractive because of their growth
opportunities, diverse customer base, attractive margins and potential for
long-term relationships with building owners and managers, general
contractors and architects.
OPERATE ON DECENTRALIZED BASIS. The Company intends to manage the
Founding Companies on a decentralized basis, with local management assuming
responsibility for the day-to-day operations, profitability and growth of
the business. The Company believes that, while maintaining strong operating
and financial controls, a decentralized operating structure will retain the
entrepreneurial spirit present in each of the Founding Companies and will
allow the Company to capitalize on the considerable local and regional
market knowledge and customer relationships possessed by each Founding
Company.
ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
significant opportunities to achieve operating efficiencies and cost
savings through purchasing economies and the adoption of "best practices"
operating programs. The Company intends to use its increased purchasing
power to gain volume discounts in areas such as HVAC components, raw
materials, service vehicles, advertising, bonding and insurance. Moreover,
the Company will review its operations and training programs at the local
and regional operating levels in order to identify those "best practices"
that can be successfully implemented throughout its operations.
ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company intends to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
38
<PAGE>
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) improved benefits packages.
INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the Founding Companies and subsequently acquired
businesses. The key elements of the Companys internal growth strategy are:
CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to expand the services it offers in its
markets by leveraging the specialized technical and marketing strengths of
individual Founding Companies. For example, one of the Founding Companies
has developed significant industry recognition for its technical expertise
within apartment complexes, condominiums, hotels and elder care facilities
which may be transferable to other Founding Companies. A number of Founding
Companies currently focus primarily on installation and, therefore, have
only limited maintenance, repair and replacement operations. The Company
believes there are significant opportunities for these Founding Companies
to provide maintenance, repair and replacement services, particularly by
offering those services to its "design and build" customers. Several of
the Founding Companies have specific expertise in HVAC control and
monitoring systems, process cooling, replacement and other service
strengths, many of which can be shared with other Founding Companies and
subsequently acquired businesses.
ESTABLISH NATIONAL MARKET COVERAGE. The Company believes that
significant demand exists from large national companies to utilize the
services of a single HVAC service company capable of providing
comprehensive commercial and industrial services on a regional or national
basis. Many of the Founding Companies already provide local or regional
coverage to companies with nationwide locations, such as commercial real
estate developers and managers, retailers and manufacturers. The Company
believes these existing relationships can be expanded as it develops a
nationwide network since these customers often desire a single source for
all of their HVAC needs to promote consistency, improve control and reduce
cost.
ACQUISITIONS. The Company believes the HVAC industry is highly fragmented
with over 40,000 companies, most of which are small, owner-operated businesses
with limited access to adequate capital for modernization and expansion. The
Company anticipates that acquisition candidates in the commercial and industrial
markets will typically have annual revenues ranging from $5 million to $35
million. The key elements of the Company's acquisition strategy are:
ENTER NEW GEOGRAPHIC MARKETS. In new markets, the Company intends to
target one or more leading local or regional companies providing HVAC or
complementary services. The acquisition target will have the customer base,
technical skills and infrastructure necessary to be a core business into
which other HVAC service operations can be consolidated. The Company will
choose businesses that are located in attractive markets, are financially
stable, are experienced in the industry and have management willing to
participate in the future growth of the Company.
EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established HVAC businesses to
expand its market penetration and range of services offered. The Company
also will pursue "tuck-in" acquisitions of smaller companies, whose
operations can be integrated into an existing Company operation to leverage
the existing infrastructure.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company will focus on its
traditional markets in the HVAC industry and may acquire companies
providing complementary services to the same customer base, such as
commercial and industrial process piping and plumbing as well as electrical
companies. This will enable the Company to offer, on a comprehensive basis
and from a single provider, HVAC, mechanical and electrical services in
certain markets.
ACQUISITION PROGRAM
The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of: (i) the Company's strategy for creating a
national, comprehensive and professionally managed HVAC
39
<PAGE>
service provider that capitalizes on cross-marketing and business development
opportunities; (ii) the Company's decentralized operating strategy; (iii) the
Company's increased visibility and access to financial resources as a public
company; (iv) the potential for increased profitability due to certain
centralized administrative functions, enhanced systems capabilities and access
to increased marketing resources; and (v) the potential for the owners of the
businesses being acquired to participate in the Company's planned internal
growth and growth through acquisitions, while realizing liquidity.
The Company believes the management teams of the Founding Companies will be
instrumental in identifying and completing future acquisitions. The Company's
visibility within the HVAC industry will increase the awareness and interest of
acquisition candidates in the Company and its acquisition program. Within the
past several months, the Company has contacted the owners of a number of
acquisition candidates, several of whom have expressed interest in having their
business acquired by the Company. The Company currently has no binding
agreements to effect any acquisition other than the Founding Companies.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis. The major factors in
establishing the purchase price for each acquisition will be historical
operating results, future prospects of the acquiree and the ability of that
business to complement the services offered by the Company. Management believes
that companies providing commercial and industrial HVAC services are larger than
those providing residential services, with commercial and industrial companies
generating annual revenues ranging from $5 million to $35 million, compared to
companies providing residential HVAC services which generally have annual
revenues ranging from $500,000 to $3 million.
OPERATIONS AND SERVICES PROVIDED
The Company provides a wide range of installation, maintenance, repair and
replacement services for HVAC systems in commercial, industrial and residential
properties. Daily operations are managed on a local basis by the management team
at each Founding Company. In addition to senior management, the Founding
Companies' personnel generally include design engineers, sales personnel,
customer service personnel, installation service technicians, sheet metal and
prefabrication technicians, estimators and administrative personnel. Upon
consummation of the Mergers, the Company will manage the Founding Companies on a
decentralized basis, with local management being responsible for day-to-day
operating decisions. The Company intends to centralize certain administrative
functions to enable the management of each Founding Company to focus on pursuing
new business opportunities and to improve operating efficiencies. Administrative
functions which the Company expects to centralize include Company-wide training
and safety programs, accounting programs, risk management programs, purchasing
programs and employee benefits.
INSTALLATION SEGMENT. The Company's installation business comprised
approximately 53% of the Company's 1996 revenues. This segment consists of the
design, engineering, integration, installation and start-up of HVAC systems. The
commercial and industrial installation services performed by the Company consist
primarily of "design and build" systems for office buildings, retail centers,
apartment complexes, hotels, manufacturing plants and government facilities. In
a "design and build" project, the customer typically has an overall design for
the facility prepared by an architect or a consulting engineer who then enlists
the Company's sales and engineering personnel to prepare a specific design for
the HVAC system. The Company determines the needed capacity, energy efficiency
and type of controls that best suit the proposed facility. The Company's
engineer then estimates the amount of time, labor, materials and equipment
needed to build the specified system. Materials and equipment for a typical
commercial or industrial project include ductwork, compressors, blowers,
chillers, cooling towers, air handling equipment and the associated pumps and
piping necessary to complete the system. The Company utilizes CAD/CAM systems in
the design and engineering phases of the project to calculate the material and
labor costs of the project based on previously established Company standards and
to generate mechanical drawings for each project. The drawings are prepared in a
format appropriate for submission to local building inspectors. The final
design, terms, price and timing of the project are then negotiated with the
customer or its representatives, after which any necessary modifications are
made to the system.
40
<PAGE>
Once an agreement has been reached, the Company orders the necessary
materials and equipment for delivery to meet the project schedule. In most
instances, the Company fabricates in its own facilities the ductwork and piping
and assembles certain components for the system based on the mechanical drawing
specifications, thereby eliminating the need to subcontract ductwork or piping
fabrication. The Company's CAD/CAM systems are capable of automatically cutting
ductboard, sheet metal and piping, thereby reducing the amount of labor
necessary to produce the ductwork and piping for the system. Project specific
components are then fabricated at the Company's facilities in sections small
enough to be transported to the job site. This enables the Company to limit the
amount of field work required for installation, reduce the labor associated with
the actual installation process and meet the shorter time requirements
increasingly demanded by commercial and industrial customers. The Company
installs the system at the project site, working closely with the general
contractor. Most commercial and industrial installation projects last from two
weeks to one year and generate revenues from $25,000 to $2,000,000 per project.
These projects are generally billed periodically as costs are incurred
throughout the project, with a 10% retainage until completion and successful
start-up of the HVAC system.
Atlas, one of the Founding Companies, specializes in the design and
installation of HVAC systems for apartment complexes, condominiums, hotels and
elder care facilities. Because the room layouts in these types of buildings are
typically very similar, Atlas is able to design a single HVAC system, or a few
systems, suitable for installation in all units within the project. This permits
Atlas to prepare a "kit" containing all parts for an individual unit and ship
all of the kits for a particular project to the job site, thereby significantly
decreasing installation time.
The Company also performs selected "plan and spec" installation services
when a bidder prequalification process has been used by the customer to limit
the number of potential bidders for an attractive project. The Company may use
these projects when "design and build" projects are in lower demand and to
provide additional on-the-job training to apprentice or less-experienced
technicians.
The Company also installs process cooling systems, control and monitoring
systems and industrial process piping. Process cooling systems are utilized
primarily in industrial facilities to provide heating and/or cooling to precise
temperature and climate standards for products being manufactured and for the
manufacturing equipment. Control systems are used in HVAC and process cooling
systems in order to maintain pre-established temperature or climate standards
for commercial or industrial facilities. These systems use direct digital
technology integrated with computer terminals. HVAC control systems are capable
not only of controlling a facility's entire HVAC system, often on a room-by-room
basis, but can be programmed to integrate energy management, security, fire,
card key access, lighting and overall facility monitoring. Monitoring can be
performed on-site or remotely through a PC-based communications system. The
monitoring system will sound an alarm when the HVAC system is operating outside
pre-established parameters. Diagnosis of potential problems can be performed
from the computer terminal which often can remotely adjust the control system.
Industrial process piping is utilized in manufacturing facilities to convey
required raw materials, support utilities and finished products.
The Company's residential services consist of installing complete central
HVAC systems in new and existing homes, often through agreements with housing
developers. In 1996, residential installation comprised approximately 2% of the
Company's revenues.
The Founding Companies generally warrant their labor for the first year
after installation on new HVAC systems and for 30 days after servicing of
existing HVAC systems. A reserve for warranty costs is recorded based on a
percentage of material costs.
MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. The Company's maintenance,
repair and replacement segment comprised approximately 47% of the Company's 1996
combined revenues and includes the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process piping.
Over one-half of the Company's maintenance, repair and replacement segment
revenues were derived from reconfiguring existing HVAC systems for commercial
and industrial customers. Reconfiguration often utilizes consultative expertise
similar to that provided in the "design and build" installation market. The
Company believes that the reconfiguration of an existing system results in a
more cost-
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effective, energy-efficient system that better meets the specific needs of the
building owner. The reconfiguration also enables the Company to utilize its
design and engineering personnel as well as its sheet metal and pre-fabrication
facilities.
Maintenance and repair services are provided either in response to service
calls or pursuant to a service agreement. Service calls are coordinated by
customer service representatives or dispatchers that use computer and
communications technology to process orders, arrange service calls, communicate
with customers, dispatch technicians and invoice customers. Service technicians
work out of service vans equipped with commonly used parts, supplies and tools
to complete a variety of jobs.
Commercial and industrial service agreements usually have terms of one to
three years, with automatic annual renewals, and typically provide fees from
$3,000 to $20,000 per year. The Company also provides remote monitoring of
temperature, pressure, humidity and air flow for HVAC systems for commercial and
industrial customers. If the system is not operating within the specifications
set forth by the customer and cannot be remotely adjusted, a service crew is
dispatched to analyze and repair the system, as appropriate. Residential service
agreements generally have one year terms, automatic renewal provisions and
provide annual fees between $100 and $200 per system.
SOURCES OF SUPPLY
The raw materials and components used by the Company include HVAC system
components, ductwork, steel, sheet metal and copper tubing and piping. These raw
materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand
may take a month or more to obtain. Chillers for large units typically have the
longest delivery time and generally have lead times of up to six months. The
major components of HVAC systems are compressors and chillers that are
manufactured primarily by York Heating and Air Conditioning Corporation
("York"), Carrier Corporation and Trane Air Conditioning Company. The major
suppliers of control systems are Honeywell Inc., Johnson Controls Inc., York and
Andover Control Corporation. The Company believes that it will be able to reduce
costs on raw materials and components through volume purchases. The Company does
not currently have any significant contracts for the supply of raw materials or
components.
SALES AND MARKETING
The Company has a diverse customer base, with no single customer accounting
for more than 4% of the Company's pro forma combined 1996 revenues. Management
and a dedicated sales force at the Founding Companies have been responsible for
developing and maintaining successful long-term relationships with key
customers. Customers of the Founding Companies generally include building owners
and developers and property managers, as well as general contractors, architects
and consulting engineers. The Company intends to continue its emphasis on
developing and maintaining long-term relationships with its customers by
providing superior, high-quality service in a professional manner. Moreover, the
dedicated sales force will receive additional technical and sales training to
enhance the comprehensive selling skills necessary to serve the HVAC needs of
its customers.
The Company also intends to capitalize on cross-marketing and business
development opportunities that management believes will be available to the
Company as a national provider of comprehensive commercial, industrial and
residential HVAC services. Management believes that it will be able to leverage
the diverse technical and marketing strengths of individual Founding Companies
to expand the services offered in other local markets. Eventually, the Company
intends to offer comprehensive services from many of its regional locations.
EMPLOYEES
As of July 29, 1997 the Company had 1,482 employees, including 98
management personnel, 1,160 engineers and service and installation technicians,
67 sales personnel and 157 administrative personnel. The Company does not
anticipate any reductions in staff as a result of the recent consolidation of
the Founding Companies. Rather, as it implements its internal growth and
acquisition strategies, the Company expects
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that the number of employees will increase. Three of the Founding Companies have
collective bargaining agreements which cover, in the aggregate, fewer than 50
employees. Under these agreements, these Founding Companies make payments to
multi-employer pension plans. The Company has not experienced any strikes or
work stoppages and believes its relationship with its employees and union
representatives is satisfactory.
RECRUITING, TRAINING AND SAFETY
The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians, field
supervisors and project managers. The Company believes that its success in
retaining qualified employees will be based on the quality of its recruiting,
training, compensation, employee benefits programs and opportunities for
advancement. The Company recruits at local technical schools and community
colleges where students focus on learning basic HVAC and related skills, and
provides on-the-job training, apprenticeship programs, improved benefit
packages, steady employment and opportunities for advancement.
The Company intends to establish "best practices" throughout its
operations to ensure that all technicians comply with safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company's employment screening process seeks to
determine that prospective employees have the requisite skills, sufficient
background references and acceptable driving records, if applicable. The Company
believes that these employment criteria effectively identify potential employees
committed to safety and quality. Additionally, the Company intends to implement
a "best practices" safety program throughout its operations, which will
provide employees with incentives to improve safety performance and decrease
workplace accidents. The Company intends to implement job site safety meetings
and instruct personnel in proper lifting techniques and eye safety in an effort
to reduce the number of preventable accidents.
FACILITIES AND VEHICLES
All of the Company's facilities are leased. See "Certain
Transactions -- Leases of Real Property by Founding Companies."
The Founding Companies collectively lease approximately 250,000 square feet
of commercial property, which they utilize for office, warehouse, fabrication
and storage space. Leased premises range in size from 50,200 square feet, in the
case of Quality, to 7,000 square feet and 6,500 square feet in the case of
Eastern and Seasonair, respectively. In addition, Atlas currently leases 14
one-bedroom apartments for technicians and installation crews working on
projects around the country. The Company believes that the opportunities for
some of the Founding Companies to use fabrication and storage facilities of
other Founding Companies for sheet metal cutting, equipment fabrication and
inventory storage will increase operating efficiencies for the Company as a
whole. The Company believes that its facilities are sufficient for its current
needs.
The Company operates a fleet of approximately 600 owned or leased service
trucks, vans and support vehicles. It believes these vehicles generally are
well-maintained and adequate for the Company's current operations. The Company
expects it will be able to purchase vehicles at lower prices due to its
increased purchasing volume.
The Company leases its principal executive and administrative offices in
Houston, Texas and is currently in the process of relocating within Houston,
Texas.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company has obtained and intends
to maintain liability insurance for bodily injury and third party property
damage which it considers sufficient to insure against these risks, subject to
self-insured amounts. The workers' compensation insurance policies held by the
Founding Companies generally provide for first dollar coverage.
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The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. The Company is
not currently involved in any litigation, nor is the Company aware of any
threatened litigation, that the Company believes is likely to have a material
adverse effect on its financial condition or results of operations.
The Company generally offers one year warranties on labor it performs and
passes to the customer warranties on equipment purchased from manufacturers. The
Company does not expect warranty claims to have a material effect on its results
of operations or financial condition.
COMPETITION
The HVAC industry is highly competitive. The Company believes that
purchasing decisions in the commercial and industrial markets are based on (i)
long-term customer relationships, (ii) quality, timeliness and reliability of
services provided, (iii) competitive price, (iv) range of services provided, and
(v) scale of operation. The Company believes its strategy of becoming a leading
national provider of comprehensive HVAC installation services as well as
maintenance, repair and replacement of HVAC systems directly addresses these
factors. Specifically, the Company's strategy to focus on the highly
consultative "design and build" installation segment and the maintenance,
repair and replacement segment, as well as its strategy to operate on a
decentralized basis, should promote the development and strengthening of
long-term customer relationships. In addition, the Company's focus on
attracting, training and retaining quality employees by utilizing professionally
managed recruiting, training and benefits programs should allow it to offer high
quality, comprehensive HVAC services at a competitive price.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are a few public companies
focused on providing HVAC services in some of the same services lines provided
by the Company. In addition, there are a number of private companies attempting
to consolidate HVAC companies on a regional or national basis. In the future,
competition may be encountered from new entrants, such as public utilities and
HVAC manufacturers. Certain of the Company's competitors and potential
competitors may have greater financial resources than the Company to finance
acquisition and development opportunities, to pay higher prices for the same
opportunities or to develop and support their own operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations, including, (i) licensing requirements applicable to
service technicians, (ii) building and HVAC codes and zoning ordinances, (iii)
regulations relating to consumer protection, including those governing
residential service agreements and (iv) regulations relating to worker safety
and protection of the environment. The Company believes it has all required
licenses to conduct its operations and is in substantial compliance with
applicable regulatory requirements. Failure of the Company to comply with
applicable regulations could result in substantial fines or revocation of the
Company's operating licenses.
Many state and local regulations governing the HVAC services trades require
permits and licenses to be held by individuals. In some cases, a required permit
or license held by a single individual may be sufficient to authorize specified
activities for all the Company's service technicians who work in the state or
county that issued the permit or license. The Company intends to implement a
policy to ensure that, where possible, any such permits or licenses that may be
material to the Company's operations in a particular geographic region are held
by at least two Company employees within that region.
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons ("CFCs")
and certain other refrigerants. Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
equipment containing these refrigerants and also regulate the containment and
recycling of these refrigerants. These requirements have increased the Company's
training expenses and expenditures for containment and recycling equipment. The
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Clean Air Act is intended ultimately to eliminate the use of CFCs in the United
States and to require alternative refrigerants to be used in replacement HVAC
systems. As a result, the number of conversions of existing HVAC systems which
use CFCs to systems using alternative refrigerants is expected to increase.
Prior to entering into the agreements relating to the Mergers, the Company
evaluated the properties owned or leased by the Founding Companies and engaged
an independent environmental consulting firm to conduct or review assessments of
environmental conditions at these properties. No material environmental problems
were discovered in these reviews, and the Company is not aware of any material
environmental liabilities associated with these properties.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning the Company's
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Fred M. Ferreira........................ 54 Chairman of the Board, Chief Executive Officer and President
Michael Nothum, Jr...................... 43 Chief Operating Officer (acting), President of Tri-City,
Director
J. Gordon Beittenmiller................. 38 Senior Vice President, Chief Financial Officer and Director
Reagan S. Busbee........................ 33 Senior Vice President
William George, III..................... 32 Vice President, General Counsel and Secretary
Milburn E. Honeycutt.................... 33 Vice President and Controller
S. Craig Lemmon......................... 45 Vice President -- Acquisitions
Brian J. Vensel......................... 36 Vice President -- Acquisitions
Brian S. Atlas.......................... 45 Chief Executive Officer of Atlas, Director
Thomas J. Beaty......................... 43 President of Accurate, Director
Robert R. Cook.......................... 42 President of Tech, Director
Alfred J. Giardenelli, Jr............... 50 President of Eastern, Director
Charles W. Klapperich................... 50 President of Western, Director
Samuel M. Lawrence III.................. 45 Chief Executive Officer of Lawrence, Director
John C. Phillips........................ 55 President of CSI/Bonneville, Director
Robert J. Powers........................ 57 President of Quality, Director
Steven S. Harter........................ 35 Director
Larry Martin............................ 55 Director
John Mercadante, Jr..................... 52 Director
Robert Arbuckle......................... 47 President of Freeway
James C. Hardin, Sr..................... 35 Chief Executive Officer of Seasonair
Thomas B. Kime.......................... 50 President of Standard
</TABLE>
Fred M. Ferreira has served as Chairman of the Board, Chief Executive
Officer and President of Comfort Systems since January 1997. Mr. Ferreira was
responsible for introducing the consolidation opportunity in the commercial and
industrial HVAC industry to Notre and has been primarily responsible for the
organization of Comfort Systems, the acquisition of the Founding Companies and
this Offering. From 1995 through 1996, Mr. Ferreira was a private investor. He
served as Chief Operating Officer and a director of Allwaste, Inc., a
publicly-traded environmental services company ("Allwaste"), from 1994 to
1995, and was President of Allwaste Environmental Services, Inc., the largest
division of Allwaste, from 1991 to 1994. From 1989 to 1990, Mr. Ferreira served
as President of Allied Waste Industries, Inc., an environmental services
company. Prior to that time, Mr. Ferreira served as Vice President -- Southern
District and in various other positions with Waste Management, Inc., an
environmental services company.
Michael Nothum, Jr. is a director of the Company and its Chief Operating
Officer (acting). He has been employed by Tri-City since 1979, serving as
President since 1992. Mr. Nothum currently serves on the Education and Training
Committee of Associated Builders and Contractors and on the Legislative
Committee of the Air Conditioning Contractors Association. It is anticipated
that Mr. Nothum will return full-time to his duties at Tri-City when a permanent
Chief Operating Officer joins the Company.
J. Gordon Beittenmiller has served as Senior Vice President, Chief
Financial Officer and a director of Comfort Systems since February 1997. From
1994 to February 1997, Mr. Beittenmiller was Corporate Controller of Keystone
International, Inc. ("Keystone"), a publicly-traded manufacturer of industrial
valves and actuators, and served Keystone in other financial positions from 1991
to 1994. From 1987 to
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1991, he was Vice President -- Finance of Critical Industries, Inc., a
publicly-traded manufacturer and distributor of specialized safety equipment.
From 1982 to 1987, he held various positions with Arthur Andersen LLP. Mr.
Beittenmiller is a Certified Public Accountant.
Reagan S. Busbee has served as Senior Vice President of Comfort Systems
since January 1997. From 1992 through 1996, Mr. Busbee served as Vice President
of Chas. P. Young Co., a financial printer and a wholly-owned subsidiary of
Consolidated Graphics Inc., a publicly-traded company. From August 1986 to May
1992, he was a certified public accountant with Arthur Andersen LLP.
William George, III has served as Vice President, General Counsel and
Secretary of Comfort Systems since March 1997. From October 1995 to March 1997,
Mr. George was Vice President and General Counsel of American Medical Response,
Inc., a publicly-traded consolidator of the healthcare transportation industry.
From September 1992 to September 1995, Mr. George practiced corporate and
antitrust law at Ropes & Gray, a law firm.
Milburn E. Honeycutt has served as Vice President and Controller of Comfort
Systems since February 1997. From 1994 to January 1997, Mr. Honeycutt was
Financial Accounting Manager -- Corporate Controllers Group for Browning-Ferris
Industries, Inc., a publicly-traded waste services company. From 1986 to 1994,
he held various positions with Arthur Andersen LLP. Mr. Honeycutt is a Certified
Public Accountant.
