UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): February 12, 1998
Commission File Number: 1-13011
COMFORT SYSTEMS USA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0484996
(State or other jurisdiction (I.R.S. Employer Indentification No.)
of incorporation)
THREE RIVERWAY
SUITE 200
HOUSTON, TEXAS 77056
(Address of Principal Executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 830-9600
<PAGE>
COMFORT SYSTEMS USA, INC.
FINANCIAL STATEMENTS AND EXHIBITS
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
This Form 8-K/A is being filed to include in the Current Report on Form 8-K
filed by the Registrant with the Securities and Exchange Commission on February
25, 1998 the financial statements and pro forma financial information required
by Item 7.
The required financial statements of the business acquired by the Registrant
are included as an exhibit to the Form 8-K/A.
(B) PRO FORMA FINANCIAL INFORMATION
The required pro forma financial information of the Registrant is included
as an exhibit to this Form 8-K/A.
(C) EXHIBITS
<TABLE>
<CAPTION>
Comfort Systems USA, Inc. Pro Forma Page
<S> <C>
Introduction to Unaudited Pro Forma Combined Financial Statements..................................F-2
Pro Forma Combined Balance Sheet (unaudited).......................................................F-3
Pro Forma Combined Statement of Operations (unaudited).............................................F-4
Notes to Pro Forma Combined Financial Statements (unaudited).................................F-5 - F-7
F&G Mechanical Corp. and Affiliate
Report of Independent Public Accountants...........................................................F-9
Combined Balance Sheet.....................................................................F-10 & F-11
Combined Statement of Income and Retained Earnings................................................F-12
Combined Statement of Cash Flows..................................................................F-13
Notes to Combined Financial Statements............................................................F-14
Exhibit 23.1 Consent of Marden, Harrison & Kreuter
</TABLE>
<PAGE>
COMFORT SYSTEMS USA, INC.
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Comfort Systems USA, Inc. ("Comfort Systems" and collectively with its
subsidiaries, the "Company") was founded in 1996 to become a leading national
provider of HVAC services focusing primarily on commercial and industrial
markets. On June 27, 1997, Comfort Systems completed the initial public offering
(the "Offering") of its common stock (the "Common Stock") and simultaneously
acquired in separate concurrent transactions, twelve companies (collectively
referred to as the "Founding Companies"). For financial statement purposes,
Comfort Systems has been identified as the accounting acquirer. Subsequent to
June 30, 1997, and through December 31, 1997, the Company acquired 27 HVAC and
related businesses. Of the 27 acquisitions, 14 were accounted for as
poolings-of-interests (the "Pooled Companies") and 13 were accounted for as
purchases (the "Purchased Companies").
On February 12, 1998, Comfort Systems acquired F&G Mechanical Corporation
and Meadowlands Fire Protection Corp. (together "F&G"). Pursuant to the rules of
the Securities and Exchange Commission, F&G is considered a "significant
subsidiary."
The following unaudited pro forma combined balance sheet reflects the
acquisition of F&G as if it had occurred on December 31, 1997. The following
unaudited pro forma combined statement of operations for the year ended December
31, 1997 presents the Company, and the restatement of F&G, the Founding
Companies and Purchased Companies as if the acquisitions by the Company occurred
on January 1, 1997.
Comfort Systems has preliminarily analyzed the savings that it expects to be
realized from reductions in salaries and certain benefits to the former owners.
To the extent the former owners of F&G, the Founding Companies, the Purchased
Companies and the Pooled 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. 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 Company, F&G, the Founding
Companies, Purchased Companies and Pooled 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 Form 8-K/A.
F-2
<PAGE>
COMFORT SYSTEMS USA, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMFORT F&G ADJUSTMENTS COMBINED
----------- ----------- -------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents..................... $ 14,533 $ 1,401 $ (943) $ 14,991
Marketable Securities......................... -- 1,781 -- 1,781
Accounts receivable........................... 73,826 16,665 -- 90,491
Less -- Allowance......................... 1,034 200 -- 1,234
----------- ----------- ---------- -----------
Accounts receivable, net............... 72,792 16,465 -- 89,257
Other receivables............................. 884 2,620 -- 3,504
Inventories................................... 6,214 -- -- 6,214
Prepaid expenses and other.................... 4,428 377 -- 4,805
Costs and estimated earnings in excess........
