================================================================================
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): November 15, 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
of incorporation) Indentification No.)
777 POST OAK BLVD.
SUITE 500
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 November
15, 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
PAGE
-----
Comfort Systems USA, Inc. Pro Forma
Introduction to Unaudited Pro
Forma Combined Financial
Statements..................... F-2
Pro Forma Combined Balance Sheet
(unaudited).................... F-3
Pro Forma Combined Statements of
Operations (unaudited)......... F-4
Notes to Pro Forma Combined
Financial Statements
(unaudited).................... F-6
Shambaugh & Son, Inc.
Financial Statements as of
September 30, 1998 and 1997
Balance Sheets (unaudited)...... F-11
Statements of Income
(unaudited).................... F-12
Statements of Shareholder's
Equity (unaudited)............. F-13
Statements of Cash Flows
(unaudited).................... F-14
Notes to Financial Statements
(unaudited).................... F-15
Financial Statements as of December
31, 1997
Report of Independent
Auditors........................ F-23
Balance Sheet................... F-24
Statement of Income............. F-25
Statement of Shareholder's
Equity.......................... F-26
Statement of Cash Flows......... F-27
Notes to Financial Statements... F-28
Consent of Crowe, Chizek and Company
LLP.................................. F-35
F-1
<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 July 2, 1997, Comfort Systems completed the initial public offering
(the "IPO") 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
the IPO, and through September 30, 1998, the Company acquired 70 HVAC and
related businesses. Of the 70 acquisitions, 17 were accounted for as
poolings-of-interests (the "Pooled Companies") and 53 were accounted for as
purchases (the "Purchased Companies").
On November 15, 1998, Comfort Systems acquired Shambaugh & Son, Inc.
("S&S"). Pursuant to the rules of the Securities and Exchange Commission, S&S
is considered a "significant subsidiary."
The following unaudited pro forma combined balance sheet reflects the
acquisition of S&S as if it had occurred on September 30, 1998. The following
unaudited pro forma combined statement of operations presents the Company,
restated for the Pooled Companies, and the restatement of S&S, 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 S&S, 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' 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, S&S, 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
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMFORT PRO FORMA PRO FORMA
SYSTEMS S&S ADJUSTMENTS COMBINED
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 9,687 $ 1,861 $ (500) $ 11,048
Marketable securities.............. -- 6,808 (3,565) 3,243
Accounts receivable................ 194,605 35,864 -- 230,469
Less -- Allowance............... 3,526 455 -- 3,981
--------- --------- ------------ ----------
Accounts receivable, net... 191,079 35,409 -- 226,488
Other receivables.................. 2,360 246 (194) 2,412
Inventories........................ 13,209 1,595 -- 14,804
Prepaid expenses and other......... 10,602 363 1,314 12,279
Costs and estimated earnings in
excess of billings.............. 26,595 5,044 -- 31,639
--------- --------- ------------ ----------
Total current assets....... 253,532 51,326 (2,945) 301,913
PROPERTY AND EQUIPMENT, net.......... 26,054 7,230 (3,360) 29,924
GOODWILL, net........................ 310,452 104 75,264 385,820
OTHER NONCURRENT ASSETS.............. 10,611 4,713 (1,894) 13,430
--------- --------- ------------ ----------
Total assets............... $ 600,649 $ 63,373 $ 67,065 $731,087
========= ========= ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 6,821 $ 562 $ (384) $ 6,999
Accounts payable................... 56,728 11,402 -- 68,130
Accrued compensation and
benefits........................ 21,280 4,490 -- 25,770
Billings in excess of costs and
estimated earnings.............. 31,220 9,700 -- 40,920
Income taxes payable............... 3,259 -- -- 3,259
Other current liabilities.......... 16,856 2,177 40 19,073
--------- --------- ------------ ----------
Total current
liabilities............. 136,164 28,331 (344) 164,151
DEFERRED INCOME TAXES................ 889 -- 203 1,092
LONG-TERM DEBT, NET OF CURRENT
MATURITIES......................... 127,969 2,532 85,833 216,334
OTHER LONG-TERM LIABILITIES.......... 1,309 -- -- 1,309
--------- --------- ------------ ----------
Total liabilities.......... 266,331 30,863 85,692 382,886
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock.................... -- -- -- --
Common stock....................... 349 3,185 (3,169) 365
Additional paid-in capital......... 300,644 -- 13,867 314,511
Retained earnings.................. 33,325 29,325 (29,325) 33,325
--------- --------- ------------ ----------
Total stockholders'
equity.................. 334,318 32,510 (18,627) 348,201
--------- --------- ------------ ----------
Total liabilities and
stockholders' equity.... $ 600,649 $ 63,373 $ 67,065 $731,087
========= ========= ============ ==========
</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
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PURCHASED
COMPANIES
THROUGH
COMFORT ACQUISITION PRO FORMA PRO FORMA
SYSTEMS DATE S&S ADJUSTMENTS COMBINED
-------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................................ $559,339 $ 133,407 $ 141,209 $ -- 833,955
COST OF SERVICES........................ 423,223 112,193 113,773 -- 649,189
-------- ----------- ---------- ----------- ---------
Gross profit....................... 136,116 21,214 27,436 -- 184,766
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 87,609 21,448 18,469 (3,876) 123,650
GOODWILL AMORTIZATION................... 4,642 3 3 2,870 7,518
-------- ----------- ---------- ----------- ---------
Operating income (loss)............ 43,865 (237) 8,964 1006 53,598
OTHER INCOME (EXPENSE):
Interest expense, net.............. (3,731) (42) (97) (6,189) (10,059)
Other.............................. 156 (419) 182 194 113
-------- ----------- ---------- ----------- ---------
Other income (expense)........ (3,575) (461) 85 (5,995) (9,946)
-------- ----------- ---------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... 40,290 (698) 9,049 (4,989) 43,652
PROVISION (BENEFIT) FOR INCOME TAXES.... 17,687 (305) 130 1,944 19,456
-------- ----------- ---------- ----------- ---------
NET INCOME (LOSS)....................... $ 22,603 $ (393) $ 8,919 $(6,933) $ 24,196
======== =========== ========== =========== =========
NET INCOME PER SHARE:
Basic.............................. $ .71 $ .67
======== =========
Diluted............................ $ .70 $ .67
======== =========
SHARES USED IN COMPUTING NET INCOME PER
SHARE:
Basic.............................. 31,689 35,893
======== =========
Diluted............................ 32,179 36,383
======== =========
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
F-4
<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
COMBINED THROUGH ACQUISITION PRO FORMA PRO FORMA
SYSTEMS JUNE 30, 1997 DATE S&S ADJUSTMENTS COMBINED
---------- ------------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 297,649 $86,900 $ 442,581 $ 157,535 $ -- $ 984,665
COST OF SERVICES..................... 220,418 62,395 350,449 121,387 -- 754,649
---------- ------------- ----------- ---------- ----------- ---------
Gross profit............... 77,231 24,505 92,132 36,148 -- 230,016
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 68,775 17,430 71,670 24,299 (35,323) 146,851
GOODWILL AMORTIZATION................ 1,851 -- -- 3 7,967 9,821
---------- ------------- ----------- ---------- ----------- ---------
Operating income........... 6,605 7,075 20,462 11,846 27,356 73,344
OTHER INCOME (EXPENSE):
Interest expense, net........... (146) (236) 14 (45) (12,446) (12,859)
Other........................... (839) 227 682 420 (135) 355
---------- ------------- ----------- ---------- ----------- ---------
Other income (expense)..... (985) (9) 696 375 (12,581) (12,504)
---------- ------------- ----------- ---------- ----------- ---------
INCOME BEFORE INCOME TAXES........... 5,620 7,066 21,158 12,221 14,775 60,840
PROVISION FOR INCOME TAXES........... 7,743 537 1,193 107 16,265 25,845
---------- ------------- ----------- ---------- ----------- ---------
NET INCOME (LOSS).................... $ (2,123) $ 6,529 $ 19,965 $ 12,114 $ (1,490) $ 34,995
========== ============= =========== ========== =========== =========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (.11) $ 1.02
========== =========
Diluted (Reflects the interest
effect of $1,610 related to
the assumed conversion of
outstanding convertible
notes)........................ $ (.11) $ 1.00
========== =========
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 18,953 34,238
========== =========
Diluted......................... 18,953 36,671
========== =========
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
F-5
<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 July 2, 1997, Comfort Systems completed the initial public offering
(the "IPO") 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
IPO, and through September 30, 1998, the Company acquired 70 HVAC and related
businesses. Of the 70 acquisitions, 17 were accounted for as
poolings-of-interests and were restated (the "Pooled Companies") and 53 were
accounted for as purchases (the "Purchased Companies").