S. Craig Lemmon is Vice President -- Acquisitions. Mr. Lemmon has been a
consultant to Comfort Systems since its inception in December 1996. From 1993 to
1996, he served as Manager of Mergers and Acquisitions of Allwaste Environmental
Services, Inc. From 1992 to 1993, he served as Vice President -- Acquisitions
and Vice President -- Southern Region of United Waste Systems, Inc., an
environmental services company. Prior thereto, Mr. Lemmon held various positions
in the transportation and solid waste industries.
Brian J. Vensel has served as Vice President -- Acquisitions of the Company
since February 1997. From September 1996 through January 1997, Mr. Vensel served
as Projects Director of the Liquids Business Unit of NGC Corporation, a
publicly-traded gas marketer and processor. From April 1996 through August 1996,
Mr. Vensel served as Corporate Controller and an officer of Phoenix Energy
Products, Inc., a privately-owned, oilfield service company. From 1982 through
March 1996, Mr. Vensel held various positions, primarily with Price Waterhouse
LLP and Arthur Andersen LLP. Mr. Vensel is a Certified Public Accountant.
Brian S. Atlas is a director of the Company. He has been employed by Atlas
since 1974, serving as its Chief Executive Officer since 1983.
Thomas J. Beaty is a director of the Company. He founded and has served as
President of Accurate since 1980.
Robert R. Cook is a director of the Company. He founded and has served as
President of Tech since 1979.
Alfred J. Giardenelli, Jr. is a director of the Company. He has been the
President of Eastern since 1982.
Charles W. Klapperich is a director of the Company. He founded and has
served as President of Western since 1980.
Samuel M. Lawrence III is a director of the Company. He has been employed
by Lawrence since 1977, serving as its Chairman and Chief Executive Officer
since 1991.
John C. Phillips is a director of the Company. He co-founded CSI/Bonneville
in 1969, serving as President and General Manager since 1969. Mr. Phillips was
President of the Utah Heating and Air Conditioning Contractors Association from
1981 to 1982 and is currently a director of that association.
Robert J. Powers is a director of the Company. He has been employed by
Quality since 1977, serving as President since 1988.
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<PAGE>
Steven S. Harter has been a director of the Company since December 1996 and
is the director elected by the holders of the Restricted Common Stock. Mr.
Harter is President of Notre, a consolidator of highly-fragmented industries.
Prior to becoming the President of Notre, Mr. Harter was Senior Vice President
of Notre Capital Ventures, Ltd. ("Notre I") from June 1993 through July 1995
and was the Notre I principal primarily responsible for the initial public
offerings of US Delivery Systems, Inc., a consolidator of the local delivery
industry, and Physicians Resource Group, Inc., a consolidator of eye care
physician management companies. From April 1989 to June 1993, Mr. Harter was
Director of Mergers and Acquisitions for Allwaste. From May 1984 to April 1989,
Mr. Harter was a certified public accountant with Arthur Andersen LLP. Mr.
Harter also serves as a director of Coach USA, Inc. ("Coach").
Larry Martin is a director of the Company. Mr. Martin, a co-founder of
Sanifill, Inc., an environmental services provider ("Sanifill"), served as its
Vice Chairman from March 1992 through August 1996. From July 1991 to February
1992, he was President of Sanifill, and from October 1989 to July 1991, he
served as its President and Co-Chief Executive Officer. Prior to that time, Mr.
Martin served in various positions in the environmental services and contracting
industries. Mr. Martin currently serves on the Board of Directors of USA Waste
Services, Inc., an environmental services company.
John Mercadante, Jr. is a director of the Company. Mr. Mercadante
co-founded Leisure Time Tours, Inc. in 1970 and was President of Cape Transit
Corp. both of which are motor coach companies that were acquired by Coach at the
time of Coach's initial public offering in May 1996. Mr. Mercadante has served
as President, Chief Operating Officer and a director of Coach since its initial
public offering.
Robert Arbuckle has been employed by Freeway since 1975, serving as its
President since 1987.
James C. Hardin, Sr. has been employed by Seasonair since 1986, serving
initially as a service technician, as field supervisor from 1988 to 1990, as
service manager from 1990 to 1993 and as Vice President of Operations from 1993
to March 1997. Mr. Hardin currently serves as Chief Executive Officer of
Seasonair
Thomas B. Kime has been employed by Standard since 1977, serving as its
President since 1996.
The Board of Directors is divided into three classes of four, five and five
directors, respectively, with directors serving staggered three-year terms,
expiring at the annual meeting of stockholders in 1998, 1999 and 2000,
respectively. At each annual meeting of stockholders, one class of directors
will be elected for a full term of three years to succeed that class of
directors whose terms are expiring. All officers serve at the discretion of the
Board of Directors.
The Board of Directors has established an Audit Committee, a Compensation
Committee and an Executive Committee. The members of the Audit Committee and the
Compensation Committee are Messrs. Harter, Mercadante and Martin. The members of
the Executive Committee have yet to be selected and will include at least one
outside director.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive a
fee of $2,000 for attendance at each Board of Directors' meeting and $1,000 for
each committee meeting (unless held on the same day as a Board of Directors'
meeting). In addition, under the Company's 1997 Non-Employee Directors' Stock
Plan, each non-employee director will automatically be granted an option to
acquire 10,000 shares of Common Stock upon such person's initial election as a
director, and an annual option to acquire 5,000 shares at each annual meeting of
the Company's stockholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. Each non-employee director also
may elect to receive shares of Common Stock or credits representing "deferred
shares" in lieu of cash directors' fees. See " -- 1997 Non-Employee Directors'
Stock Plan." Directors are also reimbursed for out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof.
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<PAGE>
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in December 1996 and did not pay any of its
executive officers compensation during 1996. The Company anticipates that during
1997 its five most highly compensated executive officers will be Messrs.
Ferreira, Beittenmiller, George, Nothum and Powers.
Each of Messrs. Ferreira, Beittenmiller and George has entered into an
employment agreement with the Company providing for an annual base salary of
$150,000. Each employment agreement is for a term of three years, and unless
terminated or not renewed by the Company or not renewed by the employee, the
term will continue thereafter on a year-to-year basis on the same terms and
conditions existing at the time of renewal. Each of these agreements provides
that, in the event of a termination of employment by the Company without cause,
the employee will be entitled to receive from the Company an amount equal to one
year's salary, payable in one lump sum on the effective date of termination. In
the event of a change in control of the Company (as defined in the agreement)
during the initial three-year term, if the employee is not given at least five
days' notice of such change in control, the employee may elect to terminate his
employment and receive in one lump sum three times the amount he would receive
pursuant to a termination without cause during such initial term. The
non-competition provisions of the employment agreement do not apply to a
termination without such notice. In the event the employee is given at least
five days' notice of such change in control, the employee may elect to terminate
his employment and receive in one lump sum three times the amount he would
receive pursuant to a termination without cause during such initial term. In
such event, the non-competition provisions of the employment agreement would
apply for two years from the effective date of termination. Each employment
agreement contains a covenant not to compete with the Company for a period of
two years immediately following termination of employment or, in the case of a
termination by the Company without cause in the absence of a change in control,
for a period of one year following termination of employment.
Each of Messrs. Nothum and Powers has entered into an employment agreement
with their respective Founding Company providing for an annual base salary of
$150,000. Each employment agreement is for a term of five years, and unless
terminated or not renewed by the Founding Company or not renewed by the
employee, the term will continue thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal. Each of these agreements
provides that, in the event of a termination of employment by the Founding
Company without cause during the first three years of the employment term (the
"Initial Term"), the employee will be entitled to receive from the Founding
Company an amount equal to his then current salary for the remainder of the
Initial Term or for one year, whichever is greater. In the event of a
termination of employment with cause during the final two years of the initial
five year term of the employment agreement, the employee will be entitled to
receive an amount equal to his then current salary for one year. In either case,
payment is due in one lump sum on the effective date of termination. In the
event of a change in control of the Company (as defined in the agreement) during
the Initial Term, if the employee is not given at least five days' notice of
such change in control, the employee may elect to terminate his employment and
receive in one lump sum three times the amount he would receive pursuant to a
termination without cause during the Initial Term. The non-competition
provisions of the employment agreement do not apply to a termination without
such notice. In the event the employee is given at least five days' notice of
such change in control, the employee may elect to terminate his employment
agreement and receive in one lump sum two times the amount he would receive
pursuant to a termination without cause during the Initial Term. In such event,
the non-competition provisions of the employment agreement would apply for two
years from the effective date of termination. Each employment agreement contains
a covenant not to compete with the Company for a period of two years immediately
following termination of employment or, in the case of a termination by the
Company without cause in the absence of a change in control, for a period of one
year following termination of employment.
At least one principal executive officer of each of the other Founding
Companies has entered into an employment agreement, containing substantially the
same provisions, including a covenant not to compete, as Messrs. Nothum's and
Power's employment agreements.
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<PAGE>
1997 LONG-TERM INCENTIVE PLAN
No stock options were granted to, or exercised by or held by any executive
officer in 1996. In March 1997, the Board of Directors and the Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, key
employees, consultants and other service providers with additional incentives by
increasing their ownership interests in the Company. Individual awards under the
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock appreciation
rights ("SARs"), (iii) restricted or deferred stock, (iv) dividend equivalents
and (v) other awards not otherwise provided for, the value of which is based in
whole or in part upon the value of the Common Stock.
The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards, determined immediately after the grant of any award, may
not exceed the greater of 2,500,000 shares or 13% of the aggregate number of
shares of Common Stock outstanding. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
At the closing of the IPO, NQSOs to purchase a total of 675,000 shares of
Common Stock were granted as follows: 200,000 shares to Mr. Ferreira, 100,000
shares to Mr. Beittenmiller, 100,000 shares to Mr. Busbee, 100,000 shares to Mr.
Lemmon, 75,000 shares to Mr. George, 50,000 shares to Mr. Honeycutt and 50,000
shares to Mr. Vensel. In addition, at the closing of the IPO, options to
purchase 1,469,953 shares were granted to certain employees of the Founding
Companies and to other key employees of the Company. Each of the foregoing
options has an exercise price equal to the initial public offering price per
share. These options will vest at the rate of 20% per year, commencing on the
first anniversary of the IPO and will expire at the earlier of seven years from
the date of grant or three months following termination of employment.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in March 1997, provides for (i) the automatic grant to
each non-employee director serving at the consummation of the IPO of an option
to purchase 10,000 shares, (ii) the automatic grant to each non-employee
director of an option to purchase 10,000 shares upon such person's initial
election as a director and (iii) an automatic annual grant to each non-employee
director of an option to purchase 5,000 shares at each annual meeting of
stockholders thereafter at which such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options have an exercise price per
share equal to the fair market value of the Common Stock on the date of grant
and are immediately vested and expire on the earlier of ten years from the date
of grant or one year after termination of service as a director. The Directors'
Plan also permits non-employee directors to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" at future
settlement dates, as selected by the director. The number of shares or deferred
shares received will equal the number of shares of Common Stock which, at the
date the fees would otherwise be payable, will have an aggregate fair market
value equal to the amount of such fees.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with the formation of Comfort Systems, Comfort Systems issued
to Notre a total of 2,969,912 shares of Common Stock for an aggregate cash
consideration of $29,699. Mr. Harter is the President of Notre and a director of
the Company. In March 1997, Notre exchanged 2,742,912 shares of Common Stock for
an equal number of shares of Restricted Common Stock. Notre advanced $1.4
million to provide funds necessary to effect the Mergers and the IPO. All of
Notre's advances were repaid from the net proceeds of the IPO.
In January and February 1997, the Company issued a total of 902,435 shares
of Common Stock at $.01 per share to various members of management, as follows:
Mr. Ferreira -- 479,435 shares, Mr. Beittenmiller -- 116,000 shares, Mr.
Busbee -- 116,000 shares, Mr. George -- 75,000 shares, Mr. Honeycutt -- 58,000
shares and Mr. Vensel -- 58,000 shares. The Company also issued 116,000 shares
to Mr. Lemmon and 251,500 shares of Common Stock to other consultants to the
Company at $0.01 per share. The Company also granted options to purchase 10,000
shares of Common Stock under the Directors' Plan, effective upon the
consummation of the IPO, to Mr. Harter, a Director of the Company, and to
Messrs. Mercadante and Martin, who became directors of the Company upon the
closing of the IPO.
In connection with the IPO, Comfort Systems acquired by merger or share
exchange all of the issued and outstanding stock of the Founding Companies, each
of which is now a wholly-owned subsidiary of the Company. The aggregate
consideration paid by Comfort Systems in the Mergers consisted of $45.3 million
in cash and 9,720,927 shares of Common Stock. In addition, prior to the Mergers,
Accurate distributed to Thomas J. Beaty real property having a net book value of
approximately $370,000.
The following table sets forth the consideration paid and total debt
assumed by Comfort Systems for each of the Founding Companies:
SHARES OF
COMMON
CASH STOCK TOTAL DEBT
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
Quality.............................. $ 10,082 2,207,158 $ 7,389
Tri-City............................. 8,680 1,557,962 3,479
Atlas................................ 6,864 1,432,000 1,540
Lawrence............................. 4,500 1,197,796 300
Tech................................. 3,997 717,408 1,906
Accurate............................. 3,145 564,537 985
CSI/Bonneville....................... 1,813 493,672 1,385
Western.............................. 2,022 362,939 777
Freeway.............................. 1,039 319,698 203
Seasonair............................ 1,516 272,084 154
Standard............................. 947 291,457 433
Eastern.............................. 698 304,216 1,138
--------- ----------- -----------
Total...................... $ 45,303 9,720,927 $ 19,689
========= =========== ===========
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Additionally, prior to the Mergers, the Founding Companies which are C
Corporations, except Atlas, made Interim Earnings Distributions to their
stockholders in the amount of $1.5 million.
In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors, key employees and holders
of more than 5% of the outstanding shares of the Company, together with their
spouses and trusts for which they act as trustees, received cash and shares of
Common Stock of the Company as follows:
SHARES OF
COMMON
NAME CASH STOCK
- ------------------------------------- --------- -----------
(DOLLARS IN THOUSANDS)
Robert J. Powers..................... $ 8,143 1,461,496
Michael Nothum, Jr................... 4,236 760,287
Robert R. Cook....................... 3,997 717,408
Brian S. Atlas....................... 3,432 716,000
Thomas J. Beaty...................... 3,145 564,537
John C. Phillips..................... 1,310 403,305
Samuel M. Lawrence III............... 1,031 317,307
Alfred J. Giardenelli, Jr............ 698 304,216
Charles W. Klapperich................ 1,423 255,401
Pursuant to the agreements entered into in connection with the Mergers, the
stockholders of the Founding Companies have agreed not to compete with the
Company for five years, commencing on the date of consummation of the IPO.
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Atlas leases its office space in Houston, Texas, as well as mobile homes
located in Austin, Texas; Phoenix, Arizona; and Antioch, Tennessee. These
properties are owned by M & B Interests, Inc. ("M & B"), a corporation
wholly-owned by Mr. Brian S. Atlas, who is a director of the Company, and his
brother, Mr. Michael Atlas. The lease for the real property in Houston expires
on September 30, 1997 and provides for an annual rental of $90,000. The three
single family residences are leased on a month-to-month basis, at an annual
aggregate rental of $36,780. The Company has also agreed to enter into an
agreement with M & B to lease a newly constructed office and warehouse facility
to be constructed by M & B in Houston for an annual rental of $204,000. When
construction is completed, this new office and warehouse facility will replace
Atlas' existing facility. The Company believes that the rent for these
properties does not exceed fair market value.
Tri-City leases its office space in Tempe, Arizona from Mr. Nothum, Jr. and
his father. Mr. Nothum, Jr. is a trustee of a family trust that is a
stockholder of Tri-City and will become a director of the Company upon
consummation of this Offering. The lease expires on June 30, 1998 and provides
for an annual rental of $120,000. Additionally, Tri-City provides liability
insurance on the property and is responsible for any increases in real property
taxes due to its improvement of the leased property. Tri-City has entered into
an agreement with a limited liability corporation owned by Mr. Nothum, Jr. and
his father to lease office, operations and warehouse facilities which are being
constructed, for a ten year term at annual rental of $530,100. The Company
believes that the rent for these properties does not and will not exceed fair
market value.
Lawrence leases its office space and fabrication facility in Jackson,
Tennessee from the father of Mr. Samuel M. Lawrence III, who is Lawrence's Chief
Executive Officer and a director of the Company. The lease expires on October
31, 1997 and provides for an annual rental of $110,400. Additionally, Lawrence
provides liability insurance on the property and pays its proportionate share of
ad valorem taxes, utilities and maintenance costs. The Company believes that the
rent for this property does not exceed fair market value.
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Accurate leases two parcels of real property in Houston, Texas owned by Mr.
Beaty, who is a director of the Company. One of the leased premises is used by
Accurate for office and warehouse space. The lease on one of these premises
expires on June 30, 2002 and provides for an annual rental of $38,000. The other
leased premise is used by Accurate as a sheet metal shop under a lease dated
July 1, 1997, that will expire on June 30, 2002 and will provide for an annual
rental of $46,700. The rental rate on these premises in subsequent years of the
lease term will be adjusted in accordance with the Consumer Price Index.
Additionally, Accurate will pay all utility, taxes and insurance costs on both
leased premises. Accurate has options to renew each lease for two additional
five-year terms. The Company believes that the rent for both properties does not
and will not exceed fair market value. Accurate previously owned the property it
uses for its sheet metal shop. Prior to the Mergers, Accurate distributed this
property having a net book value of approximately $370,000 to Mr. Beaty.
Eastern leases its office and warehouse space in Albany, New York from 60
Loudonville Road Associates ("Loudonville"), a partnership of Mr. Alfred J.
Giardenelli, Jr., who is a director of the Company, and his brother. The lease
provides for annual rental of $55,000 and payment by Eastern of taxes,
maintenance, repairs, utilities and insurance costs on the leased premises. The
Company believes that the rent for this property does not exceed the fair market
value. The lease expires on December 31, 1999. Prior to expiration, however,
Eastern intends to enter into a 10-year lease with Loudonville for a new
building and to terminate the existing lease. Eastern has agreed to install the
HVAC systems in the new building at a price which the Company believes to be at
a fair market value. The Company's annual rental in the new building will be at
fair market value, as determined by an appraisal.
CSI/Bonneville leases its office and warehouse space in Salt Lake Valley,
Utah from J & J Investments, a joint venture partly owned by Mr. Phillips, who
is a director of the Company. This lease expires on February 28, 2002 and
provides for an annual rental in 1997 of $120,720, increasing annually by 5%.
CSI/Bonneville is responsible for ad valorem taxes, maintenance, insurance and
third-party management costs related thereto. CSI/Bonneville has options to
renew the lease for two additional five-year terms at a fair market value, as
determined by an appraisal. The Company believes that the rent for this property
does not exceed fair market value.
Tech leases its office and warehouse space in Solon, Ohio from Mr. Cook,
who is a director of the Company. The lease expires on April 2, 2000, and
provides for an annual rental of $84,000. Tech is responsible for its utility
costs, 15% of common utility costs and 50% of the landlord's cost of servicing
and maintaining the premises and providing comprehensive liability insurance for
the leased premises. The Company believes that the rent for such property does
not exceed fair market value.
Quality leases its warehouse facility in Grand Rapids, Michigan from Mr.
Powers, who is a director of the Company. Construction of the warehouse facility
was financed with the proceeds of a public bond issue. The lease expires on
April 30, 2005, and provides for an annual rental of the greater of $216,000 or
Mr. Powers' costs for the leased warehouse, including bond debt service or
mortgage payments, utilities, insurance, ad valorem taxes, maintenance and
repairs. Quality has an option to renew the lease for one additional three-year
term on the same terms. The Company believes that the rent for such property
does not exceed fair market value. Quality has guaranteed the payment of two
series of public bonds issued in 1985 and 1990, respectively, by the Michigan
Strategic Fund on behalf of two real property development entities owned by Mr.
Powers, the proceeds of which were used to fund the construction of Quality's
leased warehouse facility and a second adjacent warehouse. As of March 1997,
approximately $1.6 million of the bond debt remained outstanding.
The Company has adopted a policy that, whenever possible, it will not own
any real estate. Accordingly, in connection with future acquisitions, the
Company may require the distribution of real property owned by acquired
companies to its stockholders and the leaseback of such property at fair market
value.
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OTHER TRANSACTIONS
Prior to the IPO, Atlas owed $78,000 to Sid Atlas, the father of Brian and
Michael Atlas, payable in monthly installments of $5,500, including interest at
the rate of 10%, through March 1998. Atlas was also the obligor on two
promissory notes payable to Brian S. Atlas and Michael Atlas in the outstanding
principal amount of $63,537 to each, providing for aggregate monthly
installments of $4,812, including interest at the rate of 10%, through June
1999. Shortly after the IPO the Company paid and retired all such indebtedness.
On October 31, 1996, Lawrence loaned $75,000 to Charles Lawrence at an
interest rate of 8%. This note was payable on demand or October 31, 2001, and
was repaid shortly following the IPO. Charles Lawrence is a brother of Samuel M.
Lawrence III, who is a director of the Company on consummation of this Offering.
On December 27, 1996, Accurate borrowed $630,000 from Mr. Beaty. Interest
was payable monthly at the rate of 9% on the outstanding balance. The note
matured on June 30, 1997 and was repaid at that time.
CSI/Bonneville owed Messrs. Phillips and another stockholder of
CSI/Bonneville $424,000 and $105,000, respectively. Two of the promissory notes,
payable to Mr. Phillips and the other stockholder, are in the principal amount
of $80,000 and $20,000, respectively, and are payable on demand. The remaining
eight promissory notes are each payable ten years from the date of the note, and
mature at various times from 2002 to 2006. All of the notes bear interest at
10%, with interest payable monthly and principal payable at maturity. In 1996,
CSI/Bonneville made interest payments to Mr. Phillips and the other stockholder
in the amount of $35,000 and $6,000, respectively.
During 1996, Mr. Klapperich, who is a director of the Company, received
advances from Western aggregating $173,500. On December 31, 1996, Western
credited against this amount a portion of a dividend payable in the amount of
$210,315, discharging the indebtedness of Mr. Klapperich to Western.
On January 2, 1996, Standard loaned Mr. Kime $480,000 under a promissory
note at an interest rate of 7.67%. Mr. Kime has repaid the balance of this note.
The note was formerly secured by a pledge of his shares of stock in Standard;
however, Standard released its security interest in such stock on March 6, 1997
in anticipation of consummation of the Mergers.
The Company has agreed to pay up to an aggregate of $150,000 of the legal
fees of the owners of the Founding Companies.
The Company has agreed to indemnify Notre for liabilities arising in
connection with actions taken by it in connection with its role as a promoter
prior to and during the IPO.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company or its subsidiaries are anticipated to be minimal and will be
approved in advance by a majority of disinterested members of the Board of
Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and the IPO,
by (i) each person known to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each Company director and person who has consented
to be named as a director ("named directors"); (iii) each named executive
officer; and (iv) all executive officers, directors and named directors as a
group. All persons listed have an address c/o the Company's principal executive
offices and have sole voting and investment power with respect to their shares
unless otherwise indicated.
SHARES BENEFICIALLY
OWNED(1)
----------------------
NAME NUMBER PERCENT
- ------------------------------------- ---------- --------
Notre Capital Ventures II, L.L.C..... 2,969,912 14.2%
Steven S. Harter(2).................. 2,979,912 14.2
Robert J. Powers..................... 1,461,915 7.0
Michael Nothum, Jr.(3)............... 778,981 3.7
Robert R. Cook....................... 717,408 3.4
Brian S. Atlas....................... 716,000 3.4
Thomas J. Beaty...................... 564,537 2.7
Fred M. Ferreira..................... 479,535 2.3
John C. Phillips..................... 403,305 1.9
Samuel M. Lawrence III............... 317,307 1.5
Alfred J. Giardenelli, Jr............ 304,216 1.5
Charles W. Klapperich................ 255,401 1.2
J. Gordon Beittenmiller.............. 116,000 *
Reagan S. Busbee..................... 116,000 *
William George, III.................. 75,000 *
Larry Martin(4)(5)................... 27,692 *
John Mercadante, Jr.(4)(5)........... 27,692 *
All executive officers, directors and
named directors
as a group (16 persons)............ 9,340,901 44.5
- ------------
* Less than 1%.
(1) Shares shown do not include shares that could be acquired upon exercise of
options which do not vest within 60 days.