of billings 12,050 952 -- 13,002
----------- ----------- ---------- -----------
Total current assets................... 110,901 23,596 (943) 133,554
PROPERTY AND EQUIPMENT, net....................... 12,046 851 -- 12,897
GOODWILL, net ................................... 163,126 -- 23,743 186,869
OTHER NONCURRENT ASSETS........................... 1,707 5,778 -- 7,485
----------- ----------- ---------- -----------
Total assets........................... $ 287,780 $ 30,225 $ 22,800 $ 340,805
=========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.......... $ 869 $ 1,946 $ -- $ 2,815
Accounts payable.............................. 22,805 7,789 -- 30,594
Accrued compensation and benefits............. 5,622 4,790 -- 10,412
Payable to stockholders/affiliates............ 16 134 -- 150
Billings in excess of costs and estimated
earnings.................................... 10,100 2,456 -- 12,556
Income taxes payable.......................... 4,928 75 -- 5,003
Other current liabilities..................... 9,286 205 -- 9,491
----------- ----------- ---------- -----------
Total current liabilities.............. 53,626 17,395 -- 71,021
DEFERRED INCOME TAXES............................. 960 -- -- 960
LONG-TERM DEBT, NET OF CURRENT MATURITIES......... 20,326 -- 19,300 39,626
PAYABLE TO STOCKHOLDERS/AFFILIATES................ -- -- -- --
OTHER LONG-TERM LIABILITIES....................... 200 -- -- 200
----------- ----------- ---------- -----------
Total liabilities...................... 75,112 17,395 19,300 111,807
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.................................. 266 11 3 280
Additional paid-in capital.................... 205,709 -- 16,316 222,025
Retained earnings............................. 6,693 12,722 (12,722) 6,693
Net unrealized holding gain on securities..... -- 97 (97) --
----------- ----------- ---------- -----------
Total stockholders' equity............. 212,668 12,830 3,500 228,998
----------- ----------- ---------- -----------
Total liabilities and
stockholders' equity................. $ 287,780 $ 30,225 $ 22,800 $ 340,805
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
financial statement.
F-3
<PAGE>
COMFORT SYSTEMS USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED PURCHASED
FOUNDING COMPANIES
COMPANIES THROUGH
THROUGH ACQUISITION PRO FORMA PRO FORMA
COMFORT JUNE 30, 1997 DATE F&G ADJUSTMENTS COMBINED
------------ -------------- ------------ -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......................................... $ 237,709 $ 86,900 $ 56,919 $ 69,593 $ -- $ 451,121
COST OF SERVICES................................. 171,941 62,395 43,090 61,792 -- 339,218
------------ ------------- ------------ -------- ------------- ------------
Gross profit.......................... 65,768 24,505 13,829 7,801 -- 111,903
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 59,386 17,430 11,633 5,280 (23,237) 70,492
GOODWILL AND OTHER AMORTIZATION.................. 1,851 -- -- -- 2,786 4,637
------------ ------------- ------------ -------- ------------- ------------
Operating income...................... 4,531 7,075 2,196 2,521 20,451 36,774
OTHER INCOME (EXPENSE):
Interest income.......................... 1,149 167 59 418 -- 1,793
Interest expense......................... (1,212) (403) (145) (139) (1,679) (3,578)
Other.................................... 132 227 8 49 (135) 281
------------ ------------- ------------ -------- ------------- ------------
Other income (expense)................ 69 (9) (78) 328 (1,814) (1,504)
------------ ------------- ------------ -------- -------------- ------------
INCOME BEFORE INCOME TAXES....................... 4,600 7,066 2,118 2,849 18,637 35,270
PROVISION FOR INCOME TAXES....................... 7,430 537 72 90 6,969 15,098
------------ ------------- ------------ -------- ------------- ------------
NET INCOME (LOSS)................................ $ (2,830) $ 6,529 $ 2,046 $ 2,759 $ 11,668 $ 20,172
============ ============= ============ ======== ============= ============
NET INCOME (LOSS) PER SHARE:
Basic.................................... $ (.16) $ .76
========== ============
Diluted.................................. $ (.16) $ .75
========== ============
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic.................................... 17,515 26,649
========== ============
Diluted.................................. 17,708 26,842
========== ============
</TABLE>
The accompanying notes are an integral part of this pro
forma combined financial statements.