On November 15, 1998, Comfort Systems acquired Shambaugh & Son, Inc.
("S&S"). Pursuant to the rules of the Securities and Exchange Commission, S&S
is considered a "significant subsidiary."
2. BUSINESS COMBINATIONS:
The accompanying pro forma combined balance sheet as of September 30, 1998
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 $385.8 million of
total pro forma combined goodwill including, $75.3 million of goodwill related
to S&S, which represents the excess of purchase price over the estimated fair
value of the net assets acquired for S&S, the Founding Companies and the
Purchased Companies.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation distributions of S&S for $6.3 million which
consisted primarily of $3.6 million of marketable securities, $3.4
million of property and equipment, $0.9 million of cash surrender
value of key man life insurance policies and $1.1 million of notes
receivables, offset by the reduction of certain notes payable of $2.7
million related to the property and equipment distributed.
(b) Records the estimated purchase price of S&S by Comfort Systems
consisting of $58.4 million in cash, $29.8 million in principal amount
of convertible subordinated notes, and approximately $0.5 million of
costs related to the acquisition, and an aggregate of 1,610,889 shares
of Common Stock. The cash portion of the purchase price was funded by
borrowings.
(c) Records deferred income tax assets and liabilities.
F-6
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
-------------------------------- PRO FORMA
(A) (B) (C) ADJUSTMENT
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash................................. $ -- $ (500) $ -- $ (500)
Marketable securities................ (3,565) -- -- (3,565)
Other receivables.................... (194) -- -- (194)
Prepaid expenses and other........... (9) -- 1,323 1,314
--------- ---------- --------- -----------
Total current assets....... (3,768) (500) 1,323 (2,945)
Property and equipment, net.......... (3,360) -- -- (3,360)
Goodwill, net........................ -- 76,344 (1,080) 75,264
Other noncurrent assets.............. (1,894) -- -- (1,894)
--------- ---------- --------- -----------
Total assets............... $ (9,022) $ 75,844 $ 243 $ 67,065
========= ========== ========= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term
debt................................. $ (384) $ -- $ -- $ (384)
Other current liabilities............ -- -- 40 40
--------- ---------- --------- -----------
Total current
liabilities................ (384) -- 40 (344)
Deferred income taxes................ -- -- 203 203
Long-term debt, net of current
maturities......................... (2,337) 88,170 -- 85,833
--------- ---------- --------- -----------
Total liabilities.......... (2,721) 88,170 243 85,692
--------- ---------- --------- -----------
Stockholders' equity:
Common stock.................... -- (3,169) -- (3,169)
Additional paid-in capital...... -- 13,867 -- 13,867
Retained earnings............... (6,301) (23,024) -- (29,325)
--------- ---------- --------- -----------
Total stockholders'
equity..................... (6,301) (12,326) -- (18,627)
--------- ---------- --------- -----------
Total liabilities and stockholders'
equity............................. $ (9,022) $ 75,844 $ 243 $ 67,065
========= ========== ========= ===========
</TABLE>
F-7
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
NINE MONTHS ENDED SEPTEMBER 30, 1998
(a) Reflects (i) the reductions in salaries, bonuses and benefits to the
former owners of S&S, the Founding, Pooled and Purchased Companies,
which they contractually agreed would take effect as of their
respective acquisition dates; and (ii) the reversal of $0.5 million of
acquisition costs related to the Pooled Companies.
(b) Reflects the incremental amortization of goodwill using a 40-year
life.
(c) Reflects the incremental interest expense on borrowings of $200.5
million that would have been necessary to fund S Corporation
distributions, cash consideration and notes issued for acquisitions
subsequent to the IPO, including $58.4 million of cash consideration
and $29.8 million of notes issued related to S&S.
(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&S, Purchased and Founding Companies, and Pooled
Companies which were C Corporations.
(e) Reflects the reversal of gains and losses from sales of fixed assets
related to Purchased and Founding Companies.
The following table summarizes unaudited pro forma combined statement 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 ADMINISTRATION
EXPENSES........................... $ (3,876) $ -- $ -- $ -- $ -- $ (3,876)
GOODWILL AMORTIZATION................ -- 2,870 -- -- -- 2,870
--------- --------- --------- --------- --------- ------------
OPERATING INCOME..................... 3,876 (2,870) -- -- -- 1006
OTHER INCOME (EXPENSE):
Interest expense................... -- -- (6,189) -- -- (6,189)
Other.............................. -- -- -- -- 194 194
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 3,876 (2,870) (6,189) -- 194 (4,989)
PROVISION FOR INCOME TAXES........... -- -- -- 1,944 -- 1,944
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 3,876 $ (2,870) $ (6,189) $ (1,944) $ 194 $ (6,933)
========= ========= ========= ========= ========= ============
</TABLE>
F-8
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(a) Reflects (i) the reductions in salaries, bonuses and benefits to the
former owners of S&S, the Founding, Pooled and Purchased Companies,
which they contractually agreed would take effect as of their
respective acquisition dates; (ii) the reduction in rent expense of
$0.1 million; and (iii) the reversal of $0.6 million of acquisition
costs related to the Pooled Companies.
(b) Reflects the incremental amortization of goodwill using a 40-year
life.
(c) Reflects the incremental interest expense on borrowings of $200.5
million, net of interest incurred on distributed notes, that would
have been necessary to fund S Corporation distributions, cash
consideration and notes issued for the acquisitions subsequent to the
IPO, including $58.4 million of cash consideration and $29.8 million
of notes issued related to S&S.
(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&S, 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 IPO. The
issuance of Common Stock was made in contemplation of the IPO 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
related to Purchased and Founding Companies.