(2) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted under the Directors' Plan and 2,969,912 shares of Common Stock
issued to Notre. Mr. Harter is the President of Notre.
(3) Includes an aggregate of 18,694 shares which are held in irrevocable trusts
for Mr. Nothum's minor children and of which he is trustee.
(4) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted under the Directors' Plan.
(5) Includes 7,692 shares of Common Stock issuable on conversion of a
convertible note issued by Notre which is convertible into Common Stock of
the Company owned by Notre.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 57,969,912 shares
of capital stock, consisting of 50,000,000 shares of Common Stock, 2,969,912
shares of Restricted Common Stock and 5,000,000 shares of Preferred Stock. The
Company has outstanding 20,975,774 shares of Common Stock, which includes
2,742,912 shares of Restricted Common Stock and no shares of Preferred Stock.
The following discussion is qualified in its entirety by reference to the
Restated Certificate of Incorporation of Comfort Systems, which is included as
an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Upon consummation of
this Offering, the Board of Directors will be classified into three classes as
nearly equal in number as possible, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. Cumulative voting for the election of directors is not
permitted. Any director, or the entire Board of Directors, may be removed at any
time, with cause, by of a majority of the aggregate number of votes which may be
cast by the holders of all of the outstanding shares of Common Stock and
Restricted Common Stock entitled to vote for the election of directors, except
that only the holder of the Restricted Common Stock may remove the director such
holder is entitled to elect.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. Holders of Common Stock and holders of Restricted Common Stock
have no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. Shares of Restricted
Common Stock are not subject to any redemption provisions and are convertible
into Common Stock as described below. All outstanding shares of Common Stock and
Restricted Common Stock are, and the shares of Common Stock to be issued
pursuant to this Offering will be, upon payment therefor, fully paid and
non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)), (ii) in the event any person acquires
beneficial ownership of 15% or more of the total number of outstanding shares of
Common Stock, or (iii) in the event any person offers to acquire 15% or more of
the total number of outstanding shares of Common Stock. After July 1, 1998, the
Board of Directors may elect to convert any remaining shares of Restricted
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Common Stock have been previously
converted into shares of Common Stock.
The Common Stock is listed on The New York Stock Exchange under the symbol
"FIX." The Restricted Common Stock is not listed on any exchange.
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PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock and Restricted Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers and
(b) by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
Additionally, the Certificate of Incorporation of the Company provides that
directors and officers of the Company shall be, and at the discretion of the
Board of Directors non-officer employees and agents may be, indemnified by the
Company to the fullest extent authorized by Delaware law, as it now exists or
may in
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the future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the Company,
and further permits the advancing of expenses incurred in defense of claims.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company at an annual or special
meeting of stockholders must be effected at a duly called meeting and may not be
taken or effected by a written consent of stockholders in lieu thereof. The
Company's Bylaws provide that a special meeting of stockholders may be called
only by the Chief Executive Officer, by a majority of the Board of Directors, or
by a majority of the Executive Committee of the Board of Directors. The Bylaws
provide that only those matters set forth in the notice of the special meeting
may be considered or acted upon at that special meeting. To amend or repeal the
Company's Bylaws, an amendment or repeal thereof must first be approved by the
Board of Directors or by affirmative vote of the holders of at least 66 2/3% of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment or repeal.
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company's Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Company's Bylaws. If the Chairman
of the Board of Directors determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York, 10005.
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SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 20,974,774 shares of Common Stock. The
7,015,000 shares sold in the IPO will be freely tradeable without restriction
unless acquired by affiliates of the Company. None of the remaining outstanding
shares of Common Stock or Restricted Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock
(approximately 209,758 shares upon completion of the IPO) or (ii) the average
weekly reported volume of trading of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for a least three months prior to
the sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
The Company and its officers, directors and certain stockholders, who
beneficially own 4,239,947 shares in the aggregate, have agreed not to sell or
otherwise dispose of any shares of Common Stock or Restricted Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except that the Company may issue
Common Stock in connection with acquisitions, in connection with its 1997
Long-Term Incentive Plan and its 1997 Non-Employee Directors' Stock Plan (the
"Plans") or upon conversion of shares of the Restricted Common Stock. See
"Underwriting." In addition, all of the stockholders of the Founding
Companies, the Company's officers and directors and certain stockholders,
holding in the aggregate 13,960,874 shares of Common Stock, have agreed with the
Company that they will not sell any of their shares for a period of one year
after the closing of the IPO. These stockholders, however, have the right, in
the event the Company proposes to register under the Securities Act any Common
Stock for its own account or for the account of others, subject to certain
exceptions, to require the Company to include their shares in the registration,
subject to the right of the Company to exclude some or all of the shares in the
offering upon the advice of the managing underwriter. In addition, certain of
such stockholders have certain limited demand registration rights to require the
Company to register shares held by them following the first anniversary of the
closing of the IPO.
The Company is hereby registering 8,000,000 shares of its Common Stock
under the Securities Act for use by the Company in connection with future
acquisitions. After the effective date of such registration, any such shares
that may be issued will generally be freely tradeable, unless acquired by
persons who become affiliates of the Company. In some instances, however, the
Company may contractually restrict the sale of shares issued in connection with
future acquisitions. The piggyback registration rights described above do not
apply to the registration statement relating to these 8,000,000 shares.
No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital and complete any additional acquisitions for
Common Stock.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the SEC. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a web
site that contains reports, proxy and information statements regarding
registrants that file electronically with the SEC. The address of this web site
is (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
The Common Stock is listed on the New York Stock Exchange. Proxy
statements, reports and other information concerning the Company that are filed
under the Exchange Act can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
COMFORT SYSTEMS USA, INC. (UNAUDITED)
PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro
Forma Combined Financial
Statements..................... F-3
Unaudited Pro Forma Combined
Balance Sheet.................. F-4
Unaudited Pro Forma Combined
Statements of Operations....... F-5
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-7
COMFORT SYSTEMS USA, INC.
Report of Independent Public
Accountants.................... F-11
Balance Sheets.................. F-12
Statement of Operations......... F-13
Statement of Stockholders'
Equity......................... F-14
Statement of Cash Flows......... F-15
Notes to Financial Statements... F-16
FOUNDING COMPANIES
QUALITY AIR HEATING & COOLING, INC.
Report of Independent Public
Accountants.................... F-19
Balance Sheets.................. F-20
Statements of Operations........ F-21
Statements of Shareholders'
Equity......................... F-22
Statements of Cash Flows........ F-23
Notes to Financial Statements... F-24
ATLAS COMFORT SERVICES USA, INC.
AND SUBSIDIARY
Report of Independent Public
Accountants.................... F-29
Consolidated Balance Sheets..... F-30
Consolidated Statements of
Operations..................... F-31
Consolidated Statements of
Shareholders' Equity........... F-32
Consolidated Statements of Cash
Flows.......................... F-33
Notes to Consolidated Financial
Statements..................... F-34
TRI-CITY MECHANICAL, INC.
Report of Independent Public
Accountants.................... F-42
Balance Sheets.................. F-43
Statements of Operations........ F-44
Statements of Shareholders'
Equity......................... F-45
Statements of Cash Flows........ F-46
Notes to Financial Statements... F-47
S.M. LAWRENCE INC. AND RELATED
COMPANY
Report of Independent Public
Accountants.................... F-52
Combined Balance Sheets......... F-53
Combined Statements of
Operations..................... F-54
Combined Statements of
Shareholders' Equity........... F-55
Combined Statements of Cash
Flows.......................... F-56
Notes to Combined Financial
Statements..................... F-57
F-1
<PAGE>
PAGE
-----
ACCURATE AIR SYSTEMS, INC.
Report of Independent Public
Accountants.................... F-63
Balance Sheets.................. F-64
Statements of Operations........ F-65
Statements of Shareholder's
Equity......................... F-66
Statements of Cash Flows........ F-67
Notes to Financial Statements... F-68
EASTERN HEATING AND COOLING, INC.
Report of Independent Public
Accountants.................... F-75
Balance Sheets.................. F-76
Statements of Operations........ F-77
Statements of Shareholder's
Equity......................... F-78
Statements of Cash Flows........ F-79
Notes to Financial Statements... F-80
CONTRACT SERVICE, INC.
Report of Independent Public
Accountants.................... F-85
Balance Sheets.................. F-86
Statements of Operations........ F-87
Statements of Shareholders'
Equity......................... F-88
Statements of Cash Flows........ F-89
Notes to Financial Statements... F-90
TECH HEATING AND AIR CONDITIONING,
INC. AND RELATED COMPANY
Report of Independent Public
Accountants.................... F-95
Combined Balance Sheets......... F-96
Combined Statements of
Operations..................... F-97
Combined Statements of
Shareholders' Equity........... F-98
Combined Statements of Cash
Flows.......................... F-99
Notes to Combined Financial
Statements..................... F-100
SEASONAIR, INC.
Report of Independent Public
Accountants.................... F-105
Balance Sheets.................. F-106
Statements of Operations........ F-107
Statements of Shareholders'
Equity......................... F-108
Statements of Cash Flows........ F-109
Notes to Financial Statements... F-110
WESTERN BUILDING SERVICES, INC.
Report of Independent Public
Accountants.................... F-115
Balance Sheets.................. F-116
Statements of Operations........ F-117
Statements of Shareholders'
Equity......................... F-118
Statements of Cash Flows........ F-119
Notes to Financial Statements... F-120
F-2
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Comfort Systems USA, Inc. ("Comfort Systems") of the
outstanding capital stock of Quality, Atlas, Tri-City, Lawrence, Accurate,
Eastern, CSI/Bonneville, Seasonair, Tech, Western, Freeway and Standard
(together, the "Founding Companies"). These acquisitions (the "Mergers")
occurred concurrently with the closing of Comfort Systems' initial public
offering (the "IPO") and were accounted for using the purchase method of
accounting. Comfort Systems has been identified as the accounting acquirer for
financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the IPO as if they had occurred on March 31, 1997. The unaudited pro forma
combined statements of operations give effect to these transactions as if they
had occurred on January 1, 1996.
Comfort Systems has preliminarily analyzed the savings that it expects to
be realized from reductions in salaries and certain benefits to the owners. To
the extent the owners of the Founding Companies have agreed prospectively to
reductions in salary, bonuses and benefits, these reductions have been reflected
in the pro forma combined statements of operations. With respect to other
potential cost savings, Comfort Systems has not and cannot quantify these
savings until completion of the combination of the Founding Companies. It is
anticipated that these savings will be offset by costs related to Comfort
Systems' new corporate management and by the costs associated with being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been included in the pro forma financial information of
Comfort Systems.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what Comfort
Systems' financial position or results of operations would actually have been if
such transactions in fact had occurred on those dates and are not necessarily
representative of the Comfort Systems' financial position or results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. See "Risk
Factors" included elsewhere herein.
F-3
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE TECH
------- ------ -------- -------- -------- ------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 3,778 $ 356 $2,665 $-- $ 104 $ 131 $ 103 $ 249
Restricted cash and investments...... -- -- 828 -- -- -- -- --
Accounts receivable.................. 6,512 4,764 4,532 3,706 2,330 921 743 1,261
Less allowance...................... 80 100 30 -- 28 25 21 45
------- ------ -------- -------- -------- ------- --------------- ------
Accounts receivable, net............. 6,432 4,664 4,502 3,706 2,302 896 722 1,216
Other receivables.................... 6 -- 66 76 85 27 -- 20
Inventories.......................... 601 1,676 218 255 141 97 491 193
Prepaid expenses and other........... 50 56 2 31 -- -- 4 20
Costs in excess of billings.......... 595 314 380 262 228 48 129
Other................................ 692 145 -- -- -- -- -- --
------- ------ -------- -------- -------- ------- --------------- ------
Total current assets.............. 12,154 7,211 8,661 4,330 2,860 1,199 1,449 1,698
Property and equipment, net.......... 774 598 643 716 932 607 690 484
Goodwill, net........................ -- 22 -- -- -- -- -- --
Other noncurrent assets.............. -- 88 -- 237 -- 174 15 --
------- ------ -------- -------- -------- ------- --------------- ------
Total assets......................... $12,928 $7,919 $9,304 $5,283 $3,792 $1,980 $ 2,154 $2,182
======= ====== ======== ======== ======== ======= =============== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................ $ 695 $ 800 $-- $ 450 $ 716 $ 607 $ 101 $ 969
Accounts payable and accrued
expenses............................ 2,654 3,037 2,408 1,241 1,197 759 657 701
Payable to shareholder/affiliate..... 3,875 -- -- -- 630 -- -- --
Billings in excess of costs and
earnings............................ 988 570 435 890 97 53 218
Deferred income taxes................ -- -- -- 217 -- -- -- --
Other................................ 391 -- -- -- -- -- -- --
------- ------ -------- -------- -------- ------- --------------- ------
Total current liabilities......... 8,603 4,407 2,843 2,798 2,640 1,419 976 1,670
Deferred income taxes................ -- -- -- -- -- -- -- --
Long-term debt, net of current
maturities.......................... 362 1,174 -- -- 149 353 4 32
Payable to shareholder/affiliate..... -- 75 -- -- -- -- 430 --
------- ------ -------- -------- -------- ------- --------------- ------
Total liabilities................. 8,965 5,656 2,843 2,798 2,789 1,772 1,410 1,702
Commitments and contingencies........ -- -- -- -- -- -- -- --
Stockholders' equity:
Common stock........................ 22 1 25 161 1 50 9 1
Additional paid-in-capital.......... 6 -- 105 -- -- -- -- --
Retained earnings................... 4,833 2,262 6,331 2,339 1,002 158 735 482
Treasury stock...................... (898) -- -- (15) -- -- -- (3)
------- ------ -------- -------- -------- ------- --------------- ------
Total stockholders' equity...... 3,963 2,263 6,461 2,485 1,003 208 744 480
------- ------ -------- -------- -------- ------- --------------- ------
Total liabilities and stockholders'
equity.............................. $12,928 $7,919 $9,304 $5,283 $3,792 $1,980 $ 2,154 $2,182
======= ====== ======== ======== ======== ======= =============== ======
OTHER PRO POST
FOUNDING COMFORT PRO FORMA FORMA MERGER AS
SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
--------- ------- --------- -------- ----------- --------- ----------- --------
ASSETS
Cash and cash equivalents............ $ 221 $ 34 $ 227 $ 42 $ (5,760) $ 2,150 $ 34,572 $36,722
Restricted cash and investments...... -- -- -- -- -- 828 -- 828
Accounts receivable.................. 922 641 1,677 -- -- 28,009 -- 28,009
Less allowance...................... 9 -- 69 -- -- 407 -- 407
--------- ------- --------- -------- ----------- --------- ----------- --------
Accounts receivable, net............. 913 641 1,608 -- -- 27,602 -- 27,602
Other receivables.................... 40 6 443 -- -- 769 -- 769
Inventories.......................... 187 86 519 -- -- 4,464 -- 4,464
Prepaid expenses and other........... 49 9 82 -- -- 303 -- 303
Costs in excess of billings.......... 89 91 -- -- -- 2,136 -- 2,136
Other................................ 104 -- -- 2,866 -- 3,807 (2,866) 941
--------- ------- --------- -------- ----------- --------- ----------- --------
Total current assets.............. 1,603 867 2,879 2,908 (5,760) 42,059 31,706 73,765
Property and equipment, net.......... 61 189 288 -- -- 5,982 -- 5,982
Goodwill, net........................ -- -- -- -- 139,790 139,812 -- 139,812
Other noncurrent assets.............. 110 174 32 -- -- 830 -- 830
--------- ------- --------- -------- ----------- --------- ----------- --------
Total assets......................... $ 1,774 $1,230 $ 3,199 $ 2,908 $ 134,030 $188,683 $ 31,706 $220,389
========= ======= ========= ======== =========== ========= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................ $ 91 $ 97 $ 199 $ -- $ -- $ 4,725 $ -- $ 4,725
Accounts payable and accrued
expenses............................ 866 437 1,548 2,866 -- 18,371 (2,866) 15,505
Payable to shareholder/affiliate..... -- -- -- -- 41,428 45,933 (45,303) 630
Billings in excess of costs and
earnings............................ 134 21 44 -- -- 3,450 -- 3,450
Deferred income taxes................ -- -- 49 -- -- 266 -- 266
Other................................ -- -- 120 -- -- 511 -- 511
--------- ------- --------- -------- ----------- --------- ----------- --------
Total current liabilities......... 1,091 555 1,960 2,866 41,428 73,256 (48,169) 25,087
Deferred income taxes................ 17 -- -- -- -- 17 -- 17
Long-term debt, net of current
maturities.......................... 9 241 370 -- 11,025 13,719 -- 13,719
Payable to shareholder/affiliate..... 68 -- -- -- -- 573 -- 573
--------- ------- --------- -------- ----------- --------- ----------- --------
Total liabilities................. 1,185 796 2,330 2,866 52,453 87,565 (48,169) 39,396
Commitments and contingencies........ -- -- -- -- -- -- -- --
Stockholders' equity:
Common stock........................ 78 1 42 42 (293) 140 70 210
Additional paid-in-capital.......... 1 62 419 11,556 88,829 100,978 79,805 180,783
Retained earnings................... 745 371 458 (11,556) (8,160) -- -- --
Treasury stock...................... (235) -- (50) -- 1,201 -- -- --
--------- ------- --------- -------- ----------- --------- ----------- --------
Total stockholders' equity...... 589 434 869 42 81,577 101,118 79,875 180,993
--------- ------- --------- -------- ----------- --------- ----------- --------
Total liabilities and stockholders'
equity.............................. $ 1,774 $1,230 $ 3,199 $ 2,908 $ 134,030 $188,683 $ 31,706 $220,389
========= ======= ========= ======== =========== ========= =========== ========
</TABLE>
F-4
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE
-------- --------- --------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $29,597 $ 30,030 $24,237 $17,163 $16,806 $7,944 $ 7,842
COST OF SERVICES..................... 18,467 25,071 18,561 12,211 13,270 5,276 5,201
-------- --------- --------- --------- --------- ------- ---------------
Gross profit........................ 11,130 4,959 5,676 4,952 3,536 2,668 2,641
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 6,640 2,858 3,903 4,885 3,037 2,237 1,660
GOODWILL AMORTIZATION................ -- -- -- -- -- -- --
-------- --------- --------- --------- --------- ------- ---------------
INCOME FROM OPERATIONS............... 4,490 2,101 1,773 67 499 431 981
OTHER INCOME (EXPENSE):
Interest income..................... -- -- 152 47 -- -- --
Interest expense.................... (154 ) (292) -- -- (80) (87 ) (29)
Other............................... 97 65 89 8 14 40 51
-------- --------- --------- --------- --------- ------- ---------------
INCOME BEFORE INCOME TAXES........... 4,433 1,874 2,014 122 433 384 1,003
PROVISION FOR INCOME TAXES........... -- 750 -- 60 -- -- --
-------- --------- --------- --------- --------- ------- ---------------
NET INCOME........................... $ 4,433 $ 1,124 $ 2,014 $ 62 $ 433 $ 384 $ 1,003
======== ========= ========= ========= ========= ======= ===============
NET INCOME PER SHARE.................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1).............
OTHER
FOUNDING COMFORT PRO FORMA PRO FORMA
TECH SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED
--------- ---------- -------- ---------- -------- ------------ ----------
REVENUES............................. $ 7,537 $6,737 $6,494 $ 13,138 $-- $ -- $ 167,525
COST OF SERVICES..................... 3,996 4,006 4,662 8,991 -- -- 119,712
--------- ---------- -------- ---------- -------- ------------ ----------
Gross profit........................ 3,541 2,731 1,832 4,147 -- -- 47,813
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 1,861 2,597 1,088 3,616 -- (6,568) 27,814
GOODWILL AMORTIZATION................ -- -- -- -- -- 3,495 3,495
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME FROM OPERATIONS............... 1,680 134 744 531 -- 3,073 16,504
OTHER INCOME (EXPENSE):
Interest income..................... -- -- -- 17 -- -- 216
Interest expense.................... (18) (21) (51) -- -- (935) (1,667 )
Other............................... 31 82 (21) 34 -- -- 490
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME BEFORE INCOME TAXES........... 1,693 195 672 582 -- 2,138 15,543
PROVISION FOR INCOME TAXES........... -- 69 -- 49 -- 6,687 7,615
--------- ---------- -------- ---------- -------- ------------ ----------
NET INCOME........................... $ 1,693 $ 126 $ 672 $ 533 $-- $ (4,549) $ 7,928
========= ========== ======== ========== ======== ============ ==========
NET INCOME PER SHARE................. $ 0.44
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)............. 18,180,311
==========
</TABLE>
(1) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO. The 2,795,463 shares excluded
reflects 1,880,463 shares for the net cash proceeds to Comfort Systems from
the IPO, and 915,000 shares purchased by the underwriters pursuant to an
overallotment option.
F-5
<PAGE>
COMFORT SYSTEMS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUALITY ATLAS TRI-CITY LAWRENCE ACCURATE EASTERN CSI/BONNEVILLE
-------- --------- --------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 8,766 $ 6,115 $ 6,791 $ 4,565 $ 2,642 $1,284 $ 1,562
COST OF SERVICES..................... 5,372 4,866 5,946 3,326 2,095 805 1,045
-------- --------- --------- --------- --------- ------- ---------------
Gross profit........................ 3,394 1,249 845 1,239 547 479 517
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 2,094 753 567 698 526 582 458
GOODWILL AMORTIZATION................ -- -- -- -- -- -- --
-------- --------- --------- --------- --------- ------- ---------------
INCOME (LOSS) FROM OPERATIONS........ 1,300 496 278 541 21 (103 ) 59
OTHER INCOME (EXPENSE):
Interest income..................... 38 -- 25 -- 1 -- 2
Interest expense.................... (29 ) (54) -- -- (33) (20 ) (17)
Other............................... (34 ) 17 9 2 7 -- 9
-------- --------- --------- --------- --------- ------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES.... 1,275 459 312 543 (4) (123 ) 53
PROVISION FOR INCOME TAXES........... -- 188 -- 217 -- -- --
-------- --------- --------- --------- --------- ------- ---------------
NET INCOME (LOSS).................... $ 1,275 $ 271 $ 312 $ 326 $ (4) $ (123 ) $ 53
======== ========= ========= ========= ========= ======= ===============
NET INCOME PER SHARE.................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1).............
OTHER
FOUNDING COMFORT PRO FORMA PRO FORMA
TECH SEASONAIR WESTERN COMPANIES SYSTEMS ADJUSTMENTS COMBINED
--------- ---------- -------- ---------- -------- ------------ ----------
REVENUES............................. $ 1,656 $1,831 $1,072 $ 3,221 $ -- $ -- $ 39,505
COST OF SERVICES..................... 1,034 1,165 812 2,334 -- -- 28,800
--------- ---------- -------- ---------- -------- ------------ ----------
Gross profit........................ 622 666 260 887 -- -- 10,705
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 565 644 231 909 11,556 (11,769) 7,814
GOODWILL AMORTIZATION................ -- -- -- -- -- 874 874
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME (LOSS) FROM OPERATIONS........ 57 22 29 (22) (11,556 ) 10,895 2,017
OTHER INCOME (EXPENSE):
Interest income..................... -- -- -- 6 -- -- 72
Interest expense.................... (10) (3) (11) -- -- (207) (384 )
Other............................... 11 28 (2) 15 -- -- 62
--------- ---------- -------- ---------- -------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... 58 47 16 (1) (11,556 ) 10,688 1,767
PROVISION FOR INCOME TAXES........... -- 23 -- -- -- 492 920
--------- ---------- -------- ---------- -------- ------------ ----------
NET INCOME (LOSS).................... $ 58 $ 24 $ 16 $ (1) $(11,556) $ 10,196 $ 847
========= ========== ======== ========== ======== ============ ==========
NET INCOME PER SHARE................. $ 0.05
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)............. 18,180,311
==========
</TABLE>
(1) Includes (i) 2,969,912 shares issued to Notre, (ii) 1,269,935 shares issued
to management of and consultants to Comfort Systems, (iii) 9,720,927 shares
issued to owners of the Founding Companies and (iv) 4,219,537 of the
7,015,000 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration and expenses of the IPO. The 2,795,463 shares excluded
reflects 1,880,463 shares for the net cash proceeds to Comfort Systems from
the IPO, and 915,000 shares purchased by the underwriters pursuant to an
overallotment option.