F-4
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
Comfort Systems USA, Inc. ("Comfort Systems" and collectively with its
subsidiaries, the "Company") was founded in 1996 to become a leading national
provider of HVAC services focusing primarily on commercial and industrial
markets. On June 27, 1997, Comfort Systems completed the initial public offering
(the "Offering") of its common stock (the "Common Stock") and simultaneously
acquired in separate concurrent transactions, twelve companies (collectively
referred to as the "Founding Companies"). For financial statement purposes,
Comfort Systems has been identified as the accounting acquirer. Subsequent to
June 30, 1997, and through December 31, 1997, the Company acquired 27 HVAC and
related businesses. Of the 27 acquisition, 14 were accounted for as
poolings-of-interests (the "Pooled Companies") and 13 were accounted for as
purchases (the "Purchased Companies").
On February 12, 1998, Comfort Systems acquired F&G Mechanical Corporation
and Meadowlands Fire Protection Corp. (together "F&G"). Pursuant to the rules of
the Securities and Exchange Commission, F&G is considered a "significant
subsidiary."
2. BUSINESS COMBINATIONS:
The accompanying pro forma combined balance sheet as of December 31, 1997
includes allocations of the respective purchase prices to the assets acquired
and liabilities assumed based on preliminary estimates of fair value and is
subject to adjustment. The preliminary allocations resulted in $188.7 million of
total pro forma combined goodwill including, $23.7 million of goodwill related
to F&G, which represents the excess of purchase price over the estimated fair
value of the net assets acquired for F&G, the Founding Companies and the
Purchased Companies.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation distributions and related borrowings of F&G
for $11.8 million.
(b) Records the estimated purchase price of F&G by Comfort Systems
consisting of $7.5 million in cash and $0.9 million of costs related to
the acquisition, and an aggregate of 1,432,434 shares of Common Stock.
The cash portion of the purchase price was funded by borrowings.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
ADJUSTMENT PRO FORMA
(A) (B) ADJUSTMENTS
------- --------- -----------
ASSETS
Cash and cash equivalents.................. $ -- $ (943) $ (943)
-------- --------- ---------
Total current assets................... -- (943) (943)
Goodwill, net.............................. -- 23,743 23,743
-------- --------- ---------
Total assets............................... $ -- $ 22,800 $ 22,800
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt, net of current maturities.. $ 11,800 $ 7,500 $ 19,300
-------- --------- ---------
Total liabilities...................... 11,800 7,500 19,300
-------- --------- ---------
Stockholders' equity:
Common stock........................... -- 3 3
Additional paid in capital............. -- 16,316 16,316
Retained earnings...................... (11,800) (922) (12,722)
Net unrealized holding gain on
securities........................... -- (97) (97)
-------- -------- ---------
Total stockholders' equity......... (11,800) 15,300 3,500
-------- -------- ---------
Total liabilities and stockholders' equity. $ -- $ 22,800 $ 22,800
======== ========= =========
F-5
<PAGE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(a) Reflects the reduction in salaries, bonuses and benefits to the former
owners of F&G, the Founding, Pooled and Purchased Companies, to which
they have agreed would take effect as of the acquisition date and
reflects the reversal of $0.6 million of acquisition costs related to
the Pooled Companies. These reductions in salaries, bonuses and benefits
are in accordance with the terms of their employment agreements.
(b) Reflects the amortization of goodwill using a 40-year life.
(c) Reflects the interests expense on borrowings of $22.8 million that would
have been necessary to fund S Corporation distributions (including F&G)
and the $7.5 million of cash consideration related to F&G.
(d) Reflects the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on F&G, Purchased and Founding Companies, and Pooled
Companies which were C Corporations.
(e) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $11.6 million recorded by
Comfort Systems 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 to reflect the ongoing salaries
received by corporate management of Comfort Systems of $0.4 million as
though those salaries were being paid prior to the Offering. The
issuances of Common Stock were made in contemplation of the Offering and
acquisition of the Founding Companies, and no future issuances of this
nature are anticipated.
(f) Reflects the reversal of gains and losses from sales of fixed assets.