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.............................. $ (24,197) $ -- $ -- $ -- $ (11,126) $ -- (35,323)
GOODWILL AMORTIZATION................... -- 7,967 -- -- -- -- 7,967
--------- --------- --------- --------- --------- --------- -----------
OPERATING INCOME........................ 24,197 (7,967) -- -- 11,126 -- 27,356
OTHER INCOME (EXPENSE):
Interest expense.................... -- -- (12,446) -- -- -- (12,446)
Other............................... -- -- -- -- -- (135) (135)
--------- --------- --------- --------- --------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... 24,197 (7,967) (12,446) -- 11,126 (135) 14,775
PROVISION FOR INCOME TAXES.............. -- -- -- 16,265 -- -- 16,265
--------- --------- --------- --------- --------- --------- -----------
NET INCOME (LOSS)....................... $ 24,197 $ (7,967) $ (12,446) $ (16,265) $ 11,126 $ (135) $ (1,490)
========= ========= ========= ========= ========= ========= ===========
</TABLE>
F-9
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. EARNINGS PER SHARE:
The following table summarizes weighted average shares outstanding (in
thousands):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
Shares issued in connection with the
acquisitions of the Founding
Companies.......................... 9,721 9,721
Shares sold pursuant to the
Offering........................... 6,100 6,100
Shares issued to Notre Capital
Ventures II, L.L.C., Comfort
Systems' management and
consultants........................ 4,240 4,240
Shares issued in connection with the
acquisitions of the Pooled
Companies.......................... 5,946 5,946
Shares sold in connection with the
underwriter's overallotment for the
IPO and Second Public Offering..... 434 1,037
Shares issued in connection with the
acquisitions of the Purchased
Companies.......................... 7,063 7,063
Shares sold in Second Public
Offering........................... -- 152
Shares issued in connection with the
Employee Stock Purchase Plan....... -- 6
Shares issued in connection with the
exercise of stock options.......... -- 17
Shares issued in connection with the
acquisition of S&S................. 1,611 1,611
Less: Shares sold in the IPO that
were not used for the cash portion
of the acquisition of the Founding
Companies.......................... 877 --
------------ -------------
Weighted average shares
outstanding -- Basic............... 34,238 35,893
Weighted average portion of shares
related to stock options under the
treasury stock method.............. 193 490
Weighted average shares related to
the issuance of convertible notes 2,240 --(A)
------------ -------------
Weighted average shares
outstanding -- Diluted............. 36,671 36,383
============ =============
(A) The effect of assumed conversion of outstanding convertible notes is
antidilutive at September 30, 1998 and therefore excluded from the weighted
average shares calculation.
F-10
<PAGE>
SHAMBAUGH AND SON, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
1998 1997
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents....... $ 1,861,014 $ 4,372,761
Available for sale securities... 6,808,242 3,828,873
Accounts receivable -- net...... 35,408,575 26,556,960
Costs and estimated earnings in
excess of billings on
contracts in process.......... 5,044,002 5,488,555
Inventories, material and
supplies...................... 1,595,368 1,504,339
Notes receivable................ 246,242 305,359
Other current assets............ 363,092 1,043,433
-------------- --------------
Total current assets....... 51,326,535 43,100,280
Property and equipment, net.......... 7,229,547 6,669,484
Other assets
Investments in limited
partnerships.................. 2,100,000 1,000,000
Notes receivable................ 1,075,226 1,321,468
Other assets.................... 1,642,134 1,482,384
-------------- --------------
4,817,360 3,803,852
-------------- --------------
$ 63,373,442 $ 53,573,616
============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term
debt.......................... $ 562,127 $ 416,307
Accounts payable................ 11,402,575 9,322,672
Billings in excess of costs and
estimated earnings on
contracts in process.......... 9,699,639 7,004,699
Accrued payroll and related
liabilities................... 4,490,480 3,081,542
Accrued expenses................ 2,176,618 1,691,141
-------------- --------------
Total current
liabilities............. 28,331,439 21,516,361
Long-term debt....................... 2,532,006 2,722,005
Shareholder's equity
Common stock, no par value:
3,000 shares authorized, 2,072
shares issued and
outstanding................... 3,185,032 3,185,032
Retained earnings............... 30,359,531 26,123,088
Unrealized gain (loss) on
available-for-sale
securities.................... (1,034,566) 27,130
-------------- --------------
32,509,997 29,335,250
-------------- --------------
$ 63,373,442 $ 53,573,616
============== ==============
See accompanying notes to financial statements.
F-11
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
% TO % TO
AMOUNT REVENUE AMOUNT REVENUE
--------------- ------- --------------- -------
<S> <C> <C> <C> <C>
Earned revenue on contracts.......... $ 141,209,204 100.0% $ 116,120,729 100.0%
Costs of earned revenue on
contracts.......................... 113,773,202 80.6 90,857,039 78.2
--------------- ------- --------------- -------
GROSS PROFIT......................... 27,436,002 19.4 25,263,690 21.8
General and administrative
expenses........................... 18,472,011 13.1 17,227,261 14.8
--------------- ------- --------------- -------
OPERATING INCOME..................... 8,963,991 6.3 8,036,429 7.0
Other income......................... 84,902 .1 195,291 .1
--------------- ------- --------------- -------
INCOME BEFORE INCOME TAXES........... 9,048,893 6.4 8,231,720 7.1
Provision for income taxes........... 129,851 .1 106,470 .1
--------------- ------- --------------- -------
NET INCOME........................... $ 8,919,042 6.3% $ 8,125,250 7.0%
=============== ======= =============== =======
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
AVAILABLE-FOR- TOTAL
COMMON RETAINED SALE SHAREHOLDER'S
STOCK EARNINGS SECURITIES EQUITY
---------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........... $3,045,684 $24,109,694 $ 56,236 $ 27,211,614
Net income for the nine months ended
September 30, 1997................. -- 8,125,250 -- 8,125,250
Change in unrealized gains on
available-for-sale securities...... -- -- (29,106) (29,106)
Capital contribution................. 139,348 -- -- 139,348
Dividends............................ -- (6,111,856) -- (6,111,856)
---------- ----------- -------------- -------------
Balance at September 30, 1997........ $3,185,032 $26,123,088 $ 27,130 $ 29,335,250
========== =========== ============== =============
Balance at January 1, 1998........... $3,185,032 $25,676,489 $ (6,945) $ 28,854,576
Net income for nine months ended
September 30, 1998................. -- 8,919,042 -- 8,919,042
Change in unrealized loss on
available-for-sale securities...... -- -- (1,027,621) (1,027,621)
Dividends............................ -- (4,236,000) -- (4,236,000)
---------- ----------- -------------- -------------
Balance at September 30, 1998........ $3,185,032 $30,359,531 $ (1,034,566) $ 32,509,997
========== =========== ============== =============
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................... $ 8,919,042 $ 8,125,250
Adjustments to reconcile net income
to net cash from
operating activities
Depreciation and amortization... 994,563 830,208
Equity in net loss of affiliated
company....................... -- 27,748
Provision for losses on accounts
receivable.................... 105,165 94,957
Gain on sale of equipment....... (5,891) (37,610)
Gain on sale of
available-for-sale
securities.................... (57,181) (109,877)
Change in assets and liabilities
Accounts receivable, net...... (6,317,712) 5,809,978
Inventories................... (55,140) 54,744
Prepaid and other current
items...................... (162,839) (762,659)
Accounts payable.............. 2,159,959 (4,089,038)
Billings relative to costs and
estimated earnings on
contracts in process....... 307,386 626,245
Accrued expenses.............. 854,604 (336,947)
--------------- --------------
Total adjustments.......... (2,177,086) 2,107,749
--------------- --------------
Net cash from operating
activities............ 6,741,956 10,232,999
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............... (1,608,538) (827,803)
Increase in cash value of life
insurance....................... (136,316) (136,316)
Available-for-sale securities
purchased....................... (12,048,286) (6,241,314)
Proceeds on sale of
available-for-sale securities... 7,962,696 4,987,825
Purchase of investments in limited
partnerships.................... -- (1,000,000)
Collections on notes receivable.... 142,174 170,115
Deposits and other assets.......... 166,716 512,087
Proceeds from sale of property and
equipment....................... 5,891 37,610
--------------- --------------
Net cash from investing
activities................. (5,515,663) (2,497,796)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution............... -- 139,348
Additional borrowing on long-term
debt............................ 376,935 --
Repayment of debt.................. (307,155) (304,980)
Dividends.......................... (4,236,000) (6,111,856)
--------------- --------------
Net cash from financing
activities................. (4,166,220) (6,277,488)
--------------- --------------
Net change in cash and cash
equivalents........................ (2,939,927) 1,457,715
Cash and cash equivalents at
beginning of period................ 4,800,941 2,915,046
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 1,861,014 $ 4,372,761
=============== ==============
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest...................... $ 404,670 $ 462,196
State income taxes............ 128,973 106,470
See accompanying notes to financial statements.