F-6
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Comfort Systems USA, Inc. ("Comfort Systems") was founded to become a
leading national provider of comprehensive heating, ventilation and air
conditioning ("HVAC") installation services as well as maintenance, repair and
replacement of HVAC systems, focusing primarily on commercial and industrial
markets. Comfort Systems conducted no operations prior to the IPO and acquired
the Founding Companies concurrently with and as a condition to the closing of
the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the three months ended March 31, 1997 and for the year ended
December 31, 1996, with the exception of Lawrence for which the period is as of
and for the three months ended January 31, 1997 and for the fiscal year ended
October 31, 1996. The audited historical financial statements included elsewhere
herein have been included in accordance with Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of the IPO, Comfort
Systems acquired all of the outstanding capital stock of the Founding Companies.
The acquisitions were accounted for using the purchase method of accounting with
Comfort Systems being treated as the accounting acquirer.
The following table sets forth the consideration paid (a) in cash and (b)
in shares of Common Stock to the common stockholders of each of the Founding
Companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of the shares was determined using an estimated fair value
of $10.40 per share (or $101.1 million), which represents a discount of twenty
percent from the initial public offering price of $13.00 due to restrictions on
the sale and transferability of the shares issued. The total estimated purchase
price of $146.4 million for the acquisitions is based upon preliminary estimates
and is subject to certain purchase price adjustments at and following closing.
The table does not reflect the distributions totaling $16.8 million as of March
31, 1997 constituting substantially all of the Founding Companies undistributed
earnings previously taxed to their stockholders ("S Corporation
Distributions").
SHARES
CASH OF COMMON STOCK
--------- ---------------
(DOLLARS IN THOUSANDS)
Quality.............................. $ 10,082 2,207,158
Atlas................................ 6,864 1,432,000
Tri-City............................. 8,680 1,557,962
Lawrence............................. 4,500 1,197,796
Accurate............................. 3,145 564,537
Eastern.............................. 698 304,216
CSI/Bonneville....................... 1,813 493,672
Tech................................. 3,997 717,408
Seasonair............................ 1,516 272,084
Western.............................. 2,022 362,939
Freeway.............................. 1,039 319,698
Standard............................. 947 291,457
--------- ---------------
Total........................... $ 45,303 9,720,927
========= ===============
F-7
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation Distributions of $16.8 million as of
March 31, 1997, (including $3.9 million recorded as a payable to
affiliate at Quality) (See (b) below).
(b) Records the debt obtained to fund the S Corporation Distributions.
(c) Records the liability for the cash portion of the consideration
paid to the stockholders of the Founding Companies in connection
with the Mergers.
(d) Records the purchase of the Founding Companies by Comfort System
consisting of $45.3 million in cash and 9,720,927 shares of Common
Stock valued at $10.40 per share (or $101.1 million) for a total
purchase price of $146.4 million resulting in excess purchase
price of $139.8 million over the net assets acquired of $6.6
million. See Note 2.
(e) Records the cash proceeds of $79.3 million from the issuance of
shares of Comfort Systems Common Stock net of offering costs of
$10.5 million (includes the payment of deferred offering costs of
$4.9 of which $2.9 million was incurred through March 31, 1997).
Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the
Mergers.
(g) Records the cash proceeds of $11.9 million from the purchase of
915,000 shares of Comfort Systems Common Stock by the underwriters
pursuant to an overallotment option net of offering costs of $0.8
million. Offering costs primarily consist of underwriting
discounts and commissions.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ (16,785) $ 11,025 $ -- $ -- $ (5,760)
--------- --------- --------- --------- -----------
Total current assets................ (16,785) 11,025 -- -- (5,760)
Goodwill, net........................... -- -- -- 139,790 139,790
--------- --------- --------- --------- -----------
Total assets............................ $ (16,785) $ 11,025 $ -- $ 139,790 $ 134,030
========= ========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholder/affiliate........ $ (3,875) $ -- $ 45,303 $ -- $ 41,428
--------- --------- --------- --------- -----------
Total current liabilities........... (3,875) -- 45,303 -- 41,428
--------- --------- --------- --------- -----------
Long-term debt, net of current
maturities............................ -- 11,025 -- -- 11,025
--------- --------- --------- --------- -----------
Total liabilities................... (3,875) 11,025 45,303 -- 52,453
Stockholders' equity:
Common stock........................ -- -- -- (293) (293)
Additional paid-in capital.......... (12,910) -- (45,303) 147,042 88,829
Retained earnings................... -- -- -- (8,160) (8,160)
Treasury stock...................... -- -- -- 1,201 1,201
--------- --------- --------- --------- -----------
Total stockholders' equity..... (12,910) -- (45,303) 139,790 81,577
--------- --------- --------- --------- -----------
Total liabilities and stockholders'
equity................................ $ (16,785) $ 11,025 $ -- $ 139,790 $ 134,030
========= ========= ========= ========= ===========
POST MERGER
(E) (F) (G) ADJUSTMENTS
--------- --------- --------- -----------
ASSETS
Cash and cash equivalents............... $ 68,813 $ (45,303) $ 11,062 $ 34,572
--------- --------- --------- -----------
Other............................... (2,866) -- -- (2,866)
Total current assets................ 65,947 (45,303) 11,062 31,706
--------- --------- --------- -----------
Total assets............................ $ 65,947 $ (45,303) $ 11,062 $ 31,706
========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses... $ (2,866) $ -- $ -- $ (2,866)
Payable to shareholder/affiliate........ -- (45,303) -- (45,303)
--------- --------- --------- -----------
Total current liabilities........... (2,866) (45,303) -- (48,169)
--------- --------- --------- -----------
Total liabilities................... (2,866) (45,303) -- (48,169)
Stockholders' equity:
Common stock........................ 61 -- 9 70
Additional paid-in capital.......... 68,752 -- 11,053 79,805
Retained earnings................... -- -- -- --
Treasury stock...................... -- -- -- --
--------- --------- --------- -----------
Total stockholders' equity..... 68,813 -- 11,062 79,875
--------- --------- --------- -----------
Total liabilities and stockholders'
equity................................ $ 65,947 $ (45,303) $ 11,062 $ 31,706
========= ========= ========= ===========
</TABLE>
F-8
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1996
(a) Reflects the reduction in salaries, bonuses and benefits from an
aggregate total of $9.0 million to $2.4 million to the owners of
the Founding Companies to which they have agreed prospectively.
These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such
employment agreements are primarily for 5 years, contain
restrictions related to competition and provide severance for
termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life.
(c) Reflects the interest expense on borrowings of $12.5 million
necessary to fund the S Corporation Distributions.
(d) Reflects the incremental provision for federal and state income
taxes relating to the other statements of operations adjustments
and for income taxes on S Corporation income.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (6,568) $ -- $ -- $ -- $(6,568)
GOODWILL AMORTIZATION................ -- 3,495 -- -- 3,495
--------- --------- --------- --------- -----------
INCOME (LOSS) FROM OPERATIONS........ 6,568 (3,495) -- -- 3,073
OTHER INCOME (EXPENSE):
Interest expense................ -- -- (935) -- (935)
--------- --------- --------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... 6,568 (3,495) (935) -- 2,138
PROVISION FOR INCOME TAXES........... -- -- -- 6,687 6,687
--------- --------- --------- --------- -----------
NET INCOME (LOSS).................... $ 6,568 $ (3,495) $ (935) $ (6,687) $(4,549)
========= ========= ========= ========= ===========
</TABLE>
F-9
<PAGE>
COMFORT SYSTEMS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1997
(a) Reflects the reduction in salaries, bonuses and benefits from an
aggregate total of $1.0 million to $0.6 million to the owners of
the Founding Companies to which they have agreed prospectively.
These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such
employment agreements are primarily for 5 years, contain
restrictions related to competition and provide severance for
termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life.
(c) Reflects the interest expense on borrowings of $11.0 million
necessary to fund the S Corporation Distributions.
(d) Reflects the incremental provision for federal and state income
taxes relating to the other statements of operations adjustments
and for income taxes on S Corporation income.
(e) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $11.6 million
recorded by Comfort in the first quarter of 1997 related to Common
Stock issued to management of and consultants to the Company
offset by the increase in compensation expense related to the
on-going salaries of the management of Comfort Systems of $0.2
million in the first quarter of 1997. The issuances of Common
Stock were made in contemplation of the Mergers and the IPO, and
no future issuances of this nature are anticipated.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------------------ PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (428) $ -- $ -- $ -- (11,341) $ (11,769)
GOODWILL AMORTIZATION................ -- 874 -- -- -- 874
--------- --------- --------- --------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS........ 428 (874) -- -- 11,341 10,895
OTHER INCOME (EXPENSE):
Interest expense................ -- -- (207) -- -- (207)
--------- --------- --------- --------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... 428 (874) (207) -- 11,341 10,688
PROVISION FOR INCOME
TAXES.............................. -- -- -- 492 -- 492
--------- --------- --------- --------- ---------- -----------
NET INCOME (LOSS).................... $ 428 $ (874) $ (207) $ (492) $ 11,341 $ 10,196
========= ========= ========= ========= ========== ===========
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comfort Systems USA, Inc.:
We have audited the accompanying balance sheet of Comfort Systems USA, Inc.
as of December 31, 1996. 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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Comfort Systems USA, Inc. as
of December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 25, 1997
F-11
<PAGE>
COMFORT SYSTEMS USA, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS............... $ 1 $ 42
DEFERRED OFFERING COSTS................. 177 2,866
------------ -----------
Total assets.................. $ 178 $ 2,908
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
ACCRUED LIABILITIES AND AMOUNTS DUE TO
STOCKHOLDER........................... $ 177 $ 2,866
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par,
5,000,000 authorized, none issued
and outstanding.................. -- --
Common stock, $.01 par, 52,969,912
shares authorized, 121,139 and
4,239,847 shares issued and
outstanding, respectively........ 1 42
Additional paid in capital......... -- 11,556
Retained deficit................... -- (11,556)
------------ -----------
Total stockholder's equity.... 1 42
------------ -----------
Total liabilities and
stockholder's equity....... $ 178 $ 2,908
============ ===========
Reflects a 121.1387-for-one stock split effective on March 19, 1997.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(IN THOUSANDS)
REVENUES............................. $ --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 11,556
----------
LOSS BEFORE INCOME TAXES............. (11,556)
INCOME TAX BENEFIT................... --
----------
NET LOSS............................. $ (11,556)
==========
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 12, 1996)
THROUGH MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Initial Capitalization............... 121,139 $ 1 $ -- $ -- $ 1
----------- ------ ---------- -------- --------------
BALANCE, December 31, 1996........... 121,139 1 -- -- 1
Issuance of Management Shares
(unaudited)..................... 4,118,708 41 11,556 -- 11,597
Net loss (unaudited)............ -- -- -- (11,556) (11,556)
----------- ------ ---------- -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 4,239,847 $ 42 $ 11,556 $(11,556) $ 42
=========== ====== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss............................. $ (11,556)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities --
Compensation expense related to
issuance of management shares... 11,556
Changes in assets and
liabilities --
Increase in deferred offering
costs........................ (2,689)
Increase in accrued
liabilities and amounts due
to stockholder............... 2,689
----------
Net cash provided by
operating activities...... --
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock.................. 41
----------
Net cash provided by
financing activities...... 41
----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 41
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1
----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 42
==========
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc., a Delaware corporation, ("Comfort Systems" or
the "Company") was founded in December 1996 to become a national provider of
comprehensive HVAC installation services and maintenance, repair and replacement
of HVAC systems, focusing primarily on the commercial and industrial markets.
Comfort intends to acquire 12 U.S. businesses (the "Mergers"), complete an
initial public offering (the "Offering") of its common stock and, subsequent
to the Offering, continue to acquire through merger or purchase, similar
companies to expand its national operations.
Comfort Systems has not conducted any operations, and all activities to
date have related to the Offering and the Mergers. The Company's cash balances
were generated from the initial capitalization of the Company (see Note 3). All
other expenditures to date have been funded by the primary stockholder, Notre
Capital Ventures II, L.L.C. ("Notre"), on behalf of the Company. Since there
were no revenues, expenses or cash flows from Inception (December 12, 1996)
through December 31, 1996, statements of operations and cash flows have been
omitted for this period. Notre has committed to fund the organization expenses
and offering costs. As of December 31, 1996 and March 31, 1997, costs of
approximately $177,000 and $2,866,000 (unaudited), respectively have been
incurred by Notre in connection with the Offering. Comfort Systems has treated
these costs as deferred offering costs. There is no assurance that the pending
Mergers discussed below will be completed or that Comfort Systems will be able
to generate future operating revenues.
2. INTERIM FINANCIAL INFORMATION:
The interim financial statements as of March 31, 1997, and for the three
months then ended are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
3. STOCKHOLDER'S EQUITY:
COMMON STOCK AND PREFERRED STOCK
Comfort Systems effected a 121.1387-for-one stock split on March 19, 1997
for each share of common stock of the Company ("Common Stock") then
outstanding. In addition, the Company increased the number of authorized shares
of Common Stock to 52,969,912 and authorized 5,000,000 shares of $.01 par value
preferred stock. The effects of the Common Stock split and the increase in the
shares of authorized Common Stock have been retroactively reflected on the
balance sheet and in the accompanying notes.
In connection with the organization and initial capitalization of Comfort
Systems, the Company issued 121,139 shares of common stock at $.01 per share to
Notre. In January 1997, the Company issued 2,848,773 additional shares to Notre
for $.01 per share.
In January and February 1997, the Company issued a total of 1,269,935
shares of Common Stock to management and consultants to the Company at a price
of $.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $10.7 million (unaudited) in the first quarter of 1997,
representing the difference between the amount paid for the shares and an
estimated fair value of the shares on the date of sale.
RESTRICTED COMMON STOCK
In March 1997, the primary stockholder exchanged its 2,742,912 shares of
Common Stock for an equal number of shares of restricted voting common stock
("Restricted Common Stock"). The holder of
F-16
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Common Stock is entitled to elect one member of the Company's Board
of Directors and to 0.55 of one vote for each share on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
which is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holders (as defined in Sections 267, 707,
318 and/or 4946 of the Internal Revenue of 1986, as amended)), (ii) in the event
any person acquires beneficial ownership of 15% or more of the total number of
outstanding shares of Common Stock of the Company, or (iii) in the event any
person offers to acquire 15% or more of the total number of outstanding shares
of Common Stock of the Company. After July 1, 1998, the Board of Directors may
elect to convert any remaining shares of Restricted Common Stock into shares of
Common Stock in the event 80% or more of the originally outstanding shares of
Restricted Common Stock have been previously converted into shares of Common
Stock.
LONG-TERM INCENTIVE PLAN
In March 1997, the Company's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options, stock appreciation rights,
restricted or deferred stock, dividend equivalents and other incentive awards to
directors, officers, key employees and consultants to the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of
2,500,000 shares or 13% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's Board of Directors. The Company intends
to file a registration statement on Form S-8 under the Securities Act
registering the issuance of shares upon exercise of options granted under this
Plan. The Company expects to grant non-qualified stock options to purchase a
total of 675,000 shares of Common Stock to key employees of the Company at the
initial public offering price upon consummation of the Offering. In addition,
the Company expects to grant options to purchase a total of 1,271,953 shares of
Common Stock to certain employees of the Founding Companies at the initial
public offering price per share. These options will vest at the rate of 20% per
year, commencing on the first anniversary of the IPO and will expire seven years
from the date of grant or three months following termination of employment.
NON-EMPLOYEE DIRECTORS STOCK PLAN
In March 1997, the Company's stockholders approved the 1997 Non-Employee
Directors' Stock Plan (the "Directors' Plan"), which provides for the granting
or awarding of stock options and stock appreciation rights to nonemployees. The
number of shares authorized and reserved for issuance under the Stock Plan is
250,000 shares. The Directors' Plan provides for the automatic grant of options
to purchase 10,000 shares to each non-employee director serving at the
commencement of the Offering.
Each non-employee director will be granted options to purchase an
additional 10,000 shares at the time of the initial election. In addition, each
director will be automatically granted options to purchase 5,000 shares at each
annual meeting of the stockholders occurring more than two months after the date
of the director's initial election. All options will be exercised at the fair
market value at the date of grant and are immediately vested upon grant.
Options will be granted to each of two future and one current member of the
board of directors to purchase 10,000 shares of Common Stock at the initial
Offering price per share effective upon the consummation of this Offering. These
options will expire the earlier of 10 years from the date of grant or one year
after termination of service as a director.
F-17
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Directors' Plan allows non-employee directors to receive shares
("deferred shares") at future settlement dates in lieu of cash. The number of
deferred shares will have an aggregate fair market value equal to the fees
payable to the directors.
4. STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows entities to choose between a
new fair value based method of accounting for employee stock options or similar
equity instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
5. EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
Wholly-owned subsidiaries of Comfort Systems have acquired by merger or
share exchange 12 companies ("Founding Companies"). The companies are Accurate
Air Systems, Inc., Atlas Comfort Services USA, Inc. and Subsidiary, Contract
Service, Inc., Eastern Heating and Cooling, Inc., Freeway Heating and Air
Conditioning, Inc., Quality Air Heating & Cooling, Inc., Seasonair, Inc., S.M.
Lawrence Inc. and Related Company, Standard Heating and Air Conditioning
Company, Tech Heating and Air Conditioning, Inc. and Related Company, Tri-City
Mechanical, Inc. and Western Building Services, Inc. The aggregate consideration
paid by Comfort Systems to acquire the Founding Companies was approximately
$45.3 million in cash and 9,720,927 shares of Common Stock.
On June 27, 1997, Comfort Systems completed the Offering, which involved
the sale by Comfort Systems of 6,100,000 shares of Common Stock at a price to
the public of $13.00 per share. The net proceeds to Comfort Systems from the
Offering (after deducting underwriting discounts and commissions and offering
expenses) were approximately $69.7 million. Of this amount, $45.3 million was
used to pay the cash portion of the purchase prices relating to the acquisitions
for the Founding Companies. On July 9, 1997, Comfort Systems sold an additional
915,000 shares of Common Stock at $13.00 per share (which represents net
proceeds to the Company of $11.1 million after underwriting discounts and
commissions) pursuant to an overallotment option granted by Comfort Systems to
the underwriters in connection with the Offering. See "Risk Factors" included
elsewhere herein.
The Company has obtained a revolving line of credit of $75.0 million. The
facility is intended to be used for acquisitions, capital expenditures,
refinancing of debt not paid out of the proceeds of the Offering and for general
corporate purposes. The credit facility requires the Company to comply with
various loan covenants including (i) maintenance of certain financial ratios,
(ii) restrictions on additional indebtedness, and (iii) restrictions on liens,
guarantees, advances and dividends. The line of credit is subject to customary
drawing conditions. As of July 28, 1997, borrowings under the line of credit
were $17.3 million which was used to repay existing indebtedness of the Founding
Companies.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quality Air Heating & Cooling, Inc.:
We have audited the accompanying balance sheets of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
related statements of operations, shareholders' equity and cash flows for the
years ended March 31, 1995 and 1996, the nine months ended December 31, 1996,
and the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
results of their operations and their cash flows for the years ended March 31,
1995 and 1996, the nine months ended December 31, 1996 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-19
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31, MARCH 31,
1995 1996 1996 1997
--------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,669 $ 4,191 $ 2,651 $ 3,778
Accounts receivable --
Trade, net of allowance of
$87, $80, $80 and $80,
respectively............ 4,510 4,188 5,260 5,896
Retainage.................. 457 464 453 536
Other receivables.......... 14 12 5 6
Inventories..................... 445 480 541 601
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,192 964 1,312 595
Prepaid expenses and other
current assets................ 92 63 17 50
Federal income tax deposit...... 506 654 691 692
--------- --------- ------------ ------------
Total current
assets............. 8,885 11,016 10,930 12,154
PROPERTY AND EQUIPMENT, net.......... 771 708 758 774
--------- --------- ------------ ------------
Total assets.......... $ 9,656 $ 11,724 $ 11,688 $ 12,928
========= ========= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 470 $ 613 $ 675 $ 695
Accounts payable and accrued
expenses...................... 2,786 2,734 2,178 2,654
Dividends payable to
shareholder................... 1,538 3,314 1,519 3,875
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 897 604 1,254 988
Unearned revenue................ 335 362 372 391
--------- --------- ------------ ------------
Total current
liabilities........ 6,026 7,627 5,998 8,603
LONG-TERM DEBT, net of current
maturities......................... 2,444 1,392 646 362
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
250,000 shares authorized and
issued, 183,993 shares
outstanding................... 22 22 22 22
Additional paid-in capital...... 6 6 6 6
Retained earnings............... 2,056 3,575 5,914 4,833
Treasury stock, 66,007 shares,
at cost....................... (898) (898) (898) (898)
--------- --------- ------------ ------------
Total shareholders'
equity............. 1,186 2,705 5,044 3,963
--------- --------- ------------ ------------
Total liabilities and
shareholders'
equity............. $ 9,656 $ 11,724 $ 11,688 $ 12,928
========= ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS YEAR THREE MONTHS ENDED
MARCH 31, ENDED ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 24,434 $ 32,594 $ 23,282 $ 29,597 $ 6,315 $ 8,766
COST OF SERVICES..................... 15,634 20,850 14,176 18,467 4,291 5,372
--------- --------- ------------ ------------ --------- ---------
Gross profit.................... 8,800 11,744 9,106 11,130 2,024 3,394
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,646 6,791 5,032 6,640 1,608 2,094
--------- --------- ------------ ------------ --------- ---------
Income from operations.......... 2,154 4,953 4,074 4,490 416 1,300
OTHER INCOME (EXPENSE):
Interest expense................ (36) (218) (101) (154) (53) (29)
Other........................... 53 98 60 97 37 4
--------- --------- ------------ ------------ --------- ---------
NET INCOME........................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 400 $ 1,275
========= ========= ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------ ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994................. 250,000 $ 22 $ 6 $ 3,636 $-- $ 3,664
Purchase of treasury stock......... -- -- -- -- (898) (898)
Distributions to shareholders...... -- -- -- (3,751) -- (3,751)
Net income......................... -- -- -- 2,171 -- 2,171
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1995................. 250,000 22 6 2,056 (898) 1,186
Distributions to shareholders...... -- -- -- (3,314) -- (3,314)
Net income......................... -- -- -- 4,833 -- 4,833
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1996................. 250,000 22 6 3,575 (898) 2,705
Distributions to shareholders...... -- -- -- (1,694) -- (1,694)
Net income......................... -- -- -- 4,033 -- 4,033
------- ------ ---------- --------- -------- --------------
BALANCE, December 31, 1996.............. 250,000 22 6 5,914 (898) 5,044
Distribution to shareholders
(unaudited)...................... -- -- -- (2,356) -- (2,356)
Net income (unaudited)............. -- -- -- 1,275 -- 1,275
------- ------ ---------- --------- -------- --------------
BALANCE, March 31, 1997 (unaudited)..... 250,000 $ 22 $ 6 $ 4,833 $ (898) $ 3,963
======= ====== ========== ========= ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED NINE MONTHS YEAR ENDED
MARCH 31 ENDED ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 400 $ 1,275
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 359 371 242 370 121 127
Loss (gain) on sale of property
and equipment................. 7 -- 25 25 3 (1)
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (1,334) 317 (1,054) 335 1,389 (720)
Inventories................ (6) (35) (61) (76) (15) (60)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (804) 228 (348) (253) 95 717
Prepaid expenses and other
current assets.......... (15) 29 46 (3) (49) (33)
Federal income tax
deposit................. 50 (148) (37) (185) (148) (1)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 470 (52) (556) (481) 74 476
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 477 (293) 650 269 (381) (266)
Unearned revenue........... (15) 27 10 26 17 19
--------- --------- ------------ ------------ --------- ---------
Net cash provided by
operating
activities......... 1,360 5,277 2,950 4,460 1,506 1,533
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 21 -- 14 14 4 3
Additions of property and
equipment....................... (467) (308) (331) (455) (123) (145)
--------- --------- ------------ ------------ --------- ---------
Net cash used in
investing
activities......... (446) (308) (317) (441) (119) (142)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 3,000 -- -- -- -- --
Payments of long-term debt......... (226) (909) (684) (903) (219) (264)
Distributions to shareholders...... (3,088) (1,538) (3,489) (3,488) -- --
Purchase of treasury stock......... (898) -- -- -- -- --
--------- --------- ------------ ------------ --------- ---------
Net cash used in
financing
activities......... (1,212) (2,447) (4,173) (4,391) (219) (264)
--------- --------- ------------ ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (298) 2,522 (1,540) (372) 1,168 1,127
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1,967 1,669 4,191 3,023 3,023 2,651
--------- --------- ------------ ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,669 $ 4,191 $ 2,651 $ 2,651 $ 4,191 $ 3,778
========= ========= ============ ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for --
Interest........................ $ 44 $ 201 $ 107 $ 152 $ 45 $ 25
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Quality Air Heating & Cooling, Inc., a Michigan corporation, (the
"Company") focuses on providing "design and build" installation services and
maintenance, repair and replacement of HVAC systems primarily for mid-sized to
large commercial facilities. Quality primarily operates throughout western
Michigan.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
F-24
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering. Included in current assets are deposits to prepay certain of the
shareholders' federal income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Transportation equipment............. 5 $ 1,449 $ 1,554 $1,725
Machinery and equipment.............. 7 480 453 465
Computer and telephone equipment..... 5-7 80 87 90
Leasehold improvements............... 5 838 834 859
Furniture and fixtures............... 7 435 414 459
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (2,511) (2,634) (2,840)
--------- --------- ------------
Property and equipment, net..... $ 771 $ 708 $ 758
========= ========= ============
</TABLE>
F-25
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consists of the
following:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 70 $ 87 $ 80
Additions to costs and expenses...... 142 35 2
Deductions for uncollectible
receivables written off and
recoveries......................... (125) (42) (2)
--------- --------- ------------
$ 87 $ 80 $ 80
========= ========= ============
Accounts payable and accrued expenses consist of the following:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 1,353 $ 1,145 $ 921
Accrued compensation and benefits.... 540 693 426
Other accrued expenses............... 893 896 831
--------- --------- ------------
$ 2,786 $ 2,734 $2,178
========= ========= ============
Installation contracts in progress are as follows:
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 5,240 $ 7,697 $ 7,231
Estimated earnings, net of losses.... 1,556 2,588 2,433
--------- --------- ------------
6,796 10,285 9,664
Less -- Billings to date............. 6,501 9,925 9,606
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 1,192 $ 964 $ 1,312
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (897) (604) (1,254)
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============
5. LONG-TERM DEBT:
Long-term debt consists of a note payable to a bank. The debt is secured by
certain equipment, accounts receivable, inventory, a $1,000,000 life insurance
policy on the president and the personal guaranty of the president limited to 50
percent of the outstanding balance of the loan. The note is payable in monthly
installments of $63,000 including interest at the prime lending rate less .25
percent (8 percent at December 31, 1996). The Company has restrictive and
various financial covenants with which the Company was in compliance at December
31, 1996.