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
---------------------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
------ ------- ------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND
ADMINISTRATION EXPENSES ............ $(12,111) $ -- $ -- $ -- $(11,126) $-- $(23,237)
GOODWILL AMORTIZATION .................. -- 2,786 -- -- -- -- 2,786
-------- ------- ------- ------- -------- ----- --------
INCOME (LOSS) FROM
OPERATIONS ......................... 12,111 (2,786) -- -- 11,126 -- 20,451
OTHER INCOME (EXPENSE):
Interest expense ............... -- -- (1,679) -- -- -- (1,679)
Other .......................... -- -- -- -- -- (135) (135)
-------- ------- ------- ------- -------- ----- --------
INCOME (LOSS) BEFORE
INCOME TAXES ....................... 12,111 (2,786) (1,679) -- 11,126 (135) 18,637
PROVISION FOR INCOME
TAXES .............................. -- -- -- 6,969 -- -- 6,969
-------- ------- ------- ------- -------- ----- --------
NET INCOME (LOSS) ...................... $ 12,111 $(2,786) $(1,679) $(6,969) $ 11,126 $(135) $ 11,668
======== ======= ======= ======= ======== ===== ========
</TABLE>
F-6
<PAGE>
5. WEIGHTED AVERAGE SHARES:
The following table summarizes weighted average shares outstanding (in
thousands):
Shares issued in connection with the acquisitions of the
Founding Companies........................................... 9,721
Shares sold pursuant to the Offering............................. 5,223
Shares issued to Notre Capital Ventures II, L.L.C., Comfort Systems'
management and consultants................................... 4,240
Shares issued in connection with the acquisitions of the
Pooled Companies............................................. 4,507
Shares issued in connection with the underwriter's overallotment. 434
Shares issued in connection with the acquisitions of the
Purchased Companies.......................................... 1,092
Shares issued in connection with the acquisition of F&G.......... 1,432
--------
Weighted average shares outstanding - Basic...................... 26,649
Weighted average portion of shares related to stock options
under the treasury stock method.............................. 193
--------
Weighted average shares outstanding - Diluted.................... 26,842
========
F-7
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
PAGE
----
Independent auditors' report ............................................ 1
Combined financial statements:
Combined balance sheet ................................................ 2-3
Combined statement of income and retained earnings .................... 4
Combined statement of cash flows ...................................... 5
Notes to combined financial statements ................................ 6-14
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
F & G Mechanical Corp. and Affiliate
348 New County Road
Secaucus, New Jersey 07094
We have audited the accompanying combined balance sheet of F & G Mechanical
Corp. and affiliate as of December 31, 1997, and the related combined statements
of income, retained earnings, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides 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 F & G Mechanical
Corp. and affiliate at December 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
As discussed in Note 1, the combined financial statements include the accounts
of F &G Mechanical ("F&G") and Meadowlands Fire Protection Corp. ("Meadowlands")
which are related by common stockholder interests. In prior years separate
financial statements were issued for F&G and Meadowlands. On February 12, 1998,
both companies were purchased by Comfort Systems USA, Inc. ("Comfort Systems").
Accordingly, the current combined financial statements are presented to reflect
the activity of these companies as a single economic unit.
MARDEN, HARRISON & KREUTER
Certified Public Accountants, P.C.
Port Chester, New York
March 24, 1998
F-9
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
COMBINED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 1,400,941
Marketable securities ...................................... 1,780,888
Accounts receivable, net of allowance for
doubtful accounts of $200,000 ............................. 12,833,931
Retainage receivable ....................................... 3,631,046
Costs and estimated earnings in excess of
billings on uncompleted contracts ......................... 952,827
Loans receivable - officers ................................ 1,554,123
Notes and loans receivable - related parties ............... 1,065,963
Deferred contract costs .................................... 176,776
Prepaid expenses and other receivables ..................... 199,548
-----------
Total current assets ................................. 23,596,043
-----------
Property and equipment:
Machinery and equipment .................................... 503,499
Transportation equipment ................................... 1,489,008
Furniture and fixtures ..................................... 489,469
Leasehold improvements ..................................... 26,665
-----------
2,508,641
Less accumulated depreciation and amortization ............. 1,657,075
-----------
Net property and equipment ........................... 851,566
-----------
Other assets:
Notes and loans receivable - related parties,
net of current portion .................................... 5,778,005
-----------
Total other assets ................................... 5,778,005
-----------
Total assets ......................................... $30,225,614
===========
F-10
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - bank .......................................... $ 1,945,510
Accounts payable .............................................. 7,788,790
Billings in excess of costs and estimated
earnings on uncompleted contracts ........................... 2,455,659
Accrued expenses and payroll taxes payable .................... 4,790,407
Deferred contract revenue ..................................... 206,140
Loans payable - affiliates .................................... 133,595
Income taxes payable .......................................... 75,363
-----------
Total liabilities ....................................... 17,395,464
-----------
Commitments and contingencies
Stockholders' equity:
Common stock .................................................. 11,000
Retained earnings ............................................. 12,721,653
Net unrealized holding gain on available-for-sale securities .. 97,497
-----------
Total stockholders' equity .............................. 12,830,150
-----------
Total liabilities and stockholders' equity .............. $30,225,614
===========
See notes to combined financial statements.