F-14
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Shambaugh and Son, Inc. operates a construction
business to contract mechanical, electrical, fire protection, food processing,
refrigeration, temperature and process controls, water and waste water treatment
projects. It also operates a mobile home park, leases commercial real estate and
provides computer consulting services. The construction contracts occasionally
extend for periods in excess of one year and provide for progress billings in
amounts which are commensurate with the extent of performance under the
contracts. In addition to the primary location in Fort Wayne, Indiana, there are
branch offices in Southfield and Kalamazoo, Michigan; Chicago, Illinois; Toledo,
Ohio; and South Bend, Indianapolis and Lafayette, Indiana.
REVENUE RECOGNITION: The Company accounts for revenue on construction
contracts on the basis of the percentage of completion of individual contracts.
Under this method, the earned portion of the total contract is based on the
percentage of completion as computed from a comparison of total costs incurred
to date to total projected cost on the contract.
As described in the preceding paragraph, revenue is based on the amount of
costs incurred to date over total estimated costs. Management estimates the
amount of costs to complete a given contract based on information available at
each balance sheet date. Estimates of costs to complete certain contracts could
change significantly in the near term and other contracts are subject to cost
reviews by the customer. The ultimate outcome of these estimates and contracts
subject to customer review are not known. Due to these uncertainties, it is at
least reasonably possible that completion costs will be significantly different.
At the time a loss on a contract becomes probable, the entire estimated
loss is accrued.
For contracts which extend over more than one fiscal year, changes in job
performance, job conditions, estimated profitability and final contract
settlements which result in revisions to costs and income are recognized in the
accounting period when these matters become known. Claims for additional
contract revenue are recognized when realization of the claim is assured and the
amount can reasonably be determined.
Individual contract costs include direct material, subcontract, direct
labor and labor fringe costs. Indirect costs are those related to contract
performance such as indirect labor, supplies, tools, repairs and maintenance
costs. General and administrative costs are expensed as incurred.
ACCOUNTS RECEIVABLE: The Company follows the practice of filing liens
within the statutory time frame on construction projects where collection
problems are anticipated. The liens act as security for collection of
construction receivables and have the effect of restricting the customer's
ability to subsequently transfer title of the constructed property and to obtain
certain kinds of financing without first satisfying the lien.
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost. The
Company provides for depreciation using annual rates which are sufficient to
amortize the cost of depreciable assets over their estimated useful lives.
Depreciation is computed using straight-line and accelerated methods over
estimated useful lives ranging from 3 to 40 years.
BENEFIT COST: The Company is liable for certain costs related to employee
health and accident benefit programs and workmen's compensation. The Company's
responsibility for losses on these programs is limited to amounts not insured.
Costs are charged to income when incurred.
INCOME TAXES: The Company, with the consent of its shareholder, has
elected to have its income taxed under Section 1362 of the Internal Revenue
Code, and a similar section of certain state income tax laws. These provide
that, in lieu of corporate income taxes, the shareholder is taxed on his
proportionate
F-15
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share of the Company's taxable income. Therefore, the provision for income taxes
represents certain state income taxes paid by the Company.
EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of cost over net
assets acquired is being amortized on the straight-line method over a 40-year
period.
INVENTORIES: The inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method.
INVESTMENT: The Company's 50% investment in D&M Realty Corp. is accounted
for by the equity method. As of September 30, 1997, D&M Realty Corp. was
liquidated and its net assets were contributed to Shambaugh & Son, Inc.
SECURITIES: The Company classifies securities into held-to-maturity,
available-for-sale, and trading categories. Held-to-maturity securities are
those which the Company has the positive intent and ability to hold to maturity,
and are reported at amortized cost. Available-for-sale securities are those
which the Company may decide to sell if needed for liquidity, asset-liability
management, or other reasons. Available-for-sale securities are reported at fair
value, with unrealized gains or losses included as a separate component of
equity. Trading securities are bought principally for sale in the near term, and
are reported at fair value with unrealized gains or losses included in earnings.
As of September 30, 1998 and 1997, all securities were classified as available
for sale.
Realized gains or losses are determined based on the amortized cost of the
specific security sold. Securities with declines in fair value below amortized
cost that are other than temporary are written down to fair value by a charge to
earnings.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers all liquid investments with an original maturity of three
months or less to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 -- OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
1998 1997
------------ ------------
Interest expense..................... $ (421,048) $ (462,196)
Equity in net loss of affiliated
company............................ -- (27,748)
Interest income...................... 323,472 324,818
Gain on sale of available-for-sale
securities......................... 57,181 109,877
Gain on sale of equipment............ 5,891 37,610
Rental revenue....................... 236,784 244,137
Miscellaneous income (expense)....... (117,378) (31,207)
------------ ------------
$ 84,902 $ 195,291
============ ============
F-16
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- SECURITIES
The carrying value and estimated market value of investments in equity and
debt securities at September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSS VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
September 30, 1998:
Available-for-sale securities:
Bonds........................... $1,350,607 $ 5,731 $ 33,069 $1,323,269
Common stock.................... 4,966,937 57,452 981,613 4,042,776
Preferred stock................. 1,525,264 11,480 94,547 1,442,197
---------- ----------- ----------- ----------
$7,842,808 $74,663 $ 1,109,229 $6,808,242
========== =========== =========== ==========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSS VALUE
---------- ----------- ----------- ----------
September 30, 1997:
Available-for-sale securities:
Common stock.................... $ 471,875 $-- $ 4,675 $ 467,200
Preferred stock................. 3,184,805 31,805 -- 3,216,610
Bonds........................... 145,063 -- -- 145,063
---------- ----------- ----------- ----------
$3,801,743 $31,805 $ 4,675 $3,828,873
========== =========== =========== ==========
TOTAL NET SALE TOTAL COST NET
PURCHASES PROCEEDS OF SALES GAIN (LOSS)
----------- ------------ ------------ ------------
For the period ended September 30,
1998:
Available-for-sale securities:
Bonds........................... $ 863,815 $ 214,625 $ 215,000 $ (375)
Common stock.................... 9,419,643 6,061,132 6,039,497 21,635
Preferred stock................. 1,742,112 1,662,053 1,628,302 33,751
Limited partnership............. 22,716 24,886 22,716 2,170
----------- ------------ ------------ ------------
$12,048,286 $ 7,962,696 $ 7,905,515 $ 57,181
=========== ============ ============ ============
TOTAL NET SALE TOTAL COST NET
PURCHASES PROCEEDS OF SALES GAIN (LOSS)
----------- ------------ ------------ ------------
For the period ended September 30,
1997:
Available-for-sale securities:
Municipal bond fund............. $ 145,063 $ -- $ -- $ --
Common stock.................... 1,711,001 1,819,985 1,752,323 67,662
Preferred stock................. 4,385,250 2,973,072 2,932,625 40,447
Limited partnership............. -- 194,768 193,000 1,768
----------- ------------ ------------ ------------
$ 6,241,314 $ 4,987,825 $ 4,877,948 $ 109,877
=========== ============ ============ ============
</TABLE>
At September 30, 1998 and 1997, the Company has investments in limited
partnerships of $2,100,000 and $1,000,000 representing approximately 2% of an
investment fund, respectively. These investments have restrictions on the
Company's ability to sell or withdraw its capital investment for a five year
period from
F-17
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the date of each capital investment. The Company has recorded these investments
at cost in absence of the Company's belief of a reliable market value due to the
restrictions placed upon its ability to transfer.