F-26
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The maturities of long-term debt as of December 31, 1996, are as follows
(in thousands):
Year ending December 31,
1997............................ $ 675
1998............................ 646
---------
$ 1,321
=========
The Company has a $2,000,000 line of credit with a bank. The line of credit
expires August 1, 1997, and bears interest at one-half percent below the prime
lending rate. The line of credit is secured by accounts receivable, inventory, a
$1,000,000 life insurance policy, and machinery and equipment. There was no
balance outstanding under this line of credit at March 31, 1995 and 1996, and
December 31, 1996.
6. LEASES:
The Company leases a facility from a company which is owned by one of the
Company's shareholders. The lease expires on April 30, 2005. Quality has an
option to renew the lease for one additional three-year term on the same terms.
The rent paid under this related-party lease was approximately $221,000 for each
of the years ended March 31, 1995 and 1996, and December 31, 1996. The Company
also leases a facility from a third party, which expires on June 30, 1998. The
rent paid under this lease was approximately $20,000 for each of the years ended
March 31, 1995 and 1996, and December 31, 1996. The Company has guaranteed the
payment of two series of public bonds issued in 1985 and 1990, respectively, by
the Michigan Strategic Fund on behalf of two real property development entities
owned by a shareholder, the proceeds of which were used to fund the construction
of the Company's leased warehouse facility and a second adjacent warehouse. As
of March 1997, approximately $1.6 million of the bond debt remained outstanding.
Future minimum lease payments under these non-cancellable operating leases
are as follows (in thousands):
Year ending December 31,
1997............................ $ 241
1998............................ 231
1999............................ 221
2000............................ 221
2001............................ 221
Thereafter...................... 718
---------
$ 1,853
=========
7. RELATED-PARTY TRANSACTIONS:
The Company paid management fees to an entity owned by its majority
shareholder through December 31, 1995. Total management fees paid amounted to
$260,000 and $190,000 for the years ended March 31, 1995 and 1996, respectively.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit sharing plan. The plan
provides for the Company to match one-half of the first 4 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $104,000, $110,000 and $125,000 for the years ending March 31,
1995 and 1996, and December 31, 1996, respectively. The Company may also make
discretionary contributions. The Company made discretionary contributions of
$200,000 and $300,000 for the years ended March 31,
F-27
<PAGE>
QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995 and 1996, and had accrued approximately $169,000 at December 31, 1996, for
contributions to be funded in 1997.
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, a
line of credit, notes payable and debt. The Company believes that the carrying
value of these instruments on the accompanying balance sheet approximates their
fair value.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
The Company is self-insured for medical claims up to $30,000 per year per
covered individual. Additionally, the Company is part of the state's workers'
compensation plan and is responsible for claims up to $275,000 per accident with
a maximum aggregate exposure for twenty-four months of $648,000. Claims in
excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $300,000 letter of credit which expires December 31,
1997. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through March 31, 1995 and 1996 and December
31, 1996.
ROYALTY AGREEMENT
The Company is obligated to pay royalties ranging from 1 percent to 4.5
percent based on the level of service revenues through December 1, 2001, for
management systems support. Royalties paid under this agreement were
approximately $157,000, $159,000 and $165,000 for the years ended March 31, 1995
and 1996 and December 31, 1996.
11. SHAREHOLDERS' EQUITY:
On February 15, 1995, the Company acquired 66,007 shares of common stock
from its majority shareholder for approximately $898,000.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company declared and accrued distributions of
$2,356,000 to its shareholders. In connection with the merger, the Company will
make additional cash distributions of approximately $4,833,000 prior to the
merger which represents the Company's estimated S Corporation accumulated
adjustment account. Had these transactions been recorded at March 31, 1997, the
effect on the accompanying unaudited balance sheet would be a decrease in assets
of $3,478,000, an increase in liabilities of $1,355,000 and a decrease in
shareholders' equity of $4,833,000.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Comfort Services USA, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Comfort Services USA, Inc. (a Texas corporation) and its subsidiary (the
Company) as of June 30, 1995 and 1996 and December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended June 30, 1994, 1995 and 1996 and the six months ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Atlas Comfort Services USA, Inc., and its subsidiary as of June 30, 1995 and
1996, and December 31, 1996, and the consolidated results of their operations
and their cash flows for the three years ended June 30, 1994, 1995 and 1996 and
for the six months ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-29
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31, MARCH 31,
1995 1996 1996 1997
--------- --------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427 $ 391 $ 101 $ 356
Accounts receivable --
Trade, net of allowance of
$60, $60, $100 and $100,
respectively............ 2,920 3,953 2,604 3,226
Retainage.................. 904 1,327 1,208 1,280
Officers, employees and
other receivables....... 114 172 159 158
Inventories..................... 1,685 2,000 1,770 1,676
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,050 681 676 314
Current deferred income taxes... 155 164 145 145
Prepaid expenses and other
current assets................ 40 27 82 56
--------- --------- ------------ ---------
Total current
assets............. 7,295 8,715 6,745 7,211
PROPERTY AND EQUIPMENT, net.......... 231 484 499 598
OTHER ASSETS:
Goodwill, net................... 24 23 22 22
Deferred income tax............. 167 105 88 88
--------- --------- ------------ ---------
Total assets.......... $ 7,717 $ 9,327 $7,354 $ 7,919
========= ========= ============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 500 $ 600 $-- $ 200
Current maturities of notes
payable to affiliates......... 200 102 107 107
Current obligations under
capital leases................ 32 92 101 140
Current maturities of long-term
debt.......................... 9 348 356 353
Accounts payable and accrued
expenses...................... 3,522 3,295 2,246 2,101
Income tax payable.............. 363 390 752 936
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 1,115 1,947 523 570
--------- --------- ------------ ---------
Total current
liabilities........ 5,741 6,774 4,085 4,407
NOTES PAYABLE TO AFFILIATES, net of
current portion.................... 1,271 149 98 75
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 44 133 121 209
LONG-TERM DEBT, net of current
portion............................ 21 1,225 1,058 965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
5,000 shares authorized,
1,000 issued and
outstanding................... 1 1 1 1
Retained earnings............... 639 1,045 1,991 2,262
--------- --------- ------------ ---------
Total shareholders'
equity............. 640 1,046 1,992 2,263
--------- --------- ------------ ---------
Total liabilities and
shareholders'
equity............. $ 7,717 $ 9,327 $7,354 $ 7,919
========= ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- DECEMBER 31, --------------------
1994 1995 1996 1996 1996 1997
--------- --------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 21,848 $ 22,444 $ 29,174 $ 15,545 $ 6,207 $ 6,115
COST OF SERVICES..................... 19,657 19,635 25,449 12,508 5,456 4,866
--------- --------- --------- ------------ --------- ---------
Gross profit..................... 2,191 2,809 3,725 3,037 751 1,249
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,086 2,166 2,843 1,432 631 753
--------- --------- --------- ------------ --------- ---------
Income from operations........... 105 643 882 1,605 120 496
OTHER INCOME (EXPENSE):
Interest expense................. (156) (168) (185) (107) (51) (54)
Other............................ 2 28 (11) 78 -- 17
--------- --------- --------- ------------ --------- ---------
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of a change in accounting
principle.......................... (49) 503 686 1,576 69 459
Provision for income taxes
(benefit).......................... (2) 199 280 630 28 188
--------- --------- --------- ------------ --------- ---------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle..... (47) 304 406 946 41 271
Extraordinary item -- gain on
extinguishment of debt, net of
deferred taxes of $167,000 (Note
5)................................. 273 -- -- -- -- --
--------- --------- --------- ------------ --------- ---------
Income before cumulative effect of a
change in accounting principle..... 226 304 406 946 41 271
Cumulative effect on prior years of a
change in accounting for income
taxes (Note 7)..................... 141 -- -- -- -- --
--------- --------- --------- ------------ --------- ---------
NET INCOME........................... $ 367 $ 304 $ 406 $ 946 $ 41 $ 271
========= ========= ========= ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 1,000 $ 1 $ (32) $ (31)
Net income...................... -- -- 367 367
------- ------- --------- -------------
BALANCE, June 30, 1994............... 1,000 1 335 336
Net income...................... -- -- 304 304
------- ------- --------- -------------
BALANCE, June 30, 1995............... 1,000 1 639 640
Net income...................... -- -- 406 406
------- ------- --------- -------------
BALANCE, June 30, 1996............... 1,000 1 1,045 1,046
Net income...................... -- -- 946 946
------- ------- --------- -------------
BALANCE, December 31, 1996........... 1,000 1 1,991 1,992
Net income (unaudited).......... -- -- 271 271
------- ------- --------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 1,000 $ 1 $ 2,262 $ 2,263
======= ======= ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------- DECEMBER 31, --------------------
1994 1995 1996 1996 1996 1997
--------- --------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 367 $ 304 $ 406 $ 946 $ 41 $ 271
Adjustments to reconcile net
income to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 104 124 92 84 27 33
Cumulative effect of a
change in accounting
principle................. (141) -- -- -- -- --
Extraordinary gain on
extinguishment of debt.... (440) -- -- -- -- --
Deferred income tax
provision................. 167 (196) 54 36 -- --
Changes in operating assets
and liabilities --
(Increase) decrease in --
Accounts receivable......... (1,672) 148 (1,514) 1,481 816 (693)
Inventories................. (264) (554) (315) 230 (460) 94
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... (145) (266) 369 5 317 362
Prepaid expenses and other
current assets............ 121 (14) 13 (55) 124 26
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 1,320 (417) (227) (1,049) (135) (146)
Income tax payable.......... -- 363 27 362 (259) 184
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 585 437 834 (1,424) (445) 47
--------- --------- --------- ------------ --------- ---------
Net cash provided by (used
in) operating
activities................ 2 (71) (261) 616 26 178
--------- --------- --------- ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (139) (67) (121) (50) (96) (131)
--------- --------- --------- ------------ --------- ---------
Net cash used in investing
activities................ (139) (67) (121) (50) (96) (131)
--------- --------- --------- ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of
credit......................... 400 100 100 (600) 240 200
Principal payments on notes
payable to affiliates.......... (38) (261) (1,219) (50) (23) (23)
Borrowings on notes payable to
affiliates..................... 1,202 100 -- 3 -- --
Principal payments on long-term
debt........................... (1,067) (14) (150) (176) (29) (95)
Borrowings on long-term debt..... 41 -- 1,689 15 315 19
Additions to (principal payments
on) capital lease
obligations.................... (29) (37) (74) (48) (9) 107
--------- --------- --------- ------------ --------- ---------
Net cash provided by (used
in) financing
activities................ 509 (112) 346 (856) 494 208
--------- --------- --------- ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 372 (250) (36) (290) 424 255
--------- --------- --------- ------------ --------- ---------
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 305 677 427 391 -- 101
--------- --------- --------- ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 677 $ 427 $ 391 $ 101 $ 424 $ 356
========= ========= ========= ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Income Taxes..................... $ -- $ 30 $ 200 $ 224 $ 200 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Atlas Comfort Services USA, Inc., a Texas corporation, and its subsidiary
(the "Company") is a leading provider of HVAC installation services for
apartment complexes, condominiums and hotels in the United States and also
provides maintenance, repair and replacement of HVAC systems. Atlas primarily
operates in the southwest, northeast, and the mid-Atlantic regions of the United
States.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiary which are under common control and
management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of March 31, 1997, and for
the three months ended March 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the consolidated
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-34
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GOODWILL
Goodwill, in the amount of $33,000, represents the excess of cost over the
fair value of net assets acquired and is amortized using the straight-line
method over 40 years. The Company assesses the recoverability of its goodwill
whenever adverse events occur and believes that no material impairment exists.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-35
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED JUNE 30,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Transportation equipment............. 5 $ 741 $ 987 $1,043
Machinery and equipment.............. 5 116 140 137
Leasehold improvements............... 3 28 28 28
Furniture and fixtures............... 5 266 286 212
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (920) (957) (921)
--------- --------- ------------
Property and equipment,
net..................... $ 231 $ 484 $ 499
========= ========= ============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consists of the
following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 60 $ 60 $ 60
Additions to costs and expenses...... 75 77 42
Deductions for uncollectible
receivables written off and
recoveries......................... (75) (77) (2)
--------- --------- ------------
$ 60 $ 60 $ 100
========= ========= ============
Accounts payable and accrued expenses consist of the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 2,935 $ 2,409 $1,582
Accrued compensation and benefits.... 197 231 163
Accrued warranty expense............. 250 300 310
Other accrued expenses............... 140 355 191
--------- --------- ------------
$ 3,522 $ 3,295 $2,246
========= ========= ============
F-36
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 11,884 $ 12,526 $ 12,643
Estimated earnings, net of losses.... 2,666 2,589 2,582
--------- --------- ------------
14,550 15,115 15,225
Less -- Billings to date............. 14,615 16,381 15,072
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 1,050 681 676
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (1,115) (1,947) (523)
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============
5. DEBT:
LINE OF CREDIT
The Company has a $700,000 revolving line-of-credit facility with a bank at
the prime lending rate plus 1 percent with interest payable monthly. This credit
facility is secured by the Company's cash, accounts receivable, inventory, and
unpledged property and equipment. The credit facility is guaranteed by two of
the Company's officers and is also secured by investment accounts of certain
affiliates. The credit facility had an outstanding balance of $500,000,
$600,000, and $0 at June 30, 1995 and 1996 and December 31, 1996, respectively,
and matures in January 1998. The Company paid approximately $8,000, $33,000 and
$35,000 of interest relating to the revolving credit line for the years ended
June 30, 1994, 1995 and 1996 and $18,500 for the six months ended December 31,
1996.
NOTES PAYABLE TO FINANCIAL INSTITUTIONS
Long-term debt is summarized as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a financial
institution with interest at prime
plus 1%, payable in monthly
installments of $26,667 plus
interest through January 1999, when
the entire balance of unpaid
principal and accrued interest
shall be due and payable........... $ -- $ 1,467 $1,306
Vehicle notes with interest at rates
ranging from 7.9% to 9.4%, payable
in monthly installments through
March 2001......................... 30 106 108
--------- --------- ------------
30 1,573 1,414
Less -- Current maturities........... 9 348 356
--------- --------- ------------
$ 21 $ 1,225 $1,058
========= ========= ============
The note payable to a financial institution is secured by cash, accounts
receivable, inventory, property and equipment, and the personal guarantee of the
two shareholders. In addition, investment accounts of the shareholders and of
certain affiliates of the shareholders are pledged as collateral for the note.
The Company paid interest of $3,000, $3,000 and $73,500 for the years ended June
30, 1994, 1995 and 1996, respectively, and $73,000 for the six months ended
December 31, 1996.
F-37
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1993, the Company and a bank reached a settlement agreement in
which the bank released the Company from its total obligation of approximately
$1,500,000 related to a revolving line of credit, installment notes, equipment
notes and related accrued interest, for a lump sum payment of $1,100,000. The
payment was funded by the proceeds from the notes payable to affiliates
mentioned below. This early extinguishment of debt generated a gain aggregating
$440,000. The Company paid approximately $77,000 in interest during the year
ended June 30, 1994 related to these extinguished notes.
NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates are summarized as follows:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a related party in
monthly installments of $5,500
including interest at 10% through
March 1998, collateralized by stock
of the Company..................... $ 159 $ 105 $ 78
Unsecured note payable to an
affiliate in monthly installments
of $2,500 including interest at 6%
through September 1996............. 326 -- --
Notes payable to Company officers in
monthly installments of $4,812
including interest at 10% through
June 1999.......................... 186 146 127
Notes payable to Company officers
with interest due monthly at the
prime rate through September 1996,
secured by accounts receivable,
certain property and equipment, and
intangible assets.................. 700 -- --
Unsecured note payable to Company
officers with interest and any
unpaid principal balance due August
8, 1995, at the rate of 9%......... 100 -- --
--------- --------- ------------
1,471 251 205
Less -- Current maturities........... 200 102 107
--------- --------- ------------
$ 1,271 $ 149 $ 98
========= ========= ============
The Company paid interest of $116,400, $112,600 and $68,000 related to
notes payable to affiliates for the years ended June 30, 1994, 1995 and 1996,
respectively, and $12,600 for the six months ended December 31, 1996.
The aggregate maturities of notes payable to financial institutions and
affiliates are as follows (in thousands):
Year ending December 31,
1997............................ $ 463
1998............................ 424
1999............................ 718
2000............................ 13
2001 and thereafter............. 1
---------
$ 1,619
=========
F-38
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases vehicles and warehouse facilities under capital and
operating leases expiring through October, 2000. Total rent expense related to
operating leases amounted to $95,000, $143,000 and $180,000 for the years ended
June 30, 1994, 1995 and 1996, respectively, and $60,000 for the six months ended
December 31, 1996.
Future minimum lease payments for capital and noncancelable operating
leases are as follows (in thousands):
NONCANCELABLE
CAPITAL OPERATING
LEASES LEASES
------- -------------
Year ended December 31,
1997............................ $ 117 $ 142
1998............................ 98 23
1999............................ 44 --
2000............................ 6 --
------- -------------
Total minimum lease payments.... 265 165
Amounts representing interest... 43
-------
Present value of net minimum
lease payments................ 222
Less -- Current portion......... 101
-------
Long-term obligation............ $ 121
=======
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ (2) $ 331 $ 193 $ 504
Deferred........................ 141 (164) 43 28
State --
Current......................... -- 64 34 90
Deferred........................ 26 (32) 10 8
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============
</TABLE>
F-39
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Provision at the statutory rate...... $ (16) $ 171 $ 233 $ 536
Increase resulting from --
Permanent differences, mainly
meals and entertainment....... 164 7 19 29
State income tax, net of benefit
for federal deduction......... 17 21 28 65
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounting for long-term contracts... $ 159 $ 74 $ (11)
Warranty reserves.................... 100 123 127
Inventory............................ 32 38 40
Allowance for doubtful accounts...... 36 30 51
Other accrued expenses not deducted
for tax purposes................... 25 62 90
Bases differences on property and
equipment and capital lease
accounting......................... (30) (58) (64)
--------- --------- ------------
Net deferred tax assets.............. $ 322 $ 269 $ 233
========= ========= ============
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Deferred tax assets --
Current......................... $ 209 $ 240 $ 293
Long-term....................... 221 171 149
--------- --------- ------------
Total...................... 430 411 442
--------- --------- ------------
Deferred tax liabilities --
Current......................... (54) (76) (148)
Long-term....................... (54) (66) (61)
--------- --------- ------------
Total...................... (108) (142) (209)
--------- --------- ------------
Net deferred income tax
assets.................. $ 322 $ 269 $ 233
========= ========= ============
The Company adopted the provisions of SFAS No. 109 in fiscal year 1994
resulting in a cumulative effect of a change in accounting principle of
$141,000.
8. RELATED-PARTY TRANSACTIONS:
Two shareholders lease to the Company the main office facility. Total
payments made under this lease agreement amounted to $90,000 for each of the
years ended June 30, 1994, 1995 and 1996, respectively, and $45,000 for the six
months ended December 31, 1996. The Company is in the process of entering into
F-40
<PAGE>
ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an agreement with these shareholders to lease land on which a new facility will
be built. This lease agreement is anticipated to have a twenty year term.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or consolidated
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a Profit Sharing and Savings Plan (the "Plan") which
covers substantially all employees. The employees who participate in the Plan
may contribute 1 percent to 20 percent of their base compensation, and the
Company may make discretionary matching contributions. The Company did not make
any contributions for the years ended December 31, 1994 and 1995. The Company
made $18,248 in contributions for the year ended June 30, 1996 and $12,667 for
the six months ended December 31, 1996.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, notes payable, a line of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheet approximates their fair value.
12. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers are those that account for greater than ten percent
of the Company's revenues. For the year ended June 30, 1996 and the six months
ended December 31, 1996, one customer, a publicly traded Real Estate Investment
Trust, accounted for 14% and 20% of the Company's revenues, respectively.
Receivables outstanding from this customer represented 13% and 12% of the
Company's trade and retainage receivables as of June 30, 1996 and December 31,
1996, respectively. In addition, one of the Company's shareholders has less than
1% ownership in this customer.
During the years ended June 30, 1994, 1995 and 1996 and the six months
ended December 31, 1996, two vendors accounted for 12% and 11%; 29% and 17%; 20%
and 17%; and 15% and 12% of the Company's purchases, respectively.
13. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems providing for the
merger of the Company with the subsidiary of Comfort Systems.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for negotiated amounts and terms.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tri-City Mechanical, Inc.:
We have audited the accompanying balance sheets of Tri-City Mechanical,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tri-City Mechanical, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-42
<PAGE>
TRI-CITY MECHANICAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,551 $1,958 $2,665
Restricted cash................. 383 325 328
Investments..................... -- 493 500
Accounts Receivable --
Trade, net of allowance of
$130, $30 and $30,
respectively............ 4,495 3,734 3,774
Retainage.................. 831 756 728
Other receivables.......... 2 11 66
Inventories..................... 1,183 762 218
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 306 288 380
Prepaid expenses and other
current assets................ 1 12 2
------------ ------------ ------------
Total current assets....... 9,752 8,339 8,661
PROPERTY AND EQUIPMENT, net.......... 508 656 643
------------ ------------ ------------
Total assets............... $ 10,260 $8,995 $9,304
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... $ 2,683 $2,179 $2,408
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 2,207 667 435
------------ ------------ ------------
Total current
liabilities............. 4,890 2,846 2,843
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par 2,500
shares authorized, 2,500
issued and outstanding........ 25 25 25
Additional paid-in capital...... 105 105 105
Retained earnings............... 5,240 6,019 6,331
------------ ------------ ------------
Total shareholders'
equity.................. 5,370 6,149 6,461
------------ ------------ ------------
Total liabilities and
shareholders' equity.... $ 10,260 $8,995 $9,304
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 16,883 $ 25,030 $ 24,237 $ 6,482 $ 6,791
COST OF SERVICES..................... 14,271 19,298 18,561 5,082 5,946
------------ ------------ ------------ --------- ---------
Gross profit.................... 2,612 5,732 5,676 1,400 845
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,219 3,193 3,903 1,026 567
------------ ------------ ------------ --------- ---------
Income from operations.......... 393 2,539 1,773 374 278
OTHER INCOME (EXPENSE):
Interest expense................ (2) (1) -- -- --
Interest income................. 50 132 152 43 25
Other........................... 24 81 89 18 9
------------ ------------ ------------ --------- ---------
NET INCOME........................... $ 465 $ 2,751 $ 2,014 $ 435 $ 312
============ ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,500 $ 25 $ 105 $ 2,577 $ 2,707
Distributions to shareholders... -- -- -- (338) (338)
Net income...................... -- -- -- 465 465
------ ------ ---------- -------- --------------
BALANCE, December 31, 1994........... 2,500 25 105 2,704 2,834
Distributions to shareholders... -- -- -- (215) (215)
Net income...................... -- -- -- 2,751 2,751
------ ------ ---------- -------- --------------
BALANCE, December 31, 1995........... 2,500 25 105 5,240 5,370
Distributions to shareholders... -- -- -- (1,235) (1,235)
Net income...................... -- -- -- 2,014 2,014
------ ------ ---------- -------- --------------
BALANCE, December 31, 1996........... 2,500 25 105 6,019 6,149
Net income (unaudited).......... -- -- -- 312 312
------ ------ ---------- -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 2,500 $ 25 $ 105 $ 6,331 $ 6,461
====== ====== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
TRI-CITY MECHANICAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 465 $ 2,751 $ 2,014 $ 435 $ 312
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 131 134 102 36 26
Deferred income taxes........... (218) -- -- -- --
Loss (gain) on sale of property
and equipment................. -- 1 (10) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Restricted cash............ (73) (75) 58 (22) (3)
Accounts receivable........ (231) (1,306) 827 1,048 (67)
Inventories................ (329) (801) 421 1,037 544
Costs in excess of billings
and estimated earnings
on uncompleted
contracts............... 17 (90) 18 (146) (92)
Prepaid expenses and other
current assets.......... (14) 28 (11) (10) 10
Increase (decrease) in --
Accounts payable and
accrued expenses........ 864 519 (504) (393) 229
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 1,360 508 (1,540) (1,234) (232)
--------- --------- --------- --------- ---------
Net cash provided by
operating
activities......... 1,972 1,669 1,375 751 727
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... -- 18 22 -- --
Additions of property and
equipment....................... (311) (157) (262) (6) (13)
Purchase of investment............. -- -- (493) -- (7)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (311) (139) (733) (6) (20)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in payable to
shareholders.................... (210) -- -- -- --
Borrowings on line of credit....... 19 1 -- -- --
Payments on line of credit......... (17) (15) -- -- --
Distributions to shareholders...... (338) (215) (1,235) -- --
--------- --------- --------- --------- ---------
Net cash used in
financing
activities......... (546) (229) (1,235) -- --
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,115 1,301 (593) 745 707
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 135 1,250 2,551 2,551 1,958
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,250 $ 2,551 $ 1,958 $ 3,296 $ 2,665
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 2 $ 1 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Tri-City Mechanical, Inc., an Arizona corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems primarily for large commercial and
industrial facilities, as well as process piping for industrial facilities.
Tri-City primarily operates in Arizona, California and Nevada.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
The Company also maintains restricted cash which consists of certificates
of deposit. These certificates of deposit are held in a joint checking account
between the contractors and Tri-City for the retainage balance due from
contractors at the completion of the job.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires that investments in debt securities and marketable equity
securities be designated as trading, held-to-maturity or available-for-sale. At
December 31, 1996, investments have been categorized as held-to-maturity, are
stated at cost, and are classified in the balance sheet as current assets.
Investments at December 31, 1996 consist of U.S. Treasury Bills.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
F-47
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset is compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
F-48
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 521 $ 623
Machinery and equipment.............. 10 639 680
Computer and telephone equipment..... 5 121 157
Leasehold improvements............... 5 48 48
Furniture and fixtures............... 6 54 54
--------- ---------
1,383 1,562
Less -- Accumulated depreciation..... (875) (906)
--------- ---------
Property and equipment, net..... $ 508 $ 656
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance at beginning of year......... $ 100 $ 130 $ 130
Additions to costs and expenses...... 184 1 48
Deductions for uncollectible
receivables written off and
recoveries......................... (154) (1) (148)
--------- --------- ---------
$ 130 $ 130 $ 30
========= ========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 2,178 $ 1,749
Accrued compensation and benefits....... 181 97
Warranty reserve........................ 301 278
Other accrued expenses.................. 23 55
--------- ---------
$ 2,683 $ 2,179
========= =========
F-49
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 14,659 $ 8,615
Estimated earnings, net of losses.... 3,865 2,471
--------- ---------
18,524 11,086
Less -- Billings to date............. 20,425 11,465
--------- ---------
$ (1,901) $ (379)
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 306 $ 288
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (2,207) (667)
--------- ---------
$ (1,901) $ (379)
========= =========
5. LONG-TERM DEBT:
The Company has a $1.0 million line of credit with a financial services
company. The line of credit expires October 31, 1997, and bears interest at 9
percent per annum. The line of credit is secured by a lien on accounts
receivable. There was no balance outstanding under this line of credit at
December 31, 1995 or 1996.
6. LEASES:
The Company leases facilities from a company which is wholly owned by one
of the shareholders. The lease expires June 30, 1998. The rent paid under this
related-party lease was approximately $109,000 for the year ended 1996. The
lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property. The lease contains renewal and
termination provisions.
The Company leases vehicles for certain key members of management. The
leases expire October 1, 1999. The lease payments under these vehicle leases
were approximately $6,000, $15,000 and $16,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1997............................ $ 142
1998............................ 65
1999............................ 3
---------
$ 210
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan. The plan provides for the Company to
match 20 percent of the first 6 percent contributed by each employee. Total
contributions by the Company under this plan were approximately $13,000, $22,000
and $24,000 during 1994, 1995 and 1996, respectively. Amounts due to this plan
were approximately $ --, $ -- and $4,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
F-50
<PAGE>
TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
The Company provides accounting services and building maintenance at no
cost to Nothum Properties & SMAC companies which are wholly owned by the
shareholders. The estimated value of the services provided during the years
ended December 31, 1994, 1995 and 1996 was $25,000, $28,000 and $30,000,
respectively.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, and a line of credit. The Company believes that the carrying value
of these instruments on the accompanying balance sheet approximates their fair
value.
11. SALES TO SIGNIFICANT CUSTOMER:
For the years ended December 31, 1994, 1995 and 1996, a customer accounted
for approximately 17, 11 and 11 percent, respectively, of the Company's sales.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger the Company will make a cash distribution of
approximately $6,331,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $2,365,000, an increase in
liabilities of $3,966,000 and a decrease in shareholders' equity of $6,331,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
Tri-City has a verbal commitment with a limited liability corporation owned
by Mr. Nothum, Jr. and his father to construct new office, operations and
warehouse facilities. The Company believes that the rent for its current and
future property does not and will not exceed fair market value.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To S. M. Lawrence Inc.:
We have audited the accompanying combined balance sheets of S. M. Lawrence
Inc. and related company as of October 31, 1995 and 1996, and the related
combined statements of operations, shareholders' equity and cash flows for the
three years ended October 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 S. M. Lawrence Inc.
and related company as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for the three years ended October 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-52
<PAGE>
S. M. LAWRENCE INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
OCTOBER 31,
-------------------- APRIL 30,
1995 1996 1997
--------- --------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 680 $ 327 $ --
Accounts receivable --
Trade......................... 1,457 2,493 1,748
Retainage..................... 454 896 1,249
Other receivables............. 1 1 --
Note receivable from shareholder... 50 75 76
Inventories........................ 215 253 277
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 66 358 539
Prepaid expenses and other current
assets........................... 39 61 204
--------- --------- ---------
Total current assets..... 2,962 4,464 4,093
PROPERTY AND EQUIPMENT, net............. 459 644 721
OTHER NONCURRENT ASSETS................. 138 132 184
--------- --------- ---------
Total assets............. $ 3,559 $ 5,240 $ 4,998
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $ 10 $ -- $ --
Note payable to affiliate.......... -- -- --
Accounts payable and accrued
expenses......................... 1,153 2,737 1,127
Income tax payable................. -- -- 368
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 299 344 790
--------- --------- ---------
Total current
liabilities........... 1,462 3,081 2,285
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 3,000
shares authorized, 1,480 shares
issued and outstanding........... 161 161 161
Treasury stock, at cost............ (15) (15) (15)
Retained earnings.................. 1,951 2,013 2,567
--------- --------- ---------
Total shareholders'
equity................ 2,097 2,159 2,713
--------- --------- ---------
Total liabilities and
shareholders'
equity................ $ 3,559 $ 5,240 $ 4,998
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-53
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 12,758 $ 12,568 $ 17,163 $ 6,736 $ 8,563
COST OF SERVICES........................ 9,797 9,142 12,211 4,958 6,139
--------- --------- --------- --------- ---------
Gross profit....................... 2,961 3,426 4,952 1,778 2,424
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,849 3,477 4,885 1,976 1,630
--------- --------- --------- --------- ---------
Income (loss) from operations......... 112 (51) 67 (198) 794
OTHER INCOME (EXPENSE):
Interest income, net.................. 32 55 47 -- (3)
Other................................. (41) 34 8 16 133
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES.............. 103 38 122 (182) 924
PROVISION FOR INCOME TAXES.............. 50 30 60 (73) 370
--------- --------- --------- --------- ---------
NET INCOME.............................. $ 53 $ 8 $ 62 $ (109) $ 554
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-54
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
--------- ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1993............ 1,480 $ 161 $ 1,890 $ (15) $ 2,036
Net income...................... -- -- 53 -- 53
--------- ------ --------- --------- -------------
BALANCE, October 31, 1994............ 1,480 161 1,943 (15) 2,089
Net income...................... -- -- 8 -- 8
--------- ------ --------- --------- -------------
BALANCE, October 31, 1995............ 1,480 161 1,951 (15) 2,097
Net income...................... -- -- 62 -- 62
--------- ------ --------- --------- -------------
BALANCE, October 31, 1996............ 1,480 161 2,013 (15) 2,159
Net income (unaudited).......... -- -- 554 -- 554
--------- ------ --------- --------- -------------
BALANCE, April 30, 1997
(unaudited)........................ 1,480 $ 161 $ 2,567 $ (15) $ 2,713
========= ====== ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 53 $ 8 $ 62 $ (109) $ 554
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating
activities --
Depreciation and amortization... 263 121 200 86 109
Gain on sale of property and
equipment..................... -- -- -- (1) (120)
Changes in operating assets and
liabilities
(Increase) decrease in --
Accounts receivable........ 262 203 (1,502) (479) 393
Inventories................ (18) (26) (38) 32 (24)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 42 26 (292) (77) (181)
Prepaid expenses and other
assets.................. 46 (13) 3 (92) (143)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ (156) 143 1,584 469 (1,242)
Billings in excess of costs
on uncompleted
contracts............... 33 (171) 45 204 446
--------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities......... 525 291 62 33 (208)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to cash surrender value
of insurance.................... (38) (45) (19) 15 (52)
Purchases to property and
equipment, net.................. (74) (380) (386) (163) (67)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (112) (425) (405) (148) (119)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note receivable from
shareholder..................... -- (2) (10) (25) --
Proceeds received on note from
shareholder..................... -- 12 -- -- --
Payments on note payable to
shareholder..................... (181) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
(used in)
financing
activities......... (181) 10 (10) (25) --
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 232 (124) (353) (140) (327)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 572 804 680 730 327
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 804 $ 680 $ 327 $ 590 $ --
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 14 $ -- $ 5 $ -- $ 3
Income taxes.................... -- 16 14 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
S.M. Lawrence Inc., a Tennessee corporation (the "Company") focuses on
providing "design and build" installation services and process piping
primarily for industrial facilities and maintenance, repair and replacement of
commercial and industrial HVAC systems. S.M. Lawrence primarily operates in
Tennessee and the immediately surrounding states.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include the accounts and results of operations of
S.M. Lawrence Inc. and Lawrence Services, Inc. which are under common control
and management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements as of January 31, 1997, and for
the three months ended January 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the combined
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method of depreciation. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-
F-57
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
completion method measured by the percentage of costs incurred to total
estimated costs for each contract. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor and parts for one year after installation of new
air conditioning and heating systems. A reserve for warranty costs is recorded
upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-58
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED OCTOBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 774 $ 907
Machinery and equipment.............. 7 648 677
Furniture and fixtures............... 5 145 210
Leasehold improvements............... 32 122 231
Construction in process.............. 81 --
--------- ---------
1,770 2,025
Less -- Accumulated depreciation and
amortization....................... (1,311) (1,381)
--------- ---------
Property and equipment,
net..................... $ 459 $ 644
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
OCTOBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 620 $ 1,560
Accrued compensation and benefits.... 466 1,091
Other accrued expenses............... 67 86
--------- ---------
$ 1,153 $ 2,737
========= =========
Installation contracts in progress are as follows (in thousands):
OCTOBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 13,475 $ 15,503
Estimated earnings, net of losses.... 4,193 5,641
--------- ---------
17,668 21,144
Less -- Billings to date............. 17,901 21,130
--------- ---------
$ (233) $ 14
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 66 $ 358
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (299) (344)
--------- ---------
$ (233) $ 14
========= =========
5. LINE OF CREDIT:
The Company had an unsecured bank line of credit at October 31, 1995 and
1996, with an outstanding balance of $0 for all years. The available balance was
$800,000 for 1995 and $850,000 for 1996. The line of credit is secured by
guarantees and is payable upon demand. Interest is payable on the line of credit
at prime plus 1 percent.
F-59
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases facilities from a company which is owned by one of the
shareholders. The lease is for a one-year period and is renewed annually. For
each year ended October 31, 1994, 1995 and 1996, the rent expense under this
related-party lease was $110,400.
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Federal --
Current............................ $ 25 $ 24 $ 54
Deferred........................... 17 1 (3)
State --
Current............................ 5 4 10
Deferred........................... 3 1 (1)
--- --- ---
$ 50 $ 30 $ 60
=== === ===
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes for 1994 and 1995 and 35 percent for 1996 as follows (in
thousands):
OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Provision at the statutory rate......... $ 35 $ 13 $ 39
Increase resulting from --
State income tax, net of benefits
for federal deduction............ 5 3 6
Other.............................. 10 14 15
--- --- ---
$ 50 $ 30 $ 60
=== === ===
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following (in thousands):
OCTOBER 31,
------------------------
1995 1996
----------- -----------
Accruals and reserves not deductible
until paid............................ $ (1) $ 2
----------- -----------
Net deferred income tax assets
(liabilities)......................... $ (1) $ 2
=========== ===========
F-60
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
OCTOBER 31,
------------------------
1995 1996
----------- -----------
Deferred tax assets --
Current............................ $ -- $ 2
----------- -----------
Total......................... -- 2
----------- -----------
Deferred tax liabilities --
Current............................ (1) --
----------- -----------
Total......................... (1) --
----------- -----------
Net deferred income tax assets
(liabilities).............. $ (1) $ 2
=========== ===========
8. RELATED-PARTY TRANSACTIONS:
The Company loans one of the shareholders money annually. In 1994, the
shareholder signed a promissory note for $44,695 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1994. The entire note was repaid during fiscal year 1995. In fiscal year 1995,
the shareholder signed a promissory note for $50,435 to be paid on demand,
accruing interest at eight percent. The entire amount remained outstanding at
year-end 1995. The entire note was repaid during fiscal year 1996. In 1996, the
shareholder signed a promissory note for $75,435 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1996.
The Company entered into a non-compete agreement with a former major
shareholder on November 1, 1991 for $542,562. Under this agreement, the former
shareholder agreed not to compete with the Company for a period of 36 months
beginning with November 1, 1991. The principal to be paid was recorded as an
asset and was fully amortized over 36 months. The last payment of $180,854 was
made during fiscal 1994.
In September 1995, the Company entered into an agreement to purchase
equipment from a related party. The terms of the agreement included a $2,776
cash down payment and a note payable due in one year for $11,852. Payments on
the note were $1,975 and $9,877 during 1995 and 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
The Company has adopted a partially self-funded medical plan. Under this
plan, the Company pays up to $20,000 per year per employee. The Company's
insurance copay pays the remaining amount. For the years ended December 31,
1994, 1995, and 1996 the Company contributed $102,647, $82,866 and $143,788,
respectively. For claims incurred but not yet reported the Company accrued
$25,000 for the years ended December 31, 1995 and 1996.
F-61
<PAGE>
S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) retirement plan which provides for 100
percent matching contribution by the Company, up to a maximum liability of 5
percent of each participating employee's annual compensation. The Company has
the right to make additional discretionary contributions. Total contributions by
the Company under this plan to provide contributions and pay expenses were
$57,434, $141,105 and $368,377 during 1994, 1995, and 1996, respectively.
Amounts due to this plan were approximately $117,508 and $397,000 for the years
ended December 31, 1995 and 1996, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable and a line of credit. The Company
believes that the carrying value of these instruments on the accompanying
balance sheet approximates their fair value.
12. SALES TO SIGNIFICANT CUSTOMER:
During 1996, one customer accounted for approximately 19 percent of the
Company's sales.
13. SUBSEQUENT EVENT:
In December 1996, the Company entered into an agreement to purchase a
one-third interest in an investment. The investment is a partnership and will
own an aircraft, available for use by any of the partners. The Company's cost
for this investment was $100,000. In connection with the agreement, the Company
signed a note payable to the partnership on December 31, 1996 for $100,000 with
interest of 7 percent. This note was fully paid in 1997.
14. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Accurate Air Systems, Inc.:
We have audited the accompanying balance sheets of Accurate Air Systems,
Inc. as of June 30, 1995, December 31, 1995 and 1996, and the related statements
of operations, shareholder's equity and cash flows for each of the years ended
June 30, 1994 and 1995, for the six months ended December 31, 1995, and for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Accurate Air Systems, Inc.,
as of June 30, 1995, December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years ended June 30, 1994 and 1995, for
the six months ended December 31, 1995, and for the year ended December 31, 1996
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-63
<PAGE>
ACCURATE AIR SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1995 1996 1997
-------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 50 $ 33 $ 79 $ 104
Accounts receivable --
Trade, net of allowance of $70,
$70, $33 and $28,
respectively.................. 1,385 1,671 1,778 2,035
Retainage........................ 550 321 725 267
Other receivables................ 8 16 18 85
Inventories........................... 122 129 104 141
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 275 212 231 228
Prepaid expenses and other current
assets............................. 181 81 -- --
-------- ------------ ------------ ------------
Total current assets............. 2,571 2,463 2,935 2,860
PROPERTY AND EQUIPMENT, net............. 804 1,014 925 932
DEFERRED TAX ASSET...................... 14 -- -- --
-------- ------------ ------------ ------------
Total assets..................... $3,389 $3,477 $3,860 $3,792
======== ============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ 88 $ 109 $ 42 $ 16
Accounts payable and accrued
expenses........................... 1,707 1,355 1,236 1,197
Line of credit........................ 374 600 500 700
Note payable -- shareholder........... -- -- 630 630
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 229 206 312 97
-------- ------------ ------------ ------------
Total current liabilities........ 2,398 2,270 2,720 2,640
LONG-TERM DEBT, net of current
maturities............................ 56 175 133 149
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock $1 par, 250,000 shares
authorized, 1,000 shares issued and
outstanding........................ 1 1 1 1
Retained earnings..................... 934 1,031 1,006 1,002
-------- ------------ ------------ ------------
Total shareholder's equity....... 935 1,032 1,007 1,003
-------- ------------ ------------ ------------
Total liabilities and
shareholder's equity.......... $3,389 $3,477 $3,860 $3,792
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED JUNE 30, SIX MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996 1996 1997
-------- -------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $9,763 $ 12,171 $5,585 $ 16,806 $ 3,161 $ 2,642
COSTS OF SERVICES.................... 7,204 8,998 4,312 13,270 2,450 2,095
-------- -------- ------------ ------------ --------- ---------
Gross profit.................... 2,559 3,173 1,273 3,536 711 547
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 2,681 2,960 1,131 3,037 684 526
-------- -------- ------------ ------------ --------- ---------
Income (Loss) from
operations.................... (122) 213 142 499 27 21
OTHER INCOME/(EXPENSE):
Interest expense................ (21) (48) (41) (80) (20) (32)
Other........................... (9) (9) (4) 14 23 7
-------- -------- ------------ ------------ --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.... (152) 156 97 433 30 (4)
-------- -------- ------------ ------------ --------- ---------
PROVISION (BENEFIT) FOR INCOME
TAXES................................ (54) 60 -- -- -- --
-------- -------- ------------ ------------ --------- ---------
NET INCOME (LOSS).................... $ (98) $ 96 $ 97 $ 433 $ 30 $ (4)
======== ======== ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1993............... 1,000 $ 1 $ 941 $ 942
Net loss........................ -- -- (98) (98)
------ ------ -------- -------------
BALANCE, June 30, 1994............... 1,000 1 843 844
Distribution to shareholder..... -- -- (5) (5)
Net income...................... -- -- 96 96
------ ------ -------- -------------
BALANCE, June 30, 1995............... 1,000 1 934 935
Net income...................... -- -- 97 97
------ ------ -------- -------------
BALANCE, December 31, 1995........... 1,000 1 1,031 1,032
Distributions to shareholder.... -- -- (458) (458)
Net income...................... -- -- 433 433
------ ------ -------- -------------
BALANCE, December 31, 1996........... 1,000 $ 1 $1,006 $ 1,007
Net loss (unaudited)............ -- -- (4) (4)
------ ------ -------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 1,000 $ 1 $1,002 $ 1,003
====== ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, SIX MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996 1996 1997
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (98) $ 96 $ 97 $ 433 $ 30 $ (4)
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities --
Depreciation and amortization... 128 124 85 186 31 36
Deferred income tax provision... (150) (70) 81 -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 127 (395) (66) (513) (458) 134
Costs and estimated
earnings in excess of
billings on uncompleted
contracts................. (90) (58) 63 (19) (60) 3
Prepaid expenses and other
current assets............ (1) (44) 31 81 78 --
Inventories................ (22) (16) (7) 25 (9) (37)
Increase (decrease) in --
Accounts payable and
accrued expenses.......... 365 419 (350) (119) 176 (39)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 64 119 (22) 106 71 (215)
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
operating activities........ 323 175 (88) 180 (141) (122)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) of property and
equipment......................... (100) (347) (295) (97) 16 (43)
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
investing activities........ (100) (347) (295) (97) 16 (43)
--------- --------- ------------ ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- 183 192 -- -- --
Payments of long-term debt......... (186) (39) (52) (109) (29) (10)
Borrowings of short-term debt...... -- -- -- 630 -- --
Borrowings on line of credit....... 50 -- 226 -- 160 200
Payments on line of credit......... -- (76) -- (100) -- --
Distributions to shareholder....... -- (5) -- (458) -- --
--------- --------- ------------ ------------ --------- ---------
Net cash provided by (used in)
financing activities........ (136) 63 366 (37) 131 190
--------- --------- ------------ ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 87 (109) (17) 46 6 25
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 72 159 50 33 33 79
--------- --------- ------------ ------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 159 $ 50 $ 33 $ 79 $ 39 $ 104
========= ========= ============ ============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 21 $ 48 $ 41 $ 79 $ 8 $ 33
Income taxes.................... 53 34 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Accurate Air Systems, Inc., a Texas corporation, (the "Company") focuses
on providing "design and build" installation services and maintenance, repair
and replacement of HVAC systems for commercial facilities. Accurate primarily
operates in Texas and Oklahoma.