F-11
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
Contract revenue ......................................... $ 69,592,885
Direct costs ............................................. 61,792,317
Gross profit ............................................. 7,800,568
General and administrative expenses ...................... 5,280,332
Income from operations ................................... 2,520,236
Other income (expense):
Interest income ........................................ 417,891
Other income ........................................... 29,351
Gain on sale of marketable securities .................. 20,786
Interest expense ....................................... (139,498)
------------
328,530
------------
Income before income taxes ............................... 2,848,766
Income taxes ............................................. 89,982
------------
Net income ............................................... 2,758,784
Retained earnings, beginning of year ..................... 10,145,289
Distributions ............................................ (182,420)
------------
Retained earnings, end of year ........................... $ 12,721,653
============
See notes to combined financial statements.
F-12
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Reconciliation of net income to net cash
provided by operating activities:
Net income ...................................... $ 2,758,784
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................... 233,003
Provision for losses on accounts receivable ..... 126,380
Gain on sale of marketable securities ........... (20,786)
Changes in assets (increase) decrease:
Accounts receivable ........................... (2,641,044)
Retainage receivable .......................... (1,320,282)
Costs and estimated earnings in excess
of billings on uncompleted contracts ......... 115,323
Deferred contract costs ....................... (8,607)
Prepaid expenses and other receivables ........ (85,631)
Changes in liabilities increase (decrease):
Accounts payable .............................. 1,781,309
Billings in excess of costs and estimated
earnings on uncompleted contracts ............ (306,261)
Accrued expenses and payroll taxes payable .... 2,851,818
Deferred contract revenue ..................... 177,740
Income taxes payable .......................... 75,363
-----------
Net cash provided by operating activities $ 3,737,109
Investing activities:
Proceeds from sales of marketable securities .... 116,786
Purchase of marketable securities ............... (302,055)
Capital expenditures ............................ (436,780)
Net loans to related parties .................... (3,265,154)
Net loans to officers ........................... (943,359)
-----------
Net cash used in investing activities ... (4,830,562)
Financing activities:
Net loans from affiliates ....................... 133,595
Principal payments on long-term debt ............ (79,481)
Proceeds from borrowings under line of credit ... 1,800,000
Distributions to stockholders ................... (182,420)
-----------
Net cash provided by financing activities 1,671,694
-----------
Net increase in cash and cash equivalents .......... 578,241
Cash and cash equivalents, beginning of year ....... 822,700
-----------
Cash and cash equivalents, end of year ............. $ 1,400,941
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes ......... $ 16,494
Cash paid during the year for interest ............. $ 139,498
See notes to combined financial statements.
F-13
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(1) PRINCIPLES OF COMBINATION AND NATURE OF OPERATIONS:
The combined financial statements include the accounts of F&G Mechanical
Corp. and Meadowlands Fire Protection Corp. (collectively the "Company"),
which are affiliated by majority stockholder interests. All intercompany
accounts and transactions have been eliminated in combination.
In prior years, separate financial statements were presented for F & G
Mechanical Corp. and Meadowlands Fire Protection Corp. The current combined
financial statement presentation reflects the companies as a single
economic unit.
F&G Mechanical Corp. is engaged in plumbing and HVAC construction
activities primarily in New Jersey and the New York Metropolitan area.
Meadowlands Fire Protection Corp., is engaged in the installation of fire
protection systems for customers located in New Jersey and in the New York
metropolitan area.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) REVENUE AND COST RECOGNITION:
Revenue is recognized on the "percentage of completion" method for
reporting revenue on contracts not yet completed, measured by the
percentage of total costs incurred to date to estimated total costs
for each contract. This method is utilized because management
considers the cost-to-cost method the best method available to measure
progress on these contracts. Because of the inherent uncertainties in
estimating revenue and costs, it is at least reasonably possible that
the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those
other direct and indirect costs related to contract performance
including, but not limited to, indirect labor, subcontract costs and
supplies. General and administrative costs are charged to expense as
incurred.
The Company has contracts that may extend over more than one year,
therefore, revisions in cost and profit estimates during the course
of the work are reflected in the accounting period in which the
facts, which require the revisions, become known.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Claims on contracts
are not recorded until it is probable that the claim will result in
additional contract revenue and the amounts can be reliably
estimated.