NOTE 4 -- ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows at September 30:
1998 1997
-------------- --------------
Accounts receivable on contracts..... $ 30,702,970 $ 23,555,042
Contract retentions.................. 5,160,770 3,446,875
-------------- --------------
35,863,740 27,001,917
Allowance for doubtful accounts...... (455,165) (444,957)
-------------- --------------
$ 35,408,575 $ 26,556,960
============== ==============
NOTE 5 -- CONTRACTS IN PROCESS
Information with respect to contracts in process at September 30 is as
follows:
1998 1997
--------------- ---------------
Costs incurred on contracts in
process............................ $ 173,427,718 $ 171,032,772
Estimated earnings on contracts in
process............................ 30,360,958 27,032,812
--------------- ---------------
203,788,676 198,065,584
Billings to date..................... 208,444,313 199,581,728
--------------- ---------------
$ (4,655,637) $ (1,516,144)
=============== ===============
Included in accompanying balance sheet under the following captions:
1998 1997
-------------- --------------
Costs and estimated earnings in
excess of billings on contracts in
process............................ $ 5,044,002 $ 5,488,555
Billings in excess of costs and
estimated earnings on contracts in
process............................ (9,699,639) (7,004,699)
-------------- --------------
$ (4,655,637) $ (1,516,144)
============== ==============
NOTE 6 -- OTHER CURRENT ASSETS
Other current assets consist of the following at September 30:
1998 1997
---------- ------------
Due from related parties............. $ 258,049 $ 728,400
Accounts receivable, other........... 71,853 243,359
Prepaid expenses and sundry
receivables........................ 33,190 71,674
---------- ------------
$ 363,092 $ 1,043,433
========== ============
F-18
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- NOTES RECEIVABLE
Notes receivable consist of the following at September 30:
1998 1997
------------ ------------
Note receivable, shareholder, monthly
payments of $10,498 including
interest at 5.23%, balance due July
2000, secured by a real estate
mortgage on mechanical fabrication
shop............................... $ 555,499 $ 649,727
Notes receivable, shareholder,
monthly payments totaling $11,620
including interest at 5.23%,
balance due July 2000, secured by
real estate mortgages on office
buildings in Ft. Wayne and South
Bend, Indiana...................... 693,567 793,869
Note receivable, monthly payments
totaling $418 including interest at
9.25%, balance due December 2001,
secured by Front Street real
estate............................. 14,632 17,835
Note receivable, monthly payments of
$670 including interest at 10%,
final payment due July 1998,
secured by Adam Center Road real
estate mortgage.................... 15,019 15,019
Note receivable, related party,
monthly payments of $2,357
including interest at 8%, final
payment due November 2000,
unsecured (Indianapolis
building).......................... -- 78,875
Note receivable, related party,
monthly payments of $3,004
including interest at 8%, final
payment due November 1999,
unsecured (private carrier)........ 42,751 71,502
------------ ------------
1,321,468 1,626,827
Current portion...................... 246,242 305,359
------------ ------------
$ 1,075,226 $ 1,321,468
============ ============
NOTE 8 -- OTHER ASSETS
Other assets consist of the following at September 30:
1998 1997
------------ ------------
Investment in captive insurance
company............................ $ 36,000 $ 36,000
Cash surrender value of life
insurance.......................... 1,364,856 1,207,758
Unamortized goodwill................. 103,739 106,941
Deposits and other assets............ 137,539 131,685
------------ ------------
$ 1,642,134 $ 1,482,384
============ ============
NOTE 9 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
1998 1997
--------------- ---------------
Land, buildings and improvements..... $ 8,373,793 $ 8,273,172
Furniture and office equipment....... 4,670,632 3,943,925
Machinery, equipment and vehicles.... 6,354,959 5,713,888
--------------- ---------------
19,399,384 17,930,985
Accumulated depreciation............. (12,169,837) (11,261,501)
--------------- ---------------
$ 7,229,547 $ 6,669,484
=============== ===============
F-19
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- NOTES PAYABLE, BANKS
The Company has available an unsecured line of credit totaling $6,000,000
bearing interest at the lesser of the six-month LIBOR plus 1.75% or the Bank's
prime rate. The line of credit expires on May 31, 1999. As of September 30, 1998
and 1997, there were no amounts due on the line.
The Company has available two leasing lines of credit totaling $4,000,000
for equipment purchases bearing interest at the three year treasury bill rate
plus 1.25%. These lines of credit expire on May 31, 1999 and September 1, 1999.
As of September 30, 1998, there was $989,815 outstanding on the line, utilized
for operating lease purposes.
NOTE 11 -- OPERATING LEASES
The Company leases equipment, vehicles and office space under noncancelable
operating lease arrangements. These leases expire at various dates through 2002.
Rent expense for these leases included in the income statement for the nine
months ended September 30, 1998 and 1997 was $944,083 and $924,197,
respectively.
Future minimum lease payments for operating leases in effect at September
30, 1998 are as follows:
1999................................. $ 1,022,568
2000................................. 576,122
2001................................. 244,997
2002................................. 56,370
------------
$ 1,900,057
============
In addition the Company rents, on a month to month basis, transportation
equipment with a company related through common ownership. The lease provides
for monthly rents of $9,000. Rental expense for this lease was $77,000 and
$63,000 for the nine months ended September 30, 1998 and 1997, respectively.
NOTE 12 -- CAPITAL LEASES
The Company is obligated under various capital leases for offices,
warehouse facilities, and a fabricating shop owned by a shareholder. The leases
expire at various dates over the next five to eight years and require annual
payments adjusted for increases in the Consumer Price Index.
The following represents property under the capital leases at September 30:
1998 1997
------------ ------------
Building and improvements............ $ 5,017,056 $ 5,017,056
Less accumulated depreciation........ 3,189,357 2,863,206
------------ ------------
$ 1,827,699 $ 2,153,850
============ ============
F-20
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule by year of future minimum lease payments under
the capital leases together with the present value of the net minimum lease
payments as of September 30, 1998:
1999................................. $ 943,440
2000................................. 943,440
2001................................. 943,440
2002................................. 593,440
2003................................. 343,440
Thereafter........................... 798,080
------------
Total future minimum lease
payments........................... 4,565,280
Amount representing interest
expense............................ 1,809,635
------------
$ 2,755,645
============
NOTE 13 -- LONG-TERM DEBT
Long-term debt consists of the following at September 30:
1998 1997
------------ ------------
Capital lease obligations (Note
13)................................ $ 2,755,645 $ 3,106,173
Note payable, payable in monthly
installments of $4,147 including
interest at 5.17%, through March
1998, secured by computer
equipment.......................... -- 24,514
Note payable, payable in monthly
installments of $2,000 including
interest at 8% through December
1997, secured by equipment......... -- 7,625
Notes payable, payable in monthly
installments of $10,780 including
interest at 1.9% through March
2001, secured by equipment......... 338,488 --
------------ ------------
3,094,133 3,138,312
Current maturities................... 562,127 416,307
------------ ------------
$ 2,532,006 $ 2,722,005
============ ============
Maturities of long-term debt, including capital lease obligations, for the
next five years are as follows:
1999................................. $ 562,127
2000................................. 626,097
2001................................. 658,090
2002................................. 399,444
2003................................. 217,478
NOTE 14 -- TRANSACTIONS WITH RELATED PARTIES
The Company has leases (see Notes 12 and 13), notes receivable (see Note 7)
and advances (see Note 6) with related parties.