The Company and its shareholder intend to enter into a definitive agreement
with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Comfort Systems common stock concurrently with the consummation of the
initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CHANGE IN FISCAL YEAR END
Effective July 1, 1995, the Company changed its fiscal year end from June
30 to December 31. The statements of operations, shareholder's equity and cash
flows for the six months ended December 31, 1995 are presented in the
accompanying financial statements. The results of operations for the six month
period are not necessarily indicative of the results for a full year period.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-
F-68
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method measured by the percentage of costs incurred to total
estimated costs for each contract. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 90
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.
INCOME TAXES
Effective July 1, 1995, the Company elected S Corporation status as defined
by the Internal Revenue Code whereby the Company is not subject to taxation for
federal purposes. Under S Corporation status, each shareholder reports his share
of the Company's taxable earnings or losses in his personal federal and state
tax returns. The balance in the deferred tax liability account at July 1, 1995
was credited to income during the six month period ended December 31, 1995.
Prior to July 1, 1995, the Company followed the liability method of
accounting for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes were recorded
based upon differences between the financial reporting and tax bases of assets
and liabilities and were measured using the enacted tax rates and laws that
would have been in effect when the underlying assets or liabilities were
recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
F-69
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES JUNE 30, --------------------
IN YEARS 1995 1995 1996
------------ -------- --------- ---------
<S> <C> <C> <C> <C>
Land................................. -- $ 200 $ 200 $ 200
Buildings............................ 31.5 205 213 213
Transportation equipment............. 5 414 336 241
Machinery and equipment.............. 5 - 7 262 477 510
Leasehold improvements............... 15 - 18 57 60 61
Furniture and fixtures............... 5 - 7 74 122 133
-------- --------- ---------
Less -- Accumulated depreciation and
amortization....................... (408) (394) (433)
-------- --------- ---------
Property and equipment, net..... $ 804 $ 1,014 $ 925
======== ========= =========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --- ---------
Balance at beginning of year......... $ 57 $ 70 $ 70
Additions to costs and expenses...... 19 -- --
Deductions for uncollectible
receivables written off and
recoveries......................... (6) -- (37)
--- --- ---------
$ 70 $ 70 $ 33
=== === =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Accounts payable, trade.............. $ 537 $ 871 $ 685
Accrued compensation and benefits.... 509 179 288
Other accrued expenses............... 575 243 190
Warranty reserve..................... 86 62 73
-------- --------- ---------
$1,707 $ 1,355 $ 1,236
======== ========= =========
Installation contracts in progress are as follows:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Costs incurred on contracts in
progress............................. $4,113 $ 2,468 $ 5,514
Estimated earnings, net of losses.... 1,428 726 1,760
Less -- Billings to date............. 5,495 3,188 7,355
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 275 $ 212 $ 231
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (229) (206) (312)
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========
F-70
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SHORT-TERM DEBT:
On October 15, 1996, the Company executed a renewal and extension of its
revolving line of credit with its bank. The new agreement provides for maximum
borrowings of up to $900,000 with interest payable monthly on the amount
outstanding at the rate of prime plus one percent, not to exceed 18 percent. The
agreement provides that the Company may borrow up to 70 percent of its accounts
receivable that are less than sixty days past due. The revolving line of credit
is secured by accounts receivable and the personal guaranty of the sole
shareholder, and requires the Company to maintain certain minimum tangible net
worth and cash flow ratios. Balances outstanding relating to the line are
approximately $374,000, $600,000, and $500,000 as of June 30, 1995, and December
31, 1995 and 1996, respectively. The Company was in compliance with all
covenants at each applicable year end.
On December 27, 1996, the Company borrowed $630,000 from the Company's
shareholder. Interest is payable monthly at a rate of 9 percent on the
outstanding balance. The note matures on June 30, 1997. The entire balance was
outstanding as of December 31, 1996.
6. LONG-TERM DEBT:
DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
(IN THOUSANDS)
Note payable, secured by real estate,
payable in twenty-four installments
of $2,540 including interest at
9.50% per annum with the final
payment due January 28, 1997....... $ 44 $ 31 $ --
Notes payable, secured by
transportation and operating
equipment, monthly installments of
various amounts, including interest
at rates ranging from 9.00% to
9.75% per annum until 1997......... 100 69 21
Note payable, secured by operating
equipment, payable in thirty-five
installments of $3,177 including
interest at a rate of prime plus
one percent. A final payment of
$128,696 due on August 1, 1998..... -- 184 154
-------- --------- ---------
144 284 175
Less -- Current maturities........... 88 109 42
-------- --------- ---------
$ 56 $ 175 $ 133
======== ========= =========
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
1997................................. $ 42
1998................................. 133
---------
$ 175
=========
7. LEASES:
The Company leases facilities from a company which is partially owned by
the shareholder. The lease expires in April 1999. The rent paid under this
related-party lease was approximately $15,000, $60,000, $30,000 and $60,000 for
the years ended June 30, 1994 and 1995, the six months ended December 31, 1995
and the year ended December 31, 1996 respectively. The Company also leased a
facility from a third party, which expired on December 31, 1996. The rent paid
under this lease was approximately $12,000, $12,000, $6,000 and $13,200 for the
years ended June 30, 1994 and 1995, the six months ended December 31, 1995, and
the year ended December 31, 1996, respectively. The leases require the Company
to pay taxes, maintenance, insurance and certain other operating costs of the
leased properties.
F-71
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases vehicles for operations which expire in 1998. The
payments under these vehicle leases were approximately $--, $1,400, $26,000 and
$94,000 for the years ended June 30, 1994 and 1995, the six months ended
December 31, 1995 and the year ended December 31, 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
DECEMBER 31,
1996
------------
Year Ended
1997............................... $ 197
1998............................... 60
1999............................... 15
------------
$ 272
============
8. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Federal --
Current............................ $ (37) $ 111
Deferred........................... (9) (60)
State --
Current............................ (7) 20
Deferred........................... (1) (11)
--------- ---------
$ (54) $ 60
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Provision at the statutory rate......... $ (52) $ 53
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. (2) 6
Other.............................. -- 1
--------- ---------
$ (54) $ 60
========= =========
F-72
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1995
--------
Depreciation and amortization........ $ 14
Accruals and reserves not deductible
until paid......................... 121
State taxes.......................... (4)
Cash to accrual adjustments.......... (50)
--------
Net deferred income tax assets....... $ 81
========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1995
--------
Deferred tax assets --
Current......................... $ 114
Long-term....................... 14
--------
Total...................... 128
--------
Deferred tax liabilities --
Current......................... 47
Long-term....................... --
--------
Total...................... 47
--------
Net deferred income tax
assets................. $ 81
========
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
Effective January 1, 1995, the Company became self-insured for medical
claims up to $30,000 per year per covered individual per event. Claims in excess
of these amounts are covered by a stop-loss policy. The Company has recorded
reserves for self-insured claims based on estimated claims incurred through June
30, 1995, six months ended December 31, 1995 and the year ended December 31,
1996.
10. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan which provides for 10 percent
matching contributions by the Company, up to a maximum of 6 percent of each
participating employee's annual compensation. The Company has the right to make
additional discretionary contributions. Employees become 100 percent vested in
the employer's contribution after 7 years of service. Total contributions by the
Company under
F-73
<PAGE>
ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
this plan to provide contributions and pay expenses were approximately $118,000,
$131,000, $12,000 and $199,000 during the years ended June 30, 1994 and 1995,
the six months ended December 31, 1995 and the year ended December 31, 1996,
respectively. Amounts due to this plan were approximately $109,000, $--and
$173,000 for the year ended June 30, 1995, the six months ended December 31,
1995 and the year ended December 31, 1996, respectively.
The Company also adopted a discretionary profit-sharing plan under which
the Company may contribute up to 25 percent of a participant's compensation, up
to a maximum contribution of $30,000. Employees become 100 percent vested in the
employer's contributions after 7 years of service. The Company's contributions
and administrative expenses were approximately $5,000, $8,000, $-- and $--, for
the years ended June 30, 1994 and 1995, and six months ended December 31, 1995
and the year ended December 31, 1996, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes payable, a line of credit, and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
12. CAPITAL STOCK:
In addition to the 250,000 authorized shares of $1 par value voting common
stock, the Company has the following classes of authorized capital stock. None
of these three classes have been issued.
SHARES PAR
AUTHORIZED VALUE
----------- ------
Nonvoting Common..................... 250,000 $ 1
Voting Preferred..................... 250,000 $ 1
Nonvoting Preferred.................. 250,000 $ 1
13. SALES TO SIGNIFICANT CUSTOMERS:
For the years ended June 30, 1994 and 1995, the six months ended December
31, 1995, and year ended December 31, 1996 one customer accounted for
approximately 12, 25, 13, and 0 percent, respectively, of the Company's revenue.
14. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholder entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will dividend certain assets to
the shareholder, consisting of land, buildings, and automobiles, with a total
carrying value of approximately $370,000 as of March 31, 1997. Had this
adjustment been recorded at March 31, 1997, the effect on the accompanying
unaudited balance sheet would be a decrease in shareholder's equity of $370,000.
Concurrently with the merger, the Company will enter into new agreements
with a company partially owned by the shareholder to lease land and buildings
owned by such party used in the Company's operations for a negotiated amount and
term.
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eastern Heating and Cooling, Inc.:
We have audited the accompanying balance sheet of Eastern Heating and
Cooling, Inc., as of December 31, 1996, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eastern Heating and Cooling,
Inc., as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-75
<PAGE>
EASTERN HEATING AND COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 83 $ 131
Accounts receivable --
Trade, net of allowance of
$25 and $25,
respectively............ 1,214 813
Retainage.................. 43 83
Other receivables.......... 13 27
Inventories..................... 100 97
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 66 48
------------ ------------
Total current
assets............. 1,519 1,199
PROPERTY AND EQUIPMENT, net.......... 604 607
OTHER NONCURRENT ASSETS.............. 144 174
------------ ------------
Total assets.......... $2,267 $1,980
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 302 $ 302
Accounts payable and accrued
expenses....................... 826 759
Line of credit.................. 140 305
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 102 53
------------ ------------
Total current
liabilities........ 1,370 1,419
LONG-TERM DEBT, net of current
maturities......................... 431 353
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 200
shares authorized, 100 shares
issued and outstanding......... 50 50
Retained earnings............... 416 158
------------ ------------
Total shareholder's
equity............. 466 208
------------ ------------
Total liabilities and
shareholder's
equity............. $2,267 $1,980
============ ============
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
REVENUES............................. $ 7,944 $ 1,525 $ 1,284
COST OF SERVICES..................... 5,276 973 805
------------ --------- ---------
Gross profit.................... 2,668 552 479
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,237 532 582
------------ --------- ---------
Income (loss) from operations... 431 20 (103)
OTHER INCOME (EXPENSE):
Interest expense................ (87) (19) (20)
Other........................... 40 -- --
------------ --------- ---------
NET INCOME (LOSS).................... $ 384 $ 1 $ (123)
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... 100 $ 50 $ 356 $ 406
Distributions to shareholder.... -- -- (324) (324)
Net income...................... -- -- 384 384
------ ------ -------- -------------
BALANCE, December 31, 1996........... 100 $ 50 $ 416 $ 466
Distributions to shareholder
(unaudited)................... -- -- (135) (135)
Net loss (unaudited)............ -- -- (123) (123)
------ ------ -------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 100 $ 50 $ 158 $ 208
====== ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
EASTERN HEATING AND COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 384 $ 1 $ (123)
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 144 31 40
Gain on sale of property and
equipment...................... (31) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (434) (119) 347
Inventories................. 4 (1) 2
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... 123 (60) 19
Other noncurrent assets..... 80 3 (32)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 246 114 (67)
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 10 36 (48)
------------ --------- ---------
Net cash provided by
operating
activities............ 526 5 138
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 38 -- --
Additions of property and
equipment........................ (262) (3) (42)
------------ --------- ---------
Net cash used in
investing
activities............ (224) (3) (42)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 208 -- --
Payments of long-term debt......... (280) (69) (78)
Borrowings on line of credit....... 140 181 165
Distributions to shareholder....... (325) (80) (135)
------------ --------- ---------
Net cash provided by
(used in) financing
activities............ (257) 32 (48)
------------ --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 45 34 48
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 38 38 83
------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 83 $ 72 $ 131
============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 52 $ 19 $ 20
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Eastern Heating and Cooling, Inc., a New York corporation, (the
"Company") focuses on providing "design and build" installation and
maintenance, repair and replacement of HVAC systems for commercial and
industrial facilities. Eastern also offers continuous monitoring and control
systems for commercial facilities. Eastern primarily operates in the area within
a 75 mile radius of Albany, New York.
The Company and its shareholder intends to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
F-80
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 7 $ 957
Machinery and equipment.............. 10 54
Computer and telephone equipment..... 3-5 6
Leasehold improvements............... 20 36
Furniture and fixtures............... 7-10 126
------------
1,179
Less -- Accumulated depreciation and
amortization....................... (575)
------------
Property and equipment, net..... $ 604
============
F-81
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
1996
------------
Balance at beginning of year......... $ 16
Additions to costs and expenses...... 25
Deductions for uncollectible
receivables written off and
recoveries......................... (16)
------------
$ 25
============
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 611
Accrued compensation and benefits.... 120
Other accrued expenses............... 95
------------
$ 826
============
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
1996
------------
Costs incurred on contracts in
progress........................... $ 749
Estimated earnings, net of losses.... 235
------------
984
Less -- Billings to date............. 1,020
------------
$ (36)
============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 66
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (102)
------------
$ (36)
============
5. LONG-TERM DEBT:
Long-term debt consists of the following:
The Company has a term note payable to a financial institution with an
outstanding balance of approximately $133,000 at December 31, 1996. The term
note matures in April 1999, and bears interest at prime plus 2 percent (10.25
percent at December 31, 1996) which is payable along with principal of $4,583
monthly. The note is secured by substantially all assets of the Company and is
guaranteed by the Company's shareholder.
The Company has various installment notes with several financial
institutions which are secured by transportation equipment. The terms of the
notes range from 48 months to 60 months with monthly payments of principal and
interest of approximately $12,300. The notes bear interest at rates ranging from
6.5 percent to 10.5 percent and mature from 1997 to 2001.
The Company has a note payable to its former owner with an outstanding
balance of $288,444 at December 31, 1996. The note payable was calculated using
an implied interest rate of 9 percent. The note
F-82
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
payable is due in installments of $159,385 on January 1, 1997 and $168,948 on
January 1, 1998, including interest.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................ $ 302
1998............................ 296
1999............................ 85
2000............................ 42
2001............................ 8
---------
$ 733
=========
6. LINE OF CREDIT:
The Company has a $500,000 line of credit with a financial services
company. The line of credit is due on demand and bears interest at prime plus 1
percent per annum (9.25 percent at December 31, 1996). The line of credit is
secured by substantially all assets of the Company. The balance outstanding
under this line of credit at December 31, 1996 was $140,000.
7. LEASES:
The Company leases a facility from a company which is 50 percent owned by
the Company's shareholder. The lease expires in December 1999. The rent paid
under this related-party lease was approximately $50,000 for the year ended
December 31, 1996.
Additionally, the Company rents other facilities from non-related parties.
Future minimum lease payments under non-cancellable operating leases are as
follows (in thousands):
Year Ended December 31 --
1997............................... $ 55
1998............................... 55
1999............................... 50
------------
$ 160
============
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-83
<PAGE>
EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1996, one customer accounted for approximately 12 percent of the
Company's sales.
11. SUBSEQUENT EVENT:
Effective January 2, 1997, an affiliate of the Company acquired the
business and certain operating assets of RECC, Inc., a New York corporation.
This affiliate agreed to pay $10,000 over a period of one year.
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholder entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company distributed $135,000 from the accumulated
adjustment account. In connection with the merger, the Company will make
additional cash distributions of approximately $158,000 prior to the merger
which represents the Company's estimated S Corporation accumulated adjustment
account. Had these transactions been recorded at March 31, 1997, the effect on
the accompanying unaudited balance sheet would be an increase in liabilities of
$158,000 and a decrease in shareholder's equity of $158,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
Eastern intends to enter into a 10-year lease with 60 Loudonville Road
Associates for a new building and terminate the existing lease. Eastern has
agreed to install the HVAC systems in the new building at a price which the
Company believes to be at a fair market value. The Company's annual rental in
the new building will be at fair market value, as determined by appraisal.
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Contract Service, Inc.:
We have audited the accompanying balance sheets of Contract Service, Inc.,
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for the three years ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Contract Service, Inc., as
of December 31, 1995 and 1996, and the results of their operations and their
cash flows for the three years ended December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-85
<PAGE>
CONTRACT SERVICE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 116 $ 207 $ 103
Accounts receivable --
Trade, net of allowance of
$11, $22 and $21,
respectively............... 651 680 681
Retainage..................... 10 26 41
Inventories........................ 306 362 491
Costs and estimated earnings in
excess of billings on uncompletedX
contracts........................ 104 110 129
Prepaid expenses and other current
assets........................... 11 4 4
--------- --------- -----------
Total current assets.......... 1,198 1,389 1,449
PROPERTY AND EQUIPMENT, net............. 549 642 690
OTHER NONCURRENT ASSETS................. 14 16 15
--------- --------- -----------
Total assets.................. $ 1,761 $ 2,047 $ 2,154
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................. $ 100 $ 100 $ 101
Accounts payable and accrued
expenses......................... 576 691 657
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................ 149 136 218
--------- --------- -----------
Total current liabilities..... 825 927 976
LONG-TERM DEBT, net of current
maturities............................ 263 429 434
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 20,000
shares authorized, 8,946 shares
issued and outstanding........... 9 9 9
Retained earnings.................. 664 682 735
--------- --------- -----------
Total shareholders' equity.... 673 691 744
--------- --------- -----------
Total liabilities and
shareholders' equity....... $ 1,761 $ 2,047 $ 2,154
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 6,502 $ 6,361 $ 7,842 $ 1,369 $ 1,562
COST OF SERVICES........................ 4,393 4,413 5,201 926 1,045
--------- --------- --------- --------- ---------
Gross profit............. 2,109 1,948 2,641 443 517
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,228 1,500 1,660 368 458
--------- --------- --------- --------- ---------
Income from operations... 881 448 981 75 59
OTHER INCOME (EXPENSE):
Interest expense................... (5) (9) (29) (9) (15)
Other.............................. 29 38 51 13 9
--------- --------- --------- --------- ---------
NET INCOME.............................. $ 905 $ 477 $ 1,003 $ 79 $ 53
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 8,946 $ 9 $ 660 $ 669
Distributions to shareholders... -- -- (911) (911)
Net income...................... -- -- 905 905
--------- ------ -------- --------------
BALANCE, December 31, 1994........... 8,946 9 654 663
Distributions to shareholders... -- -- (467) (467)
Net income...................... -- -- 477 477
--------- ------ -------- --------------
BALANCE, December 31, 1995........... 8,946 9 664 673
Distributions to shareholders... -- -- (985) (985)
Net income...................... -- -- 1,003 1,003
--------- ------ -------- --------------
BALANCE, December 31, 1996........... 8,946 9 682 691
Net income (unaudited).......... -- -- 53 53
--------- ------ -------- --------------
BALANCE, March 31, 1997
(unaudited)........................ 8,946 $ 9 $ 735 $ 744
========= ====== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
CONTRACT SERVICE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 905 $ 477 $ 1,003 $ 79 $ 53
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation..................... 97 120 138 28 33
Gain (loss) on sale of property
and equipment................... 8 (5) -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (219) (96) (45) 177 (16)
Inventories................. 20 (49) (57) (54) (129)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (44) 35 (6) 8 (19)
Prepaid expenses and other
current assets............. (9) (2) 7 2 --
Other noncurrent assets..... (8) 5 (2) (11) 1
Increase (decrease) in --
Accounts payable and accrued
expenses................... (27) (3) 115 (32) (34)
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 12 17 (13) (28) 82
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......... 735 499 1,140 169 (29)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... -- 6 -- 1 --
Additions of property and
equipment......................... (138) (199) (230) (107) (81)
--------- --------- --------- --------- ---------
Net cash used in investing
activities.................... (138) (193) (230) (106) (81)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 102 201 166 -- 6
Distributions to shareholders...... (911) (467) (985) -- --
Collections of advances to officers
and shareholders.................. 86 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......... (723) (266) (819) -- 6
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (126) 40 91 63 (104)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 202 76 116 116 207
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 76 $ 116 $ 207 $ 179 $ 103
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 6 $ 30 $ 41 $ 9 $ 15
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Contract Service, Inc., a Utah corporation, (the "Company") focuses on
providing comprehensive maintenance, repair and replacement of HVAC systems for
commercial and residential facilities primarily in Utah.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
F-90
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation of new air
conditioning and heating units. The Company generally warrants labor for 30 days
after the servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
IN YEARS 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Transportation equipment............. 5-10 $ 690 $ 907
Machinery and equipment.............. 5-30 126 127
Furniture and fixtures............... 5-20 178 189
------------ ------------
Less -- Accumulated depreciation..... (445) (581)
------------ ------------
Property and equipment, net..... $ 549 $ 642
============ ============
</TABLE>
F-91
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Balance at beginning of year......... $ 11 $ 11
Additions to costs and expenses...... 18 26
Deductions for uncollectible
receivables written off and
recoveries......................... (18) (15)
--------- ---------
$ 11 $ 22
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 242 $ 256
Accrued compensation................. 219 312
Other accrued expenses............... 115 123
--------- ---------
$ 576 $ 691
========= =========
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress............................. $ 1,998 $ 2,534
Estimated earnings, net of losses.... 741 978
--------- ---------
2,739 3,512
Less -- Billings to date............. 2,784 3,538
--------- ---------
$ (45) $ (26)
========= =========
Costs and estimated earnings in
excess
of billings on uncompleted
contracts.......................... $ 104 $ 110
Billings in excess of costs and
estimated
earnings on uncompleted
contracts.......................... (149) (136)
--------- ---------
$ (45) $ (26)
========= =========
5. LONG-TERM DEBT:
Long-term debt consists of ten unsecured promissory notes to the Company's
shareholders of which two are demand notes. All notes, except the demand notes,
are due 10 years from the date of the note. The notes bear an interest rate of
10 percent. Monthly interest payments are made to the shareholders with the
principal due at the date of maturity.
F-92
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt are as follows (in thousands):
Year ending December 31,
1997................................. $ 100
1998................................. --
1999................................. --
2000................................. --
2001................................. --
Thereafter........................... 429
---------
$ 529
=========
6. LEASES:
The Company leases its facilities from a company owned by its two
shareholders. The lease is currently on a month-to-month basis. The rent paid
under this related-party lease was approximately $66,000, $106,000 and $120,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31,
1997............................ $ 120
1998............................ 120
1999............................ 120
2000............................ 120
2001............................ 120
---------
$ 600
=========
7. RELATED-PARTY TRANSACTIONS:
At December 31, 1994, 1995 and 1996, the Company held notes payable to the
shareholders in the amount of $162,000, $363,000 and $529,000, respectively.
(See Note 5.) The notes bear interest at 10 percent. Interest paid during the
years ended December 31, 1994, 1995 and 1996 related to these loans was $6,000,
$29,000 and $41,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-93
<PAGE>
CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLAN:
Beginning January 1, 1994, the Company adopted a 401(k) plan. The plan
allows employees to contribute a portion of their gross wages into the plan as a
salary deferral and requires the Company to match 25 percent of the employee
contribution up to 5 percent of employee's gross wages. The Company's matching
contributions for the years ended December 31, 1995 and 1996 were $17,000 and
$19,000 respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical, dental and dependent care/day care benefits. The
funds withheld are used to pay actual claims or medical insurance, based on the
employees' elections.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will make a cash distribution of
approximately $735,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $97,000 and an increase in
liabilities of $832,000 and a decrease in shareholders' equity of $735,000.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tech Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Tech Heating
and Air Conditioning, Inc., and related company as of December 31, 1995 and
1996, and the related combined statements of operations, shareholders' equity
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 combined financial position of Tech
Heating and Air Conditioning, Inc., and related company as of December 31, 1995
and 1996, and the combined results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-95
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 313 $ 611 $ 249
Accounts receivable --
Trade, net of allowance of
$45, $40 and $45,
respectively............... 1,244 1,723 1,216
Retainage..................... 92 48 --
Other receivables............. -- 7 20
Inventories........................ 67 208 193
Prepaid expenses and other current
assets........................... 7 33 20
--------- --------- -----------
Total current assets..... 1,723 2,630 1,698
PROPERTY AND EQUIPMENT, net............. 368 500 484
--------- --------- -----------
Total assets............. $ 2,091 $ 3,130 $ 2,182
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ -- $ 62 $ 69
Accounts payable and accrued
expenses........................... 1,048 757 701
Line of credit..................... 88 190 900
--------- --------- -----------
Total current
liabilities.............. 1,136 1,009 1,670
LONG-TERM DEBT, net of current
maturities.............................. 48 60 32
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,000
shares authorized, 500 shares
issued........................... 1 1 1
Treasury stock..................... (3) (3) (3)
Retained earnings.................. 909 2,063 482
--------- --------- -----------
Total shareholders'
equity................... 907 2,061 480
--------- --------- -----------
Total liabilities and
shareholders' equity..... $ 2,091 $ 3,130 $ 2,182
========= ========= ===========
The accompanying notes are an integral part of these combined financial
statements.