Revenues recognized in excess of amounts billed are recorded as a
current asset under the caption "Costs and estimated earnings in
excess of billings on uncompleted contracts." Billings in excess of
revenues recognized are recorded as a current liability under the
caption "Billings in excess of costs and estimated earnings on
uncompleted contracts."
In accordance with construction industry practice, the Company
reports in current assets and liabilities those amounts relating to
construction contracts realizable and payable over a period in excess
of one year.
F-14
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D:
(B) CASH EQUIVALENTS:
The Company considers all highly liquid instruments with original
maturities of less than three months to be cash equivalents. At
December 31, 1997, cash equivalents consist of investments in money
market funds.
(C) INVESTMENTS:
Investments, consisting of U.S. Treasury Notes, corporate bonds and
notes, mutual funds and common stock are classified as
"available-for-sale" securities and are stated at fair value. Realized
gains and losses, determined using the specific identification cost
method, are included in earnings. Unrealized holding gains and losses
are reported as a separate component of stockholders' equity.
(D) DEFERRED CONTRACT REVENUE AND COSTS:
The Company's policy is to defer all revenue and costs associated with
individual contracts prior to the mobilization of the project.
(E) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using principally the
straight-line method. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful life
of the asset. Expenditures for maintenance and repairs are charged to
operations in the period incurred.
(F) WARRANTY COSTS:
The Company typically 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.
(G) USE OF ESTIMATES:
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the combined financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-15
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(3) MARKETABLE SECURITIES:
Cost and fair value of marketable securities at December 31, 1997 are as
follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury Notes ....... $ 321,232 $ 16,527 $ -- $ 337,759
Corporate bonds and notes . 1,009,668 27,589 6,317 1,030,940
Mutual Funds .............. 228,438 86,160 1,469 313,129
Common Stocks ............. 124,053 2,649 27,642 99,060
---------- ---------- ---------- ----------
$1,683,391 $ 132,925 $ 35,428 $1,780,888
========== ========== ========== ==========
At December 31, 1997, U.S. Treasury notes and corporate bonds and notes (at
fair value) mature as follows:
YEAR ENDING DECEMBER 31,
------------------------
1999
1998 TO 2002 THEREAFTER TOTAL
-------- --------- ---------- ----------
U.S. Treasury Notes ...... $180,000 $ -- $ 157,759 $ 337,759
Corporate bonds and notes. 39,767 341,478 649,695 1,030,940
-------- --------- ---------- ----------
$219,767 $ 341,478 $ 807,454 $1,368,699
======== ========= ========== ==========
The net unrealized holding gain increased by $24,510 for the year ended
December 31, 1997. For the year ended December 31, 1997, gross realized
gains pertaining to marketable securities totaled $20,786.
(4) RETAINAGE RECEIVABLE:
The retained contract receivables include approximately $1,416,000 at
December 31, 1997, that are not collectible within one year.
(5) CONTRACTS IN PROGRESS:
Information with respect to contracts in progress at December 31, 1997 is
as follows:
Expenditures on uncompleted contracts ............... $ 27,953,123
Estimated earnings thereon .......................... 4,139,313
------------
32,092,436
Less billings applicable thereto .................... 33,595,268
------------
$ (1,502,832)
============
F-16
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(5) CONTRACTS IN PROGRESS - CONT'D:
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts .............. $ 952,827
Billings in excess of costs and estimated
earnings on uncompleted contracts ................. (2,455,659)
-----------
$(1,502,832)
===========
(6) NOTES PAYABLE - BANK:
The Company had a discretionary line of credit with a bank, which provided
for aggregate borrowings of up to $4,750,000, with interest at the bank's
prime rate plus 1%. Borrowings were guaranteed by the Company's
stockholders. The Company had outstanding borrowings under the line of
credit totaling $1,800,000 at December 31, 1997.
The Company also had term notes payable which were collateralized by
equipment. The notes were payable in aggregate monthly installments of
$7,998 with interest at 8%. The outstanding balance of the notes payable
was $145,510 at December 31, 1997.
The outstanding balances were repaid in February 1998 concurrent with the
subsequent merger of the Company, and the facility was terminated (see Note
18).