Additionally, for the nine month period ended September 30, 1998 and 1997,
the Company paid $5,371,529 and $2,962,273, respectively to a related party for
subcontract and material costs. As of September 30, 1998 and 1997, the Company
had accounts payable to this related party of $1,875,805 and $847,945,
respectively.
F-21
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- PENSION PLAN
The Company has adopted a trusteed employees' pension and savings plan. The
plan covers all employees not covered by collective bargaining agreements, after
completion of one year of service. Discretionary contributions are determined by
the Board of Directors. The plan allows, pursuant to Section 401(k) of the
Internal Revenue Code, employees to redirect a portion of their annual
compensation as a contribution to the plan. In addition, the Company has a
matching contribution of up to 7.5% of eligible compensation in certain
situations. Employer contributions totaled $356,876 and $308,062 for the nine
months ended September 30, 1998 and 1997, respectively. Information from the
plan's administrators is not available to permit the Company to determine its
share of the unfunded vested benefits.
The Company also made contributions of $3,063,751 and $2,641,240 for the
nine months ended September 30, 1998 and 1997, respectively, to collectively
bargained, multi-employer defined-benefit pension plans in accordance with
provisions of labor contracts. Information from the plans' administrators is not
available to permit the Company to determine its share of unfunded vested
benefits, if any.
NOTE 16 -- CAPTIVE INSURANCE PROGRAM
The Company is a shareholder in a captive insurance company which required
an investment of $36,000. Premiums for workers' compensation, general liability
and auto are paid to the captive insurance company. The Company may be required
to pay additional premiums if claims are significantly higher than expected.
However, the maximum amount of such possible additional costs is limited due to
reinsurance. As of September 30, 1998, the maximum potential additional premium
which could be assessed is approximately $1,343,228 (this covers the policy
periods from October 1, 1995 to September 30, 1998). The Company does not
believe any material assessment is likely. The captive agreement requires that
one half of this amount be secured, so the Company obtained a letter of credit
for the secured amount.
NOTE 17 -- SUBSEQUENT EVENTS
On November 15, 1998, 100% of the Company's stock was sold to Comfort
Systems USA.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
Shambaugh and Son, Inc.
Fort Wayne, Indiana
We have audited the accompanying balance sheet of Shambaugh and Son, Inc.
as of December 31, 1997 and the related statements of income, 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 Shambaugh and Son, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 24, 1998
F-23
<PAGE>
SHAMBAUGH AND SON, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets
Cash and cash equivalents....... $ 4,800,941
Available for sale securities... 3,693,092
Accounts receivable -- net...... 29,196,028
Costs and estimated earnings in
excess of billings on contracts
in process..................... 4,333,101
Inventories, material and
supplies....................... 1,540,228
Notes receivable................ 293,817
Other current assets............ 200,253
--------------
Total current assets....... 44,057,460
Property and equipment, net.......... 6,615,572
Other assets
Investments in limited
partnerships................... 2,100,000
Notes receivable................ 1,169,825
Other assets.................... 1,672,534
--------------
4,942,359
--------------
$ 55,615,391
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term
debt........................... $ 409,312
Accounts payable................ 9,242,616
Billings in excess of costs and
estimated earnings on contracts
in process..................... 8,681,352
Accrued payroll and related
liabilities.................... 4,529,785
Accrued expenses................ 1,282,709
--------------
Total current
liabilities............... 24,145,774
Long-term debt....................... 2,615,041
Shareholder's equity
Common stock, no par value:
3,000 shares authorized, 2,072
shares issued and
outstanding.................... 3,185,032
Retained earnings............... 25,676,489
Unrealized gain (loss) on
available-for-sale
securities..................... (6,945)
--------------
28,854,576
--------------
$ 55,615,391
==============
See accompanying notes to financial statements.
F-24
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
% TO
AMOUNT REVENUE
--------------- -------
Earned revenue on contracts.......... $ 157,535,128 100.0%
Costs of earned revenue on
contracts.......................... 121,387,346 77.1
--------------- -------
GROSS PROFIT......................... 36,147,782 22.9
General and administrative
expenses........................... 24,301,439 15.4
--------------- -------
OPERATING INCOME..................... 11,846,343 7.5
Other income......................... 374,783 .2
--------------- -------
INCOME BEFORE INCOME TAXES........... 12,221,126 7.7
Provision for income taxes........... 107,475 .1
--------------- -------
NET INCOME........................... $ 12,113,651 7.6%
=============== =======
See accompanying notes to financial statements.
F-25
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON TOTAL
COMMON RETAINED AVAILABLE-FOR- SHAREHOLDER'S
STOCK EARNINGS SALE SECURITIES EQUITY
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........... $ 3,045,684 $ 24,109,694 $ 56,236 $ 27,211,614
Net income for the year ended
December 31, 1997.................. -- 12,113,651 -- 12,113,651
Change in unrealized gain (loss) on
available-for-sale securities...... -- -- (63,181) (63,181)
Capital contribution................. 139,348 -- -- 139,348
Dividends............................ -- (10,546,856) -- (10,546,856)
------------ --------------- --------------- -------------
Balance at December 31, 1997......... $ 3,185,032 $ 25,676,489 $ (6,945) $ 28,854,576
============ =============== =============== =============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
SHAMBAUGH AND SON, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................... $ 12,113,651
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation and amortization... 1,453,374
Provision for losses on accounts
receivable..................... 38,623
Gain on sale of equipment....... (1,329)
Gain on sale of
available-for-sale
securities..................... (139,974)
Change in assets and liabilities
Accounts receivable, net... 3,227,244
Inventories................ 18,855
Prepaid and other current
items..................... 80,521
Accounts payable........... (4,169,094)
Billings relative to costs
and estimated earnings on
contracts in process...... 3,458,352
Accrued expenses........... 702,864
--------------
Total adjustments....... 4,669,436
--------------
Net cash from
operating
activities........... 16,783,087
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............... (1,444,414)
Increase in cash value of life
insurance....................... (157,098)
Available-for-sale securities
purchased....................... (10,482,798)
Proceeds on sale of
available-for-sale securities... 9,361,112
Purchase of investments in limited
partnerships.................... (2,100,000)
Collections on notes receivable.... 381,300
Deposits and other assets.......... 367,265
Proceeds from sale of property and
equipment....................... 51,888
Additional advances on notes
receivable...................... (48,000)
--------------
Net cash from
investing
activities........... (4,070,745)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution............... 139,348
Repayment of debt.................. (418,939)
Dividends.......................... (10,546,856)
--------------
Net cash from
financing
activities........... (10,826,447)
--------------
Net change in cash and cash
equivalents........................ 1,885,895
Cash and cash equivalents at
beginning of year.................. 2,915,046
--------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 4,800,941
==============
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest........................ $ 601,294
State income taxes.............. 112,398
See accompanying notes to financial statements.