F-96
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $ 6,960 $ 7,537 $ 1,075 $ 1,656
COST OF SERVICES........................ 4,212 3,996 639 1,034
--------- --------- --------- ---------
Gross profit....................... 2,748 3,541 436 622
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,800 1,861 390 565
--------- --------- --------- ---------
Income from operations............. 948 1,680 46 57
OTHER INCOME (EXPENSE):
Interest expense................... (12) (18) (3) (10)
Other.............................. 20 31 6 11
--------- --------- --------- ---------
NET INCOME.............................. $ 956 $ 1,693 $ 49 $ 58
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-97
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 500 $ 1 $ (3) $ 575 $ 573
Distributions to shareholders...... -- -- -- (622) (622)
Net income......................... -- -- -- 956 956
------ ------ --- -------- -------------
BALANCE, December 31, 1995.............. 500 1 (3) 909 907
Distributions to shareholders...... -- -- -- (539) (539)
Net income......................... -- -- -- 1,693 1,693
------ ------ --- -------- -------------
BALANCE, December 31, 1996.............. 500 1 (3) 2,063 2,061
Distributions to shareholders
(unaudited)...................... -- -- -- (1,639) (1,639)
Net income (unaudited)............. -- -- -- 58 58
------ ------ --- -------- -------------
BALANCE, March 31, 1997 (unaudited)..... 500 $ 1 $ (3) $ 482 $ 480
====== ====== === ======== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-98
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 956 $ 1,693 $ 49 $ 58
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 89 142 31 38
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 581 (442) (48) 542
Inventories................ (42) (141) 1 15
Prepaid expenses and other
current assets.......... 7 (26) (6) 13
Increase (decrease) in --
Accounts payable and
accrued expenses........ (513) (291) (312) (56)
--------- --------- --------- ---------
Net cash provided by
(used in) operating
activities......... 1,078 935 (285) 610
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment....................... (127) (274) (59) (22)
--------- --------- --------- ---------
Net cash used in
investing
activities......... (127) (274) (59) (22)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit....... 76 102 18 710
Borrowings on long-term debt....... -- 205 203 --
Payments on long-term debt......... (100) (131) -- (21)
Distributions to shareholders...... (622) (539) (15) (1,639)
--------- --------- --------- ---------
Net cash provided by
(used in) financing
activities......... (646) (363) 206 (950)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 305 298 (138) (362)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 8 313 313 611
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 313 $ 611 $ 175 $ 249
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 12 $ 18 $ 3 $ 8
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-99
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Tech Heating and Air Conditioning, Inc., an Ohio corporation, and related
company (collectively, the "Company") focuses on providing "design and
build" installation and services, maintenance, repair and replacement of HVAC
systems for commercial and industrial facilities. Tech also offers continuous
monitoring and control services for commercial facilities. The Company's
customers are primarily in the greater Cleveland, Ohio area.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems, USA, Inc. ("Comfort Systems") pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Tech Heating and Air Conditioning, Inc., and its related company,
Tech Mechanical which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements as of March 31, 1997, and for the
three months ended March 31, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the combined
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the combined statements of operations.
F-100
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.
WARRANTY COSTS
The Company warrants labor for the first year after installation of new air
conditioning and heating systems. The Company generally warrants labor for 30
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or combined results of operations of
the Company.
F-101
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment................ 5 $ 462 $ 553
Machinery and equipment................. 7 61 159
Computer and telephone equipment........ 5 107 190
Furniture and fixtures.................. 5-7 145 128
--------- ---------
Less -- Accumulated depreciation........ (407) (530)
--------- ---------
Property and equipment, net........ $ 368 $ 500
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--- ---
Balance at beginning of year............ $ 25 $ 45
Additions to costs and expenses......... 20 --
Deductions for uncollectible receivables
written off and recoveries............ -- (5)
--- ---
$ 45 $ 40
=== ===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 428 $ 388
Accrued compensation and benefits....... 337 226
Other accrued expenses.................. 283 143
--------- ---------
$ 1,048 $ 757
========= =========
At December 31, 1995 and 1996 billings to customers generally equalled work
performed which resulted in no costs and estimated earnings in excess of
billings or billings in excess of costs and estimated earnings on uncompleted
contracts.
F-102
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $8,000. The notes bear interest at rates
ranging from 7.5 percent to 9.95 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................... $ 252
1998............................... 55
1999............................... 5
---------
$ 312
=========
The Company has a $1,500,000 line of credit with a financial services
company. The line of credit expires in July 1997 and bears interest at prime
plus .25 percent per annum (8.5 percent at December 31, 1996). The line of
credit is secured by a lien on accounts receivable and inventory and is
guaranteed by the shareholders. There was $190,000 outstanding under this line
of credit at December 31, 1996.
6. LEASES:
The Company leases facilities from a company which is partially owned by
one of the shareholders. The lease expires in April of 2000. The rent paid under
this related-party lease was approximately $84,000 for the year ended December
31, 1996. The lease requires the Company to pay taxes, maintenance, insurance
and certain other operating costs of the leased property. The lease contains
renewal provisions.
The Company leases a vehicle for a key member of management. The lease
payments under this vehicle lease totaled approximately $6,700 for the year
ended December 31, 1996.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31
1997............................ $ 100
1998............................ 91
1999............................ 86
2000............................ 28
---------
$ 305
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The Company has the right to make
discretionary contributions. Total contributions by the Company under this plan
were approximately $18,000 and $12,000 for 1995 and 1996, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.
F-103
<PAGE>
TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
As of March 31, 1997, the Company distributed $1,639,000 from the
accumulated adjustment account and increased borrowings on the line of credit of
$900,000 with the remainder paid from cash on hand. In connection with the
merger, the Company will make additional cash distributions of approximately
$482,000 prior to the merger which represents the Company's estimated S
Corporation accumulated adjustment account. Had these transactions been recorded
at March 31, 1997, the effect on the accompanying unaudited balance sheet would
have been a decrease in assets of $149,000, an increase in liabilities of
$333,000 and a decrease in shareholders' equity of $482,000.
Concurrently with the merger, the Company will enter into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seasonair, Inc.:
We have audited the accompanying balance sheet of Seasonair, Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Seasonair, Inc., as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-105
<PAGE>
SEASONAIR, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 69 $ 221
Accounts receivable --
Trade, net of allowance of $
-- and $9, respectively.... 961 869
Retainage..................... 17 44
Other receivables............. -- 40
Inventories........................ 190 187
Costs on uncompleted contracts in
excess of billings................ 75 89
Deferred tax asset................. 104 104
Prepaid expenses and other current
assets............................ 96 49
------------ ------------
Total current assets..... 1,512 1,603
PROPERTY AND EQUIPMENT, net............. 63 61
OTHER NONCURRENT ASSETS................. 83 110
------------ ------------
Total assets............. $1,658 $1,774
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $-- $ 65
Current maturities of long-term
debt.............................. 34 26
Accounts payable and accrued
expenses.......................... 810 866
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... 156 134
------------ ------------
Total current
liabilities.......... 1,000 1,091
LONG-TERM DEBT, net of current
maturities............................ 76 77
DEFERRED TAX LIABILITY.................. 17 17
COMMITMENTS AND CONTINGENCIES...........
SHAREHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,244,000 shares issued and
outstanding....................... 78 78
Additional paid-in capital......... 1 1
Retained earnings.................. 721 745
Treasury stock..................... (235) (235)
------------ ------------
Total shareholders'
equity............... 565 589
------------ ------------
Total liabilities and
shareholders'
equity............... $1,658 $1,774
============ ============
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
SEASONAIR, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
REVENUES................................ $ 6,737 $ 1,128 $ 1,831
COST OF SERVICES........................ 4,006 586 1,165
------------ --------- ---------
Gross profit.................. 2,731 542 666
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,597 604 644
------------ --------- ---------
Income (loss) from
operations................. 134 (62) 22
OTHER INCOME (EXPENSE):
Interest expense................... (21) (5) (3)
Other.............................. 82 6 28
------------ --------- ---------
INCOME BEFORE INCOME TAXES.............. 195 (61) 47
PROVISION FOR INCOME TAXES.............. 69 -- 23
------------ --------- ---------
NET INCOME (LOSS)....................... $ 126 $ (61) $ 24
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
SEASONAIR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------------ ------ ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........... 1,214,724 $ 78 $ 1 $ 632 $ (269) $ 442
Sales of treasury stock......... 29,503 -- -- -- 34 34
Distributions to shareholders... -- -- -- (37) -- (37)
Net income...................... -- -- -- 126 -- 126
--
------------ ------ --------- --------- -------------
BALANCE, December 31, 1996........... 1,244,227 78 1 721 (235) 565
Purchase of treasury stock...... (266) -- -- -- -- --
Net income (unaudited).......... -- -- -- 24 -- 24
--
------------ ------ --------- --------- -------------
BALANCE, March 31, 1997
(unaudited)..................... 1,243,961 $ 78 $ 1 $ 745 $ (235) $ 589
============ ====== == ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
SEASONAIR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 126 $ (61) $ 24
Adjustments to reconcile net income
(loss) to net cash provided by
(used in)
operating activities
Depreciation.................... (54) 5 5
Gain on sale of property and
equipment..................... (4) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 49 282 25
Inventories................ (35) (6) 3
Prepaid expenses and other
current assets.......... (171) (37) 47
Costs of uncompleted
contracts in excess of
billings................ 58 (65) (14)
Other noncurrent assets.... (71) -- (27)
Increase (decrease) in --
Accounts payable and
accrued expenses........ (74) (76) 56
Billings in excess of costs
on uncompleted
contracts............... (23) 12 (22)
Deferred tax liability..... 30 -- --
------------ --------- ---------
Net cash provided by
(used in) operating
activities......... (169) 54 97
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 71 (8) (3)
------------ --------- ---------
Net cash provided by
(used in) investing
activities......... 71 (8) (3)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit.... -- -- 65
Payments of long-term debt...... (105) (82) (7)
Distributions to shareholders... (37) -- --
Cash received for sale of
treasury shares............... 34 (1) --
------------ --------- ---------
Net cash provided by
(used in) financing
activities......... (108) (83) 58
------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (206) (37) 152
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 275 275 69
------------ --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 69 $ 238 $ 221
============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 22 $ 3 $ 5
Income taxes............... 163 30 40
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Seasonair, Inc., a Maryland corporation, (the "Company") focuses on
providing installation services and maintenance, repair and replacement of HVAC
systems for light commercial facilities. Seasonair primarily operates in
Maryland, the District of Columbia and Virginia.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems, USA, Inc. ("Comfort Systems") pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting princples, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenue from construction
contracts is recognized on the completed-contract method. This method is used
because the typical contract is completed within a twelve-month period, and the
Company's current financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method. A contract is considered complete when all
costs except insignificant items have been incurred, and the installation is
operating according to specifications or has been accepted by the customer.
F-110
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
Contract costs include all direct equipment, material, labor, and
subcontract costs. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 5 $ 17
Machinery and equipment.............. 5 208
Leasehold improvements............... 39 15
Furniture and fixtures............... 7 16
------------
256
Less -- Accumulated depreciation and
amortization....................... (193)
------------
Property and equipment, net..... $ 63
============
F-111
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following (in thousands):
DECEMBER 31,
1996
------------
Balance at beginning of year............ $ --
Additions to costs and expenses......... 5
Deductions for uncollectible receivables
written off and recoveries............ (5)
---
$ --
===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 353
Accrued compensation and benefits.... 321
Warranty reserve..................... 37
Other................................ 99
------------
$ 810
============
5. LONG-TERM DEBT:
Long-term debt consists of two notes payable to officers and an installment
note payable for transportation equipment, which is secured by the related
transportation equipment. The terms of the notes range from 51 months to 80
months with monthly payments of principal and interest of approximately $3,598.
The notes bear interest at rates ranging from 10 percent to 12.7 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31 --
1997............................... $ 34
1998............................... 37
1999............................... 38
2000............................... 1
---------
$ 110
=========
The Company has a $150,000 line of credit with a financial services
company. The line of credit expires August 5, 1997, and bears interest at prime
plus one percent per annum. There was no balance outstanding under this line of
credit at December 31, 1996.
6. LEASES:
The Company leases facilities from a partnership which is partially owned
by one of the shareholders. The lease expires in October, 2006. The rent paid
under this lease was approximately $62,640 for the year ended December 31, 1996.
The lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property.
The Company leases vehicles for operations. The payments under these
vehicle leases were approximately $189,000 for the year ended December 31, 1996.
F-112
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1997............................... $ 241
1998............................... 202
1999............................... 158
2000............................... 105
2001............................... 65
---------
$ 771
=========
7. INCOME TAXES:
Federal and state income taxes for the year ended December 31, 1996, are as
follows (in thousands):
Federal --
Current............................ $ 50
Deferred........................... 7
State --
Current............................ 11
Deferred........................... 1
---
$ 69
===
Actual income tax expense for the year ended December 31, 1996, differs
from income tax expense computed by applying the U.S. federal statutory
corporate tax rate of 35% to income before income taxes as follows (in
thousands):
Provision at the statutory rate......... $ 68
Increase (decrease) resulting from --
State income tax, net of benefits
for federal deduction............. 8
Other.............................. (7)
---
$ 69
===
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities as of December 31, 1996, result principally from the
following (in thousands):
Depreciation and amortization........... $ (18)
Accruals and reserves not deductible
until paid............................ 110
State taxes............................. (5)
---------
Net deferred income tax asset........... $ 87
=========
F-113
<PAGE>
SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities at December 31, 1996, are comprised
of the following (in thousands):
Deferred tax assets --
Current............................ $ 104
Long-term.......................... --
---------
Total......................... 104
---------
Deferred tax liabilities --
Current............................ --
Long-term.......................... 17
---------
Total......................... 17
---------
Net deferred income tax
asset...................... $ 87
=========
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
9. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) profit-sharing plan which provides for the Company
to match employee contributions up to a maximum of $260 per person per year as
well as an employee stock ownership plan. Total contributions for both plans by
the Company under the plan were approximately $80,000 for purchase of treasury
stock for the employee stock ownership plan, and $5,000 for the 401(k) plan for
the year ended December 31, 1996.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
exchange of shares by the Company with the subsidiary of Comfort Systems. A
total of 70,197 shares will be exchanged for cash and distributed to the
employee stock ownership plan.
F-114
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Western Building Services, Inc.:
We have audited the accompanying balance sheets of Western Building
Services, Inc. as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Building Services,
Inc. as of December 31, 1995 and 1996, and the results of their operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 1997
F-115
<PAGE>
WESTERN BUILDING SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ -- $ 177 $ 34
Accounts receivable --
Trade......................... 726 661 513
Retainage on uncompleted
contracts.................. 78 183 128
Other receivables............. 133 3 6
Inventories........................ 71 86 86
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 65 26 91
Prepaid expenses and other current
assets........................... 31 30 9
--------- --------- -----------
Total current assets..... 1,104 1,166 867
PROPERTY AND EQUIPMENT, net............. 150 191 189
OTHER NONCURRENT ASSETS................. 22 129 174
--------- --------- -----------
Total assets............. $ 1,276 $ 1,486 $ 1,230
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $ 231 $ -- $ --
Notes payable...................... -- 6 --
Current maturities of long-term
debt............................. 86 73 78
Current portion of capital
leases........................... 17 21 19
Accounts payable and accrued
expenses......................... 732 556 437
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 76 151 21
--------- --------- -----------
Total current
liabilities........... 1,142 807 555
LONG-TERM DEBT, net of current
maturities............................ 179 261 241
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.10 par value,
4,000,000 shares authorized,
2,600 and 2,700 shares issued and
outstanding...................... 1 1 1
Additional paid-in capital......... 61 62 62
Retained earnings (deficit)........ (107) 355 371
--------- --------- -----------
Total shareholders'
equity (deficit)...... (45) 418 434
--------- --------- -----------
Total liabilities and
shareholders'
equity................ $ 1,276 $ 1,486 $ 1,230
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
REVENUES............................ $ 4,112 $ 6,494 $ 1,185 $ 1,072
COST OF SERVICES.................... 3,408 4,662 857 812
--------- --------- --------- ---------
Gross profit................... 704 1,832 328 260
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 855 1,088 232 231
--------- --------- --------- ---------
Income (loss) from operations.. (151) 744 96 29
OTHER INCOME (EXPENSE):
Interest expense............... (35) (51) (11) (11)
Other.......................... 6 (21) (1) (2)
--------- --------- --------- ---------
NET INCOME (LOSS)................... $ (180) $ 672 $ 84 $ 16
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
---------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 2,600 $ 1 $ 61 $ 73 $ 135
Net loss........................ -- -- -- (180) (180)
------ ------ --- --------- -------------
BALANCE, December 31, 1995........... 2,600 1 61 (107) (45)
Distributions to shareholders... -- -- -- (210) (210)
Net income...................... -- -- -- 672 672
Common stock issuance........... 100 -- 1 -- 1
------ ------ --- --------- -------------
BALANCE, December 31, 1996........... 2,700 1 62 355 418
Net income (unaudited).......... -- -- -- 16 16
------ ------ --- --------- -------------
BALANCE, March 31, 1997
(unaudited)........................ 2,700 $ 1 $ 62 $ 371 $ 434
====== ====== === ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
WESTERN BUILDING SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- ---------------
1995 1996 1996 1997
----- ----- ---- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $(180) $ 672 $ 84 $ 16
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 51 51 9 25
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (179) 91 23 200
Inventories................ (35) (15) -- --
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (5) 39 65 (65)
Prepaid expenses and other
current assets.......... 5 1 (19) 21
Other noncurrent assets.... (15) (106) (90) (56)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 186 (177) (22) (119)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 17 74 (50) (130)
----- ----- ---- -----
Net cash provided by
(used in) operating
activities......... (155) 630 -- (108)
----- ----- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... -- 20 -- --
Additions of property and
equipment....................... (40) (113) (20) (12)
----- ----- ---- -----
Net cash used in
investing
activities......... (40) (93) (20) (12)
----- ----- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common
stock........................... -- 1 -- --
Borrowings of long-term debt....... 206 175 20 --
Payments of long-term debt......... (259) (96) -- (23)
Net borrowings in line of credit... 230 (230) -- --
Distributions to shareholders...... -- (210) -- --
----- ----- ---- -----
Net cash provided by
(used in) financing
activities......... 177 (360) 20 (23)
----- ----- ---- -----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (18) 177 -- (143)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 18 -- -- 177
----- ----- ---- -----
CASH AND CASH EQUIVALENTS, end of
period............................. $ -- $ 177 $-- $ 34
===== ===== ==== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 35 $ 51 $ 11 $ 11
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Western Building Services, Inc., a Colorado corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems for commercial facilities. Western also
offers continuous monitoring and control services for commercial facilities. The
Company primarily operates in Colorado.
The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1997, and for the three
months ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract
F-120
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.
Revenues of approximately $783,000 and $2,291,000 with gross profits of
$339,000 and $874,000 were recognized by the Company in 1995 and 1996,
respectively, for energy conversions and new installations related to an
incentive program developed by the Public Service Company of Colorado (PSC). The
Demand Side Management program provided incentives for PSC customers to convert
from electric heat to gas/steam heat in order to reduce peak demand for
electricity. This program ended November 1996.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
F-121
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 47 $ 47
Machinery and equipment.............. 6-7 133 68
Computer and telephone equipment..... 5 120 145
Leasehold improvements............... 3 21 71
Furniture and fixtures............... 7 28 20
--------- ---------
349 351
Less -- Accumulated depreciation and
amortization....................... (199) (160)
--------- ---------
Property and equipment, net..... $ 150 $ 191
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Covenant not to compete.............. $ -- $ 75
Life insurance surrender value....... 14 27
Other noncurrent assets.............. 8 27
--------- ---------
$ 22 $ 129
========= =========
At December 31, 1996, the Company acquired the contract rights of a
competitor for $75,000 through a covenant not to compete agreement. This
agreement will be amortized over its three year term which expires at
December 31, 1999.
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 403 $ 249
Accrued compensation and benefits.... 108 86
Accrued warranty expense............. 82 82
Other accrued expenses............... 139 139
--------- ---------
$ 732 $ 556
========= =========
F-122
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 335 $ 530
Estimated earnings, net of losses.... 206 160
--------- ---------
541 690
Less -- Billings to date............. 552 815
--------- ---------
$ (11) $ (125)
========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 65 $ 26
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (76) (151)
--------- ---------
$ (11) $ (125)
========= =========
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 36 months to 48 months with monthly payments of
principal and interest of approximately $8,600. The notes bear interest at rates
ranging from 9 percent to 13 percent.
Long-term debt also consists of term loans and capital leases. The term
loans were issued in the amounts of $175,000 and $200,000 in 1996 and 1995,
respectively. The $175,000 term loan is secured by equipment, inventory,
accounts receivable and all contract rights. The $200,000 term loan is secured
by all inventory and equipment and bears interest at prime plus 2 percent per
annum. These term loans are also guaranteed by the Company president.
The capital leases relate to computer equipment and printers. The terms of
the leases range from 12 to 36 months. The interest rates on these leases range
from 10 to 12 percent.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):
Year ending December 31
1997............................ $ 85
1998............................ 89
1999............................ 98
2000............................ 89
---------
$ 361
=========
The Company has a $300,000 line of credit with a financial institution. The
line of credit expires September 28, 1997, and bears interest at prime plus 2
percent per annum. The line of credit is secured by accounts receivable and
inventory and is guaranteed by the Company president. There was no balance
outstanding under this line of credit at December 31, 1996.
6. LEASES:
The Company leases its facility from a third party, which expires in 1999.
The rent paid under this lease was approximately $43,000 and $66,500 for the
years ended December 31, 1995 and 1996. The lease requires the Company to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property. The lease contains renewal provisions.
F-123
<PAGE>
WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases vehicles for operating purposes. The lease payments
under these vehicle leases totaled approximately $47,000 and $71,000 for the
years ended December 31, 1995 and 1996, respectively.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31
1997............................ $ 144
1998............................ 132
1999............................ 19
---------
$ 295
=========
7. EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) plan which allows the Company to make
discretionary contributions and discretionary profit sharing contributions. No
contributions were made by the Company under this plan in 1995 and 1996.
However, expenses of $2,733 and $3,903 were incurred by the Company during 1995
and 1996, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
9. RELATED-PARTY TRANSACTIONS:
At December 31, 1995, the Company had a receivable of $109,500 due from the
president and vice president. At December 31, 1996, this balance was $173,500.
The Company offset this balance with the dividends payable of $210,315 at
December 31, 1996, resulting in a remaining dividend payable of $36,875 to two
shareholders and one director.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems.
In connection with the merger, the Company will make a cash distribution of
approximately $371,000 prior to the merger which represents the Company's
estimated S Corporation accumulated adjustment account. Had these transactions
been recorded at March 31, 1997, the effect on the accompanying unaudited
balance sheet would be a decrease in assets of $41,000 and an increase in
liabilities of $333,000 and a decrease in shareholders' equity of $371,000.
F-124
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT 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 ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 9
Price Range of Common Stock ................... 12
The Company.................................... 13
Dividend Policy................................ 15
Capitalization................................. 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 37
Management..................................... 46
Certain Transactions........................... 51
Principal Stockholders......................... 55
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 59
Legal Matters.................................. 60
Experts........................................ 60
Additional Information......................... 60
Index to Financial Statements.................. F-1
8,000,000 SHARES
[LOGO]
COMFORT SYSTEMS USA, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 1997
================================================================================