(7) ACCRUED EXPENSES AND PAYROLL TAXES PAYABLE:
At December 31, 1997, accrued expenses and payroll taxes payable consists
of the following:
Payroll taxes ............................. $1,627,663
Union benefits ............................ 1,003,526
Insurance ................................. 806,370
Other ..................................... 1,352,848
----------
$4,790,407
==========
(8) STOCKHOLDERS' EQUITY:
The combined financial statements reflect the following capital structures
at December 31, 1997:
F&G MECHANICAL CORP .........................................
Common stock, no par value; 1000 shares authorized;
200 shares issued and outstanding .......................... $ 1,000
Retained earnings ........................................... 9,364,045
Net unrealized holding gain on available-for-sale securities 47,190
----------
Total stockholders' equity ............................ 9,412,235
----------
F-17
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(8) STOCKHOLDERS' EQUITY - CONT'D:
MEADOWLANDS FIRE PROTECTION CORP .........................
Common stock, no par value; 1000 shares authorized;
400 shares issued and outstanding ....................... 10,000
Retained earnings ........................................ 3,357,608
Net unrealized gain on available-for-sale securities ..... 50,307
-----------
Total stockholders' equity ......................... 3,417,915
-----------
Total combined stockholders' equity ................ $12,830,150
===========
(9) CONCENTRATION RISKS:
(A) CREDIT RISK:
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and trade accounts and retainage receivables.
The Company maintains its cash and cash equivalents in accounts which
exceed Federally insured limits. The Company limits its credit risk
by selecting financial institutions considered to be highly
creditworthy.
Trade accounts and retainage receivables are due from customers
located primarily in New Jersey and the New York metropolitan area.
The Company does not require collateral in most cases, but may file
statutory liens against the construction projects if a default in
payment occurs.
(B) DIRECT LABOR:
The Company's direct labor is supplied primarily by two unions which
have collective bargaining agreements expiring in April 1999.
Although the Company's past experience was favorable with respect to
resolving conflicting demands with these unions, it is always
possible that a protracted conflict may occur which could impact the
renewal of the collective bargaining agreements.
(10) RELATED PARTY TRANSACTIONS:
(A) LOANS RECEIVABLE - OFFICERS:
The Company has loans receivable from officers totaling $1,554,123 at
December 31, 1997. The loans are noninterest bearing. In January
1998, $950,000 was repaid.
F-18
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(10) RELATED PARTY TRANSACTIONS - CONT'D:
(B) NOTES AND LOANS RECEIVABLE - RELATED PARTIES:
The Company has loans receivable from an entity related through common
management control totalling $1,009,518 at December 31, 1997. The
loans are noninterest bearing. Subsequent to December 31, 1997 this
entity was purchased by Meadowlands Fire Protection Corp. (see Note
10D).
In addition, the Company has notes receivable totaling $5,834,450,
from an entity in which the stockholders of the Company have an
ownership interest. At December 31, 1997, $56,445 of the loans were
classified as current assets. One note amounting to $3,960,000 bears
interest at 8.5% per annum. The balance of $1,818,005 is noninterest
bearing. In conjunction with the terms of the subsequent merger of the
Company, the notes, plus accrued interest, are due February 2001.
(C) LOANS PAYABLE - AFFILIATES:
The Company has loans payable to entities related through common
ownership totalling $133,595. The loans are noninterest bearing.
(D) PAYROLL:
The Company used an entity affiliated through common management
control as a common paymaster to process certain payrolls. The Company
reimbursed the affiliate at cost with no mark-up. Reimbursements
amounted to $3,373,308 for the year ended December 31, 1997.
In February 1998, the Company acquired the affiliate for a purchase
price of $25,000.
(E) OPERATING FACILITIES:
The Company leases administrative, warehouse and yard space from an
entity affiliated by common ownership through a noncancelable net
operating lease expiring May 2004. Rent expense including utilities,
maintenance and real estate taxes for this lease totaled $485,375 for
the year ended December 31, 1997. At December 31, 1997, the future
minimum rental payments to be made under the noncancellable operating
lease are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
1998 ............................ $ 338,616
1999 ............................ 355,890
2000 ............................ 355,890
2001 ............................ 355,890
2002 ............................ 355,890
Thereafter ...................... 504,178
----------
$2,266,354
==========
F-19
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(10) RELATED PARTY TRANSACTIONS - CONT'D:
(E) OPERATING FACILITIES - CONT'D:
On March 16, 1998 the Company increased the amount of space occupied.
The monthly rent increased by approximately $7,000 per month, plus
real estate taxes.