F-27
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Shambaugh and Son, Inc. operates a construction
business to contract mechanical, electrical, fire protection, food processing,
refrigeration, temperature and process controls, water and waste water treatment
projects. It also operates a mobile home park, leases commercial real estate and
provides computer consulting services. The construction contracts occasionally
extend for periods in excess of one year and provide for progress billings in
amounts which are commensurate with the extent of performance under the
contracts. In addition to the primary location in Fort Wayne, Indiana, there are
branch offices in Southfield and Kalamazoo, Michigan; Chicago, Illinois; Toledo,
Ohio; and South Bend, Indianapolis and Lafayette, Indiana.
REVENUE RECOGNITION: The Company accounts for revenue on construction
contracts on the basis of the percentage of completion of individual contracts.
Under this method, the earned portion of the total contract is based on the
percentage of completion as computed from a comparison of total costs incurred
to date to total projected cost on the contract.
As described in the preceding paragraph, revenue is based on the amount of
costs incurred to date over total estimated costs. Management estimates the
amount of costs to complete a given contract based on information available at
each balance sheet date. Estimates of costs to complete certain contracts could
change significantly in the near term and other contracts are subject to cost
reviews by the customer. The ultimate outcome of these estimates and contracts
subject to customer review are not known. Due to these uncertainties, it is at
least reasonably possible that completion costs will be significantly different.
At the time a loss on a contract becomes probable, the entire estimated
loss is accrued.
For contracts which extend over more than one fiscal year, changes in job
performance, job conditions, estimated profitability and final contract
settlements which result in revisions to costs and income are recognized in the
accounting period when these matters become known. Claims for additional
contract revenue are recognized when realization of the claim is assured and the
amount can reasonably be determined.
Individual contract costs include direct material, subcontract, direct
labor and labor fringe costs. Indirect costs are those related to contract
performance such as indirect labor, supplies, tools, repairs and maintenance
costs. General and administrative costs are expensed as incurred.
ACCOUNTS RECEIVABLE: The Company follows the practice of filing liens
within the statutory time frame on construction projects where collection
problems are anticipated. The liens act as security for collection of
construction receivables and have the effect of restricting the customer's
ability to subsequently transfer title of the constructed property and to obtain
certain kinds of financing without first satisfying the lien.
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost. The
Company provides for depreciation using annual rates which are sufficient to
amortize the cost of depreciable assets over their estimated useful lives.
BENEFIT COST: The Company is liable for certain costs related to employee
health and accident benefit programs and workmen's compensation. The Company's
responsibility for losses on these programs is limited to amounts not insured.
Costs are charged to income when incurred.
INCOME TAXES: The Company, with the consent of its shareholder, has
elected to have its income taxed under Section 1362 of the Internal Revenue
Code, and a similar section of certain state income tax laws. These provide
that, in lieu of corporate income taxes, the shareholder is taxed on his
proportionate
F-28
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share of the Company's taxable income. Therefore, the provision for income taxes
represents certain state income taxes paid by the Company.
EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of cost over net
assets acquired is being amortized on the straight-line method over a 40-year
period.
INVENTORIES: The inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method.
INVESTMENT: The Company's 50% investment in D&M Realty Corp. is accounted
for by the equity method.
SECURITIES: The Company classifies securities into held-to-maturity,
available-for-sale, and trading categories. Held-to-maturity securities are
those which the Company has the positive intent and ability to hold to maturity,
and are reported at amortized cost. Available-for-sale securities are those
which the Company may decide to sell if needed for liquidity, asset-liability
management, or other reasons. Available-for-sale securities are reported at fair
value, with unrealized gains or losses included as a separate component of
equity. Trading securities are bought principally for sale in the near term, and
are reported at fair value with unrealized gains or losses included in earnings.
Realized gains or losses are determined based on the amortized cost of the
specific security sold. Securities with declines in fair value below amortized
cost that are other than temporary are written down to fair value by a charge to
earnings.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers all liquid investments with an original maturity of three
months or less to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 -- OTHER INCOME (EXPENSE)
Other income (expense) consists of the following for the year ended
December 31, 1997:
Interest expense..................... $ (602,896)
Equity in net income (loss) of
affiliated company................. (27,748)
Interest income...................... 557,635
Gain on sale of available-for-sale
securities......................... 139,974
Gain on sale of equipment............ 1,329
Rental revenue....................... 306,489
Miscellaneous income................. --
------------
$ 374,783
============
F-29
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- SECURITIES
The carrying value and estimated market value of investments in available
for sale securities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
Bonds........................... $ 701,792 $ 610 $ -- $ 702,402
Common stock.................... 1,586,791 32,265 (50,046) 1,569,010
Preferred stock................. 1,411,454 17,699 (7,473) 1,421,680
---------- ---------- ---------- ----------
$3,700,037 $ 50,574 $ (57,519) $3,693,092
========== ========== ========== ==========
</TABLE>
Contractual maturities of debt securities at December 31, 1997 is as
follows:
AMORTIZED
COST FAIR VALUE
--------- ----------
Due two to five years................ $ 155,560 $ 155,560
Due six to ten years................. 295,608 296,218
Due after ten years.................. 250,624 250,624
--------- ----------
$ 701,792 $ 702,402
========= ==========
<TABLE>
<CAPTION>
TOTAL NET SALE TOTAL COST NET
PURCHASES PROCEEDS OF SALES GAIN (LOSS)
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Available-for-sale securities:
Bonds...................... $ 701,792 $ -- $ -- $ --
Common stock............... 3,629,428 2,642,701 2,555,833 86,868
Preferred stock............ 6,151,579 6,523,643 6,472,305 51,338
Limited partnership........ -- 194,768 193,000 1,768
----------- ----------- ---------- -----------
$10,482,798 $ 9,361,112 $9,221,138 $ 139,974
=========== =========== ========== ===========
</TABLE>
At December 31, 1997, the Company has investments in limited partnerships
of $2,100,000 representing approximately 2% of an investment fund, respectively.
These investments have restrictions on the Company's ability to sell or withdraw
its capital investment for a five year period from the date of each capital
investment. The Company has recorded these investments at cost in absence of the
Company's belief of a reliable market value due to the restrictions placed upon
its ability to transfer.