The Company also leases warehouse space from a related entity on a
month to month basis. Rent expense for this lease was $18,000 for the
year ended December 31, 1997.
(11) COMMITMENTS AND CONTINGENCIES:
(A) PERFORMANCE BONDS:
The Company is contingently liable to a surety under a general
indemnity agreement. The Company agrees to indemnify the surety for
any payments made on contracts of suretyship, guaranty or indemnity.
The Company believes that all contingent liabilities will be satisfied
by its performance on the specific bonded contracts involved.
(B) CLAIMS AND LAWSUITS:
The Company is from time to time party to litigation in the ordinary
course of business. There are currently no pending legal proceedings
that, in management's opinion, would have a material adverse effect on
the Company's operating results or financial condition. The Company
maintains various insurance coverages in order to minimize financial
risk associated with certain claims.
(12) INCOME TAXES:
Both F&G Mechanical Corp. and Meadowlands Fire Protection Corp. have
elected and the stockholders have consented, under the applicable
provisions of the Internal Revenue Code, New Jersey, and New York State
Franchise Tax Codes to have the Company report its income for Federal
Corporation, New Jersey Corporation, and New York State Franchise tax
purposes as an "S" corporation. The stockholders report the net taxable
income or loss of the Company in their personal income tax returns.
Therefore, no provision is made in the accompanying combined financial
statements for Federal Corporation, New Jersey Corporation, and New York
State Franchise taxes except for the New Jersey and New York State tax on
"S" corporations, when applicable.
In accordance with the subsequent merger of the Company, the "S"
Corporation elections were terminated and the Company will be subject to
corporate income taxes subsequent to the merger date (see Note 18).
F-20
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(13) PROFIT-SHARING PLAN:
The Company has a profit-sharing plan that covers substantially all
nonunion employees meeting the age and length of service requirements of
the plan. Contributions to the plan are at the discretion of the Company's
Board of Directors and are based on a percentage of the participants'
compensation. Profit-sharing expense was $161,860 for the year ended
December 31, 1997. In conjunction with the terms of the subsequent merger
of the Company, the profit-sharing plan was terminated February 9, 1998
(see Note 18).
(14) MULTIEMPLOYER PENSION PLANS:
The Company made contributions to multiemployer pension plans that cover
its various union employees. These plans provide benefits based on union
members' earnings and periods of coverage under the respective plans. It is
not cost-effective to accumulate information regarding the pension expense
under these plans. In the event of plan terminations or company withdrawal
from the plans, the Company may be liable for a portion of the plans'
unfunded vested benefits, the amounts of which, if any, have not been
determined.
(15) MAJOR CUSTOMERS:
The Company earned approximately 15% and 10%, respectively, from two major
customers during the year ended December 31, 1997.
(16) BACKLOG:
Backlog represents the amount of revenue the Company expects to realize
from work to be performed on uncompleted contracts in progress at year end
and from contractual agreements on which work has not commenced. Backlog
consists of the following:
Estimated revenue to be recognized from:
Uncompleted contracts in progress .................... $18,896,494
Contracts on which work has not commenced ............. 11,589,000
-----------
Total ........................................... $30,485,494
===========
(17) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Retained earnings at January 1, 1997 were restated to account for a change
in accounting principle due to a business combination. The change in
accounting principle is related to accounting for warranty costs which
management believes results in a closer matching of costs and revenues. The
cummulative effect of this change on prior years' retained earnings was
$296,418.
F-21
<PAGE>
F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONCLUDED)
YEAR ENDED DECEMBER 31, 1997
(18) SUBSEQUENT EVENT:
On February 12, 1998, F&G Mechanical Corp merged with Comfort Systems and
Meadowlands Fire Protection Corp. merged with INRI Acquisition Corp., a
wholly owned subsidiary of Comfort Systems.
In conjunction with the merger, the outstanding balances of notes payable
bank were paid in full, the profit-sharing plan was terminated, and the
stockholders of F&G Mechanical Corp. entered into 5 year employment
agreements with Comfort Systems. In addition, the Company distributed
$11,800,000 to the stockholders at the closing.
F-22
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form 8-K/A of Comfort Systems USA,
Inc. our report dated March 24, 1998 relating to the combined financial
statements of F&G Mechanical Corp. and Affiliates at December 31, 1997 and for
the year then ended.
MARDEN, HARRISON & KREUTER
Certified Public Accountants, P.C.
/s/ Marden, Harrison & Kreuter
Port Chester, New York
April 23, 1998