NOTE 4 -- ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows at December 31:
Accounts receivable on contracts..... $ 25,583,038
Contract retentions.................. 3,962,990
--------------
29,546,028
Allowance for doubtful accounts...... (350,000)
--------------
$ 29,196,028
==============
F-30
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- CONTRACTS IN PROCESS
Information with respect to contracts in process as of December 31, 1997 is
as follows:
Costs incurred on contracts in
process............................ $ 141,182,703
Estimated earnings on contracts in
process............................ 28,014,546
---------------
169,197,249
Billings to date..................... 173,545,500
---------------
$ (4,348,251)
===============
Included in accompanying balance sheet under the following captions:
Costs and estimated earnings in
excess of billings on contracts in
process............................ $ 4,333,101
Billings in excess of costs and
estimated earnings on contracts in
process............................ (8,681,352)
--------------
$ (4,348,251)
==============
NOTE 6 -- OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 1997:
Due from related parties............. $ 91,777
Accounts receivable, other........... 43,370
Prepaid expenses and sundry
receivables........................ 65,106
----------
$ 200,253
==========
NOTE 7 -- NOTES RECEIVABLE
Notes receivable consist of the following at December 31, 1997:
Note receivable, shareholder, monthly
payments of $10,498 including
interest at 5.23%, balance due July
2000, secured by a real estate
mortgage on mechanical fabrication
shop............................... $ 555,499
Notes receivable, shareholder,
monthly payments totaling $11,620
including interest at 5.23%,
balance due July 2000, secured by
real estate mortgages on office
buildings in Ft. Wayne and South
Bend, Indiana...................... 693,567
Note receivable, monthly payments
totaling $418 including interest at
9.25%, balance due December 2001,
secured by Front Street real
estate. Note was refinanced on
December 4, 1996................... 16,701
Note receivable, monthly payments of
$670 including interest at 10%,
final payment due July 1998,
secured by Adam Center Road real
estate mortgage.................... 15,019
Note receivable, related party,
monthly payments of $2,357
including interest at 8%, final
payment due November 2000,
unsecured (Indianapolis
building).......................... 73,346
Note receivable, related party,
monthly payments of $3,004
including interest at 8%, final
payment due November 1999,
unsecured (private carrier)........ 63,869
Note receivable, related party,
monthly payments of $1,515
including interest at 8.50%,
balance due October 2000, unsecured
(SFLP)............................. $ 45,641
------------
1,463,642
Current portion...................... 293,817
------------
$ 1,169,825
============
F-31
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- OTHER ASSETS
Other assets consist of the following at December 31, 1997:
Investment in captive insurance
company............................ $ 36,000
Cash surrender value of life
insurance.......................... 1,228,540
Unamortized goodwill................. 106,141
Deposits and other assets............ 301,853
------------
$ 1,672,534
============
As of September 30, 1997, D & M Realty Corp. was liquidated and its net
assets were contributed to Shambaugh and Son, Inc.
NOTE 9 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997:
Land, buildings and
improvements................... $ 8,305,740
Furniture and office
equipment...................... 4,139,721
Machinery, equipment and
vehicles....................... 5,323,056
--------------
17,768,517
==============
METHOD OF USEFUL
DEPRECIATION LIFE
------------ ----------
Accumulated depreciation:
Land, buildings and
improvements............... SL 15-40 yrs. 4,511,168
Furniture and office
equipment.................. SL 7-10 yrs. 2,688,068
Machinery, equipment and
vehicles................... SL 3-7 yrs. 3,953,709
--------------
11,152,945
--------------
Net property and equipment... $ 6,615,572
==============
NOTE 10 -- NOTES PAYABLE, BANKS
The Company has available an unsecured line of credit totaling $6,000,000
bearing interest at prime minus one-half of one percent. The line of credit
expires on May 31, 1998. As of December 31, 1997, there was no amount due on the
line.
The Company has available two leasing lines of credit totaling $4,000,000
for equipment leasing bearing interest at the three year treasury bill rate plus
1.25%. These lines of credit expire on May 31, 1998 and September 1, 1999. As of
December 31, 1997, there was $315,629 utilized on the line for operating lease
purposes.
F-32
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- OPERATING LEASES
The Company leases equipment, vehicles and office space under noncancelable
operating lease arrangements. These leases expire at various dates through
November 2001. Rent expense for these leases included in the income statement
for the year ended December 31, 1997 was $1,232,263.
Future minimum lease payments for operating leases in effect at December
31, 1997 are as follows:
1998................................. $ 1,107,457
1999................................. 727,384
2000................................. 285,083
2001................................. 108,047
------------
$ 2,227,971
============
In addition the Company rents, on a month to month basis, transportation
equipment with a company related through common ownership. The lease provides
for monthly rents of $7,000. Rental expense for this lease was $84,000 for the
year ended December 31, 1997.
NOTE 12 -- CAPITAL LEASES
The Company is obligated under various capital leases for offices,
warehouse facilities, and a fabricating shop owned by a shareholder. The leases
expire at various dates over the next five to eight years and require annual
payments adjusted for increases in the Consumer Price Index.
The following represents property under the capital leases at December 31,
1997:
Building and improvements............ $ 5,017,056
Less accumulated depreciation........ (2,944,744)
------------
$ 2,072,312
============
The following is a schedule by year of future minimum lease payments under
the capital leases together with the present value of the net minimum lease
payments as of December 31, 1997:
1998................................. $ 943,440
1999................................. 943,440
2000................................. 943,440
2001................................. 943,440
2002................................. 443,440
Thereafter........................... 1,055,660
------------
Total future minimum lease
payments............................. 5,272,860
Amount representing interest
expense.............................. 2,260,843
------------
$ 3,012,017
============
F-33
<PAGE>
SHAMBAUGH AND SON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
Capital lease obligations (Note
12)................................ $ 3,012,017
Note payable, payable in monthly
installments of $4,147 including
interest at 5.17%, through March
1998, secured by computer
equipment.......................... 12,336
------------
3,024,353
Current maturities................... 409,312
------------
$ 2,615,041
============
Maturities of long-term debt, including capital lease obligations, for the
next five years are as follows:
1998................................. $ 409,312
1999................................. 452,722
2000................................. 516,396
2001................................. 589,139
2002................................. 273,607
NOTE 14 -- TRANSACTIONS WITH RELATED PARTIES
The Company has leases (see Notes 12 and 13), notes receivable (see Note 7)
and advances (see Note 6) with related parties.
Additionally, for the year ended December 31, 1997, the Company paid
$4,390,215 to a related party for subcontract and material costs. As of December
31, 1997, the Company had accounts payable to this related party of $399,061.
NOTE 15 -- PENSION PLAN
The Company has adopted a trusteed employees' pension and savings plan. The
plan covers all employees not covered by collective bargaining agreements, after
completion of one year of service. Discretionary contributions are determined by
the Board of Directors. The plan allows, pursuant to Section 401(k) of the
Internal Revenue Code, employees to redirect a portion of their annual
compensation as a contribution to the plan. In addition, the Company has a
matching contribution of up to 7.5% of eligible compensation in certain
situations. Employer contributions totaled $488,153 for the year ended December
31, 1997.
The Company also made contributions of $3,506,698 for the year ended
December 31, 1997 to collectively bargained, multi-employer defined-benefit
pension plans in accordance with provisions of labor contracts. Information from
the plans' administrators is not available to permit the Company to determine
its share of unfunded vested benefits, if any.
NOTE 16 -- CAPTIVE INSURANCE PROGRAM
The Company is a shareholder in a captive insurance company which required
an investment of $36,000. Premiums for workers' compensation, general liability
and auto are paid to the captive insurance company. The Company may be required
to pay additional premiums if claims are significantly higher than expected.
However, the maximum amount of such possible additional costs is limited due to
reinsurance. As of December 31, 1997, the maximum potential additional premium
which could be assessed is approximately $1,162,000 (this covers the policy
periods from October 1, 1995 to March 31, 1998). The captive agreement requires
that one half of this amount be secured, so the Company obtained a letter of
credit for the secured amount.
F-34
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Comfort Systems USA,
Inc. on Form 8-K/A of our report dated February 24, 1998 relating to the
financial statements of Shambaugh & Son, Inc. as of December 31, 1997 and for
the year then ended appearing elsewhere in this registration statement.
Crowe, Chizek and Company LLP
/s/ CROWE, CHIZEK AND COMPANY LLP
South Bend, Indiana
January 26, 1999
F-35
